A Second World Bank: Do We Really Need Two?

In July 1944, as the “beginning of the end” of the Second World War began to emerge from the fog of conflict, a group of economists met in Bretton Woods, New Hampshire to plan the reconstruction of the world’s financial system.

A key concern: how would nations obtain the capital and the expertise that they required to rebuild their societies? The economists created a pair of new organizations, the World Bank and the International Monetary Fund (IMF), to address this need.

The World Bank would finance specific development projects in strategic industry sectors. Meanwhile, the IMF would provide policy advice, technical assistance, and short term loans during periods of economic instability. Together, the two entities would shepherd the world’s emerging economies through the latter half of the twentieth century.

Last week, though, an eclectic assortment of five nations agreed to operationalize its commitment of $100 billion for the creation of a New Development Bank (NDB). Designed to serve as a rival to the existing World Bank, the proposed entity would provide a new source of capital for financing the projects of emerging nations.

But do we need a second development bank? And how would it differ from the existing one? Whereas the existing World Bank is managed by the world’s established economies, the NDB would be operated and financed by the BRICS nations.

The BRICS encompass Brazil, Russia, India, China, and South Africa. The first four nations (i.e. “BRIC”) were initially identified in a 2001 Goldman Sachs paper as the “large emerging market economies” that would drive future global economic growth.

These four nations first organized a “BRIC” summit in 2009. Then, one year later, they recognized the need for an African representative and welcomed South Africa to their group. The assortment of nations, though, has never embodied an ideal representation of the world’s emerging economies.

China, for instance, is currently the world’s second largest economy; it is expected to overtake the United States and become its largest as soon as this year. And Russia, as the leader of the former Soviet Union, led one of the two global superpowers for much of the twentieth century. Thus, it’s quite a stretch to refer to them as “emerging” economies!

And South Africa may no longer represent the key “large emerging market economy” of its continent. The Nigerian economy, in fact, surpassed it in GDP earlier this year.

So does the world need a second global development bank? And one, in particular, that is financed by such a diverse assortment of countries?

On the one hand, if you believe that the emerging nations are suffering from a shortage of capital, a second bank may indeed provide critical resources to finance new projects. And the resultant competition between the banks may well help the emerging nations “strike the best deal” for their citizens.

But on the other hand, if you believe that the world is “awash in money,” then a second development bank may not be necessary at all. In fact, considering the protests in many BRICS nations regarding social needs, the leaders of the BRICS nations may instead be better advised to invest their $100 billion in their own societies.

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