NEW ORLEANS — At its sixth summit, BRICS, a group including Brazil, Russia, India, China and South Africa, announced the formation of a development bank and emergency fund intended to improve infrastructure in developing nations. The five countries’ contribution to the bank totaled $50 billion in capital, with a $100 billion reserve fund.
BRICS began meeting consistently in 2009. The group represents a number of countries with quickly developing economies. According to the Guardian, the group of countries that BRICS represents contains 46 percent of the world population and 18 percent of the international GDP. The LA Times reports that Indonesia, Mexico and Turkey might also join the bank.
Each country will have to ratify the development of the BRICS bank, in order for the bank to begin lending to developing nations.
The creation of this bank reflects a higher demand for infrastructure development in developing nations. According to Joseph Stigilitz, a Nobel-Prize winning economist, Western financial institutions do not have enough resources to provide adequate investments for developing nations. According to the World Bank, there is a $1 billion gap between what western institutions spend on infrastructure and what developing countries require.
Africa, in particular, would benefit from a development bank that offers less expensive loans. According to the Guardian, the BRICS development bank, unlike the IMF and The World Bank, could make structural adjustments that allow individual African governments to create their own development plans and, potentially, offer loans at a less expensive price.
Developing nations increasingly interact economically with one another, referred to as South-South trade, rather than with the U.S. and Europe. The Washington Post reports that the value of South-South trade outdoes North-South trade by about $2.2 billion.
Thus, the creation of a new development bank reflects a significant shift in the international financial system.
The BRICS development bank is intended to rival the financial power of western countries. The BRICS bank’s creation was a reaction to the size of member nations’ economies outgrowing the size of their impact on western financial organizations. While BRICS represents nearly 20 percent of the global economy, the BRICS countries only hold 11 percent of IMF votes. Wealthier, western countries hold a larger share of the votes.
The BRICS development bank is also evidence of the United States adjustment to changes in the global financial structure. Jim O’Neill, former chairman of Goldman Sachs Asset Management, argued that U.S. politicians have not ratified 2010 global financial reforms. These reforms would have increased the voting power of developing countries in World Bank institutions.
The United States role in global finances is significant. The United States currently selects the president of The World Bank. However, the U.S. economy no longer plays as large a role in the economy as it did at the time of the Bretton-Woods Agreement, when international financial institutions were created.
Stigilitz argues that developing countries, particularly China, have explained that their financial decisions are largely controlled by the United States and Europe, though China and other developing nations contribute significant amounts to trade and the global economy. The Guardian reports that Africa is critical of the conditions the IMF and World Bank attach to their loans.
The creation of a BRICS development bank reflects the inability or willingness of both the U.S. and Europe to adjust to a changing financial structure. Developing countries are rapidly growing, and the United States, in particular, refused to grant equally growing representation. As a result, developing countries have flexed their growing economic muscle by creating an alternative, threatening the significant international influence of the IMF and World Bank.
– Tara Wilson
Sources: The Guardian 1, The Guardian 2, Democracy NOW, LA Times, Washington Post, BBC, World Bank