Will BRICS Bank be a new World Bank?

July 16 will go down in history as a momentous day as India and its four Brics partners — Brazil, Russia, China and South Africa, on the concluding day of their summit at Fortaleza, Brazil, agreed to establish a $100 billion New Development Bank and a $100 billion Contingent Reserve Arrangement. It is the first serious step towards institutionalising this grouping, that represents 40 per cent of the world’s population and has a collective GDP of $24 trillion.

The bank is envisaged as the emerging economies’ equivalent of the World Bank — funding long-term physical and social infrastructure projects, while the Contingent Reserve Arrangement will act more like the International Monetary Fund, helping countries mitigate short-term currency crises, arising out of capital exodus like the 2013 one when the US Federal Reserve talked off trimming its bond buying programme. This created havoc with currencies and stock markets in most countries, particularly India, that had a current account deficit problem.

The New Development Bank, due to be operational by 2015-16, faces a huge task: its success and that of other institutions that will be created will depend on the commonality of purpose, mutual respect, shared ideals, and cooperation between the five countries. It is a good sign that these five recognised the need for equality between them, by agreeing that each country will subscribe an equal amount to the bank’s $100 billion capital, though China wanted to contribute a much larger amount.

Commonality of purpose is the glue that will bind the five. The World Bank-IMF structure were, after all, the offshoots of the 1944 Bretton Woods Conference where 44 allies, including the United States, Britain and France met to rebuild the international economic system while the Second World War was still raging.

The member countries had to adopt a monetary policy that kept the exchange rate stable by tying their currencies to the US dollar, and the IMF had to bridge temporary imbalances of payments. Over the years the US and Europe ruled these institutions, excluding the emerging economies that were becoming the new growth centres.

The New Development Bank could well evolve into an alternative financial power centre, depending on how well the Brics 5 play their cards. This would also require the dollar’s dominance to be minimised, by the creation of alternative reserve currencies.

China has already tried to make its yuan such a reserve currency. According to some reports, the yuan (or renminbi) has become the second-most used currency in financing trade; while another report says yuan trade stands at $120 billion per day, making it the ninth-most traded currency in the world. This may lead to moves for a few other reserve currencies as well.