Creation of new organization will benefit other developing nations and Shanghai's global image

Immediately after Germany was awarded the 2014 FIFA World Cup, leaders from Brazil, Russia, India, China and South Africa - the BRICS countries - sat down in Brazil to discuss topics critical to their economic growth and future collaboration.

Arguably the major breakthrough of this BRICS summit was the establishment of the BRICS Development Bank.

After intensive discussion and negotiation, the leaders of the five emerging giants agreed to set up its headquarters in Shanghai, China, and chose an Indian as its first president.

The announcement could not have been better timed.

With the tapering of the quantitative easing program by the US Federal Reserve, and the flow of capital away from emerging economies back to the United States, many emerging economies have started feeling a chill in their finances.

To prevent their economies from sliding any further and to stabilize their ongoing social development, many emerging countries have been anxiously looking for new opportunities to finance growth.

During the process, and especially with the withdrawal of international capital, many emerging economies have started feeling undercapitalized in many important areas.

Existing major international financial organizations, such as the World Bank and International Finance Corporation, can only do so much to help meet the increasing demands of developing countries.

The BRICS Development Bank and its planned emergency reserve fund is, therefore, clearly a timely and important complement to a global financial system still largely dominated by those two organizations.

But the slow pace of reform at both has clearly frustrated the emerging economies, which are now experiencing rapid economic growth and increasing levels of wealth.

Even at a time when emerging economies collectively contribute more than a half of the world's economic growth, many feel they are being neglected or discriminated against by these international organizations, which are still dominated and governed by developed countries.

It is probably too early to tell whether the new bank will eventually rival the World Bank or the International Monetary Fund, and it is probably not its goal anyway.

Nevertheless, many emerging economies realize that this capital scarcity remains a bottleneck to emerging economic growth.

Of course, within five such vibrant economies it is not always possible to have a consensus of opinion.

The BRICS member countries have clearly spent much time discussing and debating their capital commitments to the new bank, the location of its headquarters, and its governance structure.

But with these obstacles now largely settled, it is time for those powers to use their collaboration and collective bargaining powers to turn this new entity into a bank run by emerging economies, for emerging economies.

Needless to say, Shanghai will benefit considerably by hosting its headquarters - it's the first time the city has hosted an international financial organization of this size.

The international reach and global impact of the BRICS Development Bank will draw increasing cross-border capital flows and investment transactions into Shanghai.

Its establishment there will also add an incentive to an extension of its free trade zone, and motivate a new round of reforms within its financial services sector.

It is important to bear in mind that the bank plans to extend loans not only to BRICS countries and their enterprises, but also to other emerging economies, offering a wonderful opportunity for not just Shanghai but China as a whole to showcase its 30 years of economic growth.

This will provide these emerging countries with great opportunities to learn from Chinese experiences, and also enhance their collaboration in trade and investment with the other BRICS countries and emerging economies following in their economic footsteps.

The influx of business opportunities and talent attracted to Shanghai as a result of the bank will also bode well for the city's ongoing development as a truly global financial center.

The author is a faculty fellow at the International Center for Finance, Yale University; and deputy dean of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 07/25/2014 page10)