The emerging economies that call themselves BRICS have created a development bank to challenge the dominance of western lending institutions and the U.S. dollar. They have pledged a $100 billion to accelerate the shift global financial power away from longstanding economic powerhouses such as the U.S. to developing nations like China. Here’s what you need to know:
1. What is BRICS?
BRICS is an acronym for the original four nations in the group—Brazil, Russia, India, China and South Africa. Goldman Sachs economist Jim O’Neill coined the term for a paper he published in 2001 titled: “Building Better Global Economic BRICs.”
O’Neill wanted a quick way to identify and remember the developing world’s “trillion dollar club.” The BRIC were, and still are, the only emerging economies with annual GDPs over $1 trillion U.S. The Chinese call them jinzhuan siguo— the four “golden bricks nations.”
The group added the capital “S” in BRICS when South Africa joined in 2010. The question was what did South Africa join? Unlike the EU or Eurozone, BRICS has been more of a concept than an institution until this historic summit in Fortaleza, Brazil. At the Fortaleza summit, the group’s sixth, the BRICS nations not only created their own bank, they organized a rotating presidency, starting with India.
While designated emerging markets, the original four are all ranked in the world’s Top Ten economies by GDP. The World Bank predicts China will overtake the United States this year as the world’s number one economy—a position the U.S. has held since 1872. Together these five nations alone account for just over 42 percent of the world’s total population and make up around a fifth of world’s GDP.
Brazilian President Dilma Rousseff, Russian President Vladimir Putin, Prime Minister of India Narendra Modi, Chinese President Xi Jinping, and South African President Jacob Zuma are all attending the 2014 BRICS summit.
2. Why does the world need another development bank?
In 2013, the BRICS decided they would establish a new development bank. Why? In part, because emerging market economies have long criticized the “strings attached” to economic aid from the western-led International Monetary Fund (which is always headed by a European) and World Bank (which is always headed by an American).
Both the IMF and World Bank are headquartered in Washington, D.C. The BRICS nations have been especially critical of their limited voting rights among the 188-member World Bank and IMF. Like the U.S. electoral college, which in U.S. presidential elections, assigns more votes to states with larger populations, the World Bank and IMF give more voting power to already-developed economies like the U.S. and the UK.
The BRICS signed the “New Development Bank” (NDB) into existence Tuesday with an initial capitalization of $50 billion. Each of the BRICS will contribute $10 billion . They also created what it calls the Contingent Reserve Arrangement—$100 billion buffer against any economic instability that could result when the U.S. finally winds down its massive economic stimulus program called quantitative easing.
According to the BRICS press release, the bank will help developing nations avoid “short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements.”
The bank’s mission is twofold: it will provide contingency funds to limit disruption from any financial crisis (similar to the role of the IMF). By lending money for infrastructure projects such as bridge and road building, the NDB will provide the BRICS, and other emerging economies and developing countries, an alternative to World Bank financing. The World Bank acknowledges a need for at least $1 billion more than what the world is currently spending on infrastructure projects in low and middle-income countries.
Based on preliminary discussions in Fortaleza, China will make the biggest contribution to the bank’s capital reserve, around $41 billion. Brazil, India and Russia will contribute $18 billion each, and South Africa will provide $5 billion.
3. Where will the New Development Bank be located, and when will it start operating?
The headquarters of the NDB will be in Shanghai and an African regional center for the bank will be set up in South Africa.
If all goes according to plan, it will be open for business in 2016, according to Reuters.
4. What’s next?
The first NDB president will be from India with the presidency rotating every five years. After India, the presidency goes to Brazil, Russia, South Africa, and then China.
5. A Multipolar World
Ahead of the Fortaleza summit, Chinese President Xi Jinping said a number of complex factors remained impediments to a more robust global economic recovery. He said he expected decisions taken at the summit to provide “positive energy” that will spur more economic growth and promote peaceful development.
The New Development Bank is a concrete expression of that goal, as the BRICS each strive towards parity with G7 nations in power and influence. Russian President Vladimir Putin has called for a “multipolar world” with diminished U.S. power.
While BRICS leaders emphasize global cooperation over competition, the new bank, by default, could become a “thread pull” that accelerates the unraveling of an old world order dominated by Western financial institutions, and the U.S. dollar.
In a 2012 letter to the Financial Times, three renowned economists called the concept for such a bank “an idea whose time has come for a world in which emerging market and developing countries are becoming the drivers of growth and the drivers of savings.”
Of the BRICS, they wrote: “It is these countries that will decide the form of the new institution, and it makes good sense for the rich countries to support them in this initiative.
See our complete coverage of the ongoing BRICS summit.