BRICS Mechanisms and Global Governance

Fudan Institute of Belt and Road & Global Governance

On June 23， 2022， the 14th BRICS Summit reached new consensuses， and the leaders of the five BRICS countries unanimously agreed on BRICS expansion in line with the “BRICS Plus” cooperation， and discussed pertinent criteria and procedures. As Chinese President Xi Jinping observed， standing at the crossroads of history， we should both look back at the journey we have traveled and keep in mind why we established BRICS in the first place， and look forward to a shared future of a more comprehensive， close， practical and inclusive high-quality partnership to jointly embark on a new journey of BRICS cooperation.

As major developing countries， the BRICS stays committed to promoting gradual reform in global governance， which comes to two aspects namely， advancing the reform of the Bretton Woods system externally， and building the BRICS international organization internally. Such is the basic orientation of BRICS cooperation， as well as the point of departure in considering the current BRICS expansion.

BRICS GRADUAL REFORM ON GLOBAL GOVERNANCE SYSTEM

It is the basic orientation of BRICS cooperation mechanism to advance gradual reform in the global governance system. As BRICS leaders observed at their Fortaleza Summit in July 2014， international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness， as transitional and ad hoc arrangements become increasingly prevalent， often at the expense of multilateralism. The BRICS countries are an important force in promoting gradual reform on the existing global governance system， committed to achieving a more representative and equitable global governance. At their Beijing Summit， the leaders of the BRICS countries were in total agreement to stay committed to reforming global governance and to making instruments of global governance more inclusive， representative and participatory to facilitate greater and more meaningful participation of developing countries in global decision-making processes and structures and make it better attuned to contemporary realities.

Since the end of the Second World War， the international financial system with the Bretton Woods system at its core had long been controlled by the U.S.， Europe and other developed countries. After the international financial crisis of 2008， the BRICS conducted coordination and cooperation with the IMF， the World Bank and the G20， forcefully increasing the influence and say of developing countries in the global governance system. Taking the organizational reform of the IMF for instance， the BRICS countries have spoken with one voice in the discussion on short-term capital control， share structure reform， and new lending arrangements， being a strong counterweight to the U.S. and Europe. A most outstanding case was that the BRICS pushed the IMF to reach a historic plan for quota and governance reforms in 2010.

The BRICS has also helped advance the World Banks switch toward better meeting the needs of developing countries. Two problems resided in the World Bank that had long been dominated by developed countries. First， its loan conditions were harsh and rigid. To cater to the preferences of its big shareholders in developed countries， the World Bank had been engaged in promoting liberalization， privatization and democratization reform in developing countries， and imposed it on developing countries as loan conditions. Second， its loan fields had gradually moved away from the needs of developing countries. The World Bank loans were concentrated in such fields as public administration， anti-corruption， gender equality and climate change， neglecting infrastructure like transportation and energy which were more urgently needed in developing countries.

With the joint efforts of the BRICS countries， the World Bank released its Investment Lending Reform： Concept Note， putting forward five concrete reform opinions. First， adopt a risk-based approach to replace one-size-fits-all processes and requirements that apply to investment or project lending （IL）; second， consolidate and rationalize the IL menu to respond to clients diverse needs including rapid response projects for emergencies and fragile states; third， enhance supervision and implementation support for lending projects; fourth， create enabling environment for IL transformation， and fifth， simplify IL policy framework.

In the reform， the BRICS pushed for the replacement of G8 with G20 as the primary mechanism in global economic governance. To maintain their monopoly of global governance， developed countries had proposed a governance model of “G8+5” namely G8 plus 5 major developing countries. In contrast， the BRICS firmly stood for upholding G20s core position in global economic governance. In comparison with G8， the advantage of G20 is that it does not draw a line by ideology， that it is balanced in proportion between developed and developing countries， and that its core function is a concert of major powers， thus better attuned to contemporary realities， better accommodating both legitimacy and effectiveness of global governance， and constituting a historic breakthrough in reform on global governance.

In brief， the BRICS are committed to gradual reform on global governance mechanisms， thus being reformers rather than revolutionaries of global governance. The objective of the BRICS cooperation is to push for reform of the global governance system to better reflect legitimate concerns and reasonable interests of most of the countries， particularly developing countries. This basic orientation is also on full display in the BRICS countries creating their own multilateral bodies like the Contingent Reserve Arrangement （CRA） and the New Development Bank （NDB）.

BRICS INSTITUTIONALIZATION OF FINANCIAL COOPERATION

Even though the IMF adopted a plan for quota and governance reform in 2010， the implementation of the plan had been obstructed by developed countries. To further promote reform in the Bretton Woods system， the BRICS began to build their fund and development bank. However， it is worth emphasizing that it is not for the BRICS fund and development bank to replace or challenge the IMF and the World Bank， but rather to complement and improve the existing global financial governance system， reflecting the orientation of gradual reform.

In 2012， the BRICS put it on their agenda to build the CRA and the NDB. In the process of forming the CRA and the NDB， two interactive negotiations happened between Brazil and China and between India and China respectively. The reason why the interactive negotiations took place was because first， Brazil was the proposing state of the initiative to form the CRA whereas India was the proposing state of the initiative to form the NDB， and both played the role of borrowers， and second， in negotiations for both the CRA and the NDB， China held the position of the contributor and major shareholder， as the country， with a large foreign currency reserve and richly experienced in financial stability and development financing， would play a key role in implementing both of the cooperative initiatives.

In constructing the CRA， Brazil and China jointly played the leading roles. As a Latin American country， having long suffered from financial crises， Brazil strongly aspired for developing countries to establish their own financial safety net， and played more of the role of a borrower in the would-be CRA. And as a major developing country with a large foreign currency reserve， China considered more from the angle of a contributor， aspiring to enrich the content of BRICS cooperation and increase BRICS influence in global governance through the building of the CRA.

During the negotiations， there were different considerations between Brazil and China respectively as a borrower and a contributor， but it was their consensus that it was not for the BRICS CRA to replace the IMF but to accelerate the process of reform on it. In terms of the size of contributed capital and distribution of voting rights， China proposed 240 billion U.S. dollars， Brazil proposed 50 billion U.S. dollars， and both came up with a compromise of 100 billion U.S. dollars， with China contributing 41 billion U.S. dollars， 18 billion U.S. dollars each for Brazil， India and Russia， and 5 billion U.S. dollars for South Africa. To avoid undue influence for any of the countries， 5 percent of the vote of the CRA would be equally shared by its five founding members， and 95 percent of its voting rights would be distributed according to the number of contributions. As such， China has 39.95 percent of the voting rights of the BRICS Contingent Reserve Arrangement， Brazil， India and Russia have 18.10 percent of the voting rights each， and South Africa has 5.75 percent of the voting rights. None of the countries would have any veto powers in the BRICS CRA.

In terms of the IMF-linked portion， from the perspective of a contributor， China， in consideration of considerable political resistance to the supervision of macroeconomic conditions of member states within the BRICS framework， proposed to take reference of the early stage of the Chiang Mai Initiative Multilateralization （CMIM） and set IMF-linked portion of the CRA to 90 percent， whereas from the perspective of a borrower， Brazil considered that high proportional linkage would limit the role of the CRA， and proposed that the IMF-linked portion be lower than 70 percent. The ultimate compromise was 70 percent.

In terms of opting-out from participating as a providing party and encashment of outstanding claims， China proposed that provided this is justified by its balance of payments and reserve position or by an event of force majeure， such as a war or natural disaster， a providing party may opt-out from participating or request encashment of outstanding claims， whereas Brazil proposed that the providing party should provide the necessary information to justify its decision. The ultimate compromise between the two sides was that in an event of force majeure， such as a war or natural disaster， a providing party may opt-out from participating or request encashment of outstanding claims but shall provide the necessary information to justify its decision to other providing parties.

In constructing the NDB， India and China jointly played the leading roles. As a country that had long relied on multilateral development banks for financing， India made the initiative to establish a BRICS NDB， whereas from the perspective of a shareholder， China desired that a BRICS new development bank could enhance BRICS production capacity cooperation and investment for Chinas overseas infrastructure construction while strengthening the unity of BRICS countries and accelerating the process of reform on global governance.

During the negotiations， there were likewise different considerations between India and China respectively as a borrower and a shareholder， but both countries wished to make up for the shortfalls of the international financial bodies and urge reform in the existing international financial bodies. The two sides overcame a series of differences， found a route to BRICS unity and cooperation through mutual understanding and mutual accommodation， and injected dynamics to promote reform in global governance. In terms of size of capital and share distribution， China proposed 100 billion U.S. dollars and shares to be distributed according to the size of all of the countries GDP， whereas India proposed 10 billion U.S. dollars and shares to be equally distributed among five of the founding member countries. The compromise reached ultimately by both sides was that the initial authorized capital of the bank is 100 billion U.S. dollars， and the initial subscribed capital of the bank is 10 billion U.S. dollars with shares being equally distributed among the founding members.

Concerning clients of lending， China proposed that the NDB lend to emerging economies and other developing countries including the BRICS countries to increase the international influence of the NDB among many of the developing countries， whereas India proposes that the NDBs lending be focused on the BRICS countries. The ultimate compromise reached by both sides was that the NDBs lending should be focused on BRICS countries during its early operations to be gradually extended to other developing countries.

Concerning the location of headquarters and appointment of the president， China pointed out that among all metropolitan cities of the five BRICS countries Shanghai fully deserved to be the international financial center with a uniquely endowed capital market and financing conditions， and proposed that the NDB have its headquarters in Shanghai， whereas India proposed that the NDB have its headquarters in New Delhi to be close to the needs of borrowing countries. The ultimate compromise was that the NDB would have its headquarters in Shanghai with India nominating its first president.

In general， the establishment of the CRA and the NDB was the most iconic achievement of the BRICS cooperation， displaying its ability to take action and effectiveness. At the same time， the construction of the two BRICS financial cooperation mechanisms also provides an outside driving force for the reform of the Bretton Woods system.

OFFICIAL LAUNCHING OF BRICS EXPANSION PROCESS

Under current conditions， it is the priority to further promote reform in global governance to advance BRICS expansion. As President Xi observed， BRICS countries gather not in a closed club or an exclusive circle， but in a big family of mutual support and a partnership for win-win cooperation. At the Xiamen Summit in 2017， China took the lead in proposing the “BRICS Plus” cooperation approach， hosting a dialogue between emerging markets and developing countries that for the first time invited worldwide leaders of Egypt， Mexico， Thailand， Tajikistan and Guinea to attend， and enlarged BRICS circle of friends. Since then， the “BRICS Plus” cooperation has deepened and expanded， setting a prime example of South-South cooperation and seeking strength through unity among emerging markets and developing countries.

Based on extensive attainments of the “BRICS Plus” cooperation， China officially put BRICS expansion on the agenda. On May 19， 2022， China took the initiative to host the first dialogue session in history between BRICS foreign ministers and their counterparts of other emerging markets and developing countries， inviting foreign ministers from nine countries of Indonesia， Argentina， Saudi Arabia， the United Arab Emirates， Egypt， Nigeria， Senegal， Thailand and Kazakhstan to attend， to jointly explore how to increase the role of emerging markets and developing countries in global governance. On June 23， 2022， at the 14th BRICS Summit， leaders of the five BRICS countries reached a consensus on promoting BRICS expansion process and clarifying the criteria and procedures for this expansion process through Sherpas channel based on full consultation and consensus.

From the perspective of BRICS cooperation orientation in gradual reform on global governance， BRICS expansion should at least include the following criteria. First， priority should be given to emerging markets within G20. G20 is the primary mechanism of global governance co-led by developed economies and emerging markets， and the main platform for emerging markets to increase their influence and say in global governance. If more emerging markets in G20 join BRICS mechanism， the influence of emerging markets in global governance will further increase. Secondly， regional representation. As the purpose of BRICS cooperation is to increase the representation and participation of developing countries， if the priority of BRICS expansion will be given to developing countries of regional representation， then the regional and global influence of BRICS mechanism will further increase. Third， systemic importance. As all of the five BRICS countries are major powers in their given regions as well as countries of systemic importance in global political and economic system， the priority of BRICS expansion should be given to major developing countries of systemic importance.

Overall， rising with profound adjustment of the world pattern， the BRICS cooperation has gone through the tests of a series of major challenges and become a powerful force in promoting reform of the global governance system. In such an orientation of cooperation， BRICS expansion will surely further spur the BRICS countries as an important force in international relations and an active builder of the international system.

Authors include Huang Renwei， Executive Vice-President of Fudan Institute of Belt and Road & Global Governance and Zhu Jiejin， Professor of School of International Relations and Public Administration， Fudan University