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Why the long-term prospects for the BRICS network are positive

Part 2
Why the long-term prospects for the BRICS network are positive (Part 2 of 4)

Must-know: The BRICS alternative to the World Bank and IMF

The Summit produced some strong results, not least of which is the formal establishment of the New Development Bank after more than a year of speculative talks. This is truly a group effort, with the bank being headquartered in Shanghai and drawing its first president from India along with its first board chair from Brazil (EWZ). The bank is slated to reach the equivalent of 100 billion USD in capital, to be used for BRICS development and infrastructure projects.

Putin, among others, has been critical of institutions like the World Bank and the IMF for being biased toward the U.S. (SPY) and attaching unreasonable contingencies to capital. Fundamentally, the New Development Bank is a move away from the West and toward economic independence for emerging economies. Other countries will also be able to join the NDB, so it could grow substantially if it proves to be a viable alternative.

Capital base of banksEnlarge Graph

Market Realist – The New Development Bank would start with a capital base of $50 billion contributed by all the BRICS nations and aim to grow to $100 billion. The graph above shows you the approximate capital base of the major development banks currently existing around the world. The bank has less capital base than the World Bank and other major development banks currently.

The distinct feature of the National Development Bank is that the founding members would hold 55% of the minimum voting power at all times, unlike the World Bank, and future members can hold a maximum of up to 45%. The bank aims to provide money for infrastructure and development projects in its member countries. Every nation would have equal say irrespective of the size of its GDP, unlike World Bank and IMF.

The launch of the BRICS bank is momentous indeed. Many economists consider this the first step to breaking the dollar dominance in global trade.

The membership wouldn’t be limited to BRICS but could include other emerging nations (EEM) like Mexico, Indonesia, and Argentina.

Setting up the BRICS bank is significant primarily because of three reasons:

    1. It shows that the BRICS are viable and dynamic emerging economies despite the recent lacuna in growth rates. The countries are all developing and working towards achieving a common goal—improving the living standards and infrastructure needs of their people.
    2. No country dominates the bank and all founding members are on equal footing despite differences in GDP size.
    3. The bank directly challenges the financial order set up by the U.S. (SPY) and Europe (EZU). China (FXI) and India (EPI) have failed to increase their influence in the World Bank and the IMF, and this new bank would help with reforms benefiting these nations. The formation of the bank should push the IMF and World Bank to become more transparent, open, and efficient.

Read on to the next part of this series to find out more about the outcomes of the BRICS summit.

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