How the BRICS nations failed to rebuild the global financial order

In July 2014, the five BRICS countries of Brazil, Russia, India, China and South Africa – representing more than 3 billion people – announced the launch of a new bank that would finance desperately needed infrastructure projects across the developing world. Although it was immediately dubbed the “BRICS Bank” by supporters and detractors alike, its official name held a simple yet powerful promise: the New Development Bank (NDB).

The timing was significant – the announcement came almost 70 years to the day after the Allied nations met at Bretton Woods in New Hampshire to establish the global financial architecture that would help rebuild a world shattered by World War II. Two institutions emerged: the International Bank for Reconstruction and Development, now part of the World Bank Group, and the International Monetary Fund, which was charged with maintaining a system of fixed exchange rates centered on the US dollar and, at the time, gold. 

While the world has changed a lot since then, the institutions that arose from the 1944 Bretton Woods Conference seem slow to catch up. In a “gentlemen’s agreement” that has endured since the end of World War II, the position of World Bank president has always been held by an American and that of IMF managing director by a European. Voting power within the IMF remains pegged to the size of members’ economies, not their populations, giving the US an effective veto over all major policy decisions even as countries with far greater populations struggle to reform the institution from the inside. 

Even by its own formula for determining member countries’ internal influence, the allocation of voting shares lags behind a world turning more and more towards rising economies across the Global South. Although the five BRICS countries are responsible for 26 percent of the global GDP in nominal terms, they have just 15 percent of the voting power between them at the IMF. 

Speaking in September 2022 in the aftermath of the catastrophic floods that swept Pakistan, United Nations Secretary General Antonio Guterres called for the urgent reform of what he described as “a morally bankrupt global financial system”.

“This system was created by rich countries to benefit rich countries,” he said. “Practically no African country was sitting at the table of the Bretton Woods Agreement; and in many other parts of the world, decolonisation had not yet taken place. It perpetuates poverty and inequalities.”

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Critics of the current crop of multilateral development banks (MDBs) such as the World Bank have accused them of having privileged the financing of extractive, export-oriented projects across the developing world that ravage the environment while doing little to build up domestic industry. The IMF, in particular, has come under criticism for its structural adjustment programmes of the 1980s, which imposed trade liberalisation, privatisation and austerity measures on lower-income countries across Africa as borrowing conditions. While the programmes’ legacy remains controversial, many economists say such policies deepened poverty and inequality by cutting away social safety nets while failing to build a foundation for economic growth. 

Slashing red tape

South African Institute of International Affairs chief executive Elizabeth Sidiropoulos said the NDB and its accompanying Contingent Reserve Arrangement – an agreement among the countries’ central banks for mutual support during currency crises that was modelled on the IMF – had been born out of a palpable frustration with years of failure to reform the US-dominated institutions. 

“The idea behind the NDB was creating a bank that had greater equality among its shareholders, could hopefully make decisions more quickly and make more loans in local currencies,” she said. “These institutions are not replacing the IMF and World Bank, but providing additional space – if you compare the NDB to the World Bank, it’s a much smaller institution.”

Opening its doors in 2016 with $50 billion in start-up capital, the NDB has since carefully carved out a niche for itself, having approved $32 billion in financing for 96 projects across its five original member countries. In 2021 it expanded its membership for the first time, bringing Bangladesh, Egypt, the United Arab Emirates – almost 280 million people – into the fold, with Uruguay still listed on its site as a “prospective member”. By contrast, the World Bank Group committed $98.8 billion to its almost 190 partner countries – “distributed in credits, loans, grants, and guarantees” – in 2021 alone. 

Despite its limited scale, the NDB’s explicit mission of financing infrastructure and sustainable development projects across the Global South – most notably, the much-needed green energy infrastructure that will help developing economies shift away from a reliance on fossil fuels – has proved attractive to the bank’s growing slate of member countries. In the four years stretching from 2022 through 2026, the bank has said that it will dedicate 40 percent of its total volume of approvals to “projects contributing to climate change mitigation and adaptation”.

Also attractive is the BRICS Bank’s committment to lending more and more money in local currencies, following a long-expressed desire among the BRICS countries to break away from the domination of the US dollar. 

While the vast majority of international loans have to be repaid in US dollars, effectively increasing the debt burden of developing countries as the greenback’s value rises, local-currency lending would leave those same borrowers less affected by the policies of the US Federal Reserve. It would also leave them less vulnerable to the US government’s power to use the dollar’s status as the international reserve currency to unilaterally impose crippling financial sanctions.

Despite this committment, though, local-currency lending remains low. Less than a quarter of disbursements made by the BRICS Bank last year were in local currency – and the vast bulk of that was denominated in Chinese renminbi and, more recently, South African rand. 

The bank’s flexibility is also appealing. Aiming to cut through some of the red tape of other development banks, the NDB’s “Country Systems” approach relies on the regulatory systems in the countries in which the projects are being built, effectively passing on the responsibility for evaluating and monitoring the projects’ social and economic impacts to local agencies in line with local legislation. Although the World Bank now has strict safeguards around social and environmental impact developed through repeated consultations with civil society groups, the NDB has been criticised for keeping its own commitments deliberately vague, and passing the responsibility for community consultation and participation on new projects to the client.

Sidiropoulos said that despite its small size, the bank’s less stringent lending conditions continued to attract borrowers across the BRICS countries. 

“We’re living in a world where accessing large amounts of development finance is difficult,” she said. “The fact that this bank exists creates chances for its members to access development financing more quickly.”

Business as usual?

Daniel Bradlow, senior research fellow at the University of Pretoria’s Centre for the Advancement of Scholarship, said the NDB had remained modest in its ambitions despite the lofty rhetoric around its launch.

“As a new bank, I thought it was going to be more innovative and creative than what it is,” he said. “In practice it’s been a relatively useful, but small bank. During Covid, South Africa got $2 billion loans to deal with the pandemic, which was helpful.”

Still others see the bank’s business-as-usual approach as a wasted opportunity. Ana Garcia, general coordinator of the Rio de Janeiro-based BRICS Policy Centre, said that she had initially been hopeful that the bank had learned the hard-earned lessons of the past few decades of international lending. 

“It needs to be a lot more serious about asking what the consequences of the projects that it is financing are,” Garcia said.

Starting in the early 1980s, public outcry and political pressure over projects funded by the World Bank that caused widespread environmental degradation had pressured the institution to adopt stricter policies around ecological and social responsibility, and pathways for community and civil society participation, in new projects. No need, it seemed, to repeat the mistakes of the past.

“On the one hand, it’s very interesting to study the NDB strategic guidelines,” she said. “As a new financial institution, it already had guidelines around social and ecological impact … On the other hand, you do have a global consensus around the need to finance sustainable global infrastructure – and in this way, the NDB is not that different from the others.”

Garcia pointed to the Araripe III wind energy project, which received more than $67 million from the NDB through the Brazilian Development Bank. The project, which built 156 wind turbines on land leased from more than 70 families, now produces enough clean energy to supply 400,000 homes. But despite the project’s obvious benefits, members of the local quilombola community say they have struggled with the project’s impact on their homes and livelihoods, complaining that there had been little interest in holding consultations with locals before the project broke ground. 

Another controversial project, the paving of the Trans-Amazonian Highway that environmentalists say has facilitated the extracted deforestation that has decimated the world’s largest rainforest, seems to stretch the definition of sustainable development beyond recognition. 

Worse, despite the slew of renewable energy projects that marked the bank’s first forays into development finance, the NDB seems to be increasingly gravitating towards the kinds of traditional carbon-intensive projects that have proved so disastrous for the climate. 

In 2019, the BRICS Bank approved around $790 million in loans for three energy projects in South Africa. Of that sum, around $480 million went to local power company Eskom’s Medupi power plant, now one of the largest coal-fired power plants in the world.

Despite initially inspiring language around equality and accountability, Sidiropoulos said, the NDB’s decision-making process around how it judged proposed infrastructure projects to be “sustainable” left much to be desired.

“If you look at the point they made about transparency, in fact they are probably much more opaque than other banks,” she said.

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Garcia said that as a relatively new institution, the BRICS Bank still has time to fulfil its initial promise of a new way of financing infrastructure development.

“The first thing is transparency – they need to open their data to specific interest groups,” she said. “The second thing is participation beyond business – once you have a project, you need to open a space for consultations with local groups. Channels for participation, channels for transparency, this is something they can easily do, and something that the World Bank already does.”

But Bowman said that there was little sign that the BRICS member countries were open to building another approach than breaking ground first and asking questions later. 

“I suspect that like what happened in the other MDBs, it will take some problematic projects that make the management and member states decide that they need to pay more attention to these issues and that they should be more cautious in their reliance on country systems,” he said. “It could also change because of changing understanding in the member states on these issues, but this is less likely.”

Biswajit Dhar, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, told climate-focused publication India Climate Dialogue that the NDB’s growing reliance on private capital to fund its lending left the bank in thrall to the same economic forces that had shaped the paradigm it once sought to displace.

“By being forced to enter into private capital markets, the NDB will have to first think of remaining financially viable, which will happen at the expense of its mandate,” he said. “Since it has to function as a commercial entity and not a development finance body, it can ill afford to involve civil society organisations to do due diligence of the projects it is funding.”

Sidiropoulos said that new financial institutions, whatever their ambitions, still had to survive in a world shaped by the demands of private capital markets and the judgement of credit rating agencies.

“We are seeing the emergence of new development finance institutions, but the truth is that we do live in a globalised world,” she said. “It’s not about creating another institution, it’s about changing the paradigm, changing the framework through which [credit] risk is assessed.”

But this change, she said, was unlikely to come from a business-as-usual approach. She raised the prospect of failing to meet the 2030 deadline of the UN’s 17 Sustainable Development Goals (SDGs), which call on governments to eradicate poverty, reduce inequality and take urgent action on climate change.

“It requires a realisation that we’re in a crisis moment,” she said. “We’re halfway to the SDGs, and we’re not going to realise them, and we literally have a burning planet – and the countries of the global south are going to bear a lot of the brunt of that.”