By
Dr. Vighneswara
Swamy*
The emergence of New Development Bank (NDB)
on the global horizon, though beginning of a new international economic order, has
indeed brought into focus several issues on to the debating table. First, the
issue of global economic governance hitherto dominated by the US or the EU.
There is significant amount of disquiet among many of the developing economies
about their share in global economic governance. Second, the founding BRICS
countries assume significance as these five (Brazil, Russia, India, China and
South Africa) emerging economies host more than 2.8 billion people or 40
percent of the world‘s population, cover more than a quarter of the world‘s
land area over three continents, and account for more than 25 percent of global
GDP. BRICS possess just 11% of the votes in IMF, despite accounting for more
than 20% of global economic activity. This underscores the “weight of the
south” in global economic governance. Third, can these divergent and
distinctive economies continue to hang on to their current bonhomie out of
their dislike for the hegemony of the west as a cohesive global economic force?
Fourth, can the competing Asian giants; China and India continue this newfound
economic cooperation keeping aside their bilateral border disputes? Fifth,
would this serve as a clear warning bell to the aging multilateral economic
bodies: World Bank and the IMF that are completely monopolized by the US and
the West?
As
most of the commentators agree, the formation of NDB in a way reflects the
frustration of the emerging economies with the existing global economic
governance of the available institutions. Many of the developing nations are
more or less fed up with this and they search for an alternative in NDB. Though,
NDB with a capital base of $50 billion, expandable eventually to $100 billion,
is a midget compared with the existing institutions such as the World Bank
($232 billion in capital), Asian Development Bank ($165 billion in capital), and
others, it heralds a new beginning of economic cooperation of the mighty
emerging economies apart from show casing their desire for influential space in
the geopolitical and geo-economic paradigms. Further, given the huge
infrastructure funding needs in the developing countries at around $ 1
trillion, new global development finance are indeed a necessity. NDB aims at
making provisions for meeting the demands for infrastructure particularly
electricity, transport, telecommunications, and water/sewage on a priority
basis as it is expected to grow sharply as more countries transition out of
low-income status. Though, DB cannot compete with the existing multilateral
development banks which meet about 40 % of the USD 1 trillion infrastructure
investment gap, if expanded in the future could make a greater impact on the
global scene. Emergence of NDB is a first major development in the post World
War II global arena of multilateral economic cooperation.
The Operability of BRICS
The
intriguing question is the NDB destined for a long haul or is it meant serve
china’s global economic super power ambitions? Undoubtedly, the biggest gainer
from this move is China. China’s geo-strategic ambitious maneuvering is well
known. If this move of the BRICS could nudge the Washington headquartered global
institutions - the IMF and the World Bank for redistribution of voting rights,
China would be the sole winner from such reform measures though India and
Brazil could gain a little comparatively. Even if it could happen, it can happen
only at the expense of some ailing euro zone countries. Critics
of the NDB, view that it can pave the way for a new form of “Neo-liberalism” by the BRICS countries (particularly
by China) to expand their market in the underdeveloped world. Further, NDB
comes with its twin – Contingency Reserve Arrangement (CRA) with a reserve currency pool worth over another $100
billion aimed to provide financial support to countries under
distress due to economic volatility. Though, the BRICS nations argue that formation
of NDB would reduce the developed west’s sway over the global financial
institutions and result in devolvement of global economic power, much needs to
be pursued by these nations for the success of NDB as well managed economic
organization. BRICS claim that their new multilateral development bank would
foster greater financial development cooperation among the five emerging
markets besides helping the other developing countries. The yet to be institutionalized CRA proposes a framework
for the provision of support through liquidity and precautionary instruments in
response to actual or potential short-term balance of payments crisis like
scenarios which include currency issues where members’ national currencies are
being adversely affected by global financial pressures. This is indeed a much
daunting challenge given the resource crunch these countries are facing, of
course the with the exception of China.
Selective Criticism
Some
critics argue that NDB and CRA are born out of a power struggle between the
emerging BRICS nations and the economic super powers of the West. A quick
recall of the brief history tells us that in 2010, reforms to give more voting
rights to BRICS were agreed upon by the G20 countries. However, due to the
non-approval by the US congress (which holds 17% of IMF voting rights) the
proposals are in cold storage, though the reforms could dilute its stake by a
meager 0.5% (i.e. to 16.5% of the voting rights) but still with enough voting
power to veto any future proposals at IMF that require a super majority. China,
though makes up roughly to 10% of global GDP, currently has voting power at 5%
at the IMF. Reports suggest that the ambitious China wanted to dominate NDB
with its economic might by insisting for higher share of capital that was
thwarted by India. Further, China also insisted for higher share in CRA and
finally it was settled for 41 percent by China, 18 percent from Brazil, India,
and Russia, and 5 percent from South Africa. China looks at NDB as step towards
heralding new global economic order in which it dreams of positioning Renminbi
as a global currency parallel to USD in the global financial system apart from
global economic power. This is one of the reasons why the ambitious China
reluctantly agreed for an equal contribution to the NDB capital.
Challenges for the BRICS
How
well the NDB and CRA would be managed, is another question being posed?
Probably the most important challenge for NDB and CRA would be tackling the
problem of default and surveillance, as track record of most of the regional
initiatives on surveillance do not portend well. For instance, The Chiang Mai
Initiative, could not devise and implement a system of monitoring and
surveillance, and in the end resigned itself to demanding countries using its
credit lines to undergo surveillance by the IMF. As a result, not a single
Asian nation has used credit through the initiative. The available evidence on
multilateral economic initiatives suggests that the possibility of serious
intra-block differences could prevent these new institutions from operating at
capacity. For example, Hugo Chavez’s dream of Banco Sur replacing both the
World Bank and IMF in Latin America collapsed on a series of differences over
issues like; transparency rules, tax-free status for the bank, role of
concessional finance, relationship with private sector etc. It needs to be
noted that the NDB is being structured based on the parity between the BRICS
countries. However, the geopolitical dissimilarities as well as the sheer 24 to
1 gap between the weight of the biggest economy - China , and that of the smallest, South Africa, are
bound to complicate implementation of this principle.
Leadership matters!
As
is universally well known, for any multilateral organisation to flourish and
prosper, leadership matters much. To be justifiable, effectual, and thriving
the NDB would have to embrace global practices of unquestionable transparency,
accountability, and strict and unbiased monitoring of its lent funds. With
Shanghai as the headquarters, after resolution of a last-minute location
wrangle between China and India, and India being the President of the bank for
the first six years, the leadership of a multilateral economic arrangement is
vested with Asia for the first time in the global economic landscape. The onus
is now on India to successfully launch NDB into the global economic league and
set sound policies and practices for efficient risk management of the funds
involved. Learning from the success of credible efforts of the Andean nations
that established the Corporación Andina de Fomento (CAF), popularly called the
Development Bank of Latin America, in 1970, NDB could emerge as a successful
global institution under the able political leadership of Prime Minister
Narender Modi and the deft technical leadership of RBI
governor Raghuram Rajan in its crucial take-off phase. A word of caution exists
for India - not to be carried away by the shrewd moves of China and Russia, but
to use its swift technical abilities and negotiation skills to maneuver the
happenings in its favour to emerge in its international stature as a global economic
power.
Concluding Remarks
It
needs to be remembered that NDB and CRA have sprout out of a heterogeneous
group of five aspiring emerging countries of the world, which have several
disagreements among themselves on several of their bilateral and multi-lateral
issues. Chinese economy (second largest in the world) being larger than the
economies of all other BRICS combined, always poses a threat of domination and
mammoth challenges for coordination and operations of NDB and CRA. In 2009 and
2010, Brazil and India spoke out against China on the issue of undervalued
Yuan. In the recent WTO meet at Geneva, Russia, China and Brazil, as well as
India’s neighbour Pakistan, were among the chief opponents of India’s veto. The
success of NDB and CRA lies in the cohesiveness of the BRICS countries in their
global economic cooperation leaving aside their differences on other issues.
They need to prove that they can provide a new credible global economic
arrangement that world could look upto.
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* Dr. Vighneswara Swamy is
currently Senior Fellow with Institute of Economic Growth, Delhi. He is
reachable at vs@iegindia.org
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