A major development is unfolding at the global level on the financial architecture front. Brazil, Russia, India, China and South Africa, together known as the BRICS nations, have made a major decision to establish a new development bank to finance long-term infrastructure.

The decision taken at the BRICS Summit in Durban on March 28 was in consideration of a report by the finance ministers of the five nations to reutilize surplus savings into infrastructure investments in the developing world.

The leaders of the five BRICS countries recognized that the developing countries face challenges in terms of infrastructure development. This has largely been due to insufficient long-term financing and foreign direct investment. BRICS cooperation over more productive use of global financial resources can make a positive contribution toward addressing this problem.

The summit approved a $100 billion Contingency Reserve Arrangement (CRA) to tackle any financial crisis in the emerging economies. The CRA is also a standby facility for overcoming any liquidity crunch faced by a member country. There, however, does not seem any immediate possibility of this eventuality given BRICS' strength. The CRA is a precautionary measure that can only lend stability to the system.

China, which has a huge foreign exchange reserve, has committed $41 billion to the CRA. Save for South Africa, the rest of the nations will contribute $18 billion. South Africa, a smaller economy added to give the BRICS group an African presence, will contribute $5 billion.

The decisions to set up a development bank and the CRA in all likelihood are major challenges to the US and Europe-dominated World Bank (WB) and International Monetary Fund (IMF). These are seen as confidence-boosting measures not only for the people of the BRICS nations, but also emerging economies and poor countries in general which have often been browbeaten in political, economic and financial matters by global giants. 

However, some experts in India argue that it may be premature on the part of the BRICS nations to commit finances to a global bank. This may be partly because of the slowing down of the growth of the BRICS economies. The latest figures suggest that India's fiscal deficit is $93 billion and that India is the largest borrower from IMF and WB. And South Africa is still receiving financial aid from China.

But the huge Indian economy, which has a high fiscal deficit because of its subsidy culture, is further impacted by the recent food security act. India may be the largest borrower from the IMF, but it has never defaulted. Such commitments are long-term and India is unlikely to default as it is increasing direct and indirect taxes every year by 10-12 percent.

Additionally, there is better exploration and exploitation of natural resources which is contributing to the national wealth in BRICS nations. 

According to the Indian Finance Minister P. Chidambaram, cooperation by the five nations can pave way for a powerful international institution capable of influencing discussions and voting power in the G20, IMF and other multilateral institutions. This can help increase the legitimacy of these institutions, often overly influenced by the West.

Indications are that two emerging fast developing nations, Iran and Indonesia will soon join the BRICS nations. Countries like Venezuela, Turkey, Thailand, the Philippines and Malaysia could also be significant partners in the near future.

The collective voice and capacity of BRICS members can make an effective and meaningful contribution to addressing challenges and fostering global stability and security. They can act as an effective alternate voice on matters of importance and can help reduce bullying by other nations. 

BRICS, by creating a new reserve system and a bank, can create an alternate trade currency mechanism. China and Brazil have signed a currency swap deal, under which they will be using their own currencies for half of their mutual trade without the involvement of the US dollar.

BRICS has shown the way for a new world order and countries beginning to take power. Its expected expansion will add much needed reinforcement, enhance cooperation and reduce dependence on West-dominated financial institutions. 



The author is the former executive president of a private sector bank in India, and presently the director of the Jammu & Kashmir State financial Corporation, and visiting faculty at the University of Kashmir, specializing in business and financial studies. opinion@globaltimes.com.cn