Hope of new financial institutions at BRICS summit

The Sixth Summit of the BRICS nations to be held in Brasilia will take place amid tremendous expectations that the member countries will make landmark decisions to establish two financial institutions, the BRICS Development Bank and the Contingent Reserve Arrangement (CRA). These institutions, seen as counterparts of the Bretton Woods Institutions, the World Bank and the International Monetary Fund (IMF), are articulations of the growing assertion of the BRICS nations in the management of the global economy. But the most important aspect of this development would be that it is the first time such institutions are being established by the emerging economies, the beneficiaries of which could well be other developing countries.

The role played by the BRICS in altering the contours of global economic governance became clear in the aftermath of the economic downturn in the previous decade. One of the most important issues raised by the BRICS was the need to reform the Bretton Woods Institutions to reduce their legitimacy deficits. An important first step, according to the BRICS, was to alter the governance structures of these institutions by increasing the voting shares of emerging market countries in keeping with their larger presence in the global economy.

The impact of the pressures brought by the members of the BRICS, in particular China and India, was immediately felt. In 2010, the IMF took a major decision to overhaul of the Fund’s quotas and governance structure, which was seen as an historic step towards strengthening the Fund’s legitimacy and effectiveness. The proposed reform would have shifted more than 6% of quota shares to dynamic emerging markets and developing countries, and more than 6% from the over-represented to under-represented countries, while protecting the quota shares and voting power of the poorest members. The IMF Board also endorsed proposals that called for a more representative, all-elected Executive Board. These changes were expected to be in place by 2012, but the unwillingness of the US Congress to endorse the proposed changes has effectively blocked any move towards the reform of the governance structure of the IMF. Currently, the US has 17.72% of the vote share and is in a position to veto any major decision of the IMF, which requires a supermajority of 85%.

The steps taken by the BRICS to establish their own financial institutions in the face of the US intransigence to prevent democratisation of the IMF could have a far reaching impact on global economic governance. Members of the group should, therefore, be cognizant of the significance of this process of change that they have triggered on the global stage, while deliberating on the details of the institutions. There is, of course, no doubt that crucial decisions regarding the management structure and operating principles/guidelines of the proposed institutions would have to be taken. However, given the huge political and economic gains that the institutions promise, one expects the BRICS decision-makers to take positive and meaningful steps in the Brasilia Summit.