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The Brics (Brazil, Russia, India, China and South Africa) nations are starting their own development bank and there’s a strange twist in the contract; it follows the one country, one vote principle.
But what is a development bank? Unlike private commercial banks, it is a financial institution set up with the primary purpose of giving out loans to support economic growth and social development.
The bank aims to remain a profitable enterprise through charging interest on loans issued, but initial capital is provided by governments. This also allows development banks to sustain long periods of loss and take the risk on supporting very long-term projects such as new power plants.
There are many development banks in existence. The closest to home is the Development Bank of Southern Africa run by the South African government. In the 2012/13 financial year it approved funding worth R18.135 billion spread over 68 projects.
While it does lend money to non-South African-based projects, its primary interest is the development of southern Africa for the economic benefit of the South African economy. It lends in the interest of South Africa with South African money.
With multi-national development banks, such as the World Bank, the lending and allocation of funds is more controversial. The World Bank has 188 member nations and its goal is to eliminate poverty worldwide. Not all nations are equal though and voting power is determined by financial contribution; recently changed to also include a factor for the size of each country’s economy.
The US’s voting power (15.85 percent) is more than double that of any other nation; Japan is the second-largest with 6.84 percent. Of the Brics nations, China (4.42 percent), India (2.91 percent), and Russia (2.77 percent) appear in the top 10. The cumulative vote of the Brics nations is not even as large as that of the US alone.
This is one of many reasons behind Brics setting up its own institution to tackle development issues. The new Brics bank will be a small version of the World Bank and will largely work in the same way – representing its major stakeholders.
Other emerging markets will benefit from direct funding for projects in their economies and will indirectly benefit from a more established presence of emerging market priorities. But the Brics bank will not grant any loan or take any action that is detrimental to the member countries. It is not the selfless saviour of the marginalised economies.
Where the Brics bank is different from the World Bank, however, is that among members all things are equal. The initial pool of capital available for development loans will total $50 billion (R530bn) and each of the five nations will put in a fifth. When it comes to voting on important decisions, members have same voting power.
This does not stop any member from pressurising South Africa’s decision-making with threats or trade-offs, but it does signal a move away from the traditional problems of the World Bank and other international financial institutions.
In addition to the bank, Brics agreed to form a reserve fund worth $100bn. This is available only to them and used as a temporary support during balance of payment pressures when member economies are experiencing more money going out than coming in. Here, contributions are not shared equally and the result is likely to be China’s balance of payments surplus financing the deficits of the others.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein