The idea of a Bank for the Third World (Third World Bank) was first generated by Mr Abdel Meguid in 1976, then Deputy Minister of Planning in Egypt, followed by Mr Gamani Corea, Secretary General of the UNCTAD, Dr Abd-El Rahman Khane, Executive Director of UNIDO, and the World Bank who all supported Mr Meguid's proposal.
The World Bank promoted long-term economic development and poverty reduction by providing technical and financial support to help countries reform certain sectors or implement specific projects - such as building schools and health centres, providing water and electricity, fighting disease, and protecting the environment. World Bank loans came with strings attached.
The major economic problem inter alia the debt burden of the developing countries, due to the bulk of their import earnings being applied for servicing debt, resulted in the countries having insufficient surplus to invest in building their own industrial capacity and reduce their dependency on importing manufactured goods from the industrialised countries, as well as, dependency for emergency loans from the IMF and the World Bank to finance foreign trade.
While adjustments were required in the prevailing economic order dominated by the West to make it acceptable for the evolution and emergence of the New International Economic Order sought by the developing countries, the prospects were bleak because of protectionism and unwillingness of some industrialised countries to any fundamental change that would diminish pressures on external debt and control over the resources of developing countries that were and are still viewed as commodity producers for the benefit of the developed countries.
Mr Agha Hasan Abedi, BCC President, was aware that Third World countries would continue to face great difficulty so far as their debts, their repayment and the interest payment were concerned. There was no financial agency which provided short-term bridging finance on commercial terms to countries facing shortage of balance of payments, or emergency requirements for the import of essential goods. There were lengthy and extensive reviews and examinations of the applications and proposals in the case of the World Bank. Mr Abedi contributed in raising these issues by initially supporting the establishment of the Third World Foundation in 1978 with financial assistance provided by BCCI.
- Third World Foundation
In October 1982, BCC President Agha Hasan Abedi gave a newspaper interview to the MidEast Report, a New York publication, at which he briefly referred to the difficulties faced by Third World countries. Mr Abedi presented the proposal at the Third Conference of Banks from Developing Countries held in July 1983 in Yugoslavia. In November 1985 at an interview with BBC's World Service radio he spoke about the concept of the Third World Bank becoming a reality.
Third World and International Monetary Fund (IMF)
Classifying countries as First, Second, Third, and Fourth World was a concept created during and after the Cold War, which ran from approximately 1945 to the 1990s. The Third World was principally seen to include many countries with colonial pasts in Africa, Latin America, Oceania and Asia, originally used (1963) to describe those states not part of the capitalist, economically developed states and the communist states led by the former Soviet Union. Because many Third World countries were economically poor, and less industrialised, it became a stereotype to refer to poor countries as "third world countries".
The "Third World" term is often taken to also include newly industrialised countries like Brazil, China and India now part of BRICS. The term Third World has been partially replaced by terms such as developing countries and less-developed countries, which do not have obvious negative implications as the Third World.
Most Third World countries were dependent on medium-term loan to help with their policy programmes and to solve balance of payments problems when sufficient financing could not be obtained on easy commercial terms. The International Monetary Fund (IMF), headquartered in Washington D.C. USA, came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system and later came to play a central role in the management of balance of payment difficulties, through lending provided by the World Bank.
In situations faced by Third World countries needing emergency short-term bridging finance principally for foreign trade, there was usually no avoiding approaching the IMF for further borrowing that came attached with IMF programmes prescriptions, viewed as extremely harsh and even destroying the debtors ability to grow and even export, and thus their long-run ability to service their debt. These often impacted on living standards.
There were questions on the rationality and motive of the IMF’s economic policies which adjust the economies of Third World debtors to producing dollars at any price. It appeared that in the face of crisis in the world capitalist system with rising interest rates, the major powers and the international agencies they control were doing their utmost to shift the burden of adjustment from their own economies and taxpayers onto those who could least afford to bear it: the poor in the Third World. There was no political will to charge the development model required to balance the widening gap between the economies of the developed and developing countries.
During the 1970s, some governments of the developing countries had access to foreign private commercial banks mostly in USA and the money initially came without strings. In 1971 the IMF issued new guidelines to imply greater flexibility but in reality there was no real change in policies. At the end of 1978, with pressure on the US dollar, the US authorities took action to raise interest rates and adoption of tight monetary policies throughout the developed countries. The rise of interest rates resulted in the developing countries with private borrowings not being able to meet payments on their debt. By 1983 the banks were not lending enough to even cover interest payments even to themselves.
US$ 100 million Rice loan to Pakistan
In 1979, Bank of Credit and Commerce International (BCCI) arranged a short-term export loan of US$100 million for the Rice Export Corporation of Pakistan at a time when Pakistan was facing balance of payment difficulties and did not wish to seek an IMF loan with onerous conditions. The loan arranged by BCCI was to finance the year's rice crop and involved the participation of other banks. The loan was guaranteed by the Pakistan government and repaid after harvesting from the sale proceeds of the exported rice crop. The official signing of the loan agreement took place in BCC's central office at 100 Leadenhall Street, London EC3.
BCCI reportedly also arranged short-term loans for other developing countries facing balance of payment difficulties, such as Jamaica and Peru.
Proposal for the Third World Bank
The need for a Third World Bank was discussed in meetings of the Non-Aligned Movement and UNCTAD. The idea was consolidated at a conference of developing countries' bankers. Mr Agha Hasan Abedi, President of the Bank of Credit and Commerce International (BCCI) presented the proposal at the Third Conference of Banks from Developing Countries held in July 1983 in Ljubljana, Slovenia, part of former Yugoslavia.
At the South-South Cooperation: Experiences and Prospects conference held in Harare, Zimbabwe in November 1985, co-sponsored by the Third World Foundation and the University of Zimbabwe, Agha Hasan Abedi, President of BCC and Chairman of the Board of Trustees of the Foundation, suggested the establishment of a consortium of commercial banks, public and private, to promote mutual trade among developing countries, institute a mutual settlement system or the purpose of bridging finance and extend short term commodity credit.
- South-South financial cooperation and Proposal for a Bank for Developing Countries - a Third World commercial bank
The proposal was for the Third World Bank to help developing countries by establishing a mechanism to finance trade and multinational purchasing and marketing arrangements. The Bank would provide short-term balance of payments support. It would also act as a vehicle for counter-trade and barter business between member countries.
The work on the proposal for establishing the Third World Bank presented by Mr Abedi was advanced with the assistance of Dr Dragoslav Avramovic (1919-2001), a retired World Bank economist, who was a consultant with BCCI. A senior advisor on Economic Cooperation, Office of the Secretary-General, UNCTAD, he was a former Director to the Secretariat and ex-offcio member of the Independent Commission on International Development Issues (Brandt Commission), Geneva. His last professional position (from 1984 to 1988) was that of an economic adviser in the Bank for Trade and Development in Washington D.C. USA.
- A proposal to establish a Bank of the Third World: Extracts from BCC President's address on 5 July 1983
- Switzerland as Location of Third World Bank
- Special Transactions in Third World Trade: Report prepared by BCC in August 1984
In a paper on Financial Co-operation among Developing Countries: Issues and Opportunities in the book South-South Financial Cooperation, Dr Dragoslav Avramovich set out issues believed to be central to financial co-operation among developing countries and explored the case for the establishment of a bank for developing countries to provide balance of payments assistance, development financing, trade financing and financing of commodity stocks.
- South-South Financial Cooperation: Approaches to Current Crisis – the Jamaica Papers
Objective of the Third World Bank
The basic objectives of the Third World Bank were set out in a feasibility study report prepared by BCC Third World Division, were to
- develop, finance and execute trade opportunities, particularly among the developing countries themselves;
- help meet the unsatisfied needs for trade diversification of developing countries;
- arrange their mutual payments by developing an interregional multilateral settlement system;
- provide short-term (up to twelve months) commodity financing and balance-of-payments assistance under adequate security;
- extend, on request, assistance and advice in their debt and other financial negotiations, external borrowing, as well as own and foreign investments.
Operations of the Third World Bank
The Third World Bank would set up its own trading and consulting unit to assist developing countries in the diversification of their production and foreign trade structures, and to broaden the range of import sourcing and export markets; and it will provide for its members a multilateral settlement system not requiring hard currency for current business. All this aims at balanced foreign trade and at avoiding financial disequilibria while promoting collective self-reliance.
Financial and non-financial organisations of both the public and the private sectors would be admitted to membership. The majority of members were expected to come from developing countries but membership was also open to corresponding institutions from industrialised countries.
The authorised capital of the Third World Bank was set at US$ 2 billion and the initial target of paid-up capital at US$ 200 million. A minimum resource of US$1 billion was required to commence operations, so that a fair degree of the Third World Bank's trade financing of developing countries could be made from its own resources without immediate need of borrowing from other sources. The plan was to also mobilise additional resources by way of deposits and loans from the comparatively richer countries of the Third World, as well as raising funds in the international money markets.
- Third World Bank: Feasibility Study: Main Report by BCC Third World Division
Growth potential of the Third World Bank
The Third World Bank's potential for growth was seen to be considerable. It would operate on commercial principles. In view of its commitment of low-risk trade financing and the likely earnings from its other activities, such as trading and treasury operations, the Third World Bank was expected to be profitable. Its limitation to short-term lending was to maintain its manoeuvrability for a large scope of transactions by rapid turnover of funds, thus reducing the risk of accumulating frozen assets. Its trading and consulting activities would aim at mobilising product surpluses, marketing possibilities and investment opportunities, thus contributing to a veritable internationalisation of trade. The proposed multilateral settlement system would help to reduce the need for convertible currencies in trade among its members.
There was no conflict between the Third World Bank as a commercial institution and other plans for the establishment of the South Bank as an inter-governmental agency. The financing needs of developing countries were enormous and would rise further over the next years, and there was room for both bodies in meeting them. An outstanding difference between the two institutes would be their financing practice: the Third World Bank would operate at the short-term end and mostly in trade financing while the South Bank was supposed to engage in long-term investments. An excellent cooperation between the two institutes was anticipated. The Third World Bank would also cooperate closely with the existing development and financing agencies to increase the self-reliance of developing countries.
Status of the Third World Bank
The Third World Bank was not able to start operations as it never received the subscriptions committed by the heavily indebted developing countries, and by the cash rich oil producing Arab countries in the Middle East. They reportedly withdrew their commitment under pressure from the IMF and World Bank.
The economic, political and social realities that shaped the second half of the 20th century had shifted markedly, and a new set of relations were being built - between individuals, firms, countries, and between humanity and the physical environment. The challenge to provide developing countries an alternative to the dominance of the IMF and World Bank was taken up in 2012 by four of the richer Third World countries that were part of the BRICS group, Brazil, India, China and South Africa along with Russia with the objective of creating a multinational development bank (MDB) for financing infrastructure and sustainable development projects not just in BRICS but also in other emerging economies and developing countries.
The idea to establish such a MDB may be compared to the vision and the motivation behind the efforts of BCC President's efforts to establish the Third World Bank to benefit all developing countries. The African Development Bank established in1964, and the Asian Development Bank (ADB) established in1966, for example, were regional development banks and modelled closely to the World Bank and did not cater for short-term financing of trade as the Third World Bank was proposing to offer.
New Development Bank
BRICS refer to five major like-minded emerging national economies, Brazil, Russian Federation or Russia, India, China and South Africa, and the term was coined using the first letter of the country names. Four were former colonies. Originally Brazil, Russia, India and China were grouped as "BRIC" before the induction of South Africa in 2010. Since 2009, the BRICS nations have met annually at formal summits.
The idea of a new multinational development bank by the BRICS nations and the motivation behind it, might be compared to the proposal establishing the Third World Bank presented by Agha Hasan Abedi, BCC President on 5 July1983 at the conference of eminent bankers and representatives of international organisations; the purpose of the conference was the formation of an Association of Third World Bankers and devise ways of encouraging co-operation between developing nations.
The creation of a new multinational development bank by BRICS was the main agenda of the 4th BRICS summit held in India in March 2012 with a primary focus on lending for infrastructure projects and include funding development and infrastructure projects in developing and least developed countries. The idea was put forward by India, as a sign of firming the power of the group and increasing its influence in global decision-making.
Following the report from the Finance Ministers at the fifth BRICS summit in Durban (2013), the leaders agreed on the feasibility of establishing the New Development Bank and made the decision to do so. It was also agreed that the initial contribution to the Bank should be substantial and sufficient for it to be effective in financing infrastructure. The media suggested the bank was way to bypass the IMF and the World Bank.
At the 6th BRICS summit held in April 2014 in Brazil, the BRIC countries agreed to create the New Development Bank (NDB) with a capital of US$100 billion and the leaders signed the Agreement establishing the NDB. In a press release, the group wrote: "We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF's legitimacy, credibility and effectiveness." Some analysts read the announcement of the NDB as a challenge to the IMF and World Bank.
At the summit Russia’s President Vladimir Putin stated “In the BRICS case we see a whole set of coinciding strategic interests. First of all, this is the common intention to reform the international monetary and financial system. In the present form it is unjust to the BRICS countries and to new economies in general. We should take a more active part in the IMF and the World Bank's decision-making system. The international monetary system itself depends a lot on the US dollar, or, to be precise, on the monetary and financial policy of the US authorities. The BRICS countries want to change this.”
Asian Infrastructure Investment Bank (AIIB)
The AIIB was created in October 2015 by 21 countries, led by China to fund Asian energy, transport and infrastructure projects. The new financial institution was set to also set to rival the World Bank and Asian Development Bank. The US questioned the governance standards at the new institution, which it saw as spreading Chinese "soft power" and tried to persuade others to stay away. Most Asian countries and countries from the Middle East and Latin America have joined
China hosted the signing ceremony of the Asian Infrastructure Investment Bank (AIIB), Country delegates gathered at Beijing's Great Hall of the People. Australia was the first country to sign the articles of association creating the AIIB's legal framework. The AIIB would begin with authorised capital of US$50bn, eventually to be raised to US$100bn.
New Development Bank
Domination of World Bank on the World Bank