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Can a new bank build bridges and fix potholes?

Source: Thomson Reuters Foundation - Thu, 17 Jul 2014 06:17 GMT
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In a 2009 file photo, Devotees pull a huge idol of "Ganesh", the Hindu deity of prosperity, during heavy traffic on a road in Mumbai. REUTERS/Punit Paranjpe
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Sit in a traffic jam in Mumbai, Shanghai or Sao Paulo; swelter through the daily power outages in Lagos or Karachi; endure water shut-offs in Manila or Hanoi and you know firsthand the high cost of poor infrastructure.

For many developing countries, it can spell the difference between growth and poverty.

Roads, bridges, railways, ports, water and sewage systems, power plants, fibre-optic cable – these are the blood and bones that support the functioning of any modern country. Without strong ones in place, the economic, social and environmental costs of poor infrastructure are huge. Children get sick from dirty drinking water. Smog kills. Jobs suffer because businesses need modern communications.

However, low- to middle-income countries lack access to capital to upgrade their systems.

Enter the New Development Bank (NDB). Launched by leaders of the most powerful emerging economies – Brazil, Russia, India, China and South Africa - at the BRICS Summit in Brazil on Tuesday, the new bank is putting infrastructure investment and sustainable development at the heart of its mandate.

It comes none too soon. The World Bank and the Group of 20 leading countries have been talking for years about stumping up more money for big projects. Their solution has been to partner with the private sector as equity investors to encourage more investment. It’s partially working. The consulting firm Bain and Company estimates $4 trillion will be spent by 2017 on global infrastructure, roughly the total output of Japan.

Even so that’s not enough money. Some $70 billion in extra capital will be needed by 2030 to finance the world’s big public works projects, according to OECD estimates. And some civil society activists are highly critical of the World Bank for using its money, intended to end poverty, to partner with big business.

The BRICS bank will start to fill the infrastructure financing gap. It will have $50 billion in initial capital and twice that amount is authorised, meaning it expects to grow in size.

How will it work? Only the technical details have been hashed out so far, but for Sameer Dossani, advocacy coordinator for ActionAid International, there are encouraging signs it can catalyse real change in development finance.

The World Bank, backed by the economic prescriptions of the International Monetary Fund, for 70 years has promoted privatisation, free trade and market liberalisation as the path toward economic growth and poverty reduction – a recipe known as the Washington consensus. While poverty worldwide is declining, the model has shown its limitations during the financial crisis and the recent widening gap between rich and poor.

“This (NDB) is explicitly saying this is the wrong model and is offering an alternative. The paradigm for development is changing,” Dossani said in a telephone interview from Brazil.

By putting sustainable development at the heart of its operations - as explicitly mentioned in the Rio principles on sustainable development - the BRICS are indicating that green growth and lessening of income inequality will guide the NDB’s work and development principles, he said. State-led policies like those pursued by China and Malaysia may be favoured.

The Rio principles call for a decent standard of living for everyone without compromising future generations, through actions such as providing good jobs while protecting the environment, clean energy, access to decent food and water, cities that offer a decent quality of life, better transportation, healthy oceans and disaster-resilient communities.

And what about NBD’s big sister, the World Bank, which has a far larger loan portfolio of about $200 billion and plans to grow it by 50 percent?

Scott Morris, a senior associate at the Center for Global Development, sees no competition between the banks, given the huge infrastructure financing needs and the World Bank’s depth of experience. Moreover he doubts NBD will stray all that far in its operating principles from global norms – be it on human rights, environmental standards or anti-corruption issues. What is important though is coordination.

“There is an imperative here that the NBD work effectively with existing multilaterals,” Morris said.

Aid and development policy already has seen enough fragmentation and half-baked results. Another traffic jam and half-built bridge is no solution to poverty. 

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