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UPDATED: November 3, 2014
A New Pole of Global Finance
Will the BRICS-led new international development lender become an alternative to Bretton Woods institutions?
By Bai Shi

BRICS countries have been exploring ways to strengthen their cooperation in global finance governance since 2009. At theirfourth summit in the Indian capital New Delhi in 2012, BRICS members agreed in principle to set up a South-South development bank that will be funded and managed by BRICS and other developing countries. In the past two years,BRICS finance ministers and central bankgovernorsundertook the work of coordinating and structuring the framework for the new bank.

Along with the rapid economic growth, current international finance institutions are unable to meet the demands of emerging countries. The World Bank, for example, aims to help undeveloped countries reduce poverty. But BRICS countries cannot acquire loans from the World Bank because of their growing per-capita income, Huang said.

Additionally, infrastructure investment is highly demanded in emerging countries. But commercial lending agenciesprefer short-term projects to infrastructure investment that entailslong-term commitment and high risks. The NDB is expected to help meet the financing gap of infrastructure in developing countries, according to Huang.

"China has much experience and sufficient capacity in infrastructure construction. The NDB will offer opportunities for Chinese enterprises to cooperate with other members of BRICS in the field," Huang said. "Moreover, infrastructure construction will facilitate communication and trade between each other and offer job opportunities in emerging countries. It is an effective way to realize inclusive growth."

World Bank President Jim Yong Kim also welcomed the birth of the NDB during his visit toChina on July 8, Hong Kong-based South China Morning Post reported.

Kim said the BRICS-ledbank would not be regarded as a threat to the World Bank. Instead, the new bank will help reduce poverty and spur economic growth. The financing demand for infrastructure investment in developing countries reaches nearly $1 trillion a year, while the World Bank can provide only $60 billion.

A fair reform

"The establishment of the NDB and the CRA will improve and diversify current global financial governance," Zhang Haibing, a researcher of world economics with theShanghai Institutes for International Study, said to The Beijing News.

The currentglobal financial governance relies heavily on Bretton Woods institutions since they wereestablished in 1946 and 1947, respectively, under the design of the United States. BRICS countries hold humble positions in the system. None of theircurrencies are recognized as a reserve currency in the IMF.

Observers argued that BRICS countries deserve to have a bigger sayin global financial governance, as they account for over 25 percent of the global economic aggregate. Foreign exchange reservesof BRICS countries account for more than40 percent of the global total. And in the last 10 years, BRICS contributed over 50 percent of the world's economic growth.

As early as in 2009, the international community reached a consensus to reform the defective international finance institutions. For example, the IMF has agreed to increase shares of BRICS countries and make the institution more democratic and multi-lateral in 2010.

According to the reform plan, emerging economies including Brazil, Russia, India and China will rank in the top 10 shareholders of theIMF. But the plan was rejected by the U.S. Congress in 2013, dealing a blow to the reform effort. With as much as 17.69 percent of shares, the United States is the largest shareholder ofthe IMF and holds veto power on the IMF's executive board.

Due to their disadvantageous position in current international finance institutions, emerging countries are often negatively affected by the fluctuating financial policies of the United States. Today, the establishment of the new bank and reserve arrangement demonstrates a way for BRICS to build their own finance safety institution after failing to realize their just appeals in the IMF and World Bank, Zhang said.

Shen Jiru, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, said the NDB offers a new choice for developing countries to seek financial aid when they are faced with economic or financial difficulties in the future.

In the past, many developing countries would ask for help from the World Bank and the IMF, which have notoriously harsh conditions on loans. Debtor nationswould thus pay a heavy political cost for such aid. In contrast, the NDB will not interfere in internal affairs of debtor nations, marking a major difference from theWorld Bank and theIMF, Shen said.

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