Making Brics bank and CRA work is challenging
On the face of it, the $50 billion-Brics development bank and the $100 billion contingency reserve agreement (CRA) are the most obvious reaction, and solution, for an IMF/World Bank-dominated multilateral financial institution structure that still has little place for the developing world. As our lead column today points out, even after several cycles of reform, China’s vote share in the IMF is still 5.26% and India 3.06% despite their significantly higher shares in the global economy—in PPP terms, China accounted for a 14.89% share in 2011 and India 6.35%. While a host of developed countries found themselves hit badly by the US taper, largely due to private capital flowing out, the IMF remained more focussed on Europe—this is not to argue the world doesn’t face a greater challenge from a Europe not recovering, but to point to the legitimate concerns of developing countries. A Brics bank focussed on the infrastructure needs to Brics countries to begin with, and other developing countries at a later date, is an idea that is instantly appealing. A recent Unctad discussion paper points out that were the paid up capital to amount to $100 billion, as more developed countries became members, the bank could lend up to $350 billion over two decades; add in leverage since there would be co-financing of projects, and we’re talking of an amount at least double that.
The $100 billion CRA is even more appealing—China’s contribution to this will not be equal, but will be $41 billion as compared to India’s $18 billion—given how emerging markets have seen their currencies collapse post the taper. So, much like the IMF’s contingency loan windows, the CRA will provide bridge facilities to countries whose currencies are volatile. Making both the bank and the CRA work, however, will take an exceptional level of maturity given, for instance, Indian and Chinese mutual suspicion. The fact that the BRICS have not, for instance, come out with joint candidates for multilateral jobs is another sign of this suspicion. Indeed, during the period last year when India’s currency was most under strain, it was the Japanese towards whom India turned, and doubled the currency swap agreement. It is not clear if, for instance, the BRICS bank or the BRICS CRA will get held hostage to increasing Indo-Japanese cooperation in areas like infrastructure. Nor is the matter restricted to just a problem between India and China and stapled visas, it could extend to the kind of Russian aggression seen in Crimea for instance—if the price of such cooperation is to extend to supporting Russia at various multilateral fora, the new-found bonhomie could take a hit. There is little doubt both the Bank and the CRA are an idea whose time has come, but all parties need to temper their expectations for it to work. The discussion, and agreement, on where to house the Brics Bank will be the first indication of how the cooperation is progressing.