Breaking the Development Banks: How They Can Help and Hinder Development

Like fashion, international development is guided by trends. While some trends come and go, others withstand the test of time. If recent events are any indication, a new international development trend is on the horizon: development banks, governed by developing countries.

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Just before the Asia-Pacific Economic Conference in Bali last October, China announced the establishment of the Asian Infrastructure Investment Bank (AIIB). As its name suggests, the bank will devote its resources to finance national and regional infrastructure development projects throughout Asia. Startup capital for the new bank is expected to be $50 billion, with aspirations to match. One of the new bank’s notable plans is constructing a railway from Beijing to Baghdad. Though ambitious, China is willing to devote its resources to the cause. According to the McKinsey Global Institute, China spent 8.5% of its GDP on infrastructure from 1992 to 2011, more than any other country in the world.

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While plans for the AIIB are still underway, Brazil, Russia, India, China, and South Africa (BRICS) recently announced plans for their own bank. Like the AIIB, the New Development Bank (NDB) will finance infrastructure projects, with initial assets reaching $50 billion. An additional $100 billion will be designated for the Contingency Reserve Arrangement (CRA) for member states with suffering from severe current account deficits. Unlike the general infrastructure fund, to which all member states contributed equally, the CRA is dominated by Chinese assets. Of the $100 billion, the Chinese will contribute $41 billion with South Africa contributing $5 billion and Russia, Brazil, and India each contributing $18 billion. With the CRA, the NDB could prove a viable alternative to the IMF, and likely with fewer conditions.

In less than a year, two new development banks have taken root. Does this trend have staying power?

If anything, the new banks will remind the development community of the importance of infrastructure development. However, to be successful, the banks’ leaders must have realistic expectations with respect to international cooperation and lending capacity.

The AIIB and NDB challenge the structure of current global development institutions. The Bretton Woods system, created in 1944, reflects the economic structure of a bygone era in which the BRICS had not yet emerged. Decades later, the economy has changed though voting structure has not. The BRICS hold only 11% of the votes in the IMF, though their economies claim 20% of the world economy. A 2010 IMF agreement will redistribute some of the votes to give more weight to developing countries, thereby reducing the importance of financial contributions. The agreement, however still awaits ratification from the U.S. Congress. Until then, China, poised to be the world’s largest economy this year, will have fewer votes than Belgium, Netherlands, and Luxembourg combined.

The World Bank estimates a $1 trillion infrastructure gap for low- and middle-income countries, and the AIIB and the NDB could help to close the gap through their own financial contributions, a collective $200 billion. Cooperation with preexisting institutions, however, could be more complicated. Though sizeable, the initial capital of the AIIB and the NDB is much smaller compared to the World Bank or even the Asian Development Bank, with $232 billion and $165 billion, respectively. Cooperating with the World Bank, Asian Development Bank, and other institutions could mean that priority projects for both banks are deferred due to the financial might of its development predecessors. To be a serious alternative to preexisting institutions, both AIIB and NDB must raise additional capital.

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Perhaps the most notable shortcoming is both banks’ lack of involvement in any African country save for South Africa. According to the World Bank, approximately 70% of people in sub-Saharan Africa live without access to electricity. It is puzzling as to why other African countries are given the cold shoulder, particularly Nigeria and its 170 million people, the largest in Africa. Coupled with increasing GDP growth and decreasing inflation, the country is Africa’s second largest economy, and is expected to be one of the world’s top economies by 2030. China is Africa’s largest trading partner, though the country’s trade with the continent is only a 5% share of China’s global trade. Given that Africa has some of the world’s most pressing infrastructure needs, Africa’s lack of inclusion is questionable at best.

Both banks must exercise caution in their financial management and project execution. In plans for both banks, China is set to be a chief financial contributor, however the country remains a top beneficiary of World Bank funds. China, along with Brazil and India owe a collective $66 billion in outstanding loans. Additionally, both banks must remain cognizant of the impact of infrastructure in the least developed areas. In a 2013 Center for Economic Performance paper, economist Ben Faber found that small countries with only recently connected highway systems experienced GDP growth that was on average 19% less than small countries unconnected to highway systems. This was due to the inflow of inexpensive goods that replaced demand for local goods.

While the benefits of infrastructure are numerous, it is by no means a poverty-eradicating panacea. But it is very helpful. Increased productivity and competition make infrastructure investment key driver of economic growth and a lasting trend.

Do development banks governed by developing countries have lasting power? Only time- and perhaps the international community- will tell.

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Just Another BRICS in the Wall

In 2001, Goldman Sachs analyst Jim O’Neill coined the term BRIC to loosely align a group of rapidly growing emerging economies in Brazil, Russia, India and China. In 2010 this group was expanded to also include South Africa, forming the acronym BRICS.

The economic clout and influence of BRICS nations is staggering. Collectively, the five BRICS nations account for 42% of world population, 20% of output, and nearly all of current growth in the global economy.’ And they are looking to capitalize on this collective influence. During the most recent BRICS summit, these countries met in South Africa to begin the unprecedented steps toward establishing BRICS institutions. Out of this, the measure that has garnered the most attention is their plan to form a new international Development Bank to rival the Western dominated IMF and World Bank. Funded by BRICS nations, the aim is to deliver infrastructure and aid to developing markets by bypassing traditional Western structures.

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Building BRICS of Foreign Aid: Newest Member of the Club

South Africa: To BRIC or not to BRIC?

The term “BRIC” was first coined by Goldman Sachs economist Jim O’Neill in reference to the group of emerging economies that O’Neill thought had the potential to become an economic bloc rivaling the industrialized economies over the course of the next century. While not originally used to refer to a political alliance of these countries, the term BRIC has been co-opted by the countries themselves who now hold summits to discuss issues of common concern to emerging economies.

A few years ago South Africa began to lobby the other BRIC countries to be admitted to the group.  In 2010, it got its wish and an ‘S’ was added to the end of the BRIC acronym. But even now that South Africa is formally a member of the club, many people question whether it makes sense to think of South Africa in this way.  Is South Africa a future economic powerhouse with the same economic potential as the other BRIC countries?

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Building BRICS of Foreign Aid: India Gives and Receives

A country with the distinction of having been the largest foreign aid recipient in history would seem an unlikely candidate as a powerful contributor in the world of foreign aid today.  Not so for India.

Between 1951 and 1992, India received an estimated $55 billion in foreign aid and has since emerged as a global economic powerhouse.  Since then, the country launched its own space program, and in 2011 it even contributed $10 billion to the IMF European bailout fund!   The foreign aid story has now come full circle: with the creation of an Indian state foreign aid agency, the Development Partnership Administration, India plans to distribute $15 billion over the next five years.

In contrast to the traditional Western philosophy of aid, where wealthier countries bestow aid upon poorer countries, India sees foreign aid as “mutually beneficial partnerships”  in the spirit of South-South cooperation.   This perspective on aid seems to be shared by India’s fellow BRIC countries.

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Building BRICS of Foreign Aid: Ushering in Russian Foreign Aid

Russia has finally found its stride again in the international donor community. After having been a massive donor as part of the Soviet Union – providing some 26 billion dollars in 1986 alone – Russia actually received more assistance than it donated through the 1990s. It was not until 2010 that Britain stopped its aid program to Russia (and China), and the US is now no longer a donor either.

Russia is now spending around 500 million dollars a year on foreign aid and has set up an agency for direct aid while also backing the creation of a multi-billion dollar crisis response fund to help its neighbors such as Belarus which is struggling through the economic crisis. Continue reading

Building BRICS of Foreign Aid: Putting the “B” in BRICS

Brazil has a solid place among the BRICS countries, but what is it about Brazil that has enabled it to stand along with the emerging economies of Russia, India, China, and South Africa? Its increased involvement in Africa may be the answer. Continue reading

Reshaping Global Giving One BRIC at a Time

For more than half a century, Western DAC donors have monopolized foreign aid to the developing world. However, at the turn of the 21st century, this traditional flow of aid has begun to shift dramatically. According to a recent article, the four BRIC countries (Brazil, Russia, India and China) are increasing their foreign aid at an astounding rate. Western aid is no longer the only foreign aid that is alleviating global poverty and promoting economic development. Even though the traditional DAC donors are still the largest contributors to foreign aid, the BRICs have started to reshape the distribution and philosophy of foreign aid.

High and Low Estimates of BRICs ODA Per Year

Estimates of ODA dispersed by the BRICs range from $3.1 billion to S31.3 billion per year. The biggest swing factors are China, where ODA estimates range from $1.5 billion to $25.1 billion and Brazil, where ODA estimates range from $356 million to $4 billion.  There are many reasons for the different estimates. First, there tends to be lack of transparency in foreign aid spending by these emerging donors. In addition, emerging donors such as Brazil and China see foreign aid differently than the traditional DAC countries. ODA, as defined by DAC, includes grants and highly subsidized loans. They do not include Foreign Direct Investment (FDI) and in-kind transfers. There is no standard system for reporting ODA among the BRIC countries. China, for instance, doesn’t even define its foreign aid as “aid,” and describes it as “external assistance.” Continue reading