Equality and Equity in Emerging Multilateral Financial Institutions: The Case of the BRICS Institutions
| Published date | 01 September 2021 |
| Author | Hang Luo,Lize Yang |
| Date | 01 September 2021 |
| DOI | http://doi.org/10.1111/1758-5899.13003 |
Equality and Equity in Emerging Multilateral
Financial Institutions: The Case of the BRICS
Institutions
Hang Luoand Lize Yang
Peking University
Abstract
The New Development Bank (NDB) and the BRICS Contingent Reserve Arrangement (CRA) were built by Brazil, Russia, India,
China, and South Africa (the BRICS countries) in response to the ‘disappointing’Bretton Woods Institutions, including the
World Bank and the International Monetary Fund (IMF). The main difference between the Bretton Woods Institutions and the
BRICS institutions is that the latter adopts an equal-weight system instead of a weighted voting system in the NDB (all five
BRICS countries have equal shares and voting weights regardless of the major differences in their economic weights) and uses
consensus instead of majority voting rules to make decisions regarding critical issues in the CRA. In fact, both the equal-
weight system and consensus rule are unprecedented in the history of multilateral financial institutions. The World Bank, the
IMF, the Asian Development Bank and even the Asian Infrastructure Investment Bank (AIIB) all adopt weighted voting systems
and majority voting rules. We explain why the BRICS countries adopt these unprecedented designs through precise power
measurements and carefully designed experiments. First, we measure the voting power of each member of the BRICS’NDB
and CRA under the current decision-making systems, using this information as a control group. Then, we remeasure the voting
power of each member of the NDB under the assumption that their shares and voting weights are allocated according to
their economic weights; additionally, we remeasure the voting power of each country of the CRA under the assumption that
majority rules are adopted when decisions are being made on critical issues. Moreover, we establish evaluation indices of
power equality and power equity based on classic and variant Gini coefficients and Lorenz curves and use them to assess and
compare the power structures of the BRICS’NDB and CRA in the contexts of different voting weight reallocations and different
voting rules redesigns. We use these indices to precisely analyse whether the power structures of the BRICS institutions
become more equable or equitable in the examined contexts and to investigate the relationship between equality and equity
in this setting.
Policy Implications
•Why have no new members joined the NDB until now? Why is the development of the NDB much slower than expected
(particularly in comparison to that of the rapidly growing AIIB)? What should the NDB do in the future? Our recommenda-
tion is that to attract new members, the NDB should clarify its rule regarding the share and voting weight allocations of
new members and should possibly discontinue the use of its equal-weight system.
•The equal-weight system used in the NDB is controversial and unprecedented in the history of multilateral financial institu-
tions. However, even if a share and voice reform could be discussed for the NDB in the future, considering China’s eco-
nomic prowess in the BRICS, a pure ‘allocation by economic weight’plan (such as is used in the AIIB) would be unrealistic
and unacceptable for all the members except China. A high ratio of basic votes (equally distributed among all the mem-
bers) to total votes or a semi-weighted voting system might be more feasible.
•The absolute equality and great inequity of the power distributions of the BRICS’NDB and CRA result from their equal-
weight system and consensus rule. To solve the current predicament, the NDB and the CRA may improve the equity of
their power distributions through reallocating voting weights and redesigning voting rules.
•Suffice it to say, the equality and equity of a power distribution are negatively correlated. The BRICS institutions must
address the trade-off between equality and equity and try to achieve a balance between these two values.
Why study the decision-making system designs of
emerging multilateral financial institutions?
For the BRICS countries –Brazil, Russia, India, China, and
South Africa –2014 was a year of highlights and progress.
During the sixth BRICS summit in Fortaleza, Brazil in July
2014, the BRICS countries signed the Agreement on the
New Development Bank (NDB) to mobilize resources for
development projects in the BRICS countries and other
emerging economies and developing countries; additionally,
they signed the Treaty for the Establishment of a BRICS
Contingent Reserve Arrangement (CRA) –a framework for
the provision of liquidity and precautionary instruments
through currency swaps in response to actual or potential
©2021 Durham University and John Wiley & Sons, Ltd..Global Policy (2021) 12:4 doi: 10.1111/1758-5899.13003
Global Policy Volume 12 . Issue 4 . September 2021
482
Research Article
short-term payment pressures. As emerging multilateral
financial institutions outside of the influential Bretton Woods
Institutions, these BRICS institutions not only are regarded
as a notable breakthrough in terms of the cooperation
among the BRICS countries but also have a significant
impact on global economic governance, as they comple-
ment or compete with existing institutions (Chin, 2014; Liu,
2016; Morozkina, 2018; Reisen, 2015; Suchodolski and
Demeulemeester, 2018; Wang, 2019).
However, neither of these BRICS institutions has per-
formed as well as expected during the first5 yearsafter
their establishment, particularly compared with another
emerging multilateral financial institution, the Asian Infras-
tructure Investment Bank (AIIB), which was initiated by a
BRICS country (China) and began operations a few months
later than did the NDB.
1
The dissatisfaction regarding the
NDB is largely due to: (1) its membership: no new member
has joined the NDB to date, although expansion of its
membership has been a strategic focus of the Bank in the
past five years (New Development Bank, 2017a, 2017b,
2019), while the AIIB has grown to become the second lar-
gest multilateral development bank after the World Bank
within three years of its establishment; (2) its number of
approved projects: 130 projects have been approved by
the AIIB, but only 74 projects
2
have been approved by the
NDB; (3) its size of financing: AIIB’s approved and commit-
ted financing is US$45.37 billion, butthe NDB’sfinancing is
only US$29.05 billion;
3
(4) its credit rating: the AIIB is rated
AAA by all three of the authoritative credit rating agencies,
while the NDB has only an AA+rating from Standard &
Poor’s and Fitch Ratings; and (5) its international influence:
the AIIB’s projects covered 29 countries, but the NDB’s pro-
jects covered only five countries, although the NDB’s pro-
ject application is open to non-member countries
4
(AIIB,
2021; NDB, 2021). Additionally, the CRA still exists in name
to some extent, as no country, not even Brazil, which has
been declared ‘bankrupt’by the Brazilian president Jair Bol-
sonaro, has yet made a request to access its committed
resources.
We could not help but wonder why the BRICS institutions,
which were a milestone of the cooperation among the
BRICS countries and received much praise before their
establishment and during their early years, fell so far short
of expectations. This issue may stem from the unique
designs of their decision-making systems. In fact, compared
to other multilateral financial institutions, the most promi-
nent characteristics of the BRICS institutions are that they
adopt two designs that are unprecedented in the history of
multilateral financial institutions –the NDB adopts an equal-
weight system for the allocation of shares and votes and
the CRA adopts a consensus (unanimity) rule for critical
decisions (Luo and Yang, 2019). Neither traditional and
mainstream multilateral financial institutions such as the IMF
and the World Bank nor emerging institutions such as the
AIIB have ever adopted an equal-weight system or a con-
sensus rule. This unusual phenomenon confused us consid-
erably. Why do the BRICS institutions adopt such
unprecedented designs? What effect is produced by this?
Before and after the establishment of the BRICS institu-
tions, many scholars described and analysed the motivations
and reasons behind their establishment, their structure and
operation mode, their potential benefits and risks, their rela-
tionships with other traditional or emerging multilateral
financial institutions, their role in world economic develop-
ment and their impact on global financial governance (Chin,
2014; Cooper, 2017; Liu, 2016; Rana and Pacheco Pardo,
2018; Reisen, 2015; Wang, 2017, 2019). Nevertheless, they
did not pay enough attention to the unique decision-
making systems of these BRICS institutions or conduct pre-
cise quantitative analyses. Since the BRICS’NDB and CRA
have been in existence for more than five years, it is time to
take a closer look at the unprecedented designs of their
decision-making systems.
Some scholars think that the equal-weight system of the
NDB could be regarded as an innovation in the context of
global economic governance (Cooper, 2017; Wang, 2019;
Zhu, 2018, 2019). Actually, the equal-weight system is not
only unprecedented in the history of multilateral financial
institutions but also inconsistent with the appeals that the
BRICS countries have made on the reforms of the IMF and
the World Bank. These countries are unsatisfied with their
underrepresentation (namely, their voting weights are signif-
icantly less than their economic weights), as well as that of
other emerging economies, in the Bretton Woods Institu-
tions (Reisen, 2015; Wang, 2019); with the growth of their
GDP, this underrepresentation has become more severe.
There is an oft-cited principle, namely, that member coun-
tries’voting weights should largely reflect their economic
weights (Vestergaard and Wade, 2015). Weighted voting sys-
tems have become common among multilateral financial
institutions. Moreover, one of the most important motiva-
tions behind the establishment of the NDB was the desire
of the BRICS countries to drive a reform of the existing sys-
tem of global financial governance, especially in terms of
increasing their voice and representation in the Bretton
Woods Institutions (Reisen, 2015; Wang, 2017). Therefore, it
is confusing that the NDB adopts an equal-weight system
despite the major differences in the economic weights of
the five BRICS countries. The direct consequence of the
equal-weight system used in the NDB is that China is seri-
ously underrepresented while South Africa is extremely
overrepresented.
Every why has a wherefore. The story behind the estab-
lishment of the NDB is the compromise made by the BRICS
countries in the course of their negotiations (Liu, 2016). The
equal-weight system for the allocation of shares and votes
is the result of India’s insistence; India even compromised
on establishing Shanghai instead of New Delhi as the head-
quarters of the NDB to ensure the implementation of the
equal-weight system (Luo et al., 2021). However, rather than
establishing a power structure based on an equal-weight
system, China preferred to make a larger financial contribu-
tion to the capital subscription on the grounds of efficiency
(Cooper, 2017).
In addition to the equal-weight system adopted by the
NDB, another unprecedented design in the history of
Global Policy (2021) 12:4©2021 Durham University and John Wiley & Sons, Ltd..
Equality and Equity in Emerging Multilateral Financial Institutions483
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