A year ago, the BRICS countries (Brazil, China, India, Russia and South Africa), at their annual summit in Durban, South Africa, agreed to establish a BRICS Development Bank. This bank is intended to support projects in developing countries. Plenty of observers did and partly still do not expect much from this bank, especially as in Durban the BRICS leaders could not agree on the location of the bank or the funding modalities.
This probably has to do with the very large structural differences within the BRICS. Three democracies (Brazil, India and South Africa) contrast with two authoritarian regimes (China and Russia), fast-growing countries (China and India) meet slow growth economies (Brazil, Russia and South Africa), resource-rich countries (Brazil, Russia and South Africa) have different problems as compared to the resource-poor but resource-hungry China and India.
Nonetheless, two things seem to connect these countries: first, they are so-called emerging countries that have performed relatively well in recent years and are mostly on the verge of being considered industrialized. So they have similar problems in the growth process, for example higher inflation rates than OECD countries because of the so-called Balassa-Samuelson effect. In essence this means that the higher growth rate in the sector of tradable goods due to the catch-up-process in BRICS-countries leads to higher domestic demand for non-tradable goods and services, such as property or local services, as well as higher demand for labour. This also increases labour costs and consequently the prices of non-tradable goods and services in the BRICS. Intermediate products for export industries and the competitors of the imports are therefore more expensive. This mechanism is, so to speak, a natural brake on growth.
Second, the five participating countries seem to be somewhat uneasy about the western centred world economic order. For quite different reasons, the BRICS are obviously keen to create a counterbalance to this order. In particular, this group of major emerging economies have agreed to set up their own financial institutions. They want to be independent of the World Bank and International Monetary Fund.
The BRICS bank could be adapted to form a counterweight. At the recent BRICS summit in Fortaleza, Brazil, the future location of the Bank was established as Shanghai, China; and the allocation of resources and the distribution of costs was determined. The Bank will shortly (it is still unclear exactly when) go into operation with a paid up capital of 10 billion dollars. There are BRICS infrastructure projects, and projects in other countries, to be financed. Consequently a new competition with the World Bank Group has emerged.
How is this competition to be judged? Will the World Bank become less important? Will it even disappear?
The prognosis is easy, because the answers to these questions can only be negative. The World Bank should consider this competition, but it will take years for the BRICS bank to be competitive enough to approach the World Bank’s lending volumes. Also, it is by no means clear whether the BRICS Bank will have a clear and focused strategy for development of the poorest (you can argue such a strategy is lacking in Washington, a topic to be considered here only in passing). For it is quite conceivable that countries pursue quite different goals:
- Russia is likely to be primarily interested in establishing a political counterweight to the West. If this is true, the script is likely to run like a Cold War movie. Politically related governments will be supported, others that do not align with Russia’s agenda will not. This strategy will not lead to development and will repel potential borrowers.
- The contrary, however, probably applies to the Chinese and to a certain extent to Indian approaches. Their interest should be less politically motivated than the Russian, but not particularly focused on solving development problems, let alone the difficulties regularly underlying governance problems (corruption, lack of rule of law, political repression etc.).
- South Africa, Brazil and India may have primarily regional goals in mind, ie be interested in the promotion of African or Asian countries.
In this respect conflicts within the BRICS Bank are inevitable if these considerations are valid. Flowing from this, there will be enough countries that turn to the World Bank, in place of the new potential hegemons. From this perspective, the BRICS Bank is not a threat to the World Bank.
But even if the motives of the BRICS in setting up their Bank are really focused on infrastructure development and the upliftment of the poorest, at home and in other developing countries, this is still no alarm signal, quite the opposite. Yes, this would create real competition for the World Bank. However, it should be positively evaluated because there is potential for improvement of both Banks’ work. Furthermore, real competition will force them to improve.
Against this background, the establishment of the BRICS Bank should not be a cause for concern. If things go badly, not much changes. If it runs well, this will improve opportunities for the under-developed countries significantly.
So: Congratulations to the BRICS for establishing the bank!