Denying Brazil, Russia, India, China, and South Africa (the BRICS) a share of voting in the International Monetary Fund (IMF) in line with its weight in the global economy has finally backfired. At the 6th BRICS Summit, held in Fortaleza, Brazil, in July 2014, several pending issues for the two new BRICS institutions - the Contingency Reserve Arrangement (CRA) and the BRICS development bank - seem to be resolved, with the latter to operationalise in 2016.
This Summit was at first overshadowed by the intense race between China and India to host the bank’s headquarters. It seemed rather odd for India to propose New Delhi when Mumbai is clearly better placed as an international financial centre. According to the Fortaleza Declaration, a regional centre for the bank will be established in South Africa, with the headquarters to be based in Shanghai, further consolidating Shanghai’s dream to be a global centre for finance.
Winning the right to host the bank shouldn’t be viewed as China’s attempt to dominate it because of the following reasons:
1) Contributing USD10 billion each into the initial subscribed capital base ensures no country will possess veto power over major issues as the United States does with the World Bank and the IMF.
2) Rotating the bank’s presidency allows each country to propose their candidate to lead the bank. As the bank’s headquarters are in Shanghai, China will be the last country to preside, while India will be the first country to lead the bank.
3) The bank’s president is accountable to the board of directors headed by Brazil, and Russia will chair the board of governors, whose job it is to decide on strategic priorities. Such measures are deliberate actions to ensure each of the BRICS countries will have an opportunity to shape the new bank.
4) China doesn’t want to dominate the bank as it would inevitably politicise economic linkages and generate a considerable amount of anti-China antipathy within and outside BRICS countries.
5) Sharing power with the rest of the BRICS will offer China a test ground to ‘practice’ multilateralism as well as strengthening its voice for the reform of the Bretton Woods institutions.
6) Dominating the bank might also run the risk of overlapping its objectives with the China Development Bank, when clearly the rationale behind the BRICS development bank is to provide development finance multilaterally and to work in areas that national development banks cannot.
BRICS’ effort in making this project a multilateral success is further evident in the capital allocation for the CRA. The initial total committed resources under the CRA will be USD100 billion, composed of individual commitments as follows: China (USD41 billion); Brazil, India and Russia (USD18 billion each); and South Africa (USD5 billion).
The CRA will make it possible for a participating country to receive liquidity support from other participating countries and the committed resources will only be drawn through a currency swap if a country requests assistance. This means that although China contributes USD41 billion into the CRA, China can borrow only half of this amount, whereas South Africa (the smallest contributor to the CRA) can borrow twice as much as it contributes. The other three BRICS countries can only access as much as they contribute from the CRA.
As I argued a year ago, the priority for the bank is to focus on intra-BRICS cooperation and predictably, the BRICS member states will be the first to access the bank’s finances. While China looks for a higher return on its foreign reserves, internationalises the Renminbi and depoliticizes its overseas investment; India, Brazil and South Africa could see the bank as a source to develop its vast infrastructure needs and trade agreements. Russia could further consolidate its ties with the emerging powers on an increasingly isolated international stage.
The willingness and increasing capability of the BRICS, at last, is providing a form of global public good in development finance at a time when many of the global economic governance negotiations are in jeopardy. As we enter the next stage of global governance, the BRICS can share the burden of global responsibilities according to their comparative advantages as discussed in the report ‘Will the BRICS provide the global public goods the world needs?’ The last major multilateral development finance institution was the European Development Bank set up in 1991, the state of the world has changed so much since then, so perhaps it’s time to try something new.