New Development Bank: opposing force to neo-liberalism?

Densil Williams, Guest Columnist

Despite the efficiency of the Germans and the use of Big Data to advance their cause of winning the FIFA World Cup, another bit of important news emerged from Brazil. Interestingly, the Jamaican media have given some amount of attention. This news had to do with developments in the international economic order.

As the World Cup final was over on July 13, the next day the BRICS nations (Brazil, Russia, India, China and South Africa) held their sixth annual summit in Fortaleza in the northeastern Brazilian state of Ceará. The main agenda item for the summit was the formalisation of an agreement on a plan to create a development bank to serve as an alternative to lending institutions like the International Monetary Fund (IMF) and the World Bank.

On July 16, when the leaders emerged from the summit, it was announced that the New Development Bank (NDB) will become a reality. Emerging details about the bank revealed that it is to start operations in 2016 with US$50 billion in capital. Further, the BRICS members will maintain control of the bank, but membership will be open to other countries. Shanghai will be the headquarters of the new bank.

The first president of the bank will be from India; the first chairman of the board of governors from Russia; the first chairman of the board of directors from Brazil; and the first regional centre of the bank will be located in South Africa. It appears that one of the most attractive features of the NDB, in contrast to the IMF and the World Bank, is that it will not impose budgetary conditions on loans to recipients.

A change in economic philosophy?

Since July 16, there has been significant interest in economic and geopolitical circles discussing whether the formulation of the NDB is indeed a rethinking of the international economic order where the Washington Consensus model of development is to be replaced with a new orthodoxy on development thinking.

It appears there is a struggle between neo-liberal and alternative economic policies for development. Some see the NDB as an alternative to the World Bank and IMF, whose policies, the argument goes, have not profited developing nations and, as such, alternative policies are needed. As a set of fast-growing developing countries that are impatient of the pace of reforms being pushed by the Washington-based institutions, it is clear that the NDB is being positioned as an alternative source of financing for developing countries to help them to fast-track their infrastructure projects and deal with balance-of-payments issues without the strictures of the liberal institutions. Further, the NDB seems to be a response to the limited influence that the fast BRICS have on the Bretton Woods institutions. These institutions are still seen to be controlled by the USA and Western Europe.

However, with the BRICS now accounting for about 24 per cent of the world economy, these countries argue that they should have a stronger voice in the affairs of the Bretton Woods institutions. Not being able to make significant headway in this regard, the BRICS have proposed their own version of a development bank that will allow them to deal with development financing and balance-of-payments support. The indication is that the major players, China and Russia, will work with the Bretton Woods institutions in a complementary way and not as direct competitors. If this promise holds true, the fears of a replacement of the Bretton Woods institutions by the NDB should be allayed, at least, in the short run. The more pressing concern is with the workings of the bank itself.

What are the conditions for borrowing?

Like the World Bank, a major part of the NDB mandate will be to provide loans to member countries to assist them to develop infrastructure projects. This facility will seem more attractive to developing countries because the conditionalities of the neo-liberal institutions (e.g., fiscal deficit targets, inflation targets, debt targets, exchange-rate mechanism, etc.) are not likely to be imposed by the NDB. However, what is not clear from the communiqué, to date, is: if not the neo-liberal-type standards, what sort of conditions will be imposed on borrowing countries?

Lack of clarity

Clearly, the NDB is not so benign to just provide loans to members once they have projects that require funding. There have to be some conditions associated with the loans being disbursed. It is this lack of clarity that has commentators speculating on the motivation behind the bank's formation. It would not be prudent for the NDB to go the route of lax conditions for developing countries and expose the bank to the risk of non-payments of loans because of the less-than-favourable fiscal conditions in most developing countries. Macro-prudential policies will be necessary in order to prevent a recurrence of the 2008 crisis.

The NDB cannot be reckless with its approach to lending because it finds the current conditions of the Bretton Woods institutions tough. While the conditions of the Bretton Woods institutions are by no means perfect, they have at least helped to prevent developing countries from being profligate in their spending, especially to meet political objectives rather than meaningful development. It is for this reason that it is important for the NDB to outline clear conditions that borrowers will be asked to uphold as the institution takes shape. This will help to allay fears about the motivations of the institution and provide assurance about its longevity.

The NDB and Jamaica

Is Jamaica eligible to borrow from the NDB? It is clear that the anxiety surrounding this question emanates from persons feeling the effects of the austerity measures imposed by one of the Bretton Woods institutions, the IMF, under its standby arrangement. Any avenue to avoid the IMF conditionalities would be welcomed by the populace.

However, because we are not certain about the conditions that the NDB will impose, it is advisable that Jamaica tread carefully and not rush to sign up for a borrowing relationship. The neo-liberal conditions may be tough, but not knowing the alternatives and disbanding the known for the unknown can be even more dangerous.

Surely, developmental financing and balance-of-payments support with less-stringent conditions will be welcomed, especially if you do not have to face a primary surplus of 7.5 per cent of gross domestic product. However, having no conditions at all can lead to disaster. It can result in fiscal irresponsibility, which Jamaica has been guilty of over the last 50 years.

What is important for Jamaica is not to relax too drastically the current conditions that are helping to bring the macroeconomy back in line, but it is to identify the critical growth poles and get the engines of production mobilised to lessen the pain of the austere conditions. Hoping that the NDB can bring us some salvation in this regard is not the answer.

Densil A. Williams is professor of international business and executive director of the Mona School of Business and Management at the UWI, Mona. Email feedback to columns@gleanerjm.com and densilw@yahoo.com.