Saturday, November 29, 2014

A New World’s New Development Bank

NEW YORK – At the conclusion of their summit in Durban in March, the leaders of the BRICS (Brazil, Russia, India, China, and South Africa) announced their intention to establish a New Development Bank aimed at “mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.”

The significance of this decision cannot be overemphasized. For starters, it reflects the enormous successes in economic development during the last four decades (the BRICS’ aggregate GDP is now greater than that of the advanced countries when the Bretton Woods institutions were founded) and the rebalancing of global economic power that this implies. Indeed, the decision demonstrates the BRICS’ ability and willingness to work together, for their own benefit and for that of the entire world. Emerging markets and developing countries are taking the future into their own hands – at a time when rich countries are muddling through their own self-inflicted problems.

A new development bank is clearly needed. The infrastructure requirements alone in emerging-market economies and low-income countries are huge – 1.4 billion people still have no reliable electricity, 900 million lack access to clean water, and 2.6 billion do not have adequate sanitation. At the same time, an estimated two billion people will move to cities in the next quarter-century. And policymakers must ensure that the investments are environmentally sustainable.

To meet these and the other challenges confronting the developing world, infrastructure spending will have to rise from around $800 billion to at least $2 trillion annually in the coming decades. Otherwise, it will be impossible to achieve long-term poverty reduction and inclusive growth.

While the private sector can meet some of these needs, it can go only so far, especially given the nature of infrastructure projects’ risks, the huge upfront costs, and the high cyclical sensitivity of global financial markets. The funding gap is beyond what existing international financial institutions can meet – and the advanced countries’ malaise means that significant recapitalization is not in the cards. Annual infrastructure financing from multilateral development banks and overseas development assistance is likely to amount to no more than $40-60 billion, or 2-3% of projected needs.

A development bank anchored in emerging markets and developing countries can help to address this gap and become a powerful catalyst for change, both in the developing world and – through collaboration and example – in existing institutions. The world today is markedly different from the world at the time of the founding of the World Bank and many of the regional development banks. The BRICS’ proposed New Development Bank presents an important opportunity to reflect these changes, with modern financial instruments, strong governance, and a broad-based mandate.

For example, changes in financial markets (including the large amounts of money in sovereign wealth funds and public pension funds) provide opportunities for new development partnerships, which the New Development Bank can help to catalyze and orchestrate. So, too, should its deployment of a wide range of modern instruments enable it to meet the diverse range of project needs while ensuring adequate risk management.

The new bank should maximize its multiplier effects by sharing and reducing risk through collective action and “crowding in” other financing; by setting a powerful example in adopting innovative and cost-effective approaches; and through its policy and institutional impact beyond projects that it finances.

While the older institutions have attempted to adapt, their governance remains out of sync with today’s economic and political realities. The new bank’s governance structure has yet to be worked out, but it promises to be more consistent with contemporary best practices. Most important, the New Development Bank will give greater voice to the perspectives and interests of those in developing countries and emerging markets.

As with the outdated governance arrangements, conceptions of development that informed the existing multilateral institutions’ mandates are markedly different from modern development thinking. For example, there was no awareness of the challenge posed by climate change, and that all countries (including those in the developing world) must reduce their greenhouse-gas emissions and adapt to changes that will be particularly adverse to poor countries. Likewise, there was no comprehension of the innovation and opportunities entailed in pursuing more sustainable paths of inclusive economic growth.

Of course, the World Bank and the regional development banks now recognize such imperatives, and the New Development Bank should not relieve the developed countries of their responsibilities. But, with the shortfall of assistance from developed to developing countries, the new bank can provide essential help to developing countries and emerging markets as they undertake smarter and more sustainable infrastructure investment for growth and poverty reduction. Given the need to act quickly – and given the slowness with which the developed world has been responding – this new institution is all the more welcome.

The new bank can make a major contribution to the global economy’s health by facilitating the transition to new poles of growth and demand, helping to rebalance global savings and investments, and channeling excess liquidity to productive use. It will not only be a driver for sustainable growth in the developing and emerging world, but will also foster reform in the existing multilateral financial institutions – changes from which all of us, in the developed and developing world alike, will benefit.

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    1. CommentedJames Daniel Paul

      Is Bric Bank
      a. Another salesman in ethnic clothing for country debt products with differential rate segment??
      b. Signal the emergence of the new infrastructure cartels. (chinese teams working on Indian metros)
      c. Discovering another slice of the pie left over by IMF, World Bank and RBDs
      d. Are central banks are avoiding their respective sovereign debt because of corruption / external pressure?

    2. CommentedRobert Davies

      This article provides us with one hopeful and positive view from the BRICS fifth summit.

      We should not forget, however, that there is another perspective which is to do with the accumulation of power. Typically, as the late Susan Strange proposed, nation states have access to two primary types of power. The first is the familiar hard-edged relational or military power. The second is structural power or the power to influence the shape of the global political economy. From these foundations we have then of course 'soft power', or the power of influence. Global architects need access to all three types of power and we should pause to think of the BRICS development bank from this perspective.

      If we cast our minds back to the wording of the press release issued after the first G20 summit, then a new form of capitalism may be just over the horizon.

    3. CommentedPrashant Kumar

      Assuming the governance of this New Development Bank is similar to the governance of existing multilateral development organizations, how will it differ or protect itself from the political squabbles between countries. My worry is, like that in ADB, where China and India, when at odds with each other will try to block development projects, a bank that gives both these countries added prominence and control may lead to nothing actually being achieved. A bank as the authors have said, is clearly needed but the working of this bank will have to employ a new system that is more equitable than the current multilateral banking system. The nitty gritty of achieving an operating bank, especially in terms of, shares and control, with countries as politically egoistical as the BRICS nation, i fear, will impede the initiation of this development bank.

    4. CommentedFrank O'Callaghan

      BRICS. A grouping with very little in common other than having been included in an article designed to gain attention.

      Development banks have developed their own welfare and that of their controllers at the expense of everyone else.

    5. CommentedCraig Hardt

      The authors two main conclusions -- that the significance of the New Development Bank cannot be overemphasized, and that the bank will be a driver of sustainable development and reform -- seem based primarily on conjecture. While it is certainly possible that the New Development Bank will prove a significant source of reform and a driver of sustainable development, it seems more likely that it will conflict with existing multilateral institutions and muddle the rules relating to sustainable development the existing institutions have tried to implement.

      For the developing world, the primary focus is on fast economic growth to lift millions out of poverty, not on reform or sustainability. Ideally the first goal leads to the secondary outcomes, but from this perspective it would seem wise to withhold judgment until the BRICS create this new development bank and we see how it operates.