Experts: BRICS Development Bank may radically change world economy

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July 31, 2014 - PRLog -- The creation of the New Development Bank (NDB) became one of the most debated outcomes of the 6th BRICS summit which took place in the Brazilian city of Fortaleza on July 15–17.

According to the declaration signed on the first day of the summit, the capital of the BRICS’ new financial institution will amount to approximately $100 bln, which will make it one of the largest in the world.

The NDB headquarters will be located in Shanghai (China) with a regional office in Johannesburg (South Africa). The membership in the bank will be open for all UN members.

The financial organization aims to become an alternative to the World Bank which had been criticized by the BRICS countries many times for inadequate allocation of votes on the most important economic decisions.

Another document signed at the summit was the agreement to create a reserve currency pool worth $100 bln, which will be used to protect national currencies from financial market volatilities. This structure promises to become a worthy alternative to the International Monetary Fund (IMF).

The new financial institutions are expected to begin operations as early as in 2015.

According to foreign observers, the signed agreements signify the decision of the BRICS countries to make a shift towards multipolar world order, overcome the Western dominance in banking and currency issues, and create counterparts to the US dollar and the dollar-based economy.

The leaders of the five BRICS countries — Brazil, Russia, India, China and South Africa — also discussed other promising projects, such as cooperation in innovations and export credit areas.

According to Christopher Wood, Researcher with the Economic Diplomacy Programme at the South African Institute of International Affairs, among the discussed ideas were many interesting subjects, but most of them are currently at a very early stage, which makes it hard to comment on them.

At the same time, the expert noted that the decisions to create the NDB and the reserve currency pool were the most important.

“The bank is vitally important to the BRICS, because it gives the five countries the capacity to act as a group. Just as the World Bank is used as a mechanism to turn G20 decisions into action, BRICS New Development Bank can turn the BRICS words into action,” said Christopher Wood in an interview to “PenzaNews” agency.

He stressed that the decisions may not only unify the group against the common tasks and provide them with the tools to influence the world economy, but also facilitate trade relations between them.

“Inter-BRICS trade is already high, but it is dominated by Brazil, Russia, India and SA trading with China, while not trading much amongst themselves. This offers an avenue to boost trade between BRIS group,” the researcher explained.

At the same time, Lauren M. Phillips, professor of the Department of International Relations at the London School of Economics and Political Science, suggested that many inconsistencies that exist between the BRICS countries may impede successful cooperation and effective operation of the financial institutions.

“The World Bank and IMF were founded by a set of allied nations who had a lot to lose if they failed to cooperate, and the two institutions were informed by a vision about the shape of the global economy. The New Development Bank, and reserve fund, are instead founded by a diverse set of countries who have very little in common,” the expert argued.

At the same time, she said she considers the decisions significant, but the resulting effect will depend on a number of aspects that must be taken into account when planning the NDB strategy.

According to Lauren Phillips, the project must be well-realized, while the bank itself must provide not only funding, but also policy advice, and follow workable, effective and authentic ideas of economic development.

“There is a great need for alternative ideas about economic and political management,” she stressed.

Dwelling on this topic, Alexey Maslov, head of the School of Asian Studies at the Higher School of Economics, pointed out a number of facts that signify the changes in the world economy.

For example, according to him, more and more countries gradually stop using US dollars in international payments and choose Chinese Yuan instead, preferring to rely on the not too transparent, but much quickly developing financial system of China.

“Speaking of abandoning dollar as the main accounting currency, this process formally already began outside of the BRICS, and China plays the leading part in this process. Through a gradual process, it now trades with a few dozens of countries in Chinese Yuan and their national currencies. Not only the BRICS countries, but also a number of Latin American states, New Zealand, Australia, South Korea are involved in this system,” the researcher explained.

According to him, this background makes the summit agreements particularly significant.

“This is perhaps the first constructive decision made through out all the six summits. Until then, BRICS had no platform for further development and was only a platform for discussions. For the first time in the world, there are signs what BRICS may do in the future,” Alexey Maslov said.

According to him, the decision to found the New Development Bank shows that the common influence of the five countries on the rest of the world will be mainly economical in nature.

As Alexey Maslov suggested, the process of formation of BRICS as a financial organization that controls a portion of monetary flows may lead to internal conflict which may come in full force in 8 to 10 years.

Pallavi Roy, senior teaching fellow for Centre for International Studies and Diplomacy at the SOAS University of London, also suggested that the five countries in question have conflicts of interests in a number of areas, and that it is currently hard to say how their relationships will develop in the future and how effective will NDB be in solving the most urgent problems of Brazil, India and South Africa.

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