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 continued…