BRICS development bank: a dream comes true?

One more step was taken by the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) to create their own development bank. Authorities from the five nations were in Tokyo, and they reported that some progress toward the creation of the bank was done. According to the Brazilian business newspaper Valor Econômico, the bank might initially start with US$ 50 billion in capital.

The idea is to establish a joint bank which could provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries. At the same time, the BRICS development bank might be an alternate lender to the World Bank and other finance bodies, although some analysts are skeptical about it.

The BRICS countries have different objectives. While India sees the bank as an economic project, China has a political view of it. The five nations, however, can change their role in the World Bank and in the International Monetary Fund (IMF).

The BRICS countries are important borrowers from the World Bank. In 2011, over US$ 7 billion were approved to them. The five nations have been increasing their contribution to IMF, and they want the fund to reform its quota system to enhance their representation. They are demanding voting shares in IMF, for instance. Starting a new development bank might provide a bargaining power.

As the contributions to the development bank will probably be equal, the countries will have an equal voting structure. On the other hand, this can limit the size of the bank, since China has more reserves than the others. Together, the five countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion. Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product.

If it becomes a reality, the institution would be the first major multilateral lender to emerge since the European Bank for Reconstruction and Development in 1991. The BRICS will meet again in Mexico City next month.