The International Monetary Fund and World Bank began in 1944 as a post-war solution to help with reconstruction and redevelopment. Today, they continue to focus on reconstruction and reducing poverty, in addition to being the go-to source for emergency funds in times of economic crisis. It is the latest tactics around economic policy, though, that have created a division between western and emerging nations.
Frustrated by the dominance of western nations, particularly the United States, five nations — Brazil, Russia, India, China and South Africa — have decided to create their own financial alternatives to the International Monetary Fund and the World Bank. These nations, called the BRICS nations, represent very different economies than the nations that control global economic policy. They represent 21 percent of global economic output and 50 percent of all worldwide economic growth.
They are also the ones to most often have difficult experiences with the IMF and World Bank.
The decision to form their own financial organization came after repeated attempts to give emerging nations more voting power in the existing structure failed. While details are still being ironed out, each of the BRICS nations will equally contribute to $50 billion to a World Bank alternative, the tentatively named New Development Bank, along with an additional $100 billion for what is being called the Contingent Reserve Arrangement, the emergency fund equivalent of the IMF. Formal decisions on rules and investments will be ironed out in another summit in Brazil.
The five nations have very different economies and political systems, which led to some difficulty in deciding where the new financial organization’s global headquarters would be based. Part of this was trying to avoid the world’s second largest economy, China, from dominating much like the United States dominates the World Bank. In the end, it appears that Shanghai will be the new home.
The idea of competition is welcomed from the many emerging nations that have been at odds with the World Bank. The IMF’s insistence on austerity measures as a condition of emergency loans to struggling nations in Europe during the world economic crisis has been criticized. The idea of having a choice to seek help is appealing to many nations who have also born the brunt of economic sanctions from the west, including the BRICS nations. For now, only the BRICS nations will access the funds for development and infrastructure, with plans to issue their first loans as early as 2016.
The move by the BRICS nations is seen as a way to increase their leverage in economic policy decisions and to be less dependent on the political whims of the United States. The Republicans in the U.S. Congress have refused to pass legislation that would increase funding to the IMF which would be used to help developing nations. They have also refused to allow for greater voting power for China and other emerging nations.
All of the BRICS nations will have equal voting power, as will any nations that may join the new organization.
For now the IMF and the World Bank has publicly remained welcoming and not viewing it as a challenge to the world order. An IMF spokeswoman said, “All initiatives that seek to strengthen the network of multilateral lending institutions and increase the available financing for development and infrastructure are welcome.” World Bank President Jim Kim also noted it could be a good thing to have others dedicated into investing into infrastructure worldwide. There has been no official statement from the United States.
Of course, both the IMF and World Bank emphasized that it is important to “complement” and work “cooperatively” with the existing organizations.