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Euro (37.4 per cent), pound sterling (11.3 per cent) and Japanese yen (9.4 per cent) (IMF, 2010a) – based on each of their shares in international exports and “free use” of their currencies as determined by the IMF Executive Board. Although the SDR is not a true currency that can be traded on private markets, it can be exchanged for another country’s foreign reserves and also used in official transactions with the IMF and other international organisations.

The SDR can function as a reserve pooling arrangement (Obstfeld, 2011). This sort of arrangement – especially one with a more diversified SDR basket – can bring stability to the global financial system. Another way to broaden the role of SDRs could be the issuance of SDR-denominated bonds, which would reduce emerging and developing economies’ reliance on US treasuries.

At the onset of the financial crisis in December 2007, the Federal Reserve established reciprocal currency arrangements or “swap lines” with the various central banks. These swap lines were intended to ease short-term funding pressures by increasing the capacity of the partner central banks to directly fund US dollars to financial institutions in their jurisdictions. This facility, among others, helped in reducing overseas funding pressures and thus proved an effective liquidity backstop during the global financial crisis. BRICS could replicate such arrangements to pre-empt future liquidity crises. The People’s Bank of China has entered into bilateral currency swap lines with around 25 global central banks (Shotter, 2014), including Russia and Brazil.

Between 2008 and 2013, emerging and developing economies contributed to approximately 80 per cent of the world’s economic growth. However, their financial markets are still at a nascent stage – the market capitalisation of the listed companies within such economies is only 10 per cent of the global equity market capitalisation.

FIGURE 5

Economic growth and financial development (2013)

120%

100%

80%

60%

40%

20%

0%

Source: vanguard.

At the same time, emerging and developing economies have historically maintained a significantly higher savings rate than advanced economies. The average of gross savings as a percentage of GDP among the BRICS countries has been close to 30 per cent over the past seven years (although with significant differences among them), whereas the average among countries of the Organisation for Economic Co-operation and Development (OECD) has hovered around 20 per cent.

Financial inclusion is still at an early phase within most of the BRICS countries. As seen in figure 6, nearly half of the adult population within these economies lacks access to an account at a formal financial institution. According to the Global Findex Database of the World Bank, about 17 per cent of the adults reported saving at a formal financial institution in the previous year.

FIGURE 6

Adults with an account at a formal financial institution (2011)

(In %)

Source: Global Financial Inclusion Database, World Bank.

With a combined market capitalisation of USD 7.5 trillion, the national stock exchanges within BRICS provide a useful template for financial market integration as well. The BRICS Exchange Alliance, established in March 2011, was a step in the right direction that allowed the respective exchanges to cross-list benchmark equity index derivatives on each other’s platforms. To strengthen financial market integration, the role of the Exchange Alliance can be further deepened to allow cross-listing of individual securities. Similar proposals to integrate a commodity derivatives exchange, deepen the corporate bond market and incentivise infrastructure financing could go a long way in achieving the twin objectives of economic growth and financial stability.

Owing to the economic circumstances described in the previous section, BRICS has a strong incentive to design a range of institutional mechanisms to supplement efforts to ensure macro-prudential stability.

In particular, the motivation for a mechanism to rate financial instruments and sovereign risk is strong when seen in the context of the global rating agencies, which exhibited collective failure during the sub-prime mortgage crisis in the US economy. The agencies failed to acknowledge the underlying risk in complex financial securities. The US Securities and Exchange Commission has recently sought to suspend the credit grading operations of one of the three largest global credit rating agencies (Robinson and Michaels, 2014).

2.2 Reform of the Bretton Woods Institutions

2.2.1 The IMF and the World Bank

The IMF and the World Bank were created at an international conference convened in Bretton Woods, New Hampshire, USA, in July 1944. The goal of the conference was to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global economy. While this goal remains central to both institutions, their mandate is constantly evolving in response to new economic developments and challenges.

BOARD 1

The IMF and the World Bank

The IMF’s mandate: The IMF promotes international monetary cooperation and provides policy advice and technical assistance to help countries build and maintain strong economies. It also makes loans and helps countries design policy programmes to solve balance-of-payments problems when sufficient financing on affordable terms cannot be obtained to meet net international payments.

The World Bank’s mandate: The World Bank promotes long-term economic development and poverty reduction by providing technical and financial support to help countries reform particular sectors or implement specific projects and policies –for example, building schools and health centres, providing water and electricity, fighting disease, and protecting the environment. World Bank assistance, through the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), is generally long term and is funded both by member-country contributions and through bond issuance.

Source: IMF and World Bank.

The World Bank and the IMF have many similarities – both have headquarters in Washington DC and are owned by the governments of member nations. While the World Bank is primarily a development institution, the IMF acts to promote cooperation on monetary issues, as a policy adviser and as a crisis lender when countries face balance-of-payments problems.

The two organisations differ in size and structure. The IMF has about 2,300 staff members including economists and financial experts, and has no affiliates or subsidiaries. In addition to the headquarters, three small offices are maintained in Paris, Geneva and at the United Nations in New York. The World Bank – about three times the size of the IMF – has over 7,000 staff members with a range of

Although the capital structure and voting rights have been amended at both the World Bank and the IMF, voting power is still skewed towards advanced economies.

BRICS countries, accounting for more than a fifth of global output, have a mere 10.3 per cent share of the total allocated quota. European Union (EU) countries, by contrast, are allocated 32 per cent as against 21 per cent of output (The Economist, 2011). In the World Bank, high-income, non-borrowing countries hold more than 60 per cent of the total voting power.

TABLE 5

Voting shares of selected countries at the IMF and IBRD, as of 24 Oct. 2014

The proposed reforms will lead to a realignment of voting shares – more than 6 per cent of quota shares will shift to dynamic emerging and developing economies, and the BRICS (except South Africa) will be among the 10 largest shareholders.

Under the IMF Articles of Agreement, each of the five members with the largest quotas appoints an Executive Director, and the remaining members elect other Executive Board members. Presently, the IMF Executive Board consists of 24 Executive Directors presided over by the Managing Director.

The World Bank follows a similar governance structure. For instance, under the IBRD Articles of Agreement, each of the five members with the largest number of shares appoints an Executive Director, and the remaining members elect the other Executive Directors. Presently, the IBRD Board of Directors consists of 25 Executive Directors presided over by the President.

The inequitable distribution of voting power is reflected in the number of countries represented by each Executive Director. Large shareholding member nations have their own representative on the Executive Board, whereas many smaller members are grouped into constituencies representing four or more countries. For instance, 45 countries in sub-Saharan Africa are grouped into just two constituencies and represented by only two Executive Directors.

Similarly, the IMF has a mandate to ensure global financial stability. However, when providing funds during crises, the strict conditionalities it often imposes can have adverse impacts on long-term growth. Countries such as Indonesia, Republic of Korea and Thailand were forced to adopt strict structural adjustment policies in exchange for IMF bailouts during the East Asian crisis in 1997. More recently, the G77 and China have called for more flexible financial responses to the needs of member countries without the imposition of pro-cyclical conditionalities (Group of 77 and China, 2010).

2.3 The New BRICS Development Bank

At the 2014 BRICS Summit at Fortaleza, the BRICS countries signed an agreement on establishing a New Development Bank (NDB), “with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies” (BRICS, 2014).

Infrastructure financing still remains a significant hurdle in the development of many emerging and developing economies and is a clear priority for members of BRICS. For instance, within BRICS the averages of key development indicators such as per capita electricity consumption (3502 kwh), fixed broadband internet subscribers (8.9 per cent), total rail lines (53,065 km) and paved roads (51 per cent) compare poorly with developed countries.

The lack of a regular supply of infrastructure such as power and running water impedes economic growth. In fact, infrastructure deficits have proved to be a primary constraint for businesses in emerging and developing economies – between 3 and 10 per cent of total sales were lost to electricity outages in developing countries in the latest available year of the 1994-2004 period (MDB Working Group on Infrastructure, 2011). The reliability of infrastructure and the maintenance of existing infrastructure is also a challenge that BRICS countries collectively face – and perhaps there is room for the NDB’s financing mandate to cover this core development concern.

While infrastructure development is a widely acknowledged ‘hard development’ challenge within BRICS, the key challenges within ‘sustainable development’ are more nuanced and context specific. Perhaps distinctly divergent from the position taken by advanced economies, BRICS countries have repeatedly stressed poverty reduction and inclusive growth as the prerequisite to sustainable development. Indeed, a common position within these economies has been to “take eradicating poverty and promoting development as the centre-piece of the Development Agenda beyond 2015” (People’s Republic of China, 2013), as well as collectively “addressing the challenges of poverty and inequality” (BRICS, 2014). This is not surprising, as human development indicators within BRICS countries continue to lag behind developed economies. Chapter 3 provides closer discussion of social indicators.