Friday, 14 June 2013

What might the BRICS Bank mean for development?

By Stephen Spratt

On Wednesday this week I participated in an event hosted by the All Party Parliamentary Group for Debt, Aid and Trade, as part of the IDS Rising Powers in International Development Programme. We were asked to address the following question:
Will the BRICS Bank change development and shift the global balance of power?   
There are actually two questions here. In response to the second, it is clear that irrespective of what happens with the proposed bank, the emergence of the BRICS has already shifted the global balance of power in three important areas:
 
  • Economically, the BRICS have generated much of the global growth that we have seen since the crisis of 2007-8.
  • Financially, they are responsible for a rising proportion of global investment. China is the world’s largest investor in renewable energy, for example, and India is the fastest growing. South-South investment flows are an increasingly important aspect of globalisation.
  • Politically, the G8 has been replaced by the G20 as the pre-eminent political grouping at the global level.
Importantly, these power shifts have not been reflected in institutions like the World Bank and IMF. I will not dwell on the obvious unfairness of this, but simply note that Belgium has more IMF votes than Brazil. This is probably the main motivation behind the BRICS Bank: to create a development finance institution not dominated by developed countries.

This leads us to the first question: will the BRICS Bank change ‘development’? The honest answer is that we don’t know. We know little about how the bank will be structured, or what it will do.

So let’s change our question so that it can be answered:

What would the BRICS bank have to do to change development (and how likely is it that it will do these things)?

There are two ways that the BRICs bank could ‘change development’:
  • Directly - through the way it operates as a public, multilateral development bank.
  • Indirectly - through its impacts on the wider development industry.
For direct impacts, we need to clarify what development banks actually do before we can assess if the BRICS Bank will be different.  The three main functions are to:

(i) Lend to key sectors.
Commercial banks focus on the most profitable activities, but these are not always the things that matter most for the wider economy. Some key sectors, such as SME’s, are not particularly profitable. Lending small amounts to lots of small firms is far less appealing than lending large amounts to a few large firms. Infrastructure and agriculture are other key sectors that commercial banks tend to neglect.
 
(ii) Provide the right type of finance.
Infrastructure projects need long-term ‘patient’ finance. Commercial banks are very bad at providing this. They are also pro-cyclical, lending lots in good times but little in downturns. Development banks can offset this, providing lending when private finance dries up. They may also lend at below market rates when high social returns are achievable, but financial returns are low.
 
(iii) Consider the broader public good when taking decisions.
Lending for renewable energy production, for example, will rarely be the most profitable option, but is important for other reasons. Similarly, ensuring good wages are paid and human rights respected may not increase a project’s financial returns, but are important for the broader public good.  

While at this stage it’s not possible to be sure that the BRICS Bank would do these things differently from the World Bank, there are some indications that it might:

  1. For sectors the focus will be infrastructure, where there is a huge funding gap. The BRICS countries need $4.5 trillion of investment over the next 5 years; the infrastructure financing gap in Africa is $50 billion per year. Given its importance to development, an infrastructure focus is to be welcomed, particularly as existing MDBs have moved away from this in the past 10-20 years.
  2. For financing mechanisms, I would expect considerably more flexibility than we currently see.  Public banks in some BRICS countries have shown a greater willingness to provide concessional loans than the World Bank and RDBs. Some – such as in Brazil – also played an important counter-cyclical financing role in the 2007-8 crisis, and are the main sources of long-term finance. Importantly, the BRICS bank is likely to be less ideologically fixated on providing finance at market rates than current institutions.
  3. For the non-financial aspects of lending, we can be certain about one thing: World Bank style conditionality is not going to happen. On other important questions we can be less sure. For example: What say will local communities have in projects? What weight will be given to human rights and other social factors? Will potential projects’ real environmental impact be taken into account when taking decisions? How transparent will the Bank be in its operations?
On many of these questions – particularly the non-financial aspects of lending – the BRICS themselves hold different views. Just think of Brazil and Russia, for example. This means that the direct impact on development may be decided by which of the BRICS countries have the most say in how the bank functions. This is all about governance and mandate of course, which is where we know the least. We know the least because it matters the most. Given its economic weight, many expect China to have a big say in these questions, but compromise from all parties will be essential if the bank is to get off the ground. Negotiations are ongoing: there is much to play for.

When we have answers to the following questions, we will know more about the distribution of power within the BRICS bank, and its likely direct development impacts.

  • Will the BRICS provide capital in line with their economic weight, or equal amounts?
  • Will voting rights reflect these different contributions, or other considerations?
  • What say, if any, will non-BRIC countries have in the Bank’s activities?
  • How will be the Bank be financed beyond its initial capitalisation?
  • How broad or narrow will the bank’s mandate be in terms of countries, sectors, and potential financing instruments, including concessional finance?
  • What role will non-financial factors play in its lending decisions?
  • How will its performance be assessed?
Finally, the indirect effects of a BRICS bank are bound to be significant: the World Bank will have a serious competitor for the first time. If nothing else, this will force it to pay attention to what its customers want, and restrict the ability to impose its will. For an institution that has long pushed the merits of competition, there is a certain irony here.  
Stephen Spratt coauthored IDS Rapid Response Briefing "What next for BRICS Bank" with Musab Younis and Noshua Watson.