Banking with a Difference Constituted a Formal Group at a Summit of Four of the Current ﬁ Ve Members in Yekaterinburg in 2009

HT PAREKH FINANCE COLUMN

fi rst met in New York in 2006 and then Banking with a Difference constituted a formal group at a summit of four of the current fi ve members in Yekaterinburg in 2009. South Africa C P Chandrasekhar joined the group in 2010. Consisting of large countries, con- The establishment of the New he world has one more multi- sidered by some to be characterised by Development Bank by the BRICS lateral development bank, the substantial potential for rapid growth, NDB countries is a signifi cant TNew Development Bank ( ) that they are seen to be among the possible was established on 15 July 2014. With future giants that would challenge the development which could have authorised capital of $100 billion and currently dominant economies in the some impact on multilateral initial subscribed capital of $50 billion, Organisation for Economic Co-operation lending for infrastructure in the the bank’s founding partners are the and D eve lopment (OECD). With two-fi fths BRICS countries of the South. But if the countries in the grouping (Brazil, of the world’s population and a fi fth Russia, India, China and South Africa). of the world’s gross domestic product new bank is to make a difference These fi ve countries, which share equally (GDP), the BRICS are indeed a formidable and alter the international the paid-up capital in the form of actual grouping. That makes the NDB different development fi nance landscape, equity ($10 billion) and guarantees ($40 because most existing development banks democratic forces in the BRICS billion), will remain dominant in perpe- are in terms of shareholding, voting tuity with their aggregate shareholding rights and management dominated by countries and elsewhere should never falling below 55%. Organisation- one or the other developed country, pressurise their governments to ally too the BRICS bank seeks to be even- especially from among a set defi ned by act in ways that differentiate the handed: India gets the fi rst chair of a the United States (US), Germany, France NDB from the currently dominant rotating presidentship, China gets to host and Japan. Other countries have been the bank’s headquarters in Shanghai, long arguing for a reshaping of these global institutions in terms of South Africa gets to host the fi rst regional shareholding and control structures to funding patterns, rules and terms. offi ce, the fi rst chair of the board of gover- account for the changes in the relative nors is from Russia and the fi rst chair of economic and political importance of the board of directors from Brazil. individual countries in the global order, In itself, the creation of a new multi- but progress with such restructuring has lateral development bank should not be been slow and marginal. The creation considered out of the ordinary. A 2009 of the NDB is seen as being a response study from the Association of Develop- to the intransigence of countries that ment Financing Institutions in Asia and dominate the existing multilateral deve- the Pacifi c estimated that there were lopment banking infrastructure, espe- over 550 development banks world- cially the US, and a declaration of the wide, of which 32 were in the nature of exasperation of emerging nations with international, regional or subregional the current global fi nancial architec- (as opposed to national) development ture. Its founding membership also gives banks. The news that one more has it a much greater chance of success than been added to the list should not elicit past attempts like that with the Banco much excitement. del Sur (Bank of the South) in establish- Yet the news that the NDB had been ing a successful competitor to the cur- created was received in some circles rently dominant multilateral develop- with much enthusiasm, in others with ment banks. disappointment and in yet others with a degree of discomfort. The reason is Would It Make a Difference? that it is owned and controlled by the While these factors make the creation of BRICS, an unusual grouping of “emerging” the NDB a matter of signifi cance, would countries that started life as a mental it make a difference? There are develop- C P Chandrasekhar ([email protected]) is construct of an investment banking ment banks from the South such as the with the Centre for Economic Studies and analyst, Jim O’Neill, and then became China Development Bank and Brazil’s Planning, Jawaharlal Nehru University, a reality as the countries concerned Brazilian Development Bank (BNDES) New Delhi. bought into the idea. Four of their leaders that are large and have been expanding

10 august 9, 2014 vol xlIX no 32 EPW Economic & Political Weekly HT PAREKH FINANCE COLUMN their international lending operations, and discriminates against the develop- Whether even this difference would especially in other developing countries, ment interests of poorer countries and be material depends on three factors. in recent years. But this is an instance of that of the disadvantaged sections of The fi rst is the degree to which the emer- multilateral cooperation among a set of the populations in them. If, therefore, gence of the NDB alters the global fi nan- so-called “Southern countries” in the NDB lending occurs on terms that are cial architecture and perhaps, therefore, governance of a development bank, more sensitive to the requirements of the behaviour of the institutions cur- which infuses checks and balances into developing countries the impact can rently populating it. The second is the its operations. Moreover, along with the only be positive. In fact, conditionalities degree to which the BRICS bank can dif- creation of the NDB, the summit at could be so set as to distribute a part of fer in its lending practices from the insti- Fortaleza in July this year also estab- the benefi ts to the poor among develop- tutions that currently dominate the glo- lished a BRICS-controlled Contingent ing country populations. bal development-banking infrastruc- Reserve Arrangement (CRA) with com- This is particularly important because ture. And, the third is the degree to mitted resources of $100 billion, defi ned of the role that development banks play. which a development bank set up as a as “a framework for the provision of sup- Unlike conventional banks, they focus tool of state-guided development by gov- port through liquidity and precaution- on long term fi nancing, and provide ernments in countries pursuing capital- ary instruments in response to actual or credit to more capital-intensive projects, ist and even neo-liberal development potential short-term balance of pay- especially of an infrastructural kind. trajectories can indeed contribute to fur- ments pressures”. Since that involves Since such lending involves higher than thering goals of more equitable and sus- entering an area now dominated by the normal debt to equity ratios, develop- tainable development. International Monetary Fund (IMF), con- ment banks to safeguard their resources As noted earlier, the establishment of trolled again by the developed countries closely monitor the activities of the fi rms the NDB does make a difference to the led by the US, the perception that the they lend to, resulting in a special form global fi nancial architecture. More so NDB would shift power relations in the of “relationship banking”, with far great- because of the relatively large author- multilateral development-banking infra- er lending infl uence on the technology ised capital base of $100 billion and the structure seems corroborated. and on operations. The expectation is paid-up capital commitment of $50 bil- It could, for three reasons. First, in a that such infl uence would be more lion. Though established as far back as world characterised by substantially en- Southern oriented in the case of the NDB 1944, the capital base of the Inter- hanced possibilities of mobilising pri- than, say, the World Bank. national Bank for Reconstruction and vate resources in debt and equity mar- Development (IBRD) (the core lending kets, poorer developing countries are State-Capitalist arm of the World Bank) is only $190 discriminated against and kept out of But this point should not be pushed too billion of which only $36.7 billion is such markets. Since the NDB is owned far. In the fi nal analysis development available as actual equity, the rest being and backed by governments in a set of banks are instruments of state-capitalist “callable capital” that countries have “emerging economies”, it is likely to be development. Such specialised institu- committed to provide when called upon able to mobilise substantial resources at tions are needed because of the short- to do so. So even at inception the NDB reasonable cost from private markets falls in the availability of long-term seems signifi cant in size compared to and channel them to needy countries. fi nance for capital-intensive projects in rivals still controlled by the developed Second, inasmuch as the allocation of market economies, resulting from the industrial countries. these resources would be determined maturity and liquidity mismatches in- by the representatives of governments volved. In non-market economies, allo- Focus on Infrastructure from the fi ve BRICS countries, it could cations for such investments can be Regarding operational practices, there direct resources to projects that are made through the budget and fi nanced are clear signals that the NDB’s lending more in keeping with the requirements with taxes or the surpluses generated by is to be focused on large infrastructural of the Southern countries. Third, with state-owned enterprises. If the instru- projects that are seen as central to the control in the hands of the BRICS ments are state-capitalist, they are un- development effort. Both cash-strapped governments that are subject to the likely to serve non- or anti-capitalist developing country governments and infl uence of local democratic forces, the objectives that sacrifi ce private profi t to the private sector are unable or terms on which the institution lends deliver social benefi t. So the best that unwilling to fully fund the lumpy in- could in time refl ect “Southern” require- can be expected of the NDB is that it vestments involved in these long-gesta- ments and sensitivities. For example, would serve better the interests of capi- tion projects, making the role of devel- there has been developing country rec- talist development in the less-developed opment fi nancing institutions crucial to ognition that the kind of policy condi- countries (with some concern for sustain- development. An infrastructural focus tionalities attached to lending by the ability and inclusiveness) than would has therefore been a characteristic North-dominated Bretton Woods insti- multilateral banks that are dominated f eature of many of the currently exist- tutions limits national policy space in by and serve as instruments of the ing multilateral development fi nance ways that favour the dominant nations d eveloped countries. institutions as well. So if the NDB is to

Economic & Political Weekly EPW august 9, 2014 vol xlIX no 32 11 HT PAREKH FINANCE COLUMN be different from the World Bank or re- clear limits in terms of what the NDB the IMF, the possibility that the NDB can gional development banks like the itself can achieve. imitate the World Bank is also real. Asian Development Bank, the differ- It may be too much to expect the ence would have to be refl ected in the Mirroring Bretton Woods? NDB (as some non-governmental organi- choice of projects within the infra- There are other reasons why the NDB sations (NGOs) do) to adhere to sustainable structural space, in the terms on which may not live up to the expectations it has development norms that its fi nancing large loans are provided, and in the generated in some circles. To start with, pattern does not permit and the govern- concern it shows for keeping develop- the NDB not only keeps membership ments backing the organisation do not ment sustainable and inclusive. Inas- open to any United Nations (UN) mem- respect. But, as noted, there are indica- much as the institution has been estab- ber, but provides for a category called tions that the NDB and the CRA may not lished by a set of emerging nations that non-borrowing members, which can as a be too different from and completely do not exercise hegemonic power in the group acquire, with the consent of the independent of the World Bank and the international economy, it is possible board, shares that gives them voting IMF. Formally these institutions introduce that lending behaviour could refl ect power of up to 20% of the total. This more plurality into the international such differences, which possibly ac- gives developed countries entry into fi nancial and monetary landscape. But counts for the discomfort of the cur- the bank’s decision-making apparatus. in practice their presence does not guar- rently dominant institutions. Along with the declared possibility that antee signifi cant difference. The decision However, the NDB is fundamentally the international fi nancial institutions of the BRICS to set up mini-versions of the not detached from the global fi nancial would be granted the status of observers World Bank and the IMF seems to be more system. Being a bank, even if a special- in the meetings of the board of gover- a symbolic declaration of r esentment at ised one, it must ensure its own com- nors, a presence and voice for the devel- the failure of the US and its European mercial viability. And it must do so when oped countries in the NDB seems likely. allies to give emerging countries a greater a large part of the resources it lends They could exploit that presence and say in the operations of the Bretton would be mobilised from the market. differences in the degree of developed woods institutions. It may also refl ect While guarantees from the governments country dependence among the BRICS, an effort by each member of the BRICS of its shareholding countries would im- to reduce the effectiveness of the NDB as grouping to leverage this show of strength prove the institution’s rating and reduce an “alternative” institution. to extract as much benefi t as it individu- its borrowing costs, those costs will have This possibility is signalled by fea- ally can from any changes in the inter- to be borne. So any form of socially con- tures of Article 5 in the treaty esta- national system. The desire to redress the cerned lending that does not yield a blishing the CRA, which specifi es the obvious inequities in the global fi nancial return adequate to cover costs and maximum borrowing limits and the system seems far less important. d eliver at least a nominal profi t will be terms of borrowing by members of the So a fi rst effort of democratic forces ruled out. There is only so much an insti- arrangement. The article specifi es a in the BRICS countries and elsewhere tution whose activities are constrained maximum borrowing limit for each should be to pressure the governments by market realities can do. member, which is a multiple of the involved to act in ways that differentiate In addition, the procedures fi nally fi nancial commitment made by the the NDB and CRA from the currently adopted would be infl uenced by the member. Access to 30% of this maxi- dominant global institutions in terms of n ature of the governments that control mum (the delinked portion) is available funding patterns, rules and terms. If in the new institution, and paths of devel- to a member based only on the agree- the process the NDB is forced to show opment pursued in countries that asso- ment of the “Providing P arties”. The greater respect for norms of sustainable ciate with the bank either as providers remaining 70% (the IMF-linked portion) and inclusive development than the of fi nance or borrowers. The NDB does can be accessed in part or full only if, in Bretton Woods institutions do, it would not decide on the projects that come up addition to the agreement of the provid- be a major advance. for lending. It would only choose among ing parties, the R equesting Party can projects that apply for lending support. provide evidence of EPW on Scopus Database In that choice, the norms that share- an on-track arrangement between the IMF holding governments apply in their own and the Requesting Party that involves a EPW is now indexed on Scopus. IMF contexts would play a role. Moreover, commitment of the to provide fi nancing Scopus, published by Elsevier, is the world’s to the Requesting Party based on condition- wanting to be seen as respectful of the largest abstract and citation database of ality, and the compliance of the Requesting peer-reviewed literature with tools that track, sovereign interests of borrowing coun- Party with the terms and conditions of the analyse and visualise research. tries, the NDB would be careful not to arrangement. Scopus has begun indexing EPW articles frame its lending rules in ways that This substantially dilutes the role that and soon all articles from 2007 onwards will threaten the policy sovereignty of bor- the CRA can play as an alternative to be indexed. IMF rowing countries. If the countries that in offering balance of payments Please visit www.scopus.com via your approach the institution are pursuing support to a distressed economy. If the institutional subscription to that database. neo-liberal strategies, there may be CRA is being made a mere extension of

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