FORTALEZA, Brazil—The leaders of the Brics countries took another step toward carving a larger role for themselves in the global financial system when they agreed Tuesday to base a new development bank in Shanghai. The New Development Bank, as it will be called, is intended to finance infrastructure projects in the founding members of Brazil, Russia, India, China and South Africa, and in other emerging-market countries as well.
The NDB still needs approval from each Brics countries’ lawmakers, which could take years. But when it is finally set up, the bank will provide an alternative source of financing for the Brics and other emerging markets and give them much greater control over funding decisions that affect them directly.
“There will be a very powerful means to prevent new economic difficulties in the world scenario and creating the bank will also establish the basis for huge macroeconomic changes,” Russian President Vladimir Putin said. The bank “will allow us to undertake joint plans regarding out development.”
The Brics now account for about 20% of the world’s gross domestic product, Mr. Putin said. As their economies have grown, and taken on more importance in global trade, the Brics and other emerging-market countries have clamored for a bigger say in global economic decisions.
The Brics and other emerging-market countries have vast needs for financing of infrastructure projects, according to the chief executive of Brazilian development bank BNDES, who estimated the need for long-term project finance at about $800 billion.
The new institution, whose first chief executive will be from India, will start out with capital of $50 billion, to be paid in equally by all five Brics countries. Capital is planned to grow eventually to $100 billion, according to the memorandum released after the meeting in Brazil of the heads of government of the five countries.
The Brics have been trying for years to reform the International Monetary Fund and the World Bank, the backbone of the world’s global financial structure, to give emerging markets more influence over those institutions, but with little success.
“In the IMF and the World Bank, the U.S. and a handful of allies really do make almost all the decisions, and the vast majority of the world…doesn’t really have a voice,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research, in Washington, D.C. “The fund has lost most of its influence on the middle-income country in the last 15 years. This is part of the process of change in these international institutions.”
The Brics countries on Tuesday called on the members of the IMF to implement reforms to the organization that were agreed on in 2010, and for members to agree to a new formula for voting rights at the IMF.
The World Bank finances development projects around the world, and the IMF is the lender of last resort to countries that don’t have the dollars to pay their foreign debt. The IMF in particular is widely disliked among countries that need its help, because of the stringent budget control conditions it usually places on governments in return for its help.
The Brics agreed to create a so-called Contingent Reserve Arrangement, in which each country’s central bank would put aside a designated amount to be used in case of a currency crisis. China will contribute $41 billion, South Africa $5 billion and the other Brics $18 billion each, for a total of $100 billion.
The contingency fund also needs approval from lawmakers and it is unclear when it will be ready, said Brazilian Finance Minister Guido Mantega.
Brazilian President Dilma Rousseff said the fund will help reduce volatility as the U.S. unwinds its monetary-expansion policies. “We want to contribute to stability,” she told reporters late Tuesday.
The establishment of the bank was subject to the usual horse-trading among world leaders. New Delhi was also vying to host the bank, but in the end the Indians had to make do with naming the first president of the lender.
The first chairman of the board of governors will be Russian, and the first chairman of the board of directors will be Brazilian. The first regional center of the bank will be set up in South Africa while the headquarters are established in China.