During the sixth BRICS summit held in Fortaleza, Brazil, on July 15, Brazil, Russia, India, China and South Africa agreed to set up the New Development Bank (NDB) with $100 billion of capital commitment and a $100-billion contingency reserve arrangement (CRA) to finance development projects in member countries and help them weather global financial crises.

The establishment of the NDB is of extraordinary significance. It has not only opened the new stage and new pattern of South-South cooperation, but also impacted the existing system of global economic governance.

Firstly, the NDB is a key strategic component of the parallel system outside the Bretton Woods institutions. The current international economic order is still controlled by the World Bank and the International Monetary Fund (IMF), both Bretton Woods institutions founded after World War II. The interests and demands of developing countries playing an important role in global economy are not fully embodied in the traditional system. The NDB and CRA are designed to break through the traditional global governance system and make contributions to achieving a more balanced, just and transparent new international economic order.

Secondly, the NDB reflects the emerging-market countries’ disappointment with the US hindering and delaying global economic governance reform. Currently, the BRICS’ total GDP accounts for about a quarter of global economic output. However, their total voting power only accounts for 13 percent at the World Bank. The US, by contrast, holds 15 percent of voting power. Similarly, the BRICS’ total voting power at the IMF accounts for less than 11 percent, while the US has 17 percent. According to the reform scheme reached early in 2010, developed members should transfer 6 percent of their quota share to developing members. However, this has not been approved by US Congress to date.

Thirdly, the NDB signals an attempt to break away from dollar hegemony and establish a new type of international monetary system. Dependent on the international monetary system established after World War II, the dollar still occupies the dominant position in existing international trade and financial transactions.

Dollar assets still account for more than 60 percent of global foreign exchange reserves. With the dollar taken as an international currency, US private debt and financial deficit have been dependent on current account surpluses of emerging-market countries, including China, for a long time. After the global financial crisis, the Federal Reserve’s quantitative easing monetary policy had an impact on the global financial market, pushing forward the formation of inflation and asset bubbles in emerging markets. Meanwhile, the massive unordered cross-border capital outflow in emerging markets caused by the withdrawal of the policy severely impacted developing economies. The establishment of the NDB and CRA just marks the first step in challenging the dollar’s dominance.

Fourthly, the NDB is a useful supplement for the financing arrangement of the existing international financial institutions. Based on the World Bank’s estimates, every year the total capital required in infrastructure construction worldwide is $1 trillion.

However, the investment supply and demand gap is huge, since the World Bank can only offer $60 billion and investment from private sectors is only about $150 billion. Currently, loans from the China Development Bank and Export-import Bank to other developing countries have exceeded the World Bank.

In addition, the World Bank and IMF have been slammed by some developing countries due to their loans’ harsh, bureaucratic standards. These factors only further cement the BRICS bank as a more appealing alternative for developing economies.

All countries will contribute equal capital to the BRICS bank. The NDB’s initial subscribed capital of $50 billion will be equally shared among founding members. Capital for the bank will be split equally among the five participating countries, which will elect a president.

Finally, the internal governance structure of the NDB also embodies spirit of equality, tolerance and complementation in contrast to international financial organizations. All member countries will contribute equal capital to the bank and the president of the bank will be elected from the five countries in turns. This has initiated a beneficial pattern for the BRICS bloc to further deepen their cooperation in the future.

The NDB has received praise from developing countries and caused quite a stir globally. However, it still has a long way to go with many problems that need be observed and discussed. The most pressing objective for BRICS nations is the need to further build consensus and objectives, seek mutual interests and intensify political trust, creating a strong foundation for changing the existing global governance system and order.

The author is vice dean of the Graduate School at Nankai University in Tianjin and director of the China APEC Academy.

Translated by Yu Hui
Revised by Tom Fearon