Saturday, 20 April 2013

Why a BRICS Development Bank?

At the recent BRICS summit in Durban finance ministers of Brazil, Russia, India, China and South Africa - the countries that form the BRICS - agreed to form a development bank, but failed to reach consensus on the bank’s size or the member countries’ contributions to its capital. One problem: the size of the bank´s seed capital, targeted at $ 50 bn. South Africa, by far the smallest of the BRICS countries, might be unable to afford her $10 bn contribution. All BRICS should contribute an equal share of seed capital to avoid, say, China providing a greater share of the funds and winning control of the bank.

Besides mighty national (bilateral) development banks, such as Brazil´s BNDES, the China Development Bank or the German KfW, a recent list of multilateral development banks counts sixteen in existence already now. So would a new BRICS development bank not just add to an already overly complex system of multilateral development finance and intensify redundancies, mission creep and overlap beneficial for economists´ and ex politicians´ employment but burdensome for taxpayers to soft-loan recipients?[1] Even Angel Gurria (currently the SG of the OECD), in the past a staunch defender of multilateral development bank lending to emerging countries[2], raised some critical questions with respect to the new BRICS bank, in an interview with The Guardian (9 April 2013). He wondered whether there would be enough policy conditionality (implicitly assuming that this is what improves policy quality, rather than home-grown reform) imposed on prospective borrowers by the new BRICS bank. Gurria also wondered how it would fit into the development landscape. "What kind of niche or blind spot, what is the missing link are the Brics trying to fill?" asked Gurria in that interview with The Guardian.

Gurrias question can be answered. Indeed, they were before his interview with The Guardian, notably by Amar Bhattacharya (G24), Mattia Romani (Global Green Growth Institute) and Lord Nicholas Stern (LSE) at the end of 2012, in a report entitled Infrastructure for Development: Meeting the Challenge. While the authors do not openly call for a BRICS bank (it´s none of their business, after all), they deliver the analytical and quantitative elements that would justify the case for a new BRICS development bank:

·         Infrastructure remains the growth constraint #1 in most emerging and poor countries. Green growth, industrialization and urbanization need (new sources of) energy, transport, water, telecommunication to develop further. 1.4 billion people have no access to electricity, 0.9 billion have no access to safe drinking water and 2.6 billion no access to basic sanitation. Annual financing needs in those countries combined are estimated at between $ 1.8 and 2.3 trn (one trillion is 1000 billion).

·         Long tenors (gestation periods until a bankable rate of return is reached) and big tickets are not sufficiently (and if, unevenly) financed by the private sector, which tends to neglect infrastructure projects other than ICT; private-public partnerships have repeatedly disappointed the hyped expectations, but create huge contingent public liabilities. Private infrastructure finance virtually collapsed from 2007, partly due to Basel prudential bank capital regulation (Basel III) and banks´ deleveraging.


Long Term Syndicated Bank Lending ($bn)

Source: Bhattacharya, Romani and Stern (2012)


·         A BRICS development bank would catalyze the global development finance scene. Classic ODA, as long as it remains heavily tilted toward grants, is almost irrelevant for infrastructure finance in poor countries. China finances more infrastructure in Africa than the (currently shrinking) ODA and multilateral development banks combined. Multilateral development banks have been seen to be risk averse (the same seems to hold for national development banks, such as BNDES, which tend to finance big companies); risk aversion has resulted in underfinancing of new Greenfield investment projects. The World Bank-IMF Debt Sustainability Framework places too much emphasis on restrictive debt thresholds and too little on the growth impact of infrastructure investment, hence still holding back growth prospects in developing countries[3]. Combining infrastructure financing from different BRICS sources – development banks, sovereign wealth funds, and pension funds - would help pool project risks, hence reduce them and attenuate risk aversion.

We should welcome the creation of the BRICS development bank. By removing infrastructure related growth constraints in poor countries, the new bank can help foster further income convergence and reduce poverty, help finance global public goods and channel excess liquidity to productive use. The new bank will improve the credibility of the BRICS group itself and hasten badly needed changes in the global governance structure. The Bretton Woods institutions, currently meeting in Washington, will either have to cooperate or lose out to the new global financiers.

[1] See my The Multilateral Donor Non-System: Towards Accountability and Efficient Role Assignment.” Economics: The Open-Access, Open-Assessment E-Journal, Vol. 4, 2010-5.
[2] Commission on the Role of the MDBs in Emerging Markets, The Role of the Multilateral Development Banks in Emerging Market Economies, Washington D.C., 2001.
[3] See H. Reisen and S. Ndoye (2008), “Prudent versus Imprudent Lending to Africa: From Debt Relief to Emerging Lenders”, OECD Development Centre Working Papers #268.

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