BRICS leaders - Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Brazilian President Dilma Rousseff, Chinese President Xi Jinping and South African President Jacob Zuma (left to right) - attend the emerging-economy bloc's sixth summit in Fortaleza, Brazil, on July 15
Brazil continues capturing the world's
attention even as the 2014 FIFA World Cup soccer tournament has come to an end in the country. The Sixth Summit of BRICS countries - Brazil, Russia, India, China and South Africa - was held in the northeastern city of Fortaleza on July 15 under the theme of Inclusive Growth: Sustainable Solutions.
The meeting was attended by Brazilian President Dilma Rousseff, Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping and South African President Jacob Zuma. They discussed solutions to development challenges and showcased their cooperative accomplishments.
The Fortaleza Summit commences the second round of the annual BRICS summit, which the five countries take turns hosting. The First BRIC Summit - South Africa was not included in the bloc until 2010 - was held in the Russian city Yekaterinburg in 2009, initiating the cooperation mechanism of the emerging economies.
In the past five years, BRICS has forged an impressive partnership and extended common interests in the midst of a complex international context. At present, the emerging-economy bloc has been implementing cooperation initiatives in more than 30 fields.
Undoubtedly, the establishment of the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA) tops the agenda of this year's summit. It is a long-awaited achievement signaling a big step forward in the group's role in global financial governance.
According to the Fortaleza Declaration, the NDB, to be headquartered in China's Shanghai, aims to finance infrastructure and sustainable development projects in BRICS and other emerging and developing economies. It shall have an initial authorized capital of $100 billion. The initial subscribed capital will total $50 billion, equally shared among founding members. The NDB will also set up an African regional center in South Africa, which will be established concurrently with the headquarters.
And the CRA - with an initial size of $100 billion - will help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. Both the NDB and CRA are open to other developing countries. Each member provides a different amount of capital in the CRA according to their financial situation. China offers the largest capital sum of $41 billion to the reserve and receives a credit of $20.5 billion. South Africa provides $5 billion and has a doubled credit of $10 billion.
An alternative way?
Since BRICS made its announcement, the new finance institution has been subject to widespread global attention. Western media outlets have asked whether it will act as an alternative to the current Bretton Woods institutions, including the International Monetary Fund (IMF) and World Bank.
"The new bank is established for the purpose of promoting development of BRICS countries, especially in terms of infrastructure development in these countries. It is to meet the demand of BRICS and is also a beneficial supplement of current international institutions rather than a competitor," Huang Wei, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS), told Xinhua News Agency.
BRICS countries have been exploring ways to strengthen their cooperation in global finance governance since 2009. At their fourth summit in New Delhi in 2012, BRICS members agreed in principle to set up a South-South development bank that will be funded and managed by BRICS and other developing countries. In the past two years, BRICS finance ministers and central bank governors undertook the work of coordinating and structuring the framework for the new bank.
Along with the rapid economic growth, current international financial institutions are unable to meet the demands of emerging countries. The World Bank, for example, aims to help undeveloped countries reduce poverty. But BRICS countries cannot acquire loans from the World Bank because of their growing per-capita income, Huang said.
Additionally, infrastructure investment is highly demanded in emerging countries. But commercial lending agencies prefer short-term projects to infrastructure investment that entails long-term commitment and high risks. The NDB is expected to help meet the financing gap of infrastructure in developing countries, according to Huang.
"China has much experience and sufficient capacity in infrastructure construction. The NDB will offer opportunities for Chinese enterprises to cooperate with other members of BRICS in the field," Huang said. "Moreover, infrastructure construction will facilitate communication and trade between each other and create job opportunities in emerging countries. It is an effective way to realize inclusive growth."
World Bank President Jim Yong Kim also welcomed the birth of the NDB during his visit to China on July 8, Hong Kong-based South China Morning Post reported.
Kim said the BRICS-led bank would not be regarded as a threat to the World Bank. Instead, the new bank will help reduce poverty and spur economic growth. The financing demand for infrastructure investment in developing countries reaches nearly $1 trillion a year, while the World Bank can provide only $60 billion.
A fair reform
"The establishment of the NDB and the CRA will improve and diversify current global financial governance," Zhang Haibing, a researcher of world economics with the Shanghai Institutes for International Studies, said to The Beijing News.
The current global financial governance relies heavily on Bretton Woods institutions since they were established in 1946 and 1947, respectively, under the design of the United States. BRICS countries hold humble positions in the system. None of their currencies are recognized as a reserve currency in the IMF.
Observers argued that BRICS countries deserve to have a bigger say in global financial governance, as they account for over 25 percent of the global economic aggregate. Foreign exchange reserves of BRICS countries account for more than 40 percent of the global total. And in the last 10 years, BRICS contributed over 50 percent of the world's economic growth.
As early as in 2009, the international community reached a consensus to reform the defective international financial institutions. For example, the IMF has agreed to increase shares of BRICS countries and make the institution more democratic and multi-lateral in 2010.
According to the reform plan, emerging economies including Brazil, Russia, India and China will rank in the top 10 shareholders of the IMF. But the plan was rejected by the U.S. Congress in 2013, dealing a blow to the reform effort. With as much as 17.69 percent of the shares, the United States is the largest shareholder of the IMF and holds veto power on the IMF's executive board.
Due to their disadvantageous position in current international finance institutions, emerging countries are often negatively affected by the fluctuating financial policies of the United States. Today, the establishment of the new bank and reserve arrangement demonstrates a way for BRICS to build their own finance safety institution after failing to realize their just appeals in the IMF and World Bank, Zhang said.
Shen Jiru, a researcher with the Institute of World Economics and Politics under the CASS, said the NDB offers a new choice for developing countries to seek financial aid when they are faced with economic or financial difficulties in the future.
In the past, many developing countries would ask for help from the World Bank and the IMF, which have notoriously harsh conditions on loans. Debtor nations would thus pay a heavy political cost for such aid. In contrast, the NDB will not interfere in the internal affairs of debtor nations, marking a major difference from the World Bank and the IMF, Shen said.
