The new world order - Will it succeed?

The IMF and the World Bank are what we think of when we think about countries needing money to bridge their deficits or when they are in need of covering their balance of payments gaps. However that is all set to change very soon. In fact, it has already begun.

BRICS - The top 5 emerging economies of the world recently collaborated and created a 100 billion $ fund that would primarily serve two purposes -

1. Be a source of funding for infrastructure and other large scale projects in the developing economies.
2. Be a source of bailout for the economies when they face a balance of payment crisis.

Well, it also has a third - subtle but more important reason - Driven mainly by China and Russia (due to the Kiev issues probably?) this might be the beginning of a new world order - wherein the emerging economies, which make up for a little over half of the global output move away from the US dominated financial system.

Whether this will be successful or not - Only time will tell. But we can always have our opinions (or biases).

It is unclear how this will be better for the 5 nations compared to world bank and IMF as being their primary lenders in the past. Their funding has required stricter and stricter norms to be followed by borrowing nations. The amount of money that the nations borrow from these facilities depends on the severity of crisis, the credibility of the borrower and whether or not the borrower is likely to honor the rules laid down by the lender. This is also one of the primary reason for the BRICS making such a move. Should we call this more of a political move rather than a step towards fiscal freedom?

CHINA Problem - Inequality

Clearly, China has exerted a strong influence in the formulation of the BRICS development bank. The country will be the largest contributor to the bank - almost twice as much as all the others. The sheer size of their economy and their continued rivalry with US might mean that it could have a vested interest in being the harbinger of more problems of US - Not fighting the so called financial dominance of the West but to be a launchpad for its own dominance in the world economy.

These are also some of the issues that led to such a long delay in the formulation of this facility. India has done well in showing some resistance to such moves by China.

All in all, it is a good move by the 5 emerging economies. The reduced funding from Fed will also be hedged by these nations with this move. However, the imbalance due to differing contributions and variations in sizes of the economy will be a key issue. Moreover, more consolidation on the policy front will be needed in future!