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Establishment of NDB and AIIB: Shifting Economic Base from West to East

Paper No. 5824                                           Dated 20-Nov-2014

Guest Column by Hari Bansh Jha

The recently established New Development Bank (NDB) by BRICS member countries and Asian Infrastructure Investment Bank (AIIB) by 21-member Asian countries with their headquarters in China herald a shift in economic power from the West to the East. It is speculated that these two monetary institutions would dwarf the size of West-supported World Bank (WB) and the Asian Development Bank (ADB).

Only time will tell how NDB and AIIB emerge as alternative source of funding in the international financial market. But it has almost become certain that the era of West's control over the international financial resources has started eroding.

The first jolt to the international financial institutions like the WB and IMF was exhibited when the five BRICS countries, including Brazil, Russia, India, China and South Africa made an agreement for the establishment of the long awaited NDB with its headquarters in Shanghai, China in July 2014. NDB would have capital of $100 billion. Lending from this bank will start in 2016. China would contribute $41 billion in this bank; while India, Russia, Brazil each would pay $18 billion and South Africa would pay $ 5 billion.

Need for the creation of NDB was felt because of the discriminatory attitude of the West towards the developing countries. The BRICS member countries accounting for almost half of the world's population and about one-fifth of global economic output have only 11 per cent of the votes at international financial institution like the IMF. Both the WB and the IMF are based on weighted voting system, which provide the rich countries a big say in the management. There are informal arrangements whereby the American is always at the top in the WB; while the European is in top position in IMF. In those monetary institutions, the developing countries don't have enough voting rights.

Expectation is that the NDB with its total capital of $100 billion would meet short term liquidity requirement of the member countries. An effort has been made to avoid China's dominance on the bank; for which India is made president of the bank for the first six years and after this Brazil and Russia would have turns with five years each.

Commenting on the formation of NDB, Indian Prime Minister Narendra Modi said, "The BRICS Contingent Reserve arrangement gives BRICS nations a new instrument for safeguarding their economic stability. This is an important initiative at a time of high volatility in global financial markets." Nobel Prize winner Joseph Stiglitz said it is "an idea whose time has come." Such a bank could play a strong role in rebalancing the world economy. It might also help channel hard earned savings in emerging markets and developing countries in the most productive sectors, rather than funding the amount in housing markets of the rich countries.

It is likely that NDB would take less assertive position with regard to conditions attached to loans than the WB. It would mobilize resources for sustainable infrastructural development projects in BRICS and other emerging economies and developing countries. Resources from this bank would be invested in power sector, ports, roads, telecommunication net works, water and sewerage.

Like the NDB, the establishment of AIIB by the 21 Asian nations, including Nepal, India, China, Pakistan, Sri Lanka and Bangladesh in Beijing on 24th October 25, 2014 will prove another milestone in financing infrastructure projects in the Asian region. China played a key role in establishing this bank after it failed to enhance its voice in multilateral organizations like the WB and the IMF.

AIIB would have registered capital of $100 billion, which  far exceeds the capital of $ 67 billion of ADB. It is, therefore, likely that AIIB would somehow affect the image of ADB, the West-backed multilateral lender that finances projects in Asia. Perhaps, this is one of the reasons why the USA and its close allies Japan, South Korea, Indonesia and Australia remained conspicuously absent from AIIB.

With regard to the formation of AIIB, Takehiko Nakao, President of ADB said that AIIB would help meet the gap in demand and supply of funds for investment in the infrastructure sector in the Asian region. Ben Steill, Director of International Economics added, "China wants to be a lender as well as borrower at concessionary rates, as this gives them policy influence over those countries to which it directs funds."

However, like the paucity of funds with the ADB, the NDB and the AIIB would also suffer from resource crunch as they have too little capital to tackle infrastructure deficits and halt short-term liquidity pressures. ADB has at its disposal only $10 billion to lend for investment in infrastructure sector. But the demand of investment in infrastructure in the emerging markets and developing countries is likely to increase from $0.8-0.9 trillion per year to $1.8-2.3 trillion per year by 2020. The Asian region would need $ 8 trillion by 2020 for investment in infrastructure sector. India alone needs $1 trillion to finance in infrastructure sector. Even a small country like Nepal needs to make an investment to the tune of $18 billion in the infrastructure to qualify for the status of developing country by 2022.

Fears linger that China, number two economy in the world could try to assert greater influence over the NDB and AIIB. China has larger percentage of share in total capital of NDB and 50 per cent share in AIIB; when Japan and USA together have only 25 per cent share in ADB. In such a situation, China might like to expand its political mileage among the member countries, though it does not have de facto veto power in those institutions. Often, China has constructed roads in Africa in exchange for access to commodities without caring for environmental norms. It is, therefore, needed that no one country controls the lending and other operational activities of  NDB and AIIB. It is only then that these financial institutions could have some role in improving global financial governance system.

(Jha is Professor of Economics and Executive Director of Centre for Economic and Technical Studies in Nepal)