Since the Second World War, the main institutions of the Bretton Woods system,- the IMF and World Bank, have been in charge of the global financial system, with the main goal of supposedly alleviating poverty by giving financial assistance to countries in need. However, in recent times these institutions are rapidly losing their economic weight. And, the reason for this is that key actors in the developing world are currently coming to the fore, calling into question the outdated rules of the game, including the hegemony of the West. But, instead of just destroying the legacy of the last century, these key actors are offering an alternative economic system where each player can influence important decisions at the international level. This alternative is none other than the BRICS and the BRICS bank. How did the BRICS bank come about and how is it different from the World Bank and IMF? Let’s find out in this video.
The idea of building an alternative financial system was because countries were fed up with the hegemony of the West in the global financial system and it was becoming apparent that the system favored rich Western countries to the detriment of countries in the Global South. For example, the International Monetary Fund claims that the reduction of poverty is one of its objectives and they do this by offering loans to developing countries to aid their development plans. However, countless research has revealed that these developing countries that borrow from the IMF usually experience higher rates of poverty. In one particular research, it was observed that from 1986 to 2016, IMF loan arrangements containing structural reforms that were supposed to help reduce poverty in about 81 countries mostly from Africa, contributed to more people getting trapped in the poverty cycle, as the reforms involve deep and comprehensive changes that tend to raise unemployment, lower government revenue, increase costs of basic services, and restructure tax collection, pensions, and social security programs.
African countries such as Nigeria, Ghana, and a host of others that adopted the Structural Adjustment Program, a developmerental reform recommended by the IMF and World Bank in the 1980s are perfect examples of how the strategies and programs which the IMF and World Bank insist developing countries implement in exchange for loans have done considerable damages to the economy that it’s doubtful if it will ever recover. Research has shown that the implementation of the structural adjustment program have led to lower government revenue, high rate of inflation, increasing cycle of poverty and endless debt trap. This is one of the major reasons countries from the Global South have been calling for a better alternative.
Now, another reason for the call for an alternative is the attempts by the West to transfer dominance in the political sphere to the economy. Over the years, the Bretton Woods International Monetary Fund and the World Bank began to put forward political demands when providing loans to the countries of the Global South. For example, in exchange for loans, countries may be required to support ideas and policies that are supported by the World Bank, which you should not forget is headed by the US and other top European countries. So, if a country refuses to support that idea, the loans will not be granted to them. It’s a known fact that the US have used it’s position as the most powerful voice in the World Bank and IMF to enforce its ideologies and principles in developing countries. Take Uganda for instance. In 2023, the President decided to enforce an anti-gay law because LGBTQ is not supported in the country and it’s the country’s right to do so as a sovereign state. However, just because the World Bank under the leadership of the US supports the LGBTQ community, it suspended developmental loans to Uganda until the anti-gay law is removed. But is that fair?
Why do countries have to pander to the will of the West just because they need financial assistance? The system is certainly not fair to countries of the global South hence the need for an alternative. This is why BRICS was formed and established a different concept for building the future of financial stability, the New Development Bank (NDB). The insignificant voting shares among the representatives of the developing world in international economic organizations brushed aside the hopes of the BRICS member states to build a world financial architecture within Bretton Woods institutions independently of the political landscape and economic potential of the country. However, the New Development Bank demonstrates an alternative approach to the distribution of voting shares of developing countries: the BRICS strategy assumes partnership on the basis of equality, regardless of the country’s economic potential. Unlike the NDB, traditional international development banks do not have the necessary capabilities to meet the rapidly growing demand for investment in infrastructure projects, primarily from developing countries. This is not surprising given that the vast majority of international development banks were created in an era when the developed countries of Europe dominated alongside the United States and Japan.
On the contrary, the New Development Bank has confirmed its effectiveness in the face of global challenges. The Bank’s operational activities to combat the coronavirus pandemic ensured a relatively soft landing for the economies of the five countries, even in the most acute phase of the Covid crisis. The bank allocated more than $9 billion to finance government programs to restore the economy, significantly mitigating the effects of the crisis and facilitating adaptation to the new post-pandemic realities. The provision of anti-crisis loans by the Bank and the calculation of the risks associated with the pandemic piqued the interest of nations that are not members of the BRICS. In particular, Bangladesh, Egypt, Uruguay and the United Arab Emirates became members of the Bank. This expansion confirms the commitment of the NDB’s strategy as a leading development vehicle for emerging economies.
The effective activity of the New Development Bank tips the scales in favor of supporting developing countries and shows great prospects for transforming into a full-fledged platform for expanding economic and financial cooperation. To this end, in May 2022, the Board of Governors of the Bank adopted a rather ambitious Development Strategy for the 2022-2026 period; the priorities outlined by the Strategy can be reduced to five main categories of the Bank’s activity.
Number one: The Development of settlements in national currencies.
The local currency funding initiative is primarily aimed at reducing reliance on the US dollar and other international settlement currencies. The coordination of efforts in this area will contribute to raising the international status of the national currencies of the NDB member states, preclude currency risks, and greatly facilitate mutual trade between the BRICS countries. Currently, countries such as China, Russia, and India have begun to settle trade in local currencies, and, as time goes on more countries will also get on this trend.
Number two: New Development Bank Membership Expansion. In 2021, the Bank opened its doors to four new member countries and will continue to follow a similar strategy in the future in order to expand the geography of the infrastructure projects it finances. In this regard, the eyes of the Bank’s member countries are especially focused on Southeast Asia, particularly Indonesia and Thailand; the expansion of cooperation with them will make the association more representative.
Number three: The NDB beyond economic and financial cooperation. Over the years, the NDB has begun to gain geopolitical weight, displacing the traditional concept of the superiority of developed economies on the world stage and as its capacity grows, the need to expand the scope of its activities is increasingly felt. From economics, the Bank’s member countries are shifting their focus to discussing a broader agenda. A striking example of the revision of priorities in the direction of responding to global challenges is the Bank’s desire to finance projects in the field of food and energy security, climate change, and healthcare. The latter has firmly entered the agenda: voices supporting the creation of a BRICS Medical Association are growing louder and louder. The high level of dynamism with which the association is developing clearly demonstrates its potential to consolidate the efforts of the member countries: expanding the scope of the Bank’s activities will benefit everyone.
Number four: Raising the profile of sustainable development and green projects.
Against the backdrop of the increasing importance of the environmental agenda in international realities, the green initiatives of the New Development Bank are becoming clearer: funding for green projects is rapidly gaining momentum. In 2016, the NDB placed its first issue of “green bonds” on the Chinese interbank market; the amount totalled 3 billion yuan, the income from the issue was allocated to support the environmental initiatives of the member countries of the association. Thanks to such initiatives, the movement towards the implementation of the sustainable development goals has been effectively continued.
Number five: Building partnerships with the private sector
Attempts to coordinate the activity of the business structures of the association were made back in 2019, during the year of the presidency of Brazil, whose President proclaimed the deepening of business partnership for global development. Three years later, in 2022, such initiatives have received approval from the participating countries. Currently, the NDB has all the necessary conditions for intensifying such cooperation, so an increase in the role of the private sector may take place in the near future.
So, you can see that the New Development Bank is only at the beginning of its journey to create meaningful alternatives to the Bretton Woods institutions. According to analyst by 2026 the New Development Bank will expand its total package of approved loans to $60 billion: such ambitious forecasts among experts indicate that the Bank is on the right track. The purpose of this path is the global mission of the NDB – to increase the confidence of the developed world in developing countries in the global economy and a clear demonstration that emerging markets are becoming a real force to be reckoned with.
What are your thoughts? Let us know in the comment section below. Don’t forget to like, subscribe and share this video.