BRICS BANK - INDICATING A SHIFT IN WORLD ECONOMICS

By Research Desk
about 10 years ago

 

By Ruma Dubey

That hurt of colonialism persists. The only reason, many headlines screamed, the establishment of BRIC bank was good because it would show the ‘thumb’ to the West – IMF and World Bank, which would essentially mean the USA and Europe. For us, the BRICS bank is an answer to IMF/World Bank, a way to show “them” that the emerging economies have arrived and they can fend for themselves. With little or no voting rights in IMF or World Bank, none of these nations – Brazil, China, India, Russia and South Africa have much say and these had to collectively bear the brunt of the US crisis, currency volatility and economic slowdown. Now, the BRICS Bank is there to save us all from such occurrences and also when USA stops printing money completely. A way to show the 'them' that power is slowly shifting.

But then the question is – are we so fixated with the ‘West’ that we are completely ignoring the power of China and how we could be actually conceding power? Its surely a diplomatic victory that the first president of the BRICS bank – New  Development Bank will be an India for the next six years but the fact remains that it will be headquartered in Shanghai.  The President will change but the location will not. In that sense we have won very small – an opportunity which others too will enjoy.  World over this location of the BRICS bank in China is being viewed as a way in which it will assert greater influence over the bank to expand its political clout abroad. When China is the largest contributor and will essentially “be” in China, will the fact that the China will not preside over the bank for two decades make much of a difference? The good part though – each nation will have equal voting rights, irrespective of its contribution.

For Russia too, this Bank is a way of showing the western world that they could isolate the country for Ukraine and freeze funding but it has found new friends, who are actually growing powers of world economy. In that sense, Russia too is securing its place in the new emerging world.

Another big question which comes to mind – how will India contribute to this Bank? The capital will be $50 billion and then there is the $100 billion reserve facility. Apart from helping build infrastructure in the five nations, the “Contingent Reserve Arrangement” is aimed at protecting these 5 countries from future stock market shocks.  In terms of contribution, China will bring in the maximum at $41 billion while Brazil Russia, India and South Africa will contribute equally - $18 billion each.  The fund would consist of $10 billion of “paid-in-cash”, which would be a contribution of $2 billion from each country over seven years along with a additional $40 billion which is to be “paid upon request”.

India is currently grappling with its own deficit issues so where will it generate money for this?  India and the other nations have to pay the first instalment of the seven in a year from now. This means we have to pay $2 billion by June 2015, which is around Rs.12,000 crore. At current valuation of Rs.60/US dollar and given that we have pay $18 billion over seven years, we are talking about a massive Rs.1,08,000 crore contribution to the bank, which may or may not benefit us. This is more than money India plans to raise this year via divestment of PSUs and is more than the cost of the proposed bullet train, which will cost around Rs.60,000 crore. Yes, it’s a great diplomatic and geopolitical win but we surely will be paying a big price for this.

The question also arises the need for this bank. IMF itself has presented a study which shows that by 2030, China will be the largest economy in the world, followed by USA and third place will be India. Fourth place is Japan and then fifth is Brazil, sixth is Russia. The developed countries come much below this BRIC growth chart of IMF. If we are as such projected to grow like this without this Bank, why the need for the bank at all? But the other way to look at this – if we are as such projected to grow more than the developed countries, why can’t we have control like the US has over World Bank and IMF?

The New Development Bank will allow other nations to become a member and in the future, it looks like Turkey, South Korea, Mexico could become members.  The Western world probably needs to understand that by 2030, the world will be dominated by BRIC and they will have a much bigger role in shaping the world economy. The New Development Bank is probably just a form of reiterating this growing power for the “others” to take notice.

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