This blog post was first published by the Financial Times‘ beyondbrics blog on 5 September 2013.
On the sidelines of this week’s G20 summit, BRICS nations are expected to reveal details of how their proposed $100 billion alternative to the IMF will operate. Unveiled at the 5th BRICS summit in Durban in March, the Contingent Reserve Arrangement (CRA) should in reality be seen as a clever tactic to extract more influence at the G20 rather than a functional addition to the multilateral system, let alone a genuine alternative to the IMF.
In Durban excitement over the announcement of a BRICS emergency loan fund and development bank preceded details regarding how the institutions would function. However, the deputy governor of the People’s Bank of China, Yi Gang, announced last month that agreement is close to being reached on the CRA. This will detail the ratio of contributions, operation mechanisms, the governance structure and loan-to-value ratio of the CRA. He confirmed that China will be the biggest contributor while not providing more than half of the total funding.
The CRA was initially set to be modelled on the Chiang Mai Initiative Multilateralisation (CMIM), which had converted a bilateral swap agreement amongst South East Asian states into a multilateral guarantee involving South Korea, China, Japan and the ten ASEAN nations. It may not be an auspicious model, as it has suffered from two inter-related problems.
First, the CMIM is inherently unbalanced. Japan, China and South Korea are the dominant partners; they required that any significant lending (presumably to the smaller members) be subject to IMF approval to avoid the likely borrowers from bailout shopping for the least onerous loans. Given this role for the IMF, the CMIM hardly fulfils the function of the regional alternative to the IMF which Japan and its neighbours had called for following the Asian financial crisis in 1998. Second, the desire of CMIM’s smaller nations to constrain the influence of its bigger members has exacerbated the deadlock, leading them to rely on reserve accumulation, leaving both the CMIM and the IMF unused as a backstop.
The intended composition of the CRA appears to replicate these problems. Proposed CRA contributions give a dominant position to China, providing $41billion, while each of Russia, Brazil and India would pitch in $18 billion and South Africa a token $5 billion. In contrast, the IMF currently has resources of over $800 billion. As a measure of sufficiency, we should note that India’s current account deficit in 2013/14 is currently projected to be nearly $80 billion. In Durban the CRA’s decision-making processes and shareholding were not agreed; the CRA’s availability to non-BRIC nations as an alternative to the IMF was also not clarified. The CRA lacks even the logic of regional solidarity embedded in the CMIM. It is a purely political construct.
These issues inadvertently demonstrate the actual purpose of the CRA. The impetus for a BRICS fund is as a tool to demand more say in global leadership at the G20 and in the management of the IMF. IMF governance reform is currently stalled by the US and Europe. The BRICS reiterated in Durban that IMF quota reform needs to “reflect the growing weight of BRICS and other developing countries”. The BRICS contributed $75 billion to bolster the IMF’s resources last year, on the proviso that reforms would be forthcoming. The United States refused to contribute, and in 2012 its Congress repeatedly blocked ratification of the 2010-agreed reforms to the Fund’s shareholding and voting rights. European nations jealously guard their combined 30 per cent IMF voting stake despite accounting for closer to a fifth of the global economy.
The excitement around the CRA is as a challenge to the IMF’s hegemony and the dominance it enables the US and Europeans to enjoy. After all, would an IMF with a bigger say for BRICS have become embroiled in the Troika so readily or as easily? The threat made by Brazil’s blunt-speaking finance minister Guido Mantega back in 2007 reveals the CRA’s true nature as a tool to gain leverage. While complaining of stalled IMF reforms, he insisted that “developing countries [will] go their own way … we will seek self-insurance by building … international reserves, and we will participate in regional reserve-sharing pools … fragmentation of the multilateral financial system, which is already emerging, will accelerate”.
Despite the excitement, the $100 billion CRA will need far more financial firepower and an effective mechanism to manage its own members’ competing interests if it is to be more than just a bargaining chip and become a genuine alternative to the IMF.