The announcement of a development bank and a contingency fund by the heads of states of BRICS – Brazil, Russia, India, China and South Africa – in last week’s Durban summit had the world sit up and take notice.
While sceptics have raised questions, many of these valid, on the feasibility of such a venture among countries of unequal stature, it is heartening that the existing international financing institutions dominated by the developed world, such as the IMF and World Bank, are being challenged.
One big question that pops up while examining what is there on the table is the adequacy of the size of funds for the contingency arrangement and the infrastructure finance bank.
Contingency fund
Is a Contingency Reserve Arrangement (CRA) of $100 billion enough to bail out member countries in times of distress?
True, as Finance Minister P. Chidambaram has said, that the CRA was only to give more confidence to lenders. Nonetheless, there is a basic minimum amount that is necessary to give the lenders confidence.
The fund size of the safety net created by the Asean+3 group of countries (which includes the 10-member Asean, China, Japan and South Korea) is $240 billion, which is more than double the proposed size of the CRA of BRICS.
Allowing China, which has a higher GDP than all the other four BRICS nations put together, to contribute more to the fund may lead to the problem of that country grabbing more power and dictating the terms of disbursement. India certainly doesn’t want that.
India is already resisting attempts made by China to increase the initial corpus of the bank to $100 billion, instead of $50 billion, as it wants to ensure that Beijing doesn’t start calling the shots on essential matters.
Although essential issues, including whether voting rights should be linked to contributions made by individual members and if countries outside BRICS will also be allowed to borrow, remain to be sorted out, it is an encouraging sign that these nations seem to know exactly what is to be done.
Chidambaram told reporters after the summit that India plans to prepare a complete document before the next BRICS summit in Brazil next March. He was hopeful that the officials from the five countries would meet on a quarterly basis to sort out the tricky issues.
On balance, despite the obvious problems facing BRICS, their efforts need to be lauded, as the time has certainly come to challenge the existing institutions put in place by the developed nations.
The IMF and World Bank – the creations of the Bretton Woods convention back in 1944 – have flourished despite their insensitivities towards developing country needs because the world order has allowed them to do so. But this can’t continue much longer.
With the developed world’s finances in a mess and new emerging powers, including BRICS, ready to challenge the old horses, it is time for new international institutions sensitive to the needs of the poorer countries to come into existence. This should happen sooner, rather than later.