New Kid in “Development” Town

The BRICS (Brazil, Russia, India, China and South Africa) have announced that they will set up a “New Development Bank” (NDB) to fund economic development in their countries. The aim is to start with US$50bn of equal contributions in an infrastructure loan fund, to grow that over time, and to establish a US$100bn Contingency Reserves Arrangement for handling financial/payments crises.

The NDB stems:
i) partly from a frustration with the lack of reform at the World Bank/IMF nexus in recognition of all the comparative and absolute economic change of the last few decades and
ii) partly from a positive desire to develop new funding streams for the growing networks of economic interaction between and across the “south”.

The stated intention is that other ’emerging’ economies could contribute to and benefit from the NDB over time.

The NDB might well be an inherent ‘good’ for these countries and their partners.  Anything that potentially supports sound, value adding, infrastructure development could be very welcome. There are, however, five main issues that will need to be addressed.

1. Politics – how will the institution affect geopolitics?  It could be highly divisive, adding to the worrying strains (Ukraine) that already exist between ‘north’ and ‘south’?  Also, are these five contributors politically stable and aligned enough to be able to pursue their goals efficiently, effectively and honestly or are they going to fall out over the real world application of their aspiration?  There is a danger that the economics will be abused with the politics.  Rule of law and a ‘free trade’ approach are vital ingredients to successful, long-term, economic development.  Sadly, some BRICS do not always display these characteristics well.
2. Economics – the countries involved vary so much in the scale and scope of their investment processes.  South Africa is in a much smaller, poorer and vulnerable economic state than the Chinese global behemoth.  Moreover, they are competitors as well as partners – can they manage the stresses these differences will imply?  One member’s priorities could be to another’s disadvantage without fair procedures for handling disputes over aims and method.  The NDB will need careful management of internal expectations.
3. Finances – why is the pooling of this money better than the spending of it individually? Will the infrastructure that is produced be better or worse (economically, in terms of productivity enhancing skills and investment locally, as well as physically) as a result?  How will they handle the letting of contracts? There is a danger of circularity here: India donates funds to the NDB which is spent with Indian companies on Indian projects – why set up an institution in Shanghai to act as a ‘middleman’ in this?  Why not do it yourself? I n essence, why would the sum of these parts make for better outcomes than the individual pots?  There is a risk that projects end up taking longer and are more expensive than they could be.
4. Technicals – who is going to do the appraisal and evaluation of investment proposals and outcomes?  There is a need for robust monitoring and surveillance of the projects and the funds. They will need high paid, highly qualified, experienced, objective, analytical researchers, economists, planners and developers.  This could mean that all the problems of an expensive bureaucracy, with the potential for corruption, will emerge during the institutional ‘learning’ phase.  There is a risk that they will want to show quick but suboptimal results.
5. Relationships – is the NDB set up in competition or partnership with the IMF/WB and other bodies?  Will it lead to separate funding streams that are vying for the same or similar projects, risking duplication or inefficiency?  Competition may be good between competing developers but it can also be divisive and, ultimately, ineffective.  Is China going to act as guarantor as, effectively, the USA has done for the Bretton Woods institutions for nearly 70 years?  How will the existing institutions now evolve – decline, disappear or be revitalised into more of a ‘developed’ world club?

At this point, we can not answer these questions. Good intentions now need to be backed up with practical implementation. We will need to watch closely as the NDB is born, grows and struggles for maturity.