What is ‘new’ about the New Development Bank?

Last month marked the official launch of the New Development Bank (NDB) in Shanghai. After the short-lived fanfare and excitement, the real work is now well under way to build, from humble beginnings, a new global development finance institution.

The historical context that gave rise to the BRICS (Brazil, Russia, India, China and South Africa) as a bloc and the establishment of the NDB is well understood. In brief, there have been fundamental changes and shifts in the global economy in the past decade and a half. These changes include a radical shift in the world economy towards developing countries, and Asia in particular. Among these countries, the BRICS bloc constitutes 43% of the world’s population and generates roughly 22% of global GDP.

For some time, the conditions have been ripe for the establishment of a new development bank anchored in the emerging markets. Several past attempts to reorganize the governance structures of the World Bank and the IMF to give a bigger voice to developing countries have failed. Furthermore, emerging markets have accumulated large long-term foreign exchange reserves over this period, creating the right enabling conditions for a bank like the NDB to come to life.

It is symbolically significant that despite the major variations of economic size between its founding members, the NDB was set up on an equal share basis. After all, the nominal GDP of China is larger than that of the other BRICS members combined. However, in the day-to-day management and governance of the bank, the five member states have an equal share.

Building essential infrastructure is an important element of economic development and a priority for the continued industrialization of the BRICS countries. Investment in infrastructure, including modern ports and gateways, intelligent transportation, pipelines, telecommunications and power, provides the pillars of national prosperity and economic development of any country. With an  authorized capital base of $100 billion, the NDB will provide an additional pool of capital to the BRICS nations to fund their infrastructure plans.

Discarding misconceptions

Some misconceptions have surfaced in public commentary about the NDB. The first is that the NDB was created as a rival to the World Bank and the IMF. But as NDB President K. V. Kamath has stated, the objective is not to challenge or replace the existing system of development finance – it is instead to improve and complement the system. More formally, the purpose of the bank, as expressed in our articles, is to “mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies, complementing the existing efforts of multilateral and regional development banks”. For sure, the formation of the NDB and the Asia Infrastructure Investment Bank (AIIB) represents a major shift in the overall development finance architecture. However, as a new kid on the block, the NDB will aim to learn from the cumulative experiences and best practices developed over many decades by all the existing multilateral development banks. Beyond drawing on best practices, the NDB will aim, in a modest way, to build what is described in our founding principles as “next practices”.

In 2013, a Mckinsey Global Institute report found that “globally, $57 trillion in new infrastructure investment would be required in the period up to 2030, simply to keep up with projected GDP growth. This estimate suggests a requirement of $3.2 trillion investment a year.” When assessed against current infrastructure spend by all the multilateral development banks combined, this leaves a huge financing gap. The NDB and other new institutions such as the AIIB are contributing to closing this funding gap. As opposed to being competitors or rivals, the World Bank and others are viewed as partners in development.

The second misconception is the notion that the BRICS more broadly and the NDB in particular are just China-led and dominated clubs. Some critics argue that the NDB is part and parcel of a grander vision, which includes the Silk Road Economic belt and the Maritime Silk Road Initiative, often referred to as One Belt, One Road. With this initiative, China essentially signalled its intention to revive the economic power of the ancient Silk Road. While the One Belt, One Road vision is naturally important, the NDB is by no means merely a vehicle to broaden Chinese influence, as some critics contend. Regional collaboration, which is essentially what the One Belt, One Road vision entails, is a powerful driver of economic prosperity for all.

The third misconception is the claim that the NDB will not uphold the highest standards of good governance and that our social and environmental policies will be compromised. On the contrary, sustainability is core to the bank’s approach, and we will not compromise on social safeguards.

Charting a new course

It is early days, but the broad mix of ideas taking shape at the NDB draws on four interrelated imperatives: sustainability, pragmatism, innovation and speed of execution.

Firstly, sustainability and clean energy will be an essential ingredient of our approach to development. Secondly, our five founding member states have directed us to be driven by pragmatism. There is no master plan to challenge the existing paradigm, nor is anyone driven by any new ideological doctrine, such as a Chinese model or a Beijing consensus. Instead, the brief is to tinker, innovate and experiment with what works rather than replicating old models of development. The “new” in NDB is a licence to experiment relentlessly, within certain risk parameters. Thirdly, as a new organization, it is fair to expect the NDB to be faster, more agile and less bureaucratic than existing multilateral banks. After all, there are no cumbersome procedures to slow down operating processes and delivery. There has to be scope to simplify and whittle down existing processes, which have slowed down the pace of delivery of large infrastructure projects. It certainly seems that the time-tested ideas and traditional methods used by multilateral development banks have created inefficiencies. At best, expect the pace of this process to be gradual and incremental. In this sense the NDB will be well advised to follow Deng Xiaopeng’s well-known dictum about reform being a process of “crossing the river while feeling for stones”.

Finally, and most importantly perhaps, is the NDB’s aim to embrace innovation. We intend to use our newness as a source of strength by looking at old problems through fresh lenses. Leveraging new technologies, we will aim to unlock new business models. There is a definite keenness to develop new approaches to development, including new tools and methods. To do this, some difficult questions need to be tackled. Visitors to the NDB office will be struck by the lack of hierarchy and relative informality of the culture. If you want to chart a new course, it helps to be brand new.

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Author: Leslie Maasdorp is Vice President of the New Development Bank based in Shanghai, China, and a Young Global Leader