NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, July 23, 2014

Following two years of intense negotiations, the BRICS leaders agreed on 15 July 2014 in Fortaleza (Brazil) to launch the New Development Bank (NDB). This is a significant (and therefore not to be underestimated) step in their efforts to build a less crisis-prone international financial system. If the bank succeeds in its goal to provide development funding for its member states and for the rest of developing nations, it has the potential to become a game-changer in the evolution of the international economic order. The creation of the NDB is already a historic landmark. It is the most significant institutional innovation in international development funding since the creation of the Inter-American Development Bank (IDB) in 1959, the Asian Development Bank (ADB) in 1966 and the European Bank for Reconstruction and Development (EBRD) in 1991.

The birth of the NDB is unique for a number of reasons. Unlike the development banks mentioned above, which have a predominantly regional focus, the NDB’s founder countries are from four different continents and its potential reach is thus truly global. Furthermore, this will be the first time since the Bretton Woods conference in 1944 (which created the IMF and the World Bank) that the US has no influence in the governance structures of an international development bank (it is important to remember that the US is a founder-member of the IDB, the ADB and the EBRD). Finally, its creation is historically significant because this is the first time in modern history that China is actively involved in the creation of a multilateral institution. In fact, after knowing the first details of the bank’s governance structures, it might safely be argued that China is the leading country behind the NDB project.

Despite strong opposition from India and Brazil, two other emerging heavyweights, China has been able to convince its partners to locate the NDB’s headquarters in Shanghai. It has also pushed through the creation of the first NDB regional centre in Johannesburg, which means that most of the funding that will not go to the BRICS will probably go to infrastructure projects in Africa, one of Beijing’s priorities. China therefore has the potential to function similarly to the US in the Washington-based Bretton Woods institutions. With a GDP of US$9.2 trillion, one and a half times the combined GDPs of Brazil (US$2.2 trillion), Russia (US$2.1 trillion), India (US$1.8 trillion) and South Africa (US$350 billion), China will have a de facto veto power in most of the NDB’s key decisions, even though voting powers are theoretically equal since all five members will contribute US$10 billion to the bank’s US$50 billion initial subscribed capital.