BRICS development bank should challenge the Washington Consensus

The five countries in the BRICS group have set up a development bank and a reserve fund to increase their influence in world affairs. Their desires are justified. Their combined economies are equal to America's in gross domestic product and far bigger in trade. And, yet, they have little influence in international financial institutions like the World Bank, the International Monetary Fund or the Asian Development Bank.

So could the BRICS project work in their favour and advance the interests of emerging economies in general?

At first glance, it seems the project will struggle to be effective. The World Bank and the IMF are UN-affiliated organisations, and virtually all UN members are shareholders. The BRICS bank and fund have five members and can't establish regular, official dialogue with other emerging economies. Hence, it may function like another commercial bank. That would be a pity.

Meanwhile, the influence and relevance of international financial institutions have been dwindling. Emerging economies have trillions of dollars in foreign reserves, thanks to the US Federal Reserve's easy monetary policy. The odds are that they will be called on to bail out developed economies, rather than the other way around. Indeed, the IMF has been bailing out European economies partly with funds from emerging economies.

The World Bank has been a significant source of long-term capital for emerging economies for many decades. But global capital markets have developed so much that its funds are tiny compared to what emerging economies can get from issuing stocks and bonds.

Both institutions have been struggling to justify their existence. Instead of being major sources of financing, they try to sell the "Washington Consensus" to their member countries or the public, that is, an open economy, deregulation and fiscal discipline.

In the past decade, major events have shaken people's faith in what they say. The 2008 global financial crisis, for one, can be partly attributed to financial deregulation. The successes of China and Russia in growing their economies have also generated enthusiasm among emerging markets for the state capitalism model as an alternative to the Washington Consensus.