New Development Bank BRICS best card?

By: Shahzad Ahmad

“We should remain committed to multilateralism and the basic norms governing international relations, work for a new type of international relations, and foster a peaceful and stable environment for the development of all countries. We need to make economic globalization open, inclusive, balanced and beneficial to all, build an open world economy, support the multilateral trading regime and oppose protectionism. We need to advance the reform of global economic governance, increase the representation and voice of emerging market and developing countries, and inject new impetus into the efforts to address the development gap between the North and South and boost global growth.”

— Xi Jinping President of the People’s Republic of China (At the Plenary Session of the BRICS Xiamen Summit 4 September 2017)

The ninth annual BRICS summit was held in Xiamen, China on 3-5 September. The BRICS concept, coined in 2001 by Jim O’Neill, a Goldman Sachs economist, morphed into a formal association in 2008 in the hope it would become an influential global association and, in particular, grow to rival the Group of Seven (G-7) forum of major developed economies and leading democracies in the governance of global affairs. Since then, the bloc has engineered a significant restructuring of the global governance built on US-led Bretton Woods institutions. Covering 44 percent of the world’s population, abundant natural resources, vast markets, and economies with huge growth potential, the bloc has become a key engine of economic growth. It currently accounts for more than half of global growth. It has increased the share of voting rights for emerging markets at the International Monetary Fund and World Bank. It has also started operating its own New Development Bank, largely backed by China.

But if question marks on the future of BRICS are repeatedly raised, the New Development Bank (NDB) is probably the most concrete avenue through which the grouping can deepen cooperation. Recently, the NDB Board of Directors approved four projects in China, Russia and India with loans totalling more than $1.4bn.

The second tranche of projects broadens the scope of NDB’s activities from renewable energy to areas ranging from information technology to energy conservation. This includes a $2bn sovereign project finance facility for flood control and water quality extended to Hunan province in China, and a $470m sovereign project loan for developing the rural drinking water supply scheme in the Indian state of Madhya Pradesh. Going forward, another $30bn in loans, including a total of 15 projects by the end of 2017 and up to 50 in 2021, has already been announced.

According to the Bank’s five-year strategy, two-thirds of all projects will be devoted to sustainable infrastructure development. The NDB’s stated commitment to sustainable infrastructure is perhaps its most important differentiating feature, carving out a niche for itself among existing multilateral development banks.

In 2015, almost 190 countries, accounting for more than 98 percent of greenhouse gas emissions, agreed to a global climate change strategy. Each country submitted a voluntary plan that set out how it would move its economy on to a lower-carbon growth pathway. With the recent withdrawal of the US from the Paris Agreement, countries such as India and China may well provide a new kind of leadership to climate change efforts.

Attention now shifts towards how to implement and finance sustainable development. While these voluntary plans will take years to play out, one thing likely to happen is to direct investment towards ensuring the sustainability of infrastructure. Given the scale of investment required, creating the right conditions for these investments is essential. From 2015 to 2030, global demand for new infrastructure could amount to more than $90tn from a total estimate of $50tn in 2015. In India alone, this amount could reach $646bn over the next five years. Doing it sustainably will probably increase upfront capital costs by 6 percent for individual projects.

But apart from stating that sustainable development will be linked to the financing of infrastructure projects, the NDB has been less clear about how it will ensure that these projects will be rooted in sound social and environmental practices. Addressing this question will be critical as the NDB implements its five-year strategy and realises its vision around sustainable development.

An ongoing research study by BRICS scholars at the Center for African, Latin American and Caribbean Studies (CALACS) at O.P. Jindal Global University, India, and Conectas Human Rights, Brazil, in collaboration with the Center for BRICS Studies at Fudan University, China, has found that there is no common definition nor a unified approach to sustainable infrastructure. A working definition of sustainable infrastructure coupled with a framework for assessing the actual sustainability of NDB’s projects would equip the bank with the necessary policy tools to fully articulate its mandate. Some institutions have gone further and developed methodologies for assessing sustainability of infrastructure projects and institutions’ commitments to sustainable development. These experiences point to important lessons for the BRICS to apply within the context of the NDB.

First, the negative spillovers of sustainable infrastructure projects on the environment and local communities are normally corrected via safeguards. But safeguards are limiting in that they do not necessarily unlock the transformational nature of development itself. Sustainable infrastructure projects should not only aim to compensate or mitigate adverse impacts on the environment and vulnerable groups, but go beyond the “do no harm” approach to generate positive impacts in borrowing countries.

Second, emphasis on each pillar of the sustainability triple bottom-line is context-specific and should follow a country’s development priorities and trajectories. While India and South Africa may place greater emphasis on social aspects such as job creation and service delivery, China would likely place more emphasis on economic growth. Moving forward pragmatically, without being overly prescriptive, is a must.

Third, the social dimension of sustainability is not exactly framed under a “rights-based approach” to development. Even though requirements on consultation, participation, transparency, accountability and non-discrimination are present in most existing frameworks, people’s rights are not necessarily reflected therein. This is particularly important since infrastructure projects can cause heavy social impacts.

Financial and non-financial incentives, such as long-term repayment terms and lower interest rates, could be further designed to stimulate countries to submit projects that meet these sustainability criteria and to ensure that projects remain as such throughout their entire life cycle.

Linking sustainability criteria to incentives would encourage countries to think about sustainable practices not as bureaucratic formalities or risks to be avoided, but as actions conducive to better development outcomes. This would represent a major shift in the way environmental and social standards are conceived in the international financial architecture, ultimately moving beyond do no harm and bottom lines to unravelling the “new” in the New Development Bank.

Can NDB Challenge the World Bank?

Merits of the NDB

The NDB has several attractive characteristics. First, it follows a considerable extent of policy autonomy along with adopting the implications and conditions of the World Bank, the Washington Consensus in particular, by editing certain policies and making them suitable for their respective domestic contexts and hence coming up with a hybridity of sorts.

One of such adoptions can be seen in the critical role played by states in developmental policymaking. Second, the NDB is a source of investment for the developing countries from non-Bretton Woods institutions. Third, if institutions like the BRICS NDB become more influential, they will be a counterbalance to Western international development institutions and may foster the long-sought balance between the North and South. Fourth, a distinct characteristic of the working of the Bank is the provision of its initial subscription in equal shares (20%) by the five member countries, although the vital role of China is displayed by the establishment of the Bank’s first headquarters in Shanghai.

If one compares the World Bank’s current role in the global market and access to the international capital market (considering its extremely efficient financial management system), the New Development Bank cannot yet seriously challenge it. However, it has the upper hand when it comes to the state-owned banks of its members, especially China.

Challenges

Apart from a less developed financial management system, the NDB has a large number of potential challenges – the major one being the establishment of proper transparency and independence from political influence and corruption. This is especially imperative, considering its members are countries which rank between 67 and 136 on the Transparency International Corruption Perception Index.

Secondly, due to volatile international capital flows, these countries will likely not be able to contribute to preventing crises at the global level and especially in developing countries (in the small-and medium-term, at least.) Third, the ongoing disputes between the BRICS countries, particularly the border tension between India and China, is a potential hindrance to a unified economic relationship. Finally, after the Indian economic crisis of 2013 and the Russian economic crisis of 2014, the foreign reserves of these countries have been strained. But if China implements full currency convertibility and the Yuan becomes a global reserve currency, China would be able to intervene in the global market to stabilise a crisis, which in turn would make NDB one of the main players in the international market.

Conclusion

The dynamics between the World Bank and the BRICS NDB can best be explained by Thomas Freidman’s description of globalisation’s golden handcuffs. He has described the existence of a powerful reference group which dominates the working order and demands certain rights which begin to be challenged by the formation of other such reference groups. These other groups take the gravitational force created by the first reference group’s power away from it, thus initiating a process of power diffusion.

The World Bank can be seen as this dominant reference group which is being challenged by the formation of new groups such as BRICS NDB, which is spreading its influence and proving to be a potential challenge to the established order. In a recent talk on the Global World Order, Dr Nicola Leveringhaus stated that new institutions like the NDB could potentially lead to China’s resurgence by making it seem less of a threat and more of a friendly partner.