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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