The world’s largest emerging economies are getting fed up with the International Monetary Fund and World Bank, shown by the formation of the US$200 billion New Development Bank. The organization was officially launched in July by the five members of BRICS, which itself includes Brazil, Russia, China, India, and South Africa.
The purposes of the New Development Bank include facilitating development in emerging markets, financing infrastructure projects, encouraging economic cooperation, and supporting financial institutions that are affected by volatility. These goals directly overlap with those of the World Bank and International Monetary Fund, and while many would be hesitant to believe that the importance of these two long-standing institutions could face a decline, there are several reasons why the New Development Bank has major implications for the future of the global economy.
First, it’s worth looking into why the New Development Bank was formed. The five members of BRICS together account for over 2.6 Billion people, or 40% of the world’s population, and more than 25% of global GDP. Furthermore, the effect that BRICS nations have on the global economy is increasing. In fact, a research report by Goldman Sachs estimated that by 2040, its members’ combined GDP will be worth US$74 billion compared to the G7’s US$53 billion during the same year.
Despite this, BRICS countries have relatively little input compared to the size of their populations and economies in organizations such as the World Bank and IMF where western countries represent a disproportionate amount of total votes when compared to their sizes.
In International Monetary Fund decisions, the United States, Japan, Germany, France, the United Kingdom, Italy and Saudi Arabia by themselves possess over 43% of total voting power. This is despite the fact that these seven countries make up only 10% of the world’s population. In the World Bank, the United States is the only member that has veto power, allowing it to reject any proposal that would be against its own interests.
One could easily see why Brazil, Russia, India, China and South Africa would be less than satisfied with their ability to represent themselves in these two organizations. Thus, the New Development Bank was formed – where each country has a single vote, none have veto power, and proposals are adopted simply by winning a 3-out-of-5 majority vote.
While this process seems efficient and fair, the New Development Bank will need sheer economic power in order to overtake two organizations that have been at the forefront of international decision-making for decades. This is something that they are unlikely to possess in the near future, as the US$100 billion worth of funding that they control is far less than the IMF’s US$755 billion that it had during its last review in 2010.
Although the New Development Bank seems unlikely to surpass the importance of the IMF and World Bank in the short-term, it could arguably still lead to a certain amount of decline in these two organizations. When you give a fairer, more effective channel for humanitarian, development, and economic aid purposes to a bloc that represents over US16 trillion worth of GDP, the end result seems obvious.