In 2001, an economist named Jim O’Neill realised that four of the big emerging economies in the world (Brazil, Russia, India, China) could spell out “BRIC”, and that it could be a catchy name to refer to them in the report he was writing. These countries enjoyed the new name so much that they started having high level meetings together, and (along with South Africa, making BRICS) this week they’ve agreed to create their own bank with US$100 billion dollars of capital. This won’t be just any bank; it might change how the world works. I’m pretty sure this has exceeded Jim’s expectations for his clever acronym. Good work, Jim.

So, what is this bank, and why do the BRICS want it?

While these five countries have drastically different recent histories, what they have in common is that when the new world order was set up after World War II, the US and Western Europe didn’t really draw up the rules with these countries in mind. In the past couple of decades, the five country bloc has experienced extraordinary economic growth, but felt that its new size and significance wasn’t being adequately acknowledged by global institutions like the United Nations, the International Monetary Fund (IMF), and the World Bank.

The World Bank and the IMF both provide loans to developing countries who want to improve their systems and infrastructure, but the developing countries haven’t always been satisfied with the types of loans, or the conditions tied to the loans. So if you’re not happy with your bank, and you’ve got enough money to create your own bank... well, you might just decide to create your own bank.

Don’t worry, the World Bank isn’t about to be steamrolled

While $200 billion ($100 billion straight in, and another $100 billion of emergency capital) is indeed a big bank, let’s put it into context. A decade from now, this bank could be lending around $3.4 billion each year, compared to the $61 billion that the World Bank will lend this year. So the World Bank and the IMF will continue to be centrally important, even with this new kid on the block. But the significance of the new bank is to change the tone of the discussions between the big institutions and the developing countries. It would have been impossible to create this new bank 20, or even 10 years ago. Now you can expect conversations along the lines of “Well, we don’t like that the loan you’re offering also requires us to change the structure of our finance ministry, so we’re off to the BRICS bank instead”.

The other thing to point out is that these five BRICS countries aren’t all booming right now – they’ve got significant domestic challenges of their own. While China continues to grow rapidly, India has just voted its previous government out due to slowing growth, South Africa is the smallest of the five and has ongoing structural problems, and the much-lamented US economy is expected to outpace Brazil and Russia in 2014. China’s economy is already 50% bigger than the other four BRICS put together, and you can expect China to be playing a very prominent role in the new bank, which will be located in Shanghai.

The bottom line

What we can expect to see after this bank is created, is that domestic spending in developing countries resembles the wishes of national governments a little bit more, and the wishes of the World Bank / IMF a bit less. Will this prove to be a good thing for those living in extreme poverty, or will it open the door for some unwise borrowing/spending schemes? Pretty hard to say until it kicks into action, but let’s hope it’s more of the former than the latter.

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Michael Wilson