A new $100 billion international development bank backed by developing countries launched in Shanghai on Tuesday, in what official Chinese media called a challenge to Western-backed international lenders.
The New Development Bank came after three years of negotiations among members of BRICS — Brazil, Russia, India, China and South Africa. The launch comes soon after the formation of another multilateral bank, the Asian Infrastructure Investment Bank, which was organized by Beijing.
“Obviously, the new institutions are going to break the monopoly of the World Bank. Now, there will be more options for borrowers, who will look for the best terms among different institutions,” Bala Ramasamy, professor of economics at the China Europe International Business School in Shanghai said.
China is expected to dominate both institutions. It has the biggest share at 31 percent in the AIIB. In the NDB, it is contributing equally with the four other countries in the $50 billion initial capital, which will be doubled later on. But China has taken a 41 percent share in a $100 billion contingency fund, which was announced by NDB on Tuesday.
China as global banker
“It seems China is going to play an increasingly bigger role through the new institutions,” Ramasamy said. “Developed countries like the United States and the United Kingdom will be forced to increase their roles, and review their relationship with the developing world.”
Some analysts say that the new banks are relatively small compared to the World Bank, and challenging it at a serious level will be difficult. Critics of the new banking institutions also have questioned whether the projects they finance will have provisions protecting human rights and enforcing environmental safeguards.
The NDB may not be able to compete with the World Bank in terms of low interest rates because of its higher cost of borrowings. Any future bonds by the NDB will be judged on the basis of the credit ratings of its member countries.
“The NDB and the AIIB may want to break the monopoly of World Bank and the International Monetary Fund. That is their ambition. But do they have the confidence to do so at this stage? I have to say ‘no,’” said Liu Xiaoxue, a researcher at the Beijing-based National Institute of International Strategy.
Competitors or collaborators?
M.V. Kamath, the first president of NDB, an Indian banker, addressed the bank’s relations with the World Bank, the International Monetary Fund and other major lenders at the inauguration ceremony on Tuesday.
“Our objective is not to challenge the existing system as it is but to improve and complement the system in our own way,” he said.
He also indicated NDB will coordinate policies with the AIIB by establishing a “hotline” to improve communications.
The new institutions might also need help from the World Bank and established institutions like the Asian Development Bank for project assessment expertise and joint financing. The AIIB and the World Bank are already discussing joint financing of specific projects, and this might be extended to the NDB.
“Some parts we learn from the World Bank, some parts we try to do things differently,” Zhu Xian, vice president of NDB, told China Central Television on Tuesday. “We will complement with each other with the World Bank and other international development banks. But in some projects, there will be competition.”
Funding Chinese projects
Chinese finance minister Lou Jiwei made it clear the NDB and the AIIB will work together.
“It [NDB]will also complement the China-initiated Asian Infrastructure Investment Bank, and both will share operational experience and strengthen cooperation when the projects start.”
China’s goal is to get the new bank to finance its “One Belt, One Road” program that involves constructing a chain of infrastructure projects across the world. Beijing sees it as a means to revive its own economy by obtaining contracts for Chinese construction companies and machinery suppliers.
“The bank will provide new driving force to accelerate the global economic recovery by supporting infrastructure projects and expanding global demand,” Lou said.
Critics say the World Bank takes an overly rule-bound approach to project assessment, and often rejects proposals that its experts consider to be environmentally unsustainable. The new banks are expected to take a different approach.
“I would say the NDB will conduct proper environment impact assessment. But it is going to try and reduce the negative environment impact of projects from developing countries instead of entirely rejecting them,” Ramasamy said.
Source: Voice of America