[Economy] BRICS Bank, IMF Governance Reforms

In Diplomacy by Mrunal

  1. Why BRICS Bank born?
    1. BRICS Bank vs IMF and World Bank
    2. How much money does BRICS bank have?
    3. BRICS Contingency reserve
    4. BRICS Bank not a totally new concept!
  2. IMF Quota & Governance: Need for reforms

Why BRICS Bank born?

  1. BRICS nations have become as big economic power- collectively 1/5th of World GDP and 2/5th of world population. They want to solidify and demonstrate their strength with help of this “new development bank”.
  2. BRICS nations are disenchanted with Bretton-Woods institutions viz World bank, IMF, GATT (which later became WTO).
  3. Since their inception in 1944, the IMF and World Bank have not reformed their governance structure, to give more voting and voice to emerging economies. Both dominated by USA and developed countries. Both are out of sync with the new dynamics of world economy.
  4. Will help defending these five economies from volatility in dollar exchange rate.
  5. Will help financing high tech projects, infrastructure and sustainable Development in member nations.
  6. Although IMF and World Bank provides loans but with various conditions imposed. BRICS nations want loan but without having to follow such dictates from the developed world.
  7. In BRICS bank, the First chairman of the board of governors will be a Russian. First President of the bank will be an  Indian.  This is difficult in World bank and IMF given the lobbying and uneven voting power.
  8. In the long run, it’ll make Chinese Yuan as an alternative to US Dollar- for global financial system. Then USA / West imposed ‘sanctions’ against any BRICS will become less effective.
  9. RBI Governor Rajan- “we did not setup BRICS bank to challenge World bank and IMF. This bank is setup only to provide “patient money” to BRICS nations, because World Bank and IMF are taking too much time to reform themselves.”

BRICS Bank vs IMF and World Bank

Basics compared: IMF, World Bank, BRICS
Data IMF World Bank BRICS Bank
By which summit? Bretton Woods, USA 6th BRICS summit at Fortaleza, Brazil
Year 1944 2014, July. Although ops may by 2016.
HQ Washington Shanghai, China.
members 188 188 (IBRD); 172 (IDA) only five
voting power Different voting powers based on Quota system. Differs according to shareholding and other criteria All five members have equal voting power.
components IBRD, IDA, IFC and MIGA
Purpose
  • Loans to solve Balance of Payment (BoP) crisis.
  • technical assistance in policy making
  • surveillance over International economy
  • Poverty reduction to 3% by 2030.
  • Soft loans for development projects.
  • Promoting foreign investment and international trade.
  • loans for infrastructure and sustainable development projects
  • helping country in balance of payment (BoP) crisis

How much money does BRICS bank have?

Initial subscribed capital 50 billion (each member gave 10 billion)
Initial authorized capital 100 billion
Contingency reserve arrangement (CRA) 100 billion

BRICS Contingency reserve

It is meant to help member nations fight against Balance of Payment crisis (possible because of Fed Tapering click me to know more.)

Who gave how much to contingency fund?
China 41 billion
Brazil, India, Russia 18 billion each of them
S.Africa 5 billion.

BRICS Bank not a totally new concept!

others have done it in the past
When Where Why/Who?
60s Development Bank of Latin America Andean Nations
2000s Chiang Mai initiative.
  • 10 ASEAN + China, S.Koera and Japan.
  • To setup currency swap pacts during Asian currency crisis.
2009 Bank of South Latin American countries, due to dissatisfaction with US dominated IMF & World Bank.

Mock Questions: BRICS Development Bank marks a “fundamental change in global economic and political power. Elaborate 200 words.

IMF Quota & Governance: Need for reforms

Old topic from April 2014. Shifting it here for better revision.
Topic was in news because G-20 countries gave an ultimatum to USA to bring reforms in IMF.
Q. Examine the need for reforms in International Monetary Fund (IMF). What will India gain from this? (200 words)
IMF was born from Bretton Woods conference to stabilize currency exchange rates and help members during Balance of Payment Crisis. But given its unequal voting power mechanism, IMF doesn’t always serve the interests of poor & developing countries, hence requires two set of reforms:

#1: IMF reform in quota

  • IMF Executive board decides the Quota of each member based on various parameters including GDP and tariff barriers.
  • Higher quota gives higher voting rights and borrowing permissions.
  • But formula is designed in such way US has ~18% quota, G7 collectively own >40% while India and Russia have barely ~2.5% each.
  • BRICS, G20 and emerging market economies are against this scheme especially after Subprime crisis and declined economic strength of USA & G7.
  • 2010: Board increases quota of developing countries albeit mainly by decreasing the quota of poor countries.
  • Obstacle: 70% votes required to implement this reform. Not “70” nations, but the nations who collectively own 70% quota- USA, Germany, Japan et al. Hence quota reform is pending.

#2: IMF reform in governance

  • Currently in Executive board, 5 out 24 directors are permanently decided by five largest quota holders.
  • 2010: new reforms proposed:
    • Board composition will be reviewed every 8 years.
    • All directors be elected, no permanent chairs.
  • Obstacle:  Requires 85% votes in favour, hence governance reform is pending as well.

#3: India’s Gain

  • India wants IMF to raise the fund resources, give higher quota and powers to BRICS nations.
  • If 2010’s quota & governance reforms are implemented, India’s quota will rise from 2.445 to 2.75% i.e. 11th rank to 8th rank, thus giving more voting rights, borrowing capacity and more say in the Decision Making.

~240 words.
IMF reform Quota Share by countries.