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Will a Common Development Bank Benefit the BRICS?

Apr 28 , 2012
  • Xu Mingqi

    Deputy Director, Shanghai Academy of Social Sciences

During the BRICS Summit in New Delhi on April 8 2012, the leaders of the five developing countries agreed to “enhance intra-BRICS trade” and agreed on an accord on extending a credit facility in their own currencies. In their joint declaration the BRICS leaders made another important step in cooperation as they stated: “We have considered the possibility of setting up a new Development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, and to supplement the existing efforts of multilateral and regional financial institutions for global growth and development.” This notion of a new development bank has sparked worldwide interest.

Benefits of a New BRICS Development Bank
Of course, a new development bank would primarily serve the needs of BRICS countries, especially for countries that badly need a large investment in infrastructure, such as India. Generally speaking, all of the BRICS need to improve their infrastructure. Even China, which is considered the strongest in infrastructure development, has many poorly developed areas in the west part of the country where a large amount of finance is needed to upgrade the roads, railway and airports etc. Therefore, a development bank could provide resources in addition to those given by the central government. 
There are also political incentives behind this new development bank. The World Bank has been dominated by the West for more than half century. The recent World Bank election showed that developed countries are not willing to give up the leadership of the bank. A BRICS development bank represents the growing influence of developing countries. It could also provide a platform for BRICS to promote international financial system reform.  
Furthermore, a BRICS development bank could serve as a vehicle of concrete cooperation, as the BRICS countries have only made small abstract achievements of cooperation to date. Even within the G20, the BRICS countries did not coordinate closely for a common role in global governance. For instance, the BRICS did not recommend a common candidate for the World Bank presidency, although all of them expressed the preference to have a president from developing countries. A new common development bank by the BRICS could become cooperation meaningful point of cooperation and could help the world focus on improved global financial governance.
Challenges Ahead for the BRICS
Although a BRICS development bank could play a critical role in global development, many risks and challenges lie ahead. After all, the New Delhi summit did not confirm the establishment but only considered the possibility. Some observers criticized China for not fully supporting this proposal. If the structure is similar to existing development banks, a BRICS bank may have the same problems as the World Bank and the IMF. Before the BRICS countries can agree to the establishment of a development bank, the countries must decide how the bank will be governed.
In addition to the technical issues, there are some sensitive issues such as where to set up headquarters and how to choose a president and high ranking officials of the bank. BRICS, after all, have many differences in political and economic systems and in the international geopolitical status. The group was just officially formed a little more than one year ago. It was the international financial crisis and the instability in international markets that put them into similarly difficult situations, and they tried to avoid the damage of external shocks by cooperating. Although their cooperation is increasing recently, there is competition among the BRICS and they have different views on many issues. It will take time to build political and economic trust among the BRICS. So a new development bank would have to over come many difficult challenges before it could play an important role as mentioned above. 
However, growing economic strength and quick recovery from recession have given BRICS more confidence to take responsibility in providing global development finance and working for global stability and governance. All five countries are willing to enhance their internal trade and investment to create a wider base for further cooperation. With this trend, we believe that BRICS will overcome all sorts of difficulties and challenges to set up a totally new development bank in the next summit and make more common efforts to achieve consensus in dealing with issues of global governance. BRICS will inevitably enhance their significance in this globalized world.  
Xu Mingqi is Senior research fellow and Deputy Director of Institute of World Economy at Shanghai Academy of Social Sciences.
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