BRICS: THE NEW DEVELOPMENT BANK (NDB) AND THE CONTINGENT RESERVE ARRANGEMENT (CRA)

Charles Simkins | Aug 04, 2014
On 15 July, Brazil, Russia, India, China and South Africa signed agreements to establish the New Development Bank and the Contingency Reserve Arrangement. The provisions of each have to be incorporated into the law of each country. Once this is done, probably by 2016, the institutions can start operation. How will they work?

The players

The countries are heterogeneous as the table shows, making management of the NDB and CRA a challenge. China is in the strongest economic position by far, having the largest population, the largest GDP, the highest recent growth rate, the highest saving rate, the best Standard and Poor’s rating and the lowest default risk.  It is also the least free at the political and civil rights levels and the most opaque, being the only country of the five not subscribed to the IMF’s Special Data Dissemination Standard.  South Africa is the smallest having just 1.7% of the total population and 2.2% of the total GDP and, with Brazil, the freest.

 

 

Population

GDP

GDP per

Growth

Gross

Standard

Credit

Freedom

 

 

 

Millions

US$

capita

average

savings

& Poor's

default

House

 

 

   

billion

US$

% p.a.

rate %

rating *

risk %†

score

 

 

 

2013

2013

2013

2009-13

2013

2014

Jul-14

2014

 

 

                   

 

Brazil

200

2,246

11,208

2.7

15

BBB-

2.4

4

 

 

China

1,358

9,240

6,807

8.9

51

AA-

1.3

13

 

 

India

1,252

1,877

1,499

7.0

30

BBB-

NA

5

 

 

Russia

143

2,097

14,612

1.1

28

BBB-

3.6

11

 

 

South Africa

52

351

6,745

1.9

13

BBB-

2.9

4

 

 

                   

 

TOTAL

3,005

15,811

5,261

           

 

                   

 

* Foreign currency

               

† Deutsche Bank

 

 

 

             

Financing

The initial authorized capital of the NDB will be US$ 100 billion and the initial subscribed capital will be US$ 50 billion.  20% of the subscribed capital will be paid in over 6½ years and the remainder will be callable shares.  Each country will subscribe the same amount, which means that South Africa will have to pay in US$ 2 billion – a substantial sum, whose financing is not known.  The CRA will require initial committed resources of US$ 100 billion, $41 billion from China, $18 billion from Brazil, India and Russia and $5 billion from South Africa. 

The rules

The NDB will mobilize resources for infrastructure and sustainable development projects in BRICS and in other emerging and developing countries.  The development of infrastructure in emerging and developing economies and how to finance it has emerged as a major issue in recent years.  Available estimates indicate annual investment of roughly US$ 2 trillion required by 2020.

The bank will be headquartered in Shanghai.  India gets the first president of the Bank, Brazil gets the first chairmanship of the Board of Directors, Russia the first chairmanship of the Board of Governors and South Africa the first regional office.  Other countries may join the NDB on terms and conditions decided by the Board of Governors and upon subscription of US$ 100,000.

The CRA will provide a liquidity instrument in response to short-term balance of payments pressures and a precautionary instrument in light of potential balance of payments problems.  The maximum access of each party is: China, half of its commitment, Brazil, India and Russia, their full commitment and South Africa, double its full commitment.  30% of the maximum access is subject only to agreement of the parties, the remaining 70% requires the presence of an IMF arrangement as well.  The CRA will provide assistance through currency swaps giving requesting access to US dollars to meet payment commitments.

The game

Dissatisfaction with the IMF and the World Bank has been cited as a principal reason for the BRICS initiative.  Three components of this dissatisfaction can be identified.  

  • First, the structure of governance at the IMF and the World Bank concentrates power in the hands of the US and Europe and the BRICS want more influence in the global financial architecture.  The influence conferred by the initiatives is modest in international terms, especially given a crowded field of development banks, but it may grow. 
  • Secondly, the flow of financial resources from the World Bank to the BRICS has been drying up and a replacement is sought.  In particular, low savings BRICS (South Africa and Brazil) will be able to tap into the high savings of China. 
  • Thirdly, some hope that irksome conditions imposed by IMF and World Bank will be removed, particularly those in relation to governance and economic organization.  Russia is the country with most to gain on this front.  But there are definite limits: the NDB will have to observe sound banking principles if its capital is not to be dissipated, and the CRA requires co-operation with the IMF beyond a certain level of access.  There is little scope for alternative economic models to guide either institution.


Then there is the role of the NDB and CRA in projecting soft Chinese power.  China is unlikely to need either development finance or balance of payments support, whereas each of the other four countries will want one or both.  However, China will also want the NDB and CRA to be regarded as multilateral organizations, since bilateral aid is generally regarded as an extension of foreign policy.  So it has to play a subtle game.  Gains have to be made by the other participating countries: Brazil in the form of both infrastructure development and balance of payments support and India in terms of infrastructure (though Indian critics have already pointed out that NDB support will meet only a small fraction of their need).  The game in the case of Russia will be particularly interesting.  China’s GDP is already more than four times Russia’s and the ratio is growing. 

South Africa’s role will be to contribute infrastructural support to Africa to complement growing South African and Chinese commercial involvement.  The future role of the Development Bank of Southern Africa will be at stake. In its involvement with China, could South Africa be taking fronting to a whole new level?  At the end of the day, Africa’s destiny is tied up with its ability to supply primary resources to China.


Charles Simkins
Senior Researcher
charles@hsf.org.za