BRICS, a grouping of five major emerging economies, recently agreed to establish the New Development Bank on the pattern of the World Bank, and a $100bn Contingent Reserve Arrangement to support developing countries facing balance of payment problems.

The decision comes at a time when the US is trying to hold on to its supremacy in international finance and global politics. The group’s move signals a shake-up in the international development finance architecture, and may serve to remind the West that its financial hegemony is being challenged with the rising influence and clout of BRICS bloc. Development finance experts are awaiting the creation of a South Asian Development Bank as well as an Asian Infrastructure Investment Bank.

The NDB — with its headquarters in Shanghai, China, and comprising the five founding members with equal voting rights — would be set up with an authorised capital of $100bn and an initial subscribed capital of $50bn, with each member contributing $10bn. The first president would come from India, followed by Russia, Brazil and South Africa; whereas the first regional office would be set up in South Africa. The bank will compete for influence with the World Bank and its affiliated network of regional banks.

The PML-N government will be well advised to strengthen ties with the BRICS bloc and keep its policy options open

BRICS’ second project is to set up the CRA — parallel to the IMF — which will offer emergency cash credit to cash-strapped developing nations. China will reportedly contribute $41bn to CRA reserves, whereas the remaining BRICS countries will chip in with $23bn initially. The CRA is expected to provide balance of payment (BOP) support, especially in the US currency.

It will be interesting to see how the CRA will practically operate and offer emergency cash/BOP credit to developing nations without imposing IMF-like conditions (conforming with the Washington Consensus), which usually reduces the borrowing nation’s public spending, increases tax weights, opens up local markets for international corporations and forces them to privatise state-owned enterprises (i.e. the nation’s blue chips).

The western think tanks do not look favourably at BRICS’ move. The western media have declared the NDB project an idealist approach to improving infrastructure problems across the Asia-Pacific region, and are questioning the very rationale and effectiveness of the project. They have already expressed doubts whether a separate bank would be able to coexist with the two US-dominated, Bretton Woods heavyweight institutions — the WB and the IMF.

They are also trying to emphasise that the NDB would actually be used by Beijing for extending its global influence. Whether the bank would be able to ease the existing over a $1tr-a-year infrastructure financing gap in developing countries or be a disaster bank (as predicted by the West), is a billion-dollar question.

It will be too early to say when BRICS would be able to crystallise the move into competitive institutions that have an impact on global economic governance. It will be interesting to see how the NDB and the CRA will challenge the roles of the Bretton Woods institutions. Only time will tell whether BRICS move is a real game changer, leading to pressurising the US and the West to agree to a more expanded BRICS role and influence in the existing world economic order and enabling reforms of the WB, IMF and the IFC.

Either way, BRICS move might force the US and its allies to concede the reality of the emergence of the Multiplex World Economic Order. On the other extreme, there is a possibility of the US fighting back under its professed policy doctrine of ‘America must lead’.

The announcement may have been triggered by the consensus developed amongst BRICS that the US and its Western allies are not willing to accommodate due role and influence of the emerging countries, commensurate to the size of their economies and population.

On June 11, soon after Obama’s declaration of the new US doctrine along with the US National Security Adviser Susan Rice, made it clear to BRICS that the US’s hegemonic interests were not to be compromised with any emerging power. Later developments indicate that BRICS, particularly Russia and China, did not accept the US claim of exclusive world leadership.

In such a scenario, it will be interesting to see how the PML-N government puts up its policy response. It will be well advised to strengthen ties with the bloc and keep the policy options open. China’s role and influence could help Pakistan, but China alone cannot call the shots in favour of Pakistan. It is up to the policymakers to strengthen and maintain cordial relations with all BRICS countries if Islamabad is ready to reap the benefits of the BRICS-sponsored institutions for its development.

The writer is a British Chevening Scholar 2004-05

Published in Dawn, Aug 4th, 2014