Yves here. Quite a few readers have contended that the commitment by the BRICS countries to create a developing country challenger to the World Bank represents a serious blow to the dollar hegemony.

While rising anger against the US use of its currency/banking system dominance to further geopolitical ends is well warranted, translating that into effective counter-measures is something else completely. This article does a solid job of explaining the focus the new development bank, which is infrastructure projects, and lowering expectations as far as shaking up the current international financial architecture is concerned. But it can still make considerable progress on issues that are important to its sponsors.

By C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi, India. Extracted from an article first published as the H T Parekh Finance column in the Economic and Political Weekly

The argument that the creation of the BRICS Bank could make a significant difference to the global financial architecture should not be pushed too far. In the final analysis development banks are instruments of state capitalist development. Such specialised institutions are needed because of the shortfalls in the availability of long-term finance for capital-intensive projects in market economies, resulting from the maturity and liquidity mismatches involved. Resources mobilised are from those wanting shorter maturities and greater liquidity, and sums lent are to projects that are large and illiquid with long gestations lags and long-term profit profiles.

In non-market economies, allocations for such investments can be made through the budget and financed with taxes or the surpluses generated by state-owned enterprises. If the instruments are state capitalist, they are unlikely to serve non- or anti-capitalist objectives that sacrifice private profit to deliver social benefit. So the best that can be expected of the NDB is that it would serve better the interests of capitalist development in the less developed countries (with some concern for sustainability and inclusiveness) than would multilateral banks that are dominated by and serve as instruments of the developed countries.

Whether even this difference would be material depends on three factors. The first is the degree to which the emergence of the NDB alters the global financial architecture and perhaps, therefore, the behaviour of the institutions currently populating it. The second is the degree to which the BRICS bank can differ in its lending practices from the institutions that currently dominate the global development-banking infrastructure. And, the third is the degree to which a development bank set up as a tool of state-guided development by governments in countries pursuing capitalist and even neoliberal development trajectories can indeed contribute to furthering goals of more equitable and sustainable development.

As noted earlier, the establishment of the new development bank does make a difference to the global financial architecture. More so because of the relatively large authorised capital base of $100 billion and the paid-up capital commitment of $50 billion. Though established as far back as 1944, the capital base of the IBRD (the core lending arm of the World Bank) is only $190 billion of which only $36.7 billion is available as actual equity, the rest being “callable capital” that countries have committed to provide when called upon to do so. So even at inception the NDB seems significant in size compared to rivals still controlled by the developed industrial countries.

Regarding operational practices, there are clear signals that the new development bank’s lending is to be focused on large infrastructural projects that are seen as central to the development effort. Both cash-strapped developing country governments and the private sector are unable or unwilling to fully fund the lumpy investments involved in these long-gestation projects, making the role of development financing institutions crucial to development. An infrastructural focus has therefore been a characteristic feature of many of the currently existing multilateral development finance institutions as well. So if the NDB is to be different from the World Bank or regional development banks like the Asian Development Bank, the difference would have to be reflected in the choice of projects within the infrastructural space, in the terms on which large loans are provided, and in the concern it shows for keeping development sustainable and inclusive. Inasmuch as the institution has been established by a set of emerging nations that do not exercise hegemonic power in the international economy, it is possible that lending behaviour could reflect such differences, which possibly accounts for the discomfort of the currently dominant institutions.

However, the new development bank is fundamentally not detached from the global financial system. Being a bank, even if a specialised one, it must ensure its own commercial viability. And it must do so when a large part of the resources it lends would be mobilised from the market. While guarantees from the governments of its shareholding countries would improve the institution’s rating and reduce its borrowing costs, those costs will have to be borne. So any form of socially concerned lending that does not yield a return adequate to cover costs and deliver at least a nominal profit will be ruled out. There is only so much an institution whose activities are constrained by market realities can do.

In addition, the procedures finally adopted would be influenced by the nature of the governments that control the new institution, and paths of development pursued in countries that associate with the bank either as providers of finance or borrowers. The NDB does not decide on the projects that come up for lending. It would only choose among projects that apply for lending support. In that choice, the norms that shareholding governments apply in their own contexts would play a role. Moreover, wanting to be seen as respectful of the sovereign interests of borrowing countries, the NDB would be careful not to frame its lending rules in ways that threaten the policy sovereignty of borrowing countries. If the countries that approach the institution are pursuing neoliberal strategies, there may be clear limits in terms of what the new development bank itself can achieve.

There are other reasons why the NDB may not live up to the expectations it has generated in some circles. To start with, the new development bank not only keeps membership open to any United Nations member, but provides for a category called non-borrowing members, which can as a group acquire, with the consent of the board, shares that gives them voting power of up to 20 per cent of the total. This gives developed countries entry into the bank’s decision-making apparatus. Along with the declared possibility that the International Financial Institutions would be granted the status of observers in the meetings of the Board of Governors, a presence and voice for the developed countries in the NDB seems likely. They could exploit that presence and differences in degree of developed country dependence among the BRICS, to reduce the effectiveness of the NDB as an “alternative” institution.

This possibility is signalled by features of article 5 in the treaty establishing the Contingent Reserve Arrangement, which specifies the maximum borrowing limits and the terms of borrowing by members of the arrangement. The article specifies a maximum borrowing limit for each member, which is a multiple of the financial commitment made by the member. Access to 30 per cent of this maximum (the delinked portion) is available to a member based only on the agreement of the ‘Providing Parties’. The remaining 70 per cent (the IMF-linked portion) can be accessed in part or full only if, in addition to the agreement of the providing parties, the Requesting Party can provide evidence of “an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.” This substantially dilutes the role that the CRA can play as an alternative to IMF in offering balance of payments support to a distressed economy. If the CRA is being made a mere extension of the IMF, the possibility that the NDB can imitate the World Bank is also real.

It may be too much to expect the NDB (as some NGOs do) to adhere to sustainable development norms that its financing pattern does not permit and the governments backing the organisation do not respect. But, as noted, there are indications that the NDB and the CRA may not be too different from and completely independent of the World Bank and the IMF. Formally these institutions introduce more plurality into the international financial and monetary landscape. But in practice their presence does not guarantee significant difference. The decision of the BRICS to set up mini-versions of the World Bank and the IMF seems to be more a symbolic declaration of resentment at the failure of the US and its European allies to give emerging countries a greater say in the operations of the Bretton woods institutions. It may also reflect an effort by each member of the BRICS grouping to leverage this show of strength to extract as much benefit as it individually can from any changes in the international system. The desire to redress the obvious inequities in the global financial system seems far less important.

So a first effort of democratic forces in the BRICS countries and elsewhere should be to pressure the governments involved to act in ways that differentiate the NDB and CRA from the currently dominant global institutions in terms of funding patterns, rules and terms. If in the process the NDB is forced to show greater respect for norms of sustainable and inclusive development than the Bretton Woods institutions do, that would be a major advance.