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BRICS Development Bank: Figuring out the Durban Bid

Dr Jagannath P. Panda was Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • March 08, 2013

    Will the Durban BRICS leadership summit finalize setting up the BRICS Development Bank? The summit, scheduled for 26-27 March 2013, is the fifth BRICS (Brazil-Russia-India-China-South Africa) summit. Its theme is: BRICS and Africa – partnerships for integration and industrialization. South Africa, as is well known, has massive mineral reserves and is also known as the “gateway to Africa”. With this summit, the cycle of holding leadership summits by rotation in all current BRICS countries will also be fulfilled. The summit raises optimism that BRICS is gradually and systematically becoming more institutionalized.

    Many global political, economic, security and governance issues have been discussed at the Yekaterinburg (2009), Brasilia (2010), Sanya (2011) and New Delhi (2012) BRICS summits. Attention may be drawn here particularly to the Delhi Declaration, which charted an Action Plan to make BRICS meetings at various levels –ministerial, official and institutional – a more regular affair. The Action Plan also called for closer cooperation within BRICS in new areas: multilateral energy cooperation; long-term strategy; youth policy dialogue; and cooperation in population-related issues. Two core accents of the Action Plan in the Delhi Declaration are: (a) to establish a Development Bank that will be attuned to progress of trade and economic development among BRICS countries; and (b) to extend credit facility in local currency under a BRICS inter-banks cooperation mechanism. The Development Bank is intended to mobilize “resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement the existing efforts of multilateral and regional financial institutions for global growth and development”.1 It is intended to finance projects linked to intra-BRICS developmental aspects, in the process pushing intra-BRICS shared interests like creating job prospects and promoting urbanization, while emphasizing infrastructure development. The Delhi Declaration urged Finance Ministers of the member countries to explore the scope, feasibility and practicality of this aspiration.

    Coming to the practical details, however, there could be contentions regarding the location of the bank’s headquarters, the type of projects it will finance, and its source of funding. The idea of establishing this bank is mainly linked with the existing North-South divide in the Bretton Woods institutions. But will it act as a plausible alternative to the World Bank and IMF? Will it, in consequence, reduce the importance of the US and EU in global financial institutions? If BRICS successfully manages this project, it will provide an economic backbone for the grouping and will enhance its global prominence. It will also give substance to the politics of BRICS globally, giving practical existence to what BRICS so far has been advocating rhetorically – that there is a need to reform the global financial institutions in favour of the developing and emerging economies. News reports suggest that the starting fund of this bank will be a sum of US $50 billion, contributed equally by each member country.2

    The Durban summit is expected to discuss the structural and operational details of the proposed bank. China would be expected to campaign heavily to have the bank’s headquarters in Shanghai, probably.3 China has more millionaires than other BRICS countries, and Shanghai has more millionaires than even Beijing.4 China is the third-largest contributor to the overall WTO budget, only next to the USA and Germany, which indicates the Chinese economic supremacy in global politics. China also maintains good bilateral trade contacts with Russia, Brazil and South Africa. In global imports and exports, both commercial and merchandise, China is also much ahead of the other BRICS countries. These economic advantages may help China bag the bid to host the BRICS Development Bank.

    The Delhi Declaration also agreed to the conclusion of a “Master Agreement on Extending Credit Facility in Local Currency under BRICS Interbank Cooperation Mechanism and the Multilateral Letter of Credit Confirmation Facility Agreement” among BRICS EXIM/Development Banks. In other words, the member countries’ currencies would be used as the direct medium for intra-BRICS trade transactions. Here again, China may be the winner: the Yuan may emerge as the medium of exchange within BRICS and in the Development Bank. The approximate combined foreign exchange reserves of the BRICS is $4.5 trillion; but China alone held more than $3.31 trillion in foreign exchange reserves by the end of 2012, which is close to 50 per cent of its GDP, a ratio that no other country can match. China has tried to score over the USA and Europe on currency manipulation debate in different forums – including BRICS – through different strategies. If China can convince the other “emerging markets” to have the Yuan (renminbi) as a medium of trade exchange in place of the US dollar, the global clout of the Yuan will expand, and it can easily become an international currency.

    Discussions are continuing over the establishment of the BRICS Development Bank and its governance structure. For South Africa, the success of the Durban summit will be a platform to showcase its strategic weight and capability in global politics. It needs to be seen, in this context, as to what extent the summit will succeed in catapulting BRICS as a global institution and, in the process, project South Africa in terms of its global prominence as a developing country. But South Africa as a host country looks motivated. South Africa’s Black Business Council has enthusiastically supported the idea of establishing the BRICS Development bank. The country’s Finance Minister Pravin Gardhan has said: “the possible establishment of a BRICS-led bank is intended to mobilise domestic savings and co-fund infrastructure in developing regions”, and also generate funding for vital projects like green technology, bio-fuels, dams and nuclear plants.5 Many also visualize that the BRICS bank will reduce the bureaucratic frustration that the developing world has so far faced in getting loans, bids and financial assistance from the Bretton Woods institutions. If the BRICS Development Bank comes up, it will not only be a big moment for BRICS itself, but also for the global financial structure where the role, stake and space of the developing world will grow massively.