Prof. Fondo Sikod, an Economist with the University of Yaounde II, Soa, looks at the possible impact of the creation by the BRICS bloc of a development bank and contigency fund.

What explains last week’s decision by BRICS member States to set up a development bank and a reserve pool?

The bank and the fund have been set up to benefit countries that belong to the group to finance infrastructure development so as to increase competiveness. Eventually, it may be possible to aid debt-ridden developing nations through this fund. The creation of the bank and fund are seen as providing some alternative to the International Monetary Fund and the World Bank, which are dominated by the West.

This push for the creation of the bank and the fund also has political undertones. China and the other member countries want to gain more political clout. This can be seen in the contributions to the fund. Of the 100 billion US Dollars proposed for the fund, China is contributing 41 billion; Brazil, India and Russia are each contributing 18 billion, and South Africa, 5 billion.

The BRIC thesis recognises that Brazil, Russia, India and China have changed their political systems to embrace global capitalism. It can be foreseen that China and India, respectively, will become the dominant global suppliers of manufactured goods and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials.

Of the four main countries, Brazil remains the only polity that has the capacity to continue manufacturing, offering services and resource supply simultaneously. Cooperation is thus a logical next step among the BRICS because Brazil and Russia together form the logical commodity suppliers, while China and India will need commodities to feed their economies. Setting up the bank and fund is therefore, a necessary step to cement relations among these countries.

What impact can the measures have on international finance, developing and emerging countries?

Although the Brazilian President, Dilma Rousseff, said that BRICS nations are not seeking to distance themselves from the Washington-based International Monetary Fund, this activity lessens the dependence of BRICS on the IMF. As she said further, "On the contrary, we wish to democratise and make it as representative as possible." This is in line with the wishes of emerging economies to have a greater say in the functioning of the IMF. Emerging and developing nations have been frustrated at the slow pace of IMF reforms aimed at giving them bigger voting rights within the institution.  

The impact of the measures on international finance and emerging and developing countries will not be very significant, especially in the short run. The IMF and the World Bank use their positions to make it possible for many poor countries to secure loans to finance their economies beyond what the institutions can provide. The IMF and World Bank therefore serve as collateral.

What are the chances that the bank will survive, given the dominance of Western-backed financial institutions like the World Bank and IMF?

The International Monetary Fund, IMF, is mandated to oversee the international monetary and financial system and monitor the economic and financial policies of its 188 member countries. This activity is known as surveillance and facilitates international co-operation. All members of BRICS are shareholders of the IMF.

The perceived dominance of the Western world comes in because of the size of the shareholding of these countries. They make larger contributions to the IMF fund, and so have a larger say in protecting the money they have put in. The BRICS Fund will be managed in the same way.

The World Bank is a UN international financial institution that provides loans to developing countries for capital programmes. The World Bank is a component of the World Bank Group, and a member of the United Nations Development Group. All countries are members of the United Nations and are automatically members of the World Bank.

The World Bank's official goal is the reduction of poverty. Given that BRICS countries are also members or shareholders of the IMF and World Bank, there can be no conflict of interest. The BRICS bank and fund, will only serve to complement the activities of the IMF and World Bank.