News Column

A new rival to World Bank?

July 20, 2014

Alsir Sidahmed

Fortaleza city in Brazil, which hosted some World Cup games this year, was also the venue that embraced the recent BRICS summit. BRICS delegates decided to set up The New Development Bank (NDB), which many see as rivaling the World Bank (WB).

It remains to be seen whether Fortaleza will occupy its place in the development and financial history like Bretton Woods that was the birthplace for both the World Bank and the International Monetary Fund (IMF).

The NDB, in many ways, is a loud voice of protest against the hegemony exercised by the Western countries over the two institutions.

Despite almost two decades of campaigning for the need for change and allow emerging economies like those of the BRICS to have a say in running the two institutions, their business went on as usual.

Washington monopolizes the top post at the World Bank, while its European allies control that of the IMF.

Back in 2001, the two institutions' reform ideas were mooted seriously and concrete proposals emerged eight years later.

Though a reform program has been agreed on four years ago, no concrete action has been taken to give the countries with 40 percent of world population and 20 percent of its economy some suitable presence in terms of voting powers in the two institutions.

That was a clear signal that motivated the big five: China, Russia, India, Brazil and South Africa to push for the NDB in a reflection on the changing power balance in today's world with many blaming Washington and particularly its Congress not to endorse reforms of the two institutions.

The two main questions prevailing are whether the NDB will provide an alternative to the World Bank's finances and the terms of its lending.

The track record of the BRICS shows that the member states tend to give concessionary loans and that they avoid attaching strings in a blatant way preached by the western capitals that many countries see as meddling into their domestic affairs.

Both the World Bank and the IMF were seen as tools furthering such meddling.

However, it will be fair to say that though the BRICS on their bilateral dealings with other countries avoid meddling into domestic issues, but the NDB's plan of action is not very clear.

After all the five founding members have different aspirations and goals to achieve, besides in terms of repaying back debt or meet conditions of the loans they are extending, they behave like others.

The real test is expected in two years' time when the NDB opens its doors to business and start lending.

Some estimates have already put available money for lending in excess of $30 billion.

The NDB's currency will be one main issue. It seems the Chinese Yuan is likely to be the first choice.

If that is to happen, it will be yet another significant move to internationalize the Chinese currency in a way not seen before.

On the other hand, it is definitely too early to announce the demise of both the World Bank and IMF, but their influence will weaken somehow with the emergence and functioning of the NDB.

In fact the IMF was in the midst of soul searching prior to the 2008 financial crisis that was in a way its lifeline. Interesting enough, this time it was European countries, which have to swallow the bitter medicine that was usually prescribed for third world countries.

In fact the influence of the two Bretton Woods institutions started to weaken long time ago, when it was no longer necessary to get an economic health certificate from them to enter the financial market shopping for loans.

With privatization and unlocking of huge capital that was and continue to be looking for opportunities, the bottom line became whether the lender can get back its money and without getting into complex issues of governance and how the politico-economic set up of recipient countries is functioning.

For more than 15 years, even middle size economies stopped knocking on the doors of the IMF and the World Bank looking for loans.

The bottom line of whatever disparity exists is that it reflects inequality in politics, economics and trade. And unless developing countries manage to close the gap, there will always be unfairness in commercial exchange or economic activity.

Email: [email protected] //

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Arab News (Saudi Arabia)

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters