Much like the Cold War era that emerged after the Second World War and would be defined by contending U.S. and Soviet “superpowers,” the world is in flux again. A U.S. president struggling at home, a still economically troubled Europe, a defiant Russia, and a rising China have together brought tidings – some might say fears – of a new world order dawning, including in international development finance.
The so-called Bretton Woods system of international financial institutions, including the World Bank and International Monetary Fund, established in the post-World War II era have long faced criticism, from China and others, as being unrepresentative of a changed world. Now, the world’s leading developing nations, are not just criticizing; they are acting.
Yet, one need not be afraid of this shifting landscape or of, as one well-known commentator wrote, the “rise of the rest.”
The United States, Europe and Japan, should welcome, as an example, the recent news from Fortaleza, Brazil, at the 6th BRICS Summit of Brazil, Russia, India, China and South Africa of concrete next steps to establish a BRICS bank. This new international financial institution has the potential to serve as an additional source of funding and knowledge, helping meet these and other developing nations’ infrastructure financing needs.
More pointedly, existing institutions and all their stakeholders should welcome this BRICS Bank challenge to become more impactful, more responsive and more effective. Long criticized for overlap and lethargy, existing development institutions also should seek out ways to cooperate and to share best practices. Knowledge can and should flow both ways, including from the developing to the developed world. China’s economic growth after all has been the main driver of successful efforts to reduce extreme poverty globally.
Fittingly to be called the New Development Bank, or NDB, the new financial institution to be headquartered in Shanghai would initially be capitalized at some $50 billion, with each BRICS nations providing an equal amount. India will name the first president, Russia will name the first chair of the Board of Governors, and Brazil will name the first chair of the Board of Directors. A New Development Bank Africa Regional Center will be established in South Africa concurrently with the NDB’s establishment in Shanghai.
The BRICS nations also announced that a “mini-International Monetary Fund” will be created, capitalized at $100 billion in foreign exchange reserves. China reportedly will contribute $41 billion and Russia, Brazil and India would each contribute $18 billion to the currency reserve pool. South Africa would contribute $5 billion.
Taken as a whole, these funds are intended to finance joint development ventures, and also to serve, in some measures, as a counterbalance to the World Bank and the IMF – institutions that China and other developing nations have long perceived as unduly influenced by Western shareholders.
Certainly, announcing and then actually setting up and running an international development institution are very different matters. But let us not condemn and criticize a bank before it even exists.
At a minimum, the competition potentially posed by the New Development Bank – if it does not mean a race to the bottom when it comes to financing standards – can be good for status quo development institutions that have not done enough to embrace critical reforms to how they do business. The world will be better off if the World Bank, the Asian Development Bank and similar organizations are forced to focus more on results due to the challenge of new, emerging institutions.
Here are four suggestions for the new NDB, based on my own time pushing with others for more “responsible development” – that is development focused on people, planet and partnership – while on the Board of Directors of the Asian Development Bank (ADB).
First, pay attention to the non-financial impact of major infrastructure investments.
Ignoring the negative consequences of investment can ultimately undermine long-term support. Understandably, concerns exist, with many in the established development community fearing that a new BRICS bank will not take as seriously social safeguards implemented with mixed degree at the World Bank, Asian Development Bank, African Development Bank and elsewhere. During my time on the ADB board of directors, China went so far as to decline to cooperate with the Bank when questions were raised on at least one occasion as to compliance with social safeguards related to relocation and compensation of affected people.
Social and environmental safeguards are indeed critical issues when it comes to large-scale infrastructure projects, regardless of who provides the financing. It will indeed be instructive to see what policies are adopted by the BRICS bank when it comes to such safeguards.
Second, watch out for politics, including the politics of personnel.
Already, the major BRICS shareholders have staked out which posts their nations will claim, from president to chairman of the board. Let’s hope the people chosen for these and other roles are unquestionably qualified for the jobs they will assume. At the ADB, Japan maintains significant influence over human resources policies and personnel choices, including at mid-management levels, leading to unnecessary tensions and questions over staff qualifications.
BRICS nations with common borders and a history of tensions – China and Russia, and India and China – also will face significant challenges ahead, including over staffing the new institutions, as the reality of national interests and politics meet the rhetoric of cooperation. Vested interests may soon be focusing more on personnel picks, prerogatives and political points than on how best to speed development to places underserved by present development institutions.
Third, remember the power of the private sector.
At the end of the day, the BRICS nations also must recognize that while capital market development will be key to sustained financing, the true economic constraint to growth is often not a long-term lack of funds, but the “little bric” of bureaucracy, regulation, interventionism and corruption that too frequently gets in the way of sustainable business development and private sector growth.
Pointedly, the BRICS nations in their statement from Fortaleza emphasized what they saw as the positive role of State Owned Companies in their economies. It is, however, the private sector ultimately in all of the BRICS nations that will be the key driver of job creation and economic growth. Time will tell if the new BRICS bank will embrace a private sector partnership role in infrastructure financing.
And, fourth, accountability matters.
Sovereign nations will choose for themselves how to build a better life for their own people, and how best to be accountable to one’s own citizens. Yet, just as China today is seeing the damage to its own economy and environment from pollution and corruption, so too might other nations recognize that development “above all else” is not necessarily the way forward.
As with a China-proposed Asia Infrastructure Investment Bank, the key is to ensure through transparent systems and strong accountability that no one is made worse off by these emerging institution’s efforts to speed necessary development. Each new financial institution’s policies and approaches, if transparently developed and shared, will help the world determine where such an institution’s shareholders place their emphasis: development above all else, or a more balanced approach?
Transparency and accountability must be addressed early on as new institutions move forward. The New Development Bank and a China-driven AIIB are signs of a changing world. Change can be difficult, and it can be for the worse, but my hope is that by applying old lessons learned, new institutions can also drive change for the better.
Curtis S. Chin, a former U.S. Ambassador to the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC. Follow him on Twitter at @CurtisSChin.
