At the Durban summit in March, the BRIC leaders announced their intention to establish a New Development Bank aimed at “mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.” The significance of this decision cannot be overemphasized. It reflects the enormous successes in economic development during the last four decades (the BRICS’ aggregate GDP is now greater than that of the advanced countries when the Bretton Woods institutions were founded) and the rebalancing of global economic power that this implies. Indeed, the decision demonstrates the BRICS’ ability and willingness to work together, for their own benefit and for that of the entire world.
A new development bank is clearly needed. The infrastructure requirements alone in emerging-market economies and low-income countries are huge – 1.4 billion people still have no reliable electricity, 900 million lack access to clean water, and 2.6 billion do not have adequate sanitation. Also an estimated two billion people will move to cities in the next quarter-century. And policymakers must ensure that the investments are environmentally sustainable. To meet these and the other challenges confronting the developing world, infrastructure spending will have to rise from around $800 billion to at least $2 trillion annually in the coming decades. Else, it will be impossible to achieve long-term poverty reduction and inclusive growth.
While the private sector can meet some of these needs, it can go only so far, especially given the nature of infrastructure projects’ risks, the huge upfront costs, and the high cyclical sensitivity of global financial markets. The funding gap is beyond what existing international financial institutions can meet, not more than $40-60 billion, or 2-3% of projected needs. A development bank anchored in emerging markets and developing countries can help to address this gap and become a powerful catalyst for change, both in the developing world and – through collaboration and example – in existing institutions.
The Bank also will have modern financial instruments, strong governance, and a broad-based mandate. Changes in financial markets (including the large amounts of money in sovereign wealth funds and public pension funds) provide opportunities for new development partnerships, which the New Development Bank can help to catalyze and orchestrate. So, too, should its deployment of a wide range of modern instruments enable it to meet the diverse range of project needs while ensuring adequate risk management. The new bank should maximize its multiplier effects by sharing and reducing risk through collective action and “crowding in” other financing; by setting a powerful example in adopting innovative and cost-effective approaches; and through its policy and institutional impact beyond projects that it finances. Most important, the New Development Bank will give greater voice to the perspectives and interests of those in developing countries and emerging markets.
As with the outdated governance arrangements, conceptions of development that informed the existing multilateral institutions’ mandates are markedly different from modern development thinking. For example, there was no awareness of the challenge posed by climate change, and that all countries (including those in the developing world) must reduce their greenhouse-gas emissions and adapt to changes that will be particularly adverse to poor countries. Likewise, there was no comprehension of the innovation and opportunities entailed in pursuing more sustainable paths of inclusive economic growth.
With the shortfall of assistance from developed to developing countries, the new bank can provide essential help to developing countries and emerging markets as they undertake smarter and more sustainable infrastructure investment for growth and poverty reduction. Given the need to act quickly – and given the slowness with which the developed world has been responding – this new institution is all the more welcome. It will not only be a driver for sustainable growth, but will also foster reform in the existing multilateral financial institutions – changes from which all, in the developed &and developing world alike, will benefit.
(Co-authored with Nicholas Stern, Professor of Economics and Chair of the Asia Research Center at the London School of Economics and Political Science; Amar Bhattacharya, Director of the G-24; and Mattia Romani, Deputy Director General of the Global Green Growth Institute)
