The fastest emerging economies in the world, which account for $16 trillion in GDP and 40% of the population, are consolidating their resources with the aim to break the monopoly of the International Monetary Fund and the World Bank. And why not? If they are managed well, banks will become high profile, prestige institutions that demonstrate power and intent, as well as being profitable businesses. Both the Asian Infrastructure Investment Bank (AIIB) and the BRICS’ New Development Bank (NDB) are aiming to create financial systems that better serve their own interests. Using their own resources to finance joint, large-scale projects in transport, energy and industrial development they will – if successful, disrupt, if not dethrone, six decades of US dollar hegemony.
Bretton Woods institutions, such as the IMF and the World Bank, were formed and led by the victorious Western Powers to help rebuild shattered nations and promote international economic cooperation following WW2. This made sense when for most of the 20th century 60-70% of global output and growth came from the developed world.
The last two decades have experienced a sea change in the traditional order. Faster economic growth rates and a greater proportion of wealth are emanating from emerging markets. In spite of this, IMF voting rights on the Executive Board still give France, with a $3 trillion GDP, a far greater share of votes than China, with a $10 trillion GDP. Belgium, with its $500 billion GDP, also has a larger voting share than Brazil, with a GDP at $2.2 trillion. With stronger economic power and geopolitical influence, emerging economies are looking to match if not replace the authority of these Western-led institutions.
How Times Change. Relative Share (%) of Global GDP (PPP) for Selected Nations
The BRICS New Development Bank, with the ability to lend up to $34 billion per year while holding an emergency reserve fund of $100 billion, is being pegged as both an alternative and supplementary financier for infrastructure. The bank’s capital will be used to finance infrastructure and ‘sustainable development’ projects in the BRICS by the end of 2015. The currency reserve pool, almost a copy of the IMF and exclusively for the bloc’s members, will help maintain financial stability and reduce any exchange risk. Although all members of the UN will be eligible to join, the BRICS’ dominance will be secured by majority ownership of the shareholding. To put the NDB’s size into perspective, subscribed capital in the World Bank and Asian Development Bank is $223 billion and $162 billion respectively. Though smaller, the NDB is large enough to work as a complimentary vehicle to fund development across the BRICS. They may also motivate existing development banks to function more normatively, democratically and efficiently.
Now boasting 57 members across Europe, Oceania, Africa and South America, the Asian Infrastructure Investment Bank has ambitions to become a rival to the IMF and World Bank. The clear aim is to embed the Renminbi in global investment and trade flows. 16 of the world’s 20 largest economies are now members of the AIIB, with only the US, Mexico, Japan and Canada so far declining to participate. China may be looking to appease its many neighbors and trading partners with multi-billion dollar infrastructure projects, but it will also seek opportunities to utilize some of its $4 trillion in foreign exchange reserves for capital gains. If successful, the Renminbi will strengthen its foothold as a currency of trade, as economies become more confident of settling bilateral deals directly with Beijing, without resorting to dollars. China’s objective is clear – to have the Renminbi accepted alongside the Dollar, Euro, Swiss Franc and Yen as a fully convertible reserve currency.
The global economy is changing rapidly with emerging markets economies now accounting for 65% of global output. The BRICS Bank and the AIIB will no doubt consolidate and strengthen their members’ own economies, while reducing the influence of US-dominated institutions that secured six decades of dollar dominance.