What the Brics bank must achieve
Source: By Prodipto Ghosh: The Financial Express
Prime minister Narendra Modi, during his forthcoming visit to Brazil, on July 15 and16, is expected, along with other BRICS leaders, to close the accord on the new BRICS development bank (BDB) and the BRICS contingent reserve agreement (BCRA). What made the BRICS members set up the BDB (and the BCRA), which is an apparent challenge to the current global financial architecture led by the World Bank and IMF? What is it that the BDB (and BCRA) could do differently from the Bretton Woods institutions, and why?
The Bretton Woods multilateral financial institutions were set up towards the end of World War II, initially to help rebuild war-devastated Europe, and later, from the 1960s, to provide development finance to newly independent, formerly colonised countries as well as to provide liquidity to countries during macroeconomic crises. Their governance arrangements (voting shares) reflected relative economic and political power among the initial members and was overwhelmingly in favour of the US and the UK. Even after several cycles of reform, since 2010, the developed countries hold about 65%, middle-income countries, which include the BRICs, about 35%, and low-income countries, just 4.46%. Thus, at present China holds 5.26%, India 3.06%, and the US 15.04% voting shares, against GDP at PPP shares in 2011 of 14.89%, 6.35%, and 17.13%, respectively. The majority coalitions of voting shares at these institutions determine all funding decisions as well as attendant conditionalities and are clearly dominated by developed countries. Thus, which programs are funded, how much, on what terms, who receives the money, how it may be spent, are all determined by the relative voting strengths. This is despite the fact that, at present, the major part of resources lent are not derived from the paid up capital reflected in voting shares, but are actually accumulations of surplus from loan repayments, principally from developing countries. Also, it must be remembered that the multilateral financial institutions are not commercial institutions, interested in maximising shareholder financial returns, but are essentially vehicles for pursuing the economic and strategic interests of the main shareholders (“donors”). In the past, these institutions have been the principal instrument for pushing the “Washington consensus” (fiscal discipline, elimination of subsidies, tax reform, market-determined interest and exchange rates, trade and investment liberalisation but not free movement of labour, privatisation of public enterprises, deregulation, and secure private property rights), besides imposition of labour, social and environmental standards, with mixed results for borrowers.
In a sense, the BDB (and BCRA) represent the frustration of BRICS members—whose voting shares lag well behind their current economic strength and future potential—at the slow pace of governance reform at the multilateral institutions, and their intention to ensure continued funding for infrastructure projects for themselves and for developing countries generally that would be impossible currently from the World Bank and its affiliates under their “strategic priorities”. Alternatively, through the BCRA, the goal is to ease short-term foreign exchange constraints arising, for example, from policy actions by large developed countries, such as tapering off of the quantitative expansion by the US.
The BDB would have an authorised capital of $100 billion, of which $50 billion would be paid up, and the rest provided as guarantee by the members. It is reported that the shares would be held equally by BRICS members, who would collectively at any time have at least 55% of the shares, i.e., a clear majority. Other countries, both developing and developed, may also join the BDB, subject to shareholding limits. The size of the BCRA would also be $100 billion, with China contributing $41 billion, Brazil, India, and Russia $18 billion each, and South Africa, $5 billion.
However, whether or not the BDB can realise its promise of being a significant alternative source of finance to developing countries—and thus, also nudge the existing multilateral financial institutions towards faster reform in both governance and operations—depends upon the extent to which it addresses the stress which developing member countries (DMCs) have long faced in their dealings with these institutions. What exactly are these? First, subjecting national investment priorities to the filters of the “strategic priorities” of the World Bank and its affiliates, e.g., funding for storage hydropower and irrigation projects which may be a priority for some DMCs would currently be precluded from financing. Second, the imposition of lending conditionalities that are unrelated to addressing actual project-related risks and viability, e.g., easing FDI limits in the relevant sector. Third, a distrust of project documentation prepared by the borrowing institution, and instead relying on costly foreign consultants to prepare them afresh for the multilateral institutions’ consideration. Fourth, disregard for national regulatory standards, processes and institutions, e.g., environmental regulation, social protection, and instead substituting these with the institutions’ own requirements, to be met only through documentation prepared by international consultants. Fifth, the subtle direction of procurement of services and capital equipment financed by the loan, to providers from “donor” countries, through prescription of standards and bidding norms which assign disproportionately higher weight prior to engagements. Finally, and this is key, relying almost exclusively on developed country-based researchers (who tend to project their own experience and conceptual frameworks into the vastly different environments of developing countries) for policy analysis and advice, which clothe the donors’ political objectives with intellectual respectability.
The BDB’s role should, thus, be to emerge not simply as yet another project finance institution which replicates existing practices, but as one which is far more responsive to the national development choices of its borrowing members. Moreover, it should consciously strive to be an institution which enhances its developing country members’ capacities for conceptualisation, preparation, appraisal, implementation, and monitoring of impacts of development projects, through directly involving their institutions and professionals in its operations, in a “learning by doing” mode. It may also, as its operations scale up sufficiently, by designating its funding in currencies of the BRICs members to start with, but gradually extending to other members, facilitate the greater acceptance of these currencies in the global financial markets.
Prime minister Narendra Modi, during his forthcoming visit to Brazil, on July 15 and16, is expected, along with other BRICS leaders, to close the accord on the new BRICS development bank (BDB) and the BRICS contingent reserve agreement (BCRA). What made the BRICS members set up the BDB (and the BCRA), which is an apparent challenge to the current global financial architecture led by the World Bank and IMF? What is it that the BDB (and BCRA) could do differently from the Bretton Woods institutions, and why?
The Bretton Woods multilateral financial institutions were set up towards the end of World War II, initially to help rebuild war-devastated Europe, and later, from the 1960s, to provide development finance to newly independent, formerly colonised countries as well as to provide liquidity to countries during macroeconomic crises. Their governance arrangements (voting shares) reflected relative economic and political power among the initial members and was overwhelmingly in favour of the US and the UK. Even after several cycles of reform, since 2010, the developed countries hold about 65%, middle-income countries, which include the BRICs, about 35%, and low-income countries, just 4.46%. Thus, at present China holds 5.26%, India 3.06%, and the US 15.04% voting shares, against GDP at PPP shares in 2011 of 14.89%, 6.35%, and 17.13%, respectively. The majority coalitions of voting shares at these institutions determine all funding decisions as well as attendant conditionalities and are clearly dominated by developed countries. Thus, which programs are funded, how much, on what terms, who receives the money, how it may be spent, are all determined by the relative voting strengths. This is despite the fact that, at present, the major part of resources lent are not derived from the paid up capital reflected in voting shares, but are actually accumulations of surplus from loan repayments, principally from developing countries. Also, it must be remembered that the multilateral financial institutions are not commercial institutions, interested in maximising shareholder financial returns, but are essentially vehicles for pursuing the economic and strategic interests of the main shareholders (“donors”). In the past, these institutions have been the principal instrument for pushing the “Washington consensus” (fiscal discipline, elimination of subsidies, tax reform, market-determined interest and exchange rates, trade and investment liberalisation but not free movement of labour, privatisation of public enterprises, deregulation, and secure private property rights), besides imposition of labour, social and environmental standards, with mixed results for borrowers.
In a sense, the BDB (and BCRA) represent the frustration of BRICS members—whose voting shares lag well behind their current economic strength and future potential—at the slow pace of governance reform at the multilateral institutions, and their intention to ensure continued funding for infrastructure projects for themselves and for developing countries generally that would be impossible currently from the World Bank and its affiliates under their “strategic priorities”. Alternatively, through the BCRA, the goal is to ease short-term foreign exchange constraints arising, for example, from policy actions by large developed countries, such as tapering off of the quantitative expansion by the US.
The BDB would have an authorised capital of $100 billion, of which $50 billion would be paid up, and the rest provided as guarantee by the members. It is reported that the shares would be held equally by BRICS members, who would collectively at any time have at least 55% of the shares, i.e., a clear majority. Other countries, both developing and developed, may also join the BDB, subject to shareholding limits. The size of the BCRA would also be $100 billion, with China contributing $41 billion, Brazil, India, and Russia $18 billion each, and South Africa, $5 billion.
However, whether or not the BDB can realise its promise of being a significant alternative source of finance to developing countries—and thus, also nudge the existing multilateral financial institutions towards faster reform in both governance and operations—depends upon the extent to which it addresses the stress which developing member countries (DMCs) have long faced in their dealings with these institutions. What exactly are these? First, subjecting national investment priorities to the filters of the “strategic priorities” of the World Bank and its affiliates, e.g., funding for storage hydropower and irrigation projects which may be a priority for some DMCs would currently be precluded from financing. Second, the imposition of lending conditionalities that are unrelated to addressing actual project-related risks and viability, e.g., easing FDI limits in the relevant sector. Third, a distrust of project documentation prepared by the borrowing institution, and instead relying on costly foreign consultants to prepare them afresh for the multilateral institutions’ consideration. Fourth, disregard for national regulatory standards, processes and institutions, e.g., environmental regulation, social protection, and instead substituting these with the institutions’ own requirements, to be met only through documentation prepared by international consultants. Fifth, the subtle direction of procurement of services and capital equipment financed by the loan, to providers from “donor” countries, through prescription of standards and bidding norms which assign disproportionately higher weight prior to engagements. Finally, and this is key, relying almost exclusively on developed country-based researchers (who tend to project their own experience and conceptual frameworks into the vastly different environments of developing countries) for policy analysis and advice, which clothe the donors’ political objectives with intellectual respectability.
The BDB’s role should, thus, be to emerge not simply as yet another project finance institution which replicates existing practices, but as one which is far more responsive to the national development choices of its borrowing members. Moreover, it should consciously strive to be an institution which enhances its developing country members’ capacities for conceptualisation, preparation, appraisal, implementation, and monitoring of impacts of development projects, through directly involving their institutions and professionals in its operations, in a “learning by doing” mode. It may also, as its operations scale up sufficiently, by designating its funding in currencies of the BRICs members to start with, but gradually extending to other members, facilitate the greater acceptance of these currencies in the global financial markets.
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