Development Banks from the BRICS

The prospect of a New Development Bank (NDB) created by the five BRICS has generated a great deal of coverage on how it might challenge (or not) the existing global multilateral financial architecture, currently dominated by the World Bank, IMF and regional development banks. What is not yet clear is how the new Bank will operate and how its strategies and policies be formulated, will it take inspiration from the World Bank or perhaps instead from its founding nations.

A new paper from the Institute of Development Studies places the spot light on the five BRICS: Brazil, Russia, India, China and South Africa’s own development finance institutions and how they might play a role in shaping the workings of the NDB. The paper also examines in detail how each of the banks operate and what their policy goals are. In particular the China Development Bank and the Brazilian Development Bank (BNDES) are powerful institutions (in very different ways) that do not get the coverage they deserve and this paper helps to redress that balance.

Capital

To date the plans for the NDB amounts to an initial US$ 50 billion capital fund plus a contingency reserve arrangement (CRA) worth US$ 100 billion, but even with top ups from non-BRIC members it will struggle to match the World Bank and Asian Development Bank. But of course this is potentially just the start and the five founding members could increase the capital if the Bank is seen to be successful. Another question is one of leadership, the bank’s headquarters will be in Shanghai and the initial presidency will be held by India, but because China is clearly the biggest economic power in the group (its economy is bigger than all the others put together) will this inevitably make the NDB an arm of Chinese economic diplomacy, or will the five develop a more equitable arrangement.

The BRICS IMF?

The contingency reserve arrangement is designed to help economies facing financial problems (currency crisis, balance of payments), but with China putting up most of the money, will it just end up being a Chinese dominated version of the IMF or can the organisation avoid this trap? The NDB is still at very early stage so I hope the writers of the paper come back to cover how the five member’s different policies and attitudes develop into the working practices of the NDB and whether their differing priorities can be reconciled.

The paper also provides analysis of each nation’s development banks, how they operate internally and externally, but also how they provide aid or technical assistance to other developing countries and how their interests clash with the western OECD-BAC framework for development.

First Among Equals? Chinese Policy Banks

The CDB, a bank I covered in depth recently, is an emerging markets behemoth: both a commercial and policy bank, it has pioneered the use of oil as collateral, most notably in the case of credit to Venezuela. The overarching non-interference policy of the Chinese government has meant it does not try and apply conditionality to government actions like the IMF or World Bank does, but often sees that resources are used as collateral and that the proceeds of a loan are at least partly spent on Chinese goods or services. The paper highlights the fact that the Bank’s funding via long term bonds gives it a long term advantage over competitors – as it can then provide long term funding itself. The paper also helpfully compares the CDB to the Chinese Export Import bank (EXIM) which is focused more on supporting China’s considerable trade and concessional loans.

BNDES – The Latin American Giant

Not far behind CDB in terms of power is the giant publicly owned BNDES which provides concessional finance to Brazilian companies internally and abroad. Set up to overcome the historic lack of access to capital faced by firms in Brazil, the institution has helped big corporations grow there but often at the expense of smaller firms, more recently the bank has helped facilitate Brazil’s expansion into Africa.

The paper also looks at the Russian VnesheconomBank, which moved from dealing with the liabilities of the USSR to a state development bank in the KfW (German) mould and which has helped to support Russia’s economy in the aftermath of financial crisis. Also discussed is the Development Bank of South Africa which has a role in extending infrastructure finance and technical assistance to neighbouring countries, but remaining primarily focused on South Africa.

All these institutions (and the Indian EXIM Bank) will no doubt have a part to play in the formation of the NDB, through contributing ideas and policies, existing staff moving to the new organisation and co-operation efforts, but how their experience will translate into a new institution is yet to be seen.