The global financial architecture underpinned by the IMF and the World Bank has, for several decades, been in need of radical reform to remove its inherent deficiencies — for instance, its democratic deficit, exclusive reliance on the US dollar as an international reserve currency, inability to regulate the international financial market and the severe resource crunch it faces in dealing with crisis situations.
As members of the G-20, the BRICS countries played an important part in pulling the world economy back from the precipice after the 2008 crisis. They did this by maintaining the momentum of their own economic growth through the implementation of large rescue packages and by exerting pressure on the G-20 to mobilise additional resources, a large part of which went to developing countries. In the process, the resources of the IMF were enhanced from $250 billion to $750 billion and for the first time after the early 1970s, a general allocation of supplementary drawing rights was made. This brought closer to reality the long-cherished ambition of vastly enhancing the IMF’s resources to enable it to play its mandated role in the international monetary system and to create an international reserve currency as an alternative to the dollar.
The crisis also triggered intensive discussion on reform. Progress was made in reaching an agreement in 2009 on restructuring IMF quotas by bringing about a shift of 5 per cent from over-represented to under-represented member countries, thus raising the latter’s total quota to 48 per cent. This agreement, which is subject to ratification, has been languishing in the US Congress for the last five years. As a result, the next review of quotas, scheduled for January 2013 in order to further democratise the decision-making process inside the IMF, has been indefinitely postponed. Other reform proposals were never seriously pursued.
In this context, the initiative of the BRICS countries to establish a BRICS Development Bank (BDB) and put in place a contingency reserve arrangement (CRA) is significant. At their last summit in Durban, they agreed in principle to establish this institution. Now, an agreement has been reached on the objectives, functions, size of capital subscription, distribution among member countries, governance structure and operational mechanisms. It is hoped that the few differences that remained would have been resolved, and this initiative will be formally launched at the summit in Brazil.
There seems to be agreement that the BDB will have a total capital subscription of $50 billion, shared equally by the five member countries. Of this, the paid-up capital would be $10 billion. The initial capital of the CRA will be $100 billion, to be paid on call and not in advance. China’s share will be $41 billion, that of Brazil, India and Russia, $18 billion each, and South Africa’s, $5 billion. The BDB will finance infrastructure and sustainable development projects of the BRICS and other emerging countries. The CRA will meet their short-term liquidity needs and forestall short-term liquidity pressure, strengthen financial stability and stabilise domestic currency. The fact that beneficiary countries will have access to an additional source of funding to tide over financial crises will increase investor confidence in their economies.
The BRICS countries have practical reasons to take this initiative. A study has estimated a gap of $1 trillion in financing infrastructure and sustainable development projects in emerging economies. The BDB is intended to bridge a part of this gap. Making the bank accessible to other emerging countries will strengthen solidarity, which is important to enhance the bargaining power of the BRICS in negotiations in global economic forums. The improved infrastructure in other developing countries will have a positive impact on attempts to forge stronger trade and economic ties. Capital subscriptions will help the BRICS diversify their options for reserve holdings. The BRICS have enhanced their foreign exchange reserves since 2008, and the availability of an alternative parking place in the form of short- and long-term loans to other developing countries should be regarded as a measure of fiscal prudence.
The BRICS know that they alone cannot change global monetary and financial systems. However, the BDB can help promote a more democratic and fair system of global financial governance. It cannot — nor is it intended to — replace the World Bank and the IMF. But its potential impact on the global financial architecture cannot be ignored. It will complement, though on a modest scale, the World Bank, IMF and the regional development banks and regional contingency payment arrangements. In the process, it will contribute to the strengthening of the global financial architecture. It will also help the BRICS and other developing countries to strengthen their voice in the financial and monetary system. How successful they are in achieving these wider objectives will depend upon the scale and speed of the operation of the BDB and CRA.
The writer, a former foreign secretary, is president, Council for Social Development, Delhi