--By Sanjeev Sharma

 

A  new order in global financial system seems to be taking shape as the BRICS bloc of emerging economies have finally agreed to establish a development bank and a currency reserve. The deal, which they hail as "historic" event, was reached on Tuesday, 15th July in a summit held in Fortaleza, Brazil on the sidelines of the 2014 FIFA World Cup. BRICS leaders have agreed on the location of the proposed bank's headquarter and leadership of the new financial institutions. Named as the New Development Bank (NDB), the multilateral lender would be headquartered in China's financial capital, Shanghai and an Indian is likely to be its first president. The bank is set to start its operations by 2016 with an initial capital of USD 50 billion which is expected to increase to USD 100 billion over the next few years. All the five members will be contributing USD 10 billion each for its commencement. NDB will primarily lend to infrastructure projects of BRICS countries along with providing loans to other developing and underdeveloped nations for similar purposes. The bank, which will have authority to lend up to USD 34 billion annually, would also permit new members to join it but holding the basal threshold of BRICS capital share at 55 per cent. 

 

Likewise, the bloc gave a go-ahead to establish a USD 100 billion currency reserve fund, named Contingent Reserve Arrangement (CRA). The main aim of creating CRA is to provide the member nations with financial support to withstand economic whirlwinds. The fund is also mandated to seek various ways to strengthen currencies of BRICS countries, which are witnessing major upheavals over the past few years due to turbulences in global economy. According to the deal, China will contribute the highest share of USD 41 billion to establish the currency pool while India, Brazil and Russia will provide USD 18 billion each. South Africa, the relatively smaller economy of the bloc will be making the lowest contribution of USD 5 billion.

 

These developments mark significant shift in global financial system as the NDA and CRA will stand as alternatives to the World Bank (WB) and the International Monetary Fund (IMF) in the days ahead. The WB and IMF, long viewed, as two major pillars of the global financial system, have been the subjects of complaint and criticism by the emerging nations. The BRICS countries having aggregately surpassed the growth rate of developed nations have been demanding greater participation in the affairs of the WB and IMF. Over the past 70 years of their establishment, only Americans and Europeans have led the WB and IMF. The Bretton Woods agreement, signed by the delegates of world's major industrialised economies on July 1944 (who were also the allies of World War II), set up governing rules, regulatory frameworks along with institutions in order to create a new global monetary system. Shortly after the agreement, the architects of the Bretton Woods Conference finalised a deal between United States and European countries over the leadership of the new financial institutions. Many historians have pointed out to a so-called 'gentlemen agreement' that handed out the leadership of WB to Americans and IMF's chieftainship to Europeans. The deal, which was largely unopposed in seven decades is facing strong objection from emerging powers over the past few years. During the Presidential election of the World Bank Group in 2012, the tradition saw a major defiance with a group of emerging, developing and underdeveloped countries firmly standing up against the 'hegemony'. They, for the first time, supported a non-US candidate to challenge the western dominance. 

 

The story of emerging bloc's dissatisfaction carries different aspects. For decades they have complained about the lack of greater say within the Bretton Woods institutions. For instance, voting rights in the IMF - based on a quota system determined by financial contributions of the individual members and relative size of their economies - has become an issue of such debate. Though the emerging countries have raised the issues regarding the quota system reforms, the developed countries are seen reluctant to revise their long-standing positions. During the height of global financial crisis in 2010, member nations agreed to go through extensive reform that would probably double the quotas and increase the voting rights of emerging economies. However, the implementation of this agreement hasn't seen light of the day as US Congress failed to endorse the reform. Over the past four years, both houses of the US legislature have repeatedly rejected the IMF reform proposal. 

 

The unwillingness of US lawmakers to accept the reform, seems to be driven by the fear that the US might lose its dominance over the global financial system. The world's largest economy currently ranks 1st in IMF's voting power holding 16.75 per cent followed by Japan (6.23 per cent), Germany (5.81 per cent), France (4.29 per cent) and the United Kingdom (4.29 per cent). The top five effectively wield veto power over any attempt to change the uneven ownership structure of the institution. Meanwhile, China, the world's second largest economy, ranks 6th with 3.81 per cent in voting rights while Russia and India are placed at 10th and 11th place with 2.39 per cent and 2.34 per cent respectively. Brazil (1.72 per cent) and South Africa (0.77 per cent) ranked even lower at 14th and 27th position. The BRICS were impoverished economies when the IMF was created. Now they account for around a quarter of the world's GDP and about 42 per cent of the global population, but collectively they hold a meagre 11 per cent votes at the IMF. During the Fortaleza summit the bloc's leaders firmly stood up for the reform. “The IMF urgently needs to review its distribution of voting power in order to reflect the unquestionable weight of emerging countries,” Brazilian President Dilma Rousseff said. 

 

Another factor that fuels the bloc's discontent is the preconditions for getting loans. Complain are often being made that western nations and their allies are able to receive bigger loans from the Bretton Woods institutions with fewer conditions. But, comparatively tougher and sometimes harsh preconditions, based on manipulative policies, are rolled out for other countries to get loans from the global lenders. 

 

The announcement of BRICS has received warm welcome from prominent economists. "The foundation of the BRICS financial institution has highlighted the problems with the current system of global assistance and governance – particularly from the US," says Jim O'Neill, former chairman of Goldman Sachs Asset Management who for the first time coined the acronym 'BRIC' in 2001. "The most important thing is that it's now a permanent sign that global governance is a mess. Global governance has not kept up with the pace of global economic change," he said in an interview with CNBC television. Noble Prize laureate economist Joseph Stiglitz also voiced his support. According to the Columbia University professor and former Chief Economist at the World Bank, the effort by BRICS marks “fundamental change in global economic and political power.” Stiglitz said in a talk with the syndicated news hour Democracy Now, “What I hear now is the developing countries, emerging markets, China and the other countries, saying, ‘We’re playing the tune. We’re the big players now. We have the resources. We’re where the reserves are. And yet, you don’t want to let us play even a fair share in the role, reflecting the size of our contributions in the economy, in trade’."

 

For years, the BRICS were considered to be just an acronym. Now they have come across a turning point in their history. The emerging bloc's USD 200 billion financial institutions may not be able to rival the sizes ofBretton Woods establishments for the time being. The WB, which has USD 223.2 billion in subscribed capital and the IMF -USD 315 billion in immediately available resources and more than USD1 trillion it can get under certain conditions - will continue to be the twin pillars of the global financial system. But the Fortaleza declaration carries huge potential as Prof Stiglitz puts it, "The creation of new institutions will add to the flow of money that will go to finance infrastructure, adaptation to climate change—all the needs that are so evident in the poorest countries.”