New World Bank in the offing?

The establishment of New Development Bank is being hailed as the new Bretton Woods moment for the emerging powers

The year 2014 was truly momentous for the international political economy. On one side, it marked the 70th anniversary of the Bretton Woods agreement, which reshaped the international financial system by creating both the International Monetary Fund (IMF) and the World Bank.

On the other side, it marked the creation of the ‘BRICS Bank,’ a new multilateral development bank, inaugurated by Brazil, Russia, India, China, and South Africa at the 6th BRICS Summit at Fortaleza in Brazil. This new development, however, was mainly seen as a counterweight to the US and Europe dominated financial institutions and was based mainly in politics surrounding the control of the IMF.

In spite of the Bretton Woods system being in existence, the need of such a bank was felt by the BRICS countries mainly because the working of the Bretton Woods Twins was full of anomalies like skewed quota system, strings attached to loan policies, unequal voting rights of member-countries and the head of the institution being invariably from either America or Europe.

Jim O’Neill, the economist from Goldman Sachs who coined the term ‘BRIC’ even said that the BRICS Bank is ‘a permanent sign that global governance is a mess’. Headquartered in Shanghai, the New Development Bank (NDB), has $50billion in initial capital and planned to finance infrastructure and sustainable development projects (much like the World Bank), and $100 billion initial capital in the Contingent Reserve Arrangement (CRA) to provide assistance to members in financial difficulty (much like the IMF).

The coming of the bank within just five years of the establishment of BRICS forced the world to take notice. The rapid progress in the BRICS made Washington jittery and fearfully suspicious. But this response is not felt in all the American circles uniformly. The establishment of NDB is being hailed as the new Bretton Woods moment for the emerging powers.

BRICS’ desire to create a bank is both an economic and a political need. Economic because this bank would provide an increasing flow of finances to the infrastructure projects, a mission-critical for China, India and Brazil to grow and Russia to recover. The developmental loan would not have any social and environmental conditions attached to them unlike the World Bank loans.

Political because it would reinforce the voices of the emerging powers and further strengthen multipolarity. Washington is yet to take BRICS seriously because it feels that the BRICS countries are united only in economic terms but not in strategic spheres. Americans also believe if the adequate reforms are brought about in both the IMF and the World Bank, NDB would lose its steam.

Certain strategists regard NDB as a complement and not exactly a substitute for the existing financial institutions. Since the BRICS collectively account for more than 25 per cent of the GDP and 40% of the world’s population, they can effectively champion the causes of the less developed nations as well as provide much needed additional finance.

By Amrita Banerjee