BRICS LEADERS: From left, Indian Prime Minister Manmohan Singh, Chinese President Xi Jinping, South African President Jacob Zuma, Brazilian President Dilma Rousseff and Russian President Vladimir Putin at the Brics Summit in Durban on Wednesday. Picture: REUTERS
BRICS LEADERS: From left, Indian Prime Minister Manmohan Singh, Chinese President Xi Jinping, South African President Jacob Zuma, Brazilian President Dilma Rousseff and Russian President Vladimir Putin at the Brics Summit in Durban in March. Picture: REUTERS

AT THE end of their summit in Durban in March, the leaders of the Brics (Brazil, Russia, India, China and South Africa) announced their intention to establish a New Development Bank aimed at "mobilising resources for infrastructure and sustainable development projects in Brics and other emerging economies and developing countries". The significance of this cannot be overemphasised. For starters, it reflects the successes in economic development in the past four decades and the rebalancing of global economic power this implies.

A new development bank is clearly needed. The infrastructure requirements in emerging-market economies and low-income countries are huge — 1.4-billion people still have no reliable electricity, 900-million lack access to clean water and 2.6-billion do not have adequate sanitation. About 2-billion people will move to cities in the next 25 years. Policy makers must ensure the investments are environmentally sustainable.

To meet these and the other challenges, infrastructure spending will have to rise from about $800bn to at least $2-trillion a year in the coming decades or it will be impossible to achieve long-term poverty reduction and inclusive growth.

While the private sector can meet some of these needs, it can go only so far. The funding gap is beyond what existing international financial institutions can meet. Annual infrastructure financing from multilateral development banks and overseas development assistance is likely to amount to no more than 2%-3% of projected needs.

A development bank anchored in emerging markets and developing countries can help to address this gap and become a powerful catalyst for change. The world is markedly different from the time of the founding of the World Bank and many of the regional development banks. The proposed New Development Bank presents an opportunity to reflect these changes, with modern financial instruments, strong governance, and a broad-based mandate.

For example, changes in financial markets — including the large amounts of money in sovereign wealth funds and public pension funds — provide opportunities for new development partnerships, which the new bank can help to catalyse and orchestrate. So, too, should its deployment of a range of modern instruments enable it to meet diverse project needs with adequate risk management.

The new bank should maximise its multiplier effects by sharing and reducing risk through collective action and "crowding in" other financing; by setting a powerful example in adopting innovative and cost-effective approaches; and through its policy and institutional effects beyond projects it finances.

While the older institutions have tried to adapt, their governance is out of sync with today’s economic and political realities. The new bank’s governance structure has yet to be worked out, but it promises to be more consistent with contemporary best practice.

Conceptions of development that informed the existing multilateral institutions’ mandates are markedly different from modern development thinking. For example, there was no awareness of the challenge posed by climate change, and that all countries must reduce their greenhouse gas emissions and adapt to adverse changes. Likewise, there was no comprehension of the innovation and opportunities entailed in pursuing more sustainable paths of inclusive economic growth.

Of course, the World Bank and the regional development banks now recognise such imperatives, and the New Development Bank should not relieve the developed countries of their responsibilities. But, with the shortfall of assistance from developed to developing countries, the new bank can provide essential help to developing countries and emerging markets as they undertake smarter and more sustainable infrastructure investment for growth and poverty reduction.

The new bank will not only be a driver for sustainable growth in the developing and emerging world, it will also foster reform in the existing multilateral financial institutions — changes from which all of us, in the developed and developing world alike, will benefit.

© Project Syndicate, 2013.

Stern is with the London School of Economics and Political Science. Stiglitz is a Nobel laureate. Bhattacharya is director of the Group of 24. Romani is with the Global Green Growth Institute.