For several observers, the creation of a $100 billion contingency reserve arrangement (CRA) during the 6th BRICS Summit in Fortaleza is a bid to sow the seeds of an alternate financial structure for developing countries, arguing that it could present a direct challenge to the IMF. After the 5th Summit last year, the Indian had media hailed the creation of the CRA as “a major win for India’s campaign to reform global financial architecture.“
Yet such an interpretation is largely unfounded – for now. This is mainly so because a $100bn fund is relatively small by global standards. The BRICS countries control almost $5tn in international reserves, and if they were to contribute 16% of their reserves to a contingency fund the resulting CRA would total $800bn against $780bn in resources at the IMF. Of course, a CRA of 100 bn could be the stepping stone of something far larger, which could then truly undermine today’s global financial order.
At the same time, arrangements similar to the BRICS’ CRA already exist and have not undermined the IMF. The BRICS’ CRA is closely modeled on the Chiang Mai Initiative signed in May 2000 between the Association of Southeastern Asian Nations (ASEAN) countries as well as China, Japan and South Korea. The aim of the initiative is to strengthen the region’s capacity to protect itself against risks in the global economy. It is intended to provide a supply of emergency liquidity to member countries facing currency crises—and avoid the need to depend on the IMF, which is seen, until today, as having abused its power in its emergency loans during the Asian financial crisis of 1997–98. The crisis is often referred to in the region as “the IMF crisis.” After establishing a headquarters in Singapore in 2009, the CMI was renamed the Chiang Mai Initiative Multilateralization (CMIM).
Ultimate proof that the CMIM is not a threat to the IMF is the rule that a country under the CMIM umbrella could only access a small proportion of its line of emergency credit without being forced to enter into negotiations with the IMF for a standby agreement. Only 30% of a member’s quota is accessible without an IMF program. For the remaining 70%, the member state must agree to an IMF program, including the much-loathed policy prescriptions.
In this sense the Chiang Mai Initiative Multilateralization is far from a counterweight to current IMF-led order. The BRICS’ CRA is quite similar to the CMIM in terms of 30% quota limit before IMF kicks in. As a consequence, it too will be nested within the current system.
Funds have never been disbursed under the CMIM framework – when South Korea needed emergency liquidity in late 2008, it went directly to the U.S. central bank, so avoiding the humiliation of yet again having to deal with the IMF. In the same way, Indonesia preferred not to deal with CMIM (i.e. IMF) and requested help from Japan.
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Photo courtesy of MRE Brasil
