Establishing BRICS Development Bank is a fascinating proposal
Valdaiclub.com interview with Bruno S. Sergi, Professor of International Economics at the University of Messina and is a Principal Research Fellow & member of the Advisory Board of the Centre for EMEA Banking, Finance and Economics at the London Metropolitan Business School.
BRICS will explore a slew of new ideas, including a development bank and an investment fund that can spur the development of the emerging and developing countries. What would you say about that?
It’s true, the fourth meeting of BRICS’ leaders, held on March 29th, witnessed BRICS leaders’ commitment – among others – towards shaping a development-type bank, a kind of South-South Bank. The idea first suggested by India in February is actually no more than a declaration of intents and in fact, BRICS’ finance ministers might soon appoint a joint working group for technical feasibility studies and report by the next BRICS summit. In essence, establishing such a development bank in order to mobilize resources for infrastructure and sustainable development projects in BRICS as well as in other emerging and developing economies sounds as a fascinating proposal to me. I mean to boost and supplement existing multilateral and regional financial institutions. However, it’s easier said than done, because is hard now to predict how much financial resource could make use of and to what extent it would affect the growth of these economies, which still have different growth potential and dissimilar political and institutional arrangements. These are the key question surrounding the proposal.
How will the emergence of such an institution affect the world financial system?
Let me say that we are in a complex and interdependent global economic system and even the mere mention of this initiative is commendable in itself. This would be a political success and give great visibility and proactive role for BRICS, which now are the vanguard of world’s growth. However, transforming a political story into an economic success for the world financial system is not that straightforward. To this end, the new “Bank” should become tangible, reinforce the international status of BRICS, and become an effective counterbalance to role of other multilateral lenders such as the World Bank and Asian Development Bank. More accomplishment would come from an authentic commitment of the five countries, which are now the engine of global economy growth, to mobilize huge resources and adopt more judicious and coordinated macroeconomic policies at a time of international fragile financial system.
Which benefits will Russia get from BRICS Development Bank and which new challenges will it face?
As I said, the prospective financial institution would entail more commitment on the five partners towards more synchronised and coordinated macroeconomic stance. Therefore, Russia should coherently stick to this framework and this is a challenge per se. Although Russian financial engine is oil and gas industry in the short-run, I don’t see any other on-going systematic plan to boost up economic growth in Russia. Hence, a prospective development bank would be an additional challenge for Russia because a financial commitment would force Russia to both keep up with what the other “4-BICS” are exhibiting in terms of high growth rate potential and adhere to the strategic framework set by the development bank.
How do you assess the role of BRICS in promoting new global reserve currency? Does the world really need it?
This is a crucial question indeed. The world economy deserves financial stability and a strict and coordinated policy on the financial side. Having a new world currency, in addition to the US$ and the Euro as key reserve currencies at present, would be beneficial as long as it meets the need for more world stability. Or else, a new world currency would be worthless. Said that, no one cannot deny that China’s renminbi enjoys strong influence in Asia and the growing role of China’s renminbi on the world currency stage, although it’s a matter of fact that many central banks do not hold renminbi-denominated assets as foreign reserves. Transactions of assets denominated in the renminbi are set to increase quite strongly and Beijing’s decision to allow the state-controlled Bank of China to offer renminbi-denominated bank accounts and currency conversion services in New York, and the development of a new international payment system to facilitate cross-border renminbi clearance among market players, are important steps and maybe a challenge to the US$ and the Euro as the third key reserve currency. Therefore, a prospective “South-South Bank” could strengthen this reality for renminbi in the next years.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise