When Goldman Sachs traders coined the term BRIC—an acronym for the emerging Brazil, Russia, India, and China—in 2001, it was just handy shorthand for a flashy new investment opportunity. Now, the BRICS (which, since 2010, have included South Africa) are a real, functioning diplomatic network. On July 15, the BRICS countries signed a treaty providing for the establishment of the New Development Bank (NDB), a multilateral institution intended as an alternative to the IMF and the World Bank, two bodies in which the BRICS countries have long pushed for more influence. Its architects are hopeful that it can compete with its Western-dominated counterparts, changing the power balance of the international system. But can the NDB really disrupt the status quo?
At the turn of the millennium, the BRIC countries caught the attention of major financial institutions as promising locations for new investments. Most of these investments paid off. Between 2003 and 2008, the BRIC countries experienced monumental growth. Soon, “BRIC” became part of the wider lexicon, indicating four breakout nations that were changing the landscape of the world financial system. There was a sense that this was something historic—that Brazil, Russia, India, and China were rising from the poor and middle class of the world to join the elite, ending Western dominance over the global economy.
However, influence in the world economy is based on more than GDP and sphere of commerce. Since the Bretton Woods conference of 1945, the IMF and the World Bank have wielded tremendous sway over the global system, especially in issues pertaining to developing countries like the BRICS. While the global market is largely a meritocracy, controlling shares of the IMF and World Bank are rigid, reflecting a balance of power that looks more like 1945 than 2014. China, for example, has only a 4 percent voting share in the IMF, despite accounting for more than 16 percent of global GDP and over 19 percent of world population. Other BRICS countries are similarly underrepresented. The BRICS could increase their voting shares by contributing more to the two institutions, but the continued existence of sole veto power for the United States would limit the utility of this investment.
While the global market is largely a meritocracy, controlling shares of the IMF and World Bank are rigid, reflecting a balance of power that looks more like 1945 than 2014.
Instead, the BRICS have decided to pursue influence through the NDB. This bank will provide both development grants and emergency reserves, uniting the functions of both the World Bank and the IMF in one institution. The five founding members will hold a minimum of 55 percent voting power between them at all times, of which they will hold equal shares, while any future members, likely other emerging nations, will split the other 45 percent equally. The BRICS countries have already committed US$50 billion in base capital, with the goal of raising that number to US$100 billion with contributions from future members. The bank will also feature a US$100 billion contingent reserve arrangement, set aside for emergency liquidity in times of crisis, normally the function of the IMF. Frustrated with the status quo, the BRICS have built something substantial of their own.
But the NDB has a difficult road ahead. The US$100 billion in base capital for the Bank’s development division is, as of now, just a number on a page. The BRICS countries have promised a meager US$150 million each in the short-term, and raising the rest of their US$50 billion quota over the next five to six years will be difficult politically, as the majority of the BRICS are cash-strapped and mired in their own economic problems. The BRICS’ star has dimmed since the mid-2000s, and extracting billions from their respective domestic economies will not be a simple task. The remaining US$50 billion depends on attracting investments from other nations and institutions, which could prove difficult if the five leaders do not contribute sufficiently. Even if the bank manages to gather all the capital it plans to, the World Bank will still dwarf it by a ratio of almost five to two. If the BRICS remain committed to the project, they should be able to raise the funds they have promised, but reports of a historic change to the international financial system and a Waterloo moment for dollar dominance are drastically overstated.
The NDB will never supplant the Bretton Woods institutions, nor does it have to. Instead, it can make the world of international development and stabilization multi-polar, with the NDB supplementing the actions of the IMF and the World Bank when it can and providing an alternative when necessary. Though the NDB cannot possibly compete with the IMF and the World Bank in sheer size, it may prove a more attractive option for countries weary of Western dominance and the stringent conditions that often come with IMF and World Bank assistance. The BRICS know what it is to be a developing country. Having made such magnificent leaps in the last decade, they have experience and credibility in economic development and poverty alleviation that those in charge of the IMF and the World Bank cannot match. Perhaps competition from the NDB can pressure the Bretton Woods twins to reduce voting share discrepancies and soften conditionality, two changes that are long overdue. When asked if the founding of the NDB represented a move away from the IMF and the World Bank, Brazilian President Dilma Rousseff responded: “On the contrary, we wish to democratize it and make it as representative as possible.” If the NDB helps accomplish this, it will have done enough.
The NDB will never supplant the Bretton Woods institutions, nor does it have to.
The BRICS are a peculiar diplomatic network. They span four continents and share no common language or cultural history. They are viewed as a kind of counterweight to Western economic hegemony, and yet they were conceived in one of its temples. There’s no telling how long this arranged marriage will last, but so far, the five BRICS have seized it. The group has produced a BRICS Interbank Cooperation Mechanism, a BRICS Business Council, a BRICS Banking Forum, and a BRICS Exchanges Alliance. Russia has even floated proposals for a BRICS Energy Union, complete with a fuel reserve and a multilateral policy-making institution. The heterogeneity of the BRICS may prove not to be a weakness but a strength, as they transcend regionalist restrictions and become a kind of cosmopolitan non-West, champion of sorts for those weary with the state of things. With the New Development Bank, the BRICS make their first foray into collective global leadership. Perhaps this is only the beginning.