Will Establishment of the BRIC’s Bank for Development Result in Acceleration of Global Development?

At the meeting in Durban, South Africa, the leaders of five developing countries – Brazil, Russia, India, China and the Republic of South Africa – declared about their decision to establish the New Bank for Development (NBD) whose goal would consist in financing of infrastructure projects of developing economies.


The NBD's initial subscription capital will amount to $50bn. Fr om 2016, when the bank starts its operations, other countries may join it, but no matter how many other countries join the bank the BRIC countries will control 55% of the bank's capital. In addition to the above, a fund with the size of $100bn will be established to protect founder-countries fr om financial shocks.


By establishing the NBD, the five developing countries seek to increase their role in the system of international financial institutions wh ere the largest ones are the International Bank for Reconstruction and Development (the IBRD and the World Bank) and the International Monetary Fund (IMF).


Joseph Stiglitz, Nobel Prize winner in economics, Professor of the Columbia University and former Chief Economist of the World Bank expressed his satisfaction with the BRIC's decision to establish a new bank for financing the needs of developing countries. At the same time, Joseph Stiglitz stressed that establishment of the bank reflected the current changes in the global political and economic balance alluding, primarily, to the growing role of China.


How useful can the new international financial institute be for global economic development? What are its chances to challenge professionally, not politically, the traditional international financial institutions?


The answer to the above questions depends mostly on the will of founder-countries to make economic development the central motivation for the new international financial institution. Certainly, it is an important, but insufficient condition for the bank's effective work; to achieve that it is necessary for the bank to comply with a whole range of requirements. At present, it is proper motivation of establishment of the bank that matters because without it the effect of the new organization on the global development is hardly discernable.


For about 70 years, the World Bank has played a central role in the global economic development requesting fulfillment of different reforms from its borrowers. In the past few decades, the World Bank has requested fulfillment of standard measures, including privatization, deregulation, liberalization of foreign trade and (recently) compliance with the rules of the World Trade Organization, fiscal compliance, redistribution of budget expenditures, carry out of an anticorruption policy, efficient protection of ownership rights and other.


In Dani Rodrik's book: One Economics, Many Recipes: Globalization, Institutions and Economic Growth (the Institute of Advanced Studies, Princeton, the USA), there are many examples showing that countries which scrupulously fulfilled the World Bank's requirements managed to achieve only relatively small economic growth. So, Lora Eduardo from the Inter-American Development Bank (Lora, 2001a) calculated the value of the structural reform index for Latin America which measured the extent of trade and financial liberalization and progress in the tax reform, labor market reform and privatization for the past 15 years of the last century. As regards the economy of Latin America, the index whose maximum value is equal to 1 increased on average from 0.34 in 1985 to 0.58 in 1999. It is to be noted that in the same period average growth rates of Latin American countries happened to be below the average growth rates which those countries demonstrated in the pre-reform 1960–1980 period. From 1980 till 1990, the economies of the region grew at an annual growth rate of 0.5%, while from 1990 till 2004, at the rate of 1.1%.


On the contrary, the policy carried out by South Korea and Taiwan in the 1960s and the 1970s allowed for serious deviations from recommendations on deregulation, liberalization and privatization. However, in the 1960-2004 period those countries together with other countries of East Asia (without taking China into account) achieved sustained growth of 3.7%.


There are plenty examples of the fact that the World Banks' instructions failed to result in achievement of the expected growth rates. However, it does not mean that they are useless for economic development. A country with a developing economy has good chances to narrow the gap with rich countries if it fulfills those requirements in the long run.


However, for a poor country it may take at least a few decades to narrow the gap with developed countries; during that period that country will have to initiate the process of economic growth and then with the use of other reforms ensure sustained growth and, in the long run, if it fails to join formally the group of relatively wealthy states – the Organization for Economic Cooperation and Development – it will comply with the level of development of countries which are members of that organization.


At different stages of development, economic growth is sensitive to different requirements. It happens so because resources for reforms are scarce and all the required reforms cannot be carried out at once. Initiation of economic growth in a poor country is a very individual process. Key decisions which help initiate growth may not be sometimes a part of the World Bank's standard package of reforms, while a developing country needs quite the opposite measures. However, in its lending policy the World Bank sets the following condition: funding is granted only in case the country-recipient of the loan complies with the requirements set by the Bank.


Founder-countries of the NBD (it is noteworthy that at our time those countries are wealthier than the leading economies used to be when the World Bank and the International Monetary Fund were established) have an opportunity to pursue their own policy in the area of global economic development. The above factor permits them to experiment with the list of recommendations for poor countries and make deviations from the World Bank's instructions. A higher extent of freedom in policy-making may potentially make assistance to developing countries more effective.


At the same time, there is a serious danger that instead of supplementing the World Bank in its objective to speed up global development, the NBD will seek to replace and oust it by granting to borrowers either more funding or setting less tougher requirements (not other alternative requirements, but less tougher ones) to reforms. Such concerns are not groundless. For instance, unlike international financial organizations Russia often extends larger loans to neighboring countries and without any conditions that reforms are to be carried out.


If the NBD fails to convince the world economic community that development is its absolute priority it will be difficult for it to cooperate with leading experts in economic development: the latter will probably prefer to work for an institution wh ere nothing endangers their professional repute, except for their own mistakes.


If assistance in economic development fails to become the main objective of the new organization in which China is likely to play a dominating role, the bank risks to become an institution which neither promotes economic development, nor is able to be an expert alternative to traditional international financial institutions.


That problem can be avoided. It is up to founder-countries to make key decisions.

Ivan Lyubimov, PhD, Senior Researcher