BRICS summit 2014 and its effect on global economy

The 6^th BRICS summit 2014 was hosted by Brazil on 14-16^th of July in Fortaleza. It was the sixth annual diplomatic meeting of BRICS nation. In this global economic scenario BRICS nation has added a new milestone by declaring to establish a “New Development Bank”. After World Bank and International Monitory Fund (IMF) the New Development Bank would be the third most important global financial organization of its kind. The Headquarter of the bank would be in Shanghai, China and the first President of the bank shall be from India. India’s president ship would be for six years then the President ship would be given to Brazil followed by Russia, their tenure would be for five-five years. 

After the financial crisis of 2007-2008 the importance of developing countries has raised globally. In the last decade there has been a change in the global economic scenario, especially in the contribution of global GDP, the share of developing and developed countries has raised a lot. In some developing countries a huge raise in FDI can be seen and at the same time the area of important needs in developed countries has also increased especially in case of growth by keeping in mind infrastructure and environment.

According to recent report of United Nation, to continue the pace of growth in developing countries nearly one trillion US dollar is needed for financial investment annually. The absence of financial investment in developed countries may give rise to electricity and water crisis to a huge population, knowing these challenges to occur in future the steps taken by BRICS is very important.

How will be New Development Bank?

The starting capital of BRICS Development Bank will be of nearly 100 billion dollar. In this development bank the share of Brazil, Russia, India, China and South Africa would be equal that is 20 billion dollar each. The starting share capital would be 50 billion dollar. The bank will work on the principle of equal voting right of each country. The starting share of each member country would be 10 billion dollar. This raised capital would be used for infrastructure development and local growth planning of each of the member country of BRICS. In spite of this one important feature of this bank is that small countries having low economy can also apply for fund for their local development planning. The entire BRICS nation has agreed on 100 billion dollar of contingency reserve arrangement (CRA). From this arrangement the BRICS nation would get enough funds to encounter financial crisis. Beside the equal investment of shared capital of each member country, China’s share in CRA would be 41% and Russia, India, Brazil’s share would be 20% each where as South Africa’s share would be of 5%.

Why New Development Bank?

The 5^th part of global economy is under BRICS nation but in the International Monetary Fund (IMF) the voting right of BRICS nation is only 11% which is very less. For the past 70 years the organization running under Briton-Wood principle needs lot of improvement. According to the report of “Washington Post” in 2008 and 2012 a proposal was kept to increase the share of voting right of BRICS nation but the decision is still pending.

In this case the share of developed countries had to reduce but the organization did not agreed to this proposal for various reason and ultimately the small European nations has to suffer as their share in voting rights would have been reduced thus it was criticized by most of the European nations. According to them due to the reduction in the share of voting right they would be ignored by the developed nations and IMF and they would not be getting enough funds for their growth plans beside that their contribution in the economic growth would also be ignored by the organization. In short from the starting the control of IMF and World Bank has been in the hands of Europeans and Americans. In an interview with Nogueira Batista the person who represents Brazil and many other countries in IMF, said that if the global financial organizations would have done their job properly there would not have been any need of new bank.

India’s hope vs China’s Ambition

There are no two approaches in the infrastructural development of BRICS nation’s New Development Bank that would play an important role. In terms of India and China the importance of Bank can be easily seen, both the nation is a fast developing financial power globally. In this case the eyes of developed countries are also on both these emerging financial powers. If we talk about the relation between India and China, it has always been ups and down. India-China border issue is very old and the issue is still on. China’s possession in Arunachal Pradesh, Laddak, Jammu and Kashmir and many other parts of the land is always been a matter of concern for India. For the last few decades both neighboring countries relation has been going through various agreement related to border issues. China proclaims 90,000 sq.km of land in Arunachal Pradesh as their territory beside that they have also illegally captured 38,000 sq.km of land in Jammu and Kashmir. Thus for all these reasons agencies hesitate to invest in infrastructure projects in Arunachal Pradesh.

Now the question arises that to what extend the new agreements between India and China would be helpful for China to become a super power? The former executive director of India in IMF between 2003 to 2006, Booby Mishra in an interview said that China wants to become a financial super power till 2020 and in this case the New Development Bank would help China to achieve their goal, thus in this case India has to stay alert. Though the bank can take more than 10 years to establish their importance and put an impact over the international market. At the same time some believe that developing nation’s first step of establishing a New Development Bank is a good start to economic growth and development.

Hope from New Development Bank

The analysts believe that the contribution of BRICS nation internationally in growth projects would be very important. At the same time the members of the organization believe that BRICS Development Bank / CRA will counter World Bank and IMF. From these funds for various plans, emergency help, loan for various projects and financial help in controversial land would become much easier. The World Bank believes that in developed countries nearly one trillion dollar of investment is required in the field of infrastructure. The total development banks globally are capable of providing only 40% of the needs.

Certainly BRICS Development Bank will give more importance to electricity and power, transport, telecommunication, water and sewage system and various development projects. The demand for infrastructure development in low income countries will also rise. Some analysts believe that in near future the members of BRICS will also raise and it may happen that the loan limit in BRICS Development Bank may even go up than the World Bank. It may also happen that for high quality loan portfolio huge reserve fund would be required. In this case the organization has to deal with various security issues. Now the world’s eye would be on the effect of the step taken by BRICS nation in global economy. 

BRICS contribution in global economy

The members of BRICS are the fastest developing nation with lot of potential for growth. Some of the facts of these developing nations include-

Brazil is the largest producer of sugar, orange and coffee, where as Russia has huge amount of gas and oil reserve which is very important for running various huge projects. India is one of the richest sources of mineral resources in the world. China’s economy is the second largest economy of the world just after America. According to economists till 2020 China will leave behind America in terms of growth and development beside that the GDP of China will also surpass America’s GDP in terms of domestic production. South Africa is well known for coal, gold, platinum and diamond throughout the world. In BRICS nation word’s 40% of the total wheat is produced.

26% of the total land area is covered by BRICS nation, beside that they contribute 21.5% in the total domestic production of the world. They also contribute 24.4 % in global gas production. Nearly 42% of the total population of the world is covered by BRICS nation. Globally 42.2% of contribution is on the production of power and nearly 20.7% of share is on the production of oil. The BRICS nation covers 32% of the global agriculture land, more than 50% of the contribution in the growth of the global economy is from BRICS nation. Beside that they contribute 10.2% of the global expenditure in various military activities. The trade between the members of the BRICS nation has reached to nearly 300 billion dollar and till 2015 it will reach till 500 billion dollar according to some economists. BRICS nation has a total of 44 trillion dollar of foreign exchange, thus the contribution of BRICS nation to the global economy is increasing very fast day by day.