Pssst. What exactly is the New Development Bank?
The bank that is being formed by the BRICS nations with its headquarters in Shanghai. It would fund long-term investment in infrastructure, projects for sustainable development and balance of payments funding.
Wait. Don’t IMF and World Bank perform the same function?
Yes they do. But the increasing demands for infrastructure and more environmentally sustainable forms of development in the emerging and developing economies are not being met by these institutions. There is an estimated deficit of investment of US$1 trillion annually. Also the BRICS nations have grown in economic importance over the years which has not been followed by a similar increase in the receptivity of their voice.
I don’t get it!
See, there has been increased South-South trade, economic cooperation and foreign aid. These countries seem to have enough pooled funds to meet there own needs and no longer need to depend, only on the IMF and World Bank and nor do they need to accept their inappropriate conditions. These institutions have refused to increase the voting share of the developing countries despite the fact that they account for half the world’s population and China alone accounts for 40% of the global growth after the collapse of the Lehman Brothers.
Like the Chang Mai Initiative Multilateralization (CMIM).
The NDB is slightly different because unlike the CMIM it has a Contingency Reserve Arrangement (CRA), that provides official liquidity in times of need, of US$100 billion which will make it independent of IMF approval and surveillance.
Oh, so that means no more American influence through these institutes.
You may be wrong about that. Although the initial capital is being contributed equally by the member states, the CRA of US$100 Billion is being financed majorly (41%) by China which is more than twice of that paid by any other country. China may choose to exercise its power due to the sheer size of its economy and use this as a platform to optimize cross-border use of the Chinese currency, especially for trade-linked transactions.
Will they be as influential and powerful as the IMF and World Bank?
The failure of these institutes in spotting and stopping the 2007-08 crisis has weakened their authority and legitimacy. No doubt the NDB will be powerful, but will it be an alternative for global development finance? It can if it makes quality loans and uses a right balance of the degree of sophistication in its financial instruments.
It sounds like everything will work out fine if they manage the risk well and coordinate their activities.
Here is the catch. The ASEAN group of Southeast Asian countries has programs, that activate currency swaps and multilateral assistance, to avert short-term monetary shortfalls of its member nations. The objectives of the NDB and institutes like ASEAN, Chinese Development bank and a similar one in Brazil. As for the ASEAN, China will gain from sidelining with Tokyo to gain influence in the region given the political tensions between them, but this will shake the existing initiatives. These facts render the functions and impact of the NDB vague.
So, If China has good intentions, so will the bank.
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