“On the one hand these guys all complain about not having a bigger share of the IMF and the World Bank but of course with that goes more responsibility,” former Goldman Sachs chairman Jim O'Neill told CNBC.
“I think they’re a little bit scared of what having more global responsibility means so by doing it through something like the BRICS bank, it’s a lower-risk way of exploring this greater responsibility to others.”
O'Neill, who originally coined the term BRIC as a means of bringing together several emerging market countries, namely Brazil, Russia, India and China, stated that the establishment of the New Development Bank is quite an achievement.
(READ MORE: BRICS set up bank to counter Western hold on global finances)
“As a political group, the fact that they’ve actually come up with something specific, after meeting for six consecutive years, is quite a development. They were struggling in the past two years to agree on many basic things about this and the fact that they’ve now agreed [on] it, it’s interesting,” he said.
While he stated his surprise at the fact that the bank would be headquartered in Shanghai, he noted that it was also a permanent symbolic sign that global governance had fallen behind.
“Global governance has not kept up with the pace of global economic change, particularly with congress not ratifying the G20 agreement. It was based on 2009 weights of GDP – it’s already out of date anyhow – but congress won’t even ratify that,” O'Neill said.
“These guys are thinking, ‘Well, you expect us to keep on putting money in the IMF and you won’t even give us the weight we’re supposed to have all agreed we should have? Forget it, we’ll have our own’.”
The establishment of the bank, which was announced at the recently concluded BRICS summit in Brazil, was accompanied the formation of Contingent Reserve Arrangement (CRA) – a framework which aims to complement the existing system of financial safeguards.
According to the National Treasury in South Africa, which was only later added to the BRICS member countries, the CRA is a virtual pool of the BRICS nations’ foreign reserves.
“China will avail 41 billion US dollars, Brazil, Russia and India will avail 18 billion US dollars each and South Africa five billion US dollars,” it said.
“The agreement allows for China to seek assistance up to the limit of 20 billion US dollars, Brazil, Russia and India 18 billion US dollars and 10 billion US dollars for South Africa. Should the need arise, the funds will be made available from the reserves.”
However, O'Neill indicated that while the CRA can assist in a number of areas, it’s too soon to tell if it can rival the likes of the IMF or the World Bank.
“It’s a stretch to start thinking things of those kinds of degrees so early on but we’ll have to see what they really want to do with it,” he said.
(WATCH VIDEO: BRICS development bank to tackle infrastructure projects)
“One can think of a whole host of big projects that are in the interest of those countries, that they jointly finance – infrastructure, alternative energy, energy efficiency, clean water, the growing resistance to antibiotics – there’s a ton of things these guys can do.”