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Political and Economic Governance

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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 estab-

lished 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 institu-

tions 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)

0%

20%

40%

60%

80%

100%

120%

Share of global economy

Share of global equity market capitalization

FTSE Developed Index Countries

FTSE Emerging Index Countries

Source: vanguard.

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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 %)

92

64

56

54

48

35

0

10

20

30

40

50

60

70

80

90

100

High Income OECD

and non-OECD

China

Brazil

South Africa

Russia

India

Account penetration

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. 

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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 

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expertise, and maintains about 40 offices throughout the world. It comprises two 

major organisations: the International Bank for Reconstruction and Development 

(IBRD), the original lending arm that is operated for the benefit of 188 member 

countries, and the International Development Association (IDA), which assists 

the 82 poorest member countries. Specialised agencies such as the International 

Finance Corporation (IFC), the International Centre for Settlement of Investment 

Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA) are 

also under the aegis of the overall World Bank Group.

TABLE 3

Structure of the World Bank

IBRD

IDA

IFC

MIGA

ICSID

Recipients

Middle-income 
member countries 
and creditworthy 
poorer countries

Poorest member 
countries

Private companies 
in member 
countries

Foreign investors in 
member countries

Foreign investors 
in member 
countries

Products/
Assistance

Technical assistance, 
loans, policy advice

Technical assis-
tance, concessional 
loans, policy advice

Equity, long-term 
loans, risk 
management, 
advisory services

Political risk  
insurance

Dispute settlement 
facilities

Interest Rates/
Risk Premiums

6-month LIBOR 
+ fixed/variable 
spread

Nil or 1.25% or 
2.80% depending 
on the borrowing 
country’s credit-
worthiness

Variable/Fixed Rate 
Loans pegged to 
local reference 
rates (short-term 
interbank rate or 
government securi-
ties rate)

Insurance premium 
depends on project/
country risk. Fees 
average 1% of the 
insured amount

-

Lending 
Commitments 
(FY 13)

$15.2 billion

$16.3 billion (cred-
its and grants)

$11.2 billion (loans 
and equity 
investments)

-

-

Source: IBRD Annual Reports. 

To finance its operations, the IMF has approximately USD 379 billion (as of 

August 2014) via quota subscriptions or membership fees paid in by 188 member 

countries, each of which contributes a certain amount of money according to a 

formula defined at the inception of the IMF in 1945. 

The World Bank acts as an intermediary between sovereign investors and 

a range of recipients. With subscribed capital of USD 223.2 billion,

3

 the IBRD 

borrows funds through issuance of “triple A”-rated bonds on secondary markets 

as well as directly to governments. The IDA obtains its resources mainly through 

grants from donor nations. 

3. Paid-in capital: USD13.4 billion; callable capital: USD209.8 billion.

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Each IMF member country is assigned a quota based on a formula that is 

supposed to reflect its relative position in the global economy. The current quota 

formula is a weighted average of GDP (50 per cent, of which 60 per cent at market 

exchange rates and 40 per cent at purchasing power parity (PPP)), openness (30 

per cent), economic variability (15 per cent) and international reserves (5 per cent). 

The formula also includes a compression factor, limiting dispersion in calculated 

quota shares. A member country’s quota determines its maximum financial 

commitment to the IMF and its voting power, and in addition has a bearing 

on its access to IMF financing.

IMF members must pay their subscription in full upon joining the Fund – up 

to 25 per cent must be paid in SDRs or currencies which constitute the SDR, while 

the rest is paid in the member’s own currency. Each IMF member’s votes comprise 

basic votes plus one additional vote for each SDR 100,000 of quota. The total 

number of basic votes

4

 is fixed at 5.502 per cent of total votes. The voting share, 

in turn, determines the amount of financing (credit limit) a member can obtain 

from the IMF. For example, under IMF’s Stand-By and Extended Arrangements, 

a member can borrow up to 200 per cent of its quota annually and up to 600 per 

cent cumulatively.

At the Bretton Woods conference global leaders were mainly engaged in 

discussing a stable international exchange rate regime and creating a structure for 

the IMF to prevent balance-of-payments crises. The World Bank, considered by 

some as an afterthought, was designed for the post-war reconstruction of Europe 

and specific projects in the developing world (Peet, 2003). Consequently, the IMF 

governance framework was used as a template to design voting structures in the 

World Bank. Member countries are allocated votes at the time of membership 

and subsequently for additional subscriptions to capital. Similar to the IMF, each 

member receives votes consisting of share votes (one vote for each share of the 

Bank’s capital stock held by the member) plus basic votes, also fixed at 5.55 per 

cent of the total votes.

2.2.2 The imperative of reform 

At the most recent 6

th

 BRICS Summit at Fortaleza, the leaders’ declaration read: 

“We remain disappointed and seriously concerned with the current non-implementation 

of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts 

on the IMF’s legitimacy, credibility and effectiveness” (BRICS, 2014).

4. IMF Articles of Agreement, Article XII, Section 5: “The basic votes of each member shall be the number of votes that 

results from the equal distribution among all the members of 5.502 percent of the aggregate sum of the total voting 

power of all the members, provided that there shall be no fractional basic votes.”