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Brazil Joins Economic Forces to Create the BRICS Bank

Posted on the 12 August 2014 by Angelicolaw @AngelicoLaw

July 2014 marked the 70th anniversary of the Bretton Woods Agreement, which reformed the international financial system by establishing the World Bank and the International Monetary Fund (IMF). Now, this moment in history will also be remembered for the creation of the new BRICS Bank, an entirely new international bank owned and operated by Brazil, Russia, India, China, and South Africa.

Known as the New Development Bank (NDB), the BRICS Bank will have its headquarters in Shanghai, China and will be composed of two complimentary institutions. Established by the BRICS Summit held in Brazil, the New Development Bank will operate much like the World Bank. With $50 billion in initial capital, it will exist to finance infrastructure and development. On the other hand, the Contingent Reserve Arrangement will operate much like the IMF. With $100 billion in initial capital, it will be a source of financial assistance for member countries that are suffering financial difficulties.

The first president will come from India. Brazil will head the board of directors. The chairman of the board of governors will come from Russia. And there will be a regional base established in South Africa.

Birth of the BRICS Bank

Analysts suggest that frustration with the sharing of voting power within the IMF was a major motivation for the creation of the BRICS Bank. Voting in the IMF is based on a quota system that is designed to mirror each country’s relative size in the world economy as measured by each country’s gross domestic product (GDP).

The problem for many years has been that the GDP of developing countries like China, India, Brazil, and South Africa has risen dramatically without an increase in voting power. Consequently, the voting power of BRICS countries is disproportionately low. They have approximately 10% of the voting power despite making up 24% of the world economy.

Even though reforms to increase the voting power of developing countries were approved in 2010, the U.S. Congress has not approved the reforms, which would reduce the voting power of the U.S. from 17% to 16.5%. Another long-standing complaint is that there has not been a non-European head of the IMF since its creation in 1946.

Future of International Finance

The impact of the newly formed BRICS Bank on international finance is still uncertain. The World Bank and the IMF have many critics that claim that they have wandered away from their original mandate to promote free trade and discourage protectionism. Supporters of the BRICS Bank hope that it will be able to tap the financial resources of China to provide financing options for projects in developing nations.

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