Russia, China, Brazil and South Africa start new World Bank

Leaders from the Brics nations are launch a joint development bank to rival Western-dominated institutions at a summit on Tuesday in South Africa

Brazil, Russia, India, China and hosts South Africa will meet in Durban (South Africa) to set up an infrastructure-focused lender that would challenge seven decades of dominance by the World Bank.

Xi Jinping, who has underscored the growing importance of the group by making Durban his first summit as China’s president, expressed hopes for “positive headway” in establishing the bank. This new bank will pull the carpet from under the US dollar and set up a new currency for international trade.

If the leaders succeed it would be the first time since the inaugural Brics summit four years ago that the group matches ldemands for a more equitable global world order with concrete steps.

Together the Brics account for 25% of global GDP and 40% of the world’s population.

Members say institutions such as the World Bank, the International Monetary Fund and the United Nations Security Council are not changing fast enough reflect their new-found clout.

The World Bank has traditionally been led by an American and the IMF has been led by a European thanks to an unwritten deal made possible by skewed voting weights.

There is no Latin American or African permanent member of the UN Security Council, and India—despite it’s vast population and nuclear capabilities—remains a non-veto-wielding member.

Details of how the Brics bank would work have yet to be finalised, but diplomats say it could start with $10-billion seed money from each country.

That would be dramatically scaled back from more ambitious proposals for a $50-billion buy in from each country.

The exact role of the bank is also up for debate.

Indian officials have pressed for a Brics-led South-South development bank, recycling budget surpluses into investment in developing countries.

Many developing nations inside and outside Brics will hope that is a way of tapping China’s vast financial resources.

Meanwhile, China would no doubt like the bank to invest in trade-multiplying projects.

“The bank will help Brics sustain financial risks and provide support for the development of African countries”, state media quoted Ma Zhaoxu, a Chinese foreign ministry official, as saying.

Litmus test

However Brics expert Oliver Stuenkel at Getulio Vargas Foundation in São Paulo sees the development bank as partially a reaction to their dimmed economic outlooks.

“Now Brazil is growing at an anaemic rate, South Africa is not doing so well and India growth is stalling so the Brics need to prove they can survive and prosper in challenging economic times,” he said.

Stuenkel called the creation of the bank “a litmus test of their capacity to survive”.

Moreover, given the scepticism of the Brics nations about the commitment of the West to reform international economic institutions, “anything less than the establishment of the bank would be seen as a colossal failure”.

Western officials had been wary for the idea of a Brics bank, but have since tempered their view.

The World Bank chief economist and former Indian civil servant Kaushik Basu said there is plenty the bank could do, but warned setting it up would be a “humongous task”.

Aside from the development bank, the group will also try to establish a foreign exchange reserve pool worth as much as $240-billion to be drawn on in financial crises.

China has the world’s largest foreign exchange reserves, worth $3.31-trillion at the end of 2012, and establishing currency swap lines could help other Brics tap that massive resource.

Brazil also hopes to sign a bilateral accord with China to promote trade in their national currencies.

Brics leaders will also establish business and think tank councils and discuss a ranking system for non-Western universities.

About 5 000 delegates are expected to attend.