Development Banks' Relative Capital Bases

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The sixth BRICS (Brazil, Russia, India, China, South Africa) summit began July 14 in Brazil. The three-day summit is expected to produce finalized plans for a new financial institution to be known as the BRICS Development Bank and a currency pool to be known as the Contingency Reserve Arrangement. The bank will start lending in 2016 with an initial capital base of $50 billion ($10 billion will come from each member), with plans to increase the capitalization to $100 billion over the next five years.

The institutions are part of a larger plan by non-Western developing countries to build lending mechanisms with fewer conditions than those imposed by multilateral Western institutions. It also represents an effort to insulate from future crises in the Western-led financial system, which will continue to dominate the world's financial markets, BRICS' efforts notwithstanding. Within the new BRICS mechanism itself, China will dominate because its economy and financial power dwarfs those of the other BRICS members.

At least initially, the BRICS Development Bank will be relatively small for a multilateral development bank. The European Investment Bank, World Bank, Asian Development Bank, African Development Bank and the Inter-American Development Bank all have capital bases exceeding $100 billion. But even at $100 billion, the Contingency Reserve Arrangement would quickly be exhausted in a global financial crisis (though it would prove helpful during a domestic or regional crisis).

While negotiating the details for the BRICS Development Bank, China wanted the initial contributions to be based on each country's size, like the Contingency Reserve Arrangement. China also wanted the initial start-up to be pegged at $100 billion and even offered to put up the rest of the money, but the other BRICS members quickly rejected the idea.

BRICS members share a desire for the new institutions to eventually expand to include other members of the developing world. For institutions on par with the World Bank or International Monetary Fund to arise from the developing world, the BRICS will need widespread support and involvement from other key countries. (The World Bank itself started out as a development bank designed to help rebuild Europe after World War II before growing into the global institution it is today.) There are dozens of potential members in the developing world that could join both of the new BRICS initiatives relatively quickly, but not all of them would have the start-up capital needed to expand the bank.

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