BRICS Bank Could Change the World

By+JOHN+ROSS

THE New Development Bank （NDB）， popularly known as the “BRICS bank，” established by Brazil， Russia， India， China and South Africa， should open for business before the end of the year. The bank will be based in Shanghai， but its first chairman is Indias Kundapur Vaman Kamath. The importance India attaches to this post is shown by Kamath being， prior to his appointment， chairman of ICICI Bank， Indias largest private lender. The NDP will have US $50 billion capital and a US $100 billion currency exchange reserve， which members can tap in case of balance of payment crises. The BRICS bank is important in itself but also a nucleus of something which， if successfully developed， could be world changing.

To understand the sheer scale of BRICS， a comparison can be made with the G7 group of advanced economies. BRICS countries account for over 40 percent of the worlds population， compared to 10 percent for the G7. BRICS contain four out of the 10 countries with the worlds largest populations compared to only one for the G7.

As all BRICS members are developing countries their market exchange rates undervalue their economies compared to measurements at comparable international prices– Parity Purchasing Powers （PPPs）. But even without correcting for this the latest IMF projection is that BRICS economies will increase their combined GDP by US $7.6 trillion at market exchange rates by 2020 compared to US $6.8 trillion for the G7.

This is likely to understate the real development. First， the IMF has a well-documented “optimism bias” regarding U.S. growth – since 2007 results have consistently shown that IMF growth projections for the U.S. were too high. Second， the IMF projects that the increase in BRICS GDP by 2020 measured in PPPs will be US $17.2 trillion compared to US $8.7 trillion for the G7. As countries develop， their market exchange rates tend to adjust upwards closer to PPPs， but the IMFs current calculations for China and India do not take this into account. However， even based on conservative IMF calculations the increase in the size of the BRICS economies will be greater than that of the entire G7.

The crucial point is that the worlds two most rapidly growing major economies， China and India， are BRICS countries. Both are growing two to three times faster than the U.S. and four to five times faster than the EU and Japan. Comments in the media that Brazil and Russia have slowed recently， therefore， miss the point – China and Indias development is quite sufficient to maintain BRICS growth even if other economies within it experience problems.endprint

The BRICS banks dynamic is also somewhat different from the recently successfully established Asian Infrastructure Investment Bank （AIIB）. The AIIB contains over 50 prospective members， but these are at very different levels of development ranging from low-income（Bangladesh， Cambodia） to high-income （Australia， UK， Saudi Arabia）. Given this diversity， no new political or economic structures are proposed to be founded on the AIIB. The AIIB is a major financial institution but with a diverse character.

The BRICS countries， in contrast， are all in reality very large developing economies – even if Russias per capita GDP of US $24，800 formally qualifies as “highincome” by World Bank standards. But the other BRICS economies are all “middle-income” by global criteria –in PPPs Indias per capita GDP is US $5，900， Chinas US $12，900， South Africas US $13，000， and Brazils US$16，000. This rather common development level means the BRICS economies are not merely very large but face similar problems – giving the grouping rather coherent and focused interests.

What specifically underpins the BRICS banks firepower is Chinas financial strength. There is international discussion regarding whether China should be considered the worlds second largest economy， as China argues on the basis of GDP calculated at market exchange rates， or whether it should be considered the worlds largest economy – as many Western economists， measuring in PPPs， argue. But no matter how measured Chinas savings， the“raw materials” of banking， are now far higher than the U.S. As the chart shows， in 2014 Chinas total savings， measured at current exchange rates， were almost US $5.1 trillion compared to US $3.1 trillion for the U.S.

Chinas almost US $2 trillion lead in savings compared to the U.S. means that China is already the worlds superpower in financial terms. The fact China is prepared to work with the other BRICS countries in the NDB ensures the banks huge potential significance.

Naturally realizing the BRICS banks full potential is a challenge for the diplomacy of China and the other BRICS countries. So-called “alliances” around the U.S. are in reality United States “command and control” structures. The U.S. maintains formal veto rights in the IMF and World Bank， and via de facto control of Japans economic policy also controls the Asian Development Bank.

The BRICS are different. As all key BRICS economies are large they could， if necessary， pursue entirely independent policies. While BRICS countries have strong mutual interests they will not accept control by other members. This is reflected in the banks voting structure. Instead of the IMF system of different countries having different voting weights， each BRICS country has an equal vote in the bank.endprint

Owing to their common interests the BRICS countries are creating wider coordinating structures in the way the AIIB is not. In addition to the annual BRICS summit and BRICS bank in June the first BRICS parliamentary forum was held in Moscow. At it Zhang Dejiang， chairman of the Standing Committee of Chinas National Peoples Congress， stated regarding BRICS： “We must strive to move towards the creation of a single market in trade and economic cooperation， the creation of a multi-level mechanism of currency agreements， new infrastructure projects and strengthening cooperation on the basis of the peoples support. The key tools here include the BRICS Bank and the BRICS reserve currencies pool.” Three out of the five BRICS countries – India， China and Russia – are also within the geographical area of Chinas “Belt and Road”Initiatives.

Great attention was rightly given to the AIIBs establishment. But with economies whose absolute economic growth will exceed that of the G7， backed by Chinas unparalleled financial power， and with developing mechanisms for coordinating policy， the BRICS bank is a key part of a process that can change the world.endprint