The leaders of the BRICSs countries agreed Tuesday, July 15th, to set up a new development bank aimed at financing infrastructure projects in the founding members of Brazil, Russia, India, China and South Africa and other emerging-market countries as well.

The reserve fund and Shanghai-based development bank are seen as alternatives to Western-led institutions.

A new world bank

As reported earlier, the leaders of BRICS countries are in meetings ending July 17 to weave together plans to create a $100 billion bank to compete with the World Bank and International Monetary Fund.

Earlier, negotiations over the location of the new bank were said to be deadlocked. However, contrary to the earlier expectations, agreement has now been reached among the BRICS leaders to have the headquarters established in China, while India will preside as president the first year. The first chairman of the board of governors will be Russian, and the first chairman of the board of directors will be Brazilian. The first regional center of the bank will be set up in South Africa.

The BRICS bank will start out with capital of $50 billion to be paid equally by all five BRICS countries, with a goal of reaching $100 billion.

The group of emerging economies also agreed to establish a $100 billion Contingent Reserve Arrangement, with China contributing the lions share of $41 billion.

The BRICS countries now account for 11% of global capital investment, and trade turnover almost doubled in the last 5 years. The following picture captures significance of the BRICS countries relative to global GDP:

Significance of BRICS nations

 

20% share of global GDP

Russian President Vladimir Putin said Tuesday at the 6th BRICS summit in Fortaleza, Brazil: “BRICS Bank will be one of the major multilateral development finance institutions in this world”.

Highlighting the importance of the BRICS countries, Putin said the BRICS now account for about 20% of the world’s gross domestic product.

The BRICS countries have been trying for years to reform the International Monetary Fund and the World Bank, the backbone of the world’s global financial structure, to give emerging markets more influence over those institutions, but with little success.

The World Bank finances development projects around the world, and the IMF is the lender of last resort to countries that don’t have the funds to pay their foreign debt. However, the IMF in particular is widely disliked among countries that need its help, thanks to its stringent budget control conditions imposed on governments in return for its help.

When the new Development Bank is finally set up, it will provide an alternative source of financing for the BRICS and other emerging countries and give them much greater control over funding decisions that affect them directly.