Column: A development bank for developing nations

Jul 18 2014, 02:39 IST
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SummaryThe challenge would be to get over the conflicting political, economic and governance structures of BRICS nations

The creation of the BRICS bank, named the New Development Bank, is good news for the developing countries which are on the lookout for funds to support their requirements. It does appear that the politics of the issue has been addressed and the task ahead is to get the enterprise moving and start operations.

The need for such a bank was compelling, given the funds required by the emerging markets to support infrastructure growth. The range of funding required has been put at $1-2 trillion over a period of time; and pooling resources is the right way out. There is a feeling that the hegemony of the West came in the way of funding from institutions like the World Bank and there was a need to look at the same from the point of view of a developing economy. The issue of conditionality was controversial as, often, loans were subject to changes in the policy framework instituted to provide a safeguard against improper use of funds. This was considered to be lopsided as it represented the Western view. The concept of a bank coming from the emerging markets looks good in this context. African Development Bank and Asian Development Bank served the interests of continents but still carried forward the ethos of the West.

The getting together of the five leading developing nations is attractive as they had a combined share of around 20% of the global GDP in 2013 (IMF). However, all the nations are quite different in terms of politics, economic structures and governance. The concept of BRICS is more notional as these are countries which are geographically spread out with little competitive advantage in terms of distance or physical contiguity. Hence, this experiment will set a new financial trend.

The funding is to come from the initial capital of $50 billion that can be raised to $100 billion. There is the provision for a contingent reserve fund of $100 billion which will not be equally distributed among these nations—here China will contribute the largest share. This would be a funding facility analogous to IMF’s, made available to deal with fundamental problems that come up like the US tapering programme.

Against this capital, the New Development Bank (which can be called NDB till a formal name is accorded) can borrow multiple times from the market to shore up its funds. Intuitively, with a capital of $50 billion and

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