India's Challenge at the BRICS Bank

India’s Challenge at the BRICS Bank

Eisuke Suzuki✳

Frustrated by the failed implementation of far reaching reforms in a major overhaul of the IMF’s quotas and governance approved in December 2010, Brazil, Russia, India and China brought in South Africa and formed a new economic block of five emerging and developing economies known as BRICS, and BRICS decided to organize their own bank officially known as the New Development Bank in July 2014.

    The IMF’s reforms would have strengthened the Fund’s legitimacy and effectiveness. Indeed, the IMF’s then-Managing Director Dominique Strauss-Kahn called “the most fundamental governance overhaul in the Fund’s 65-year history and the biggest ever shift of influence in favor of emerging market and developing countries to recognize their growing role in the global economy.” But the reforms did not happen. And who would blame BRICS countries for starting their own bank. Besides, its first president is going to be from India.

    BRICS countries are now the original founders of their own bank and they want to keep that way. They are the dispensers of the powers that be. That they were put down and mistreated by Western developed economies and that they wanted to correct the imbalance of representation in the IMF are all forgotten.

    And this is how they did it.

   To our chagrin, the New Development Bank (NDB) is far from as democratic as it purports it to be; rather, its voting structure is unabashedly designed to perpetuate the control of the NDB by BRICS. The NDB Charter ensures no share increases will have effect of reducing the voting power of the founding members, i.e., BRICS below 55% of the total voting power. It is one thing for the original founding members to maintain their control of their institution, but it is quite another for them to structure the shareholding of members by class so rigidly by prohibiting (i) the voting power increase of the non-borrowing member countries, i.e., industrialized and developed member countries above 20% of the total voting power; and (ii) the voting power increase of a non-founding member country, i.e., any member country other than BRICS above 7% of

the total voting power.

    The total control of the NDB by BRICS is not limited to the voting power structure alone. That is the fundamental built-in structural inequality of the NDB.

    A cursory review of the management structure of the NDB reveals the inevitability of future internal power struggles which could lead to an eventual break down of the management system of the NDB. This will be a big headache for India. Let me explain.

    Each of BRICS countries appoints a Director on the Board of Directors, which means five Directors out of a maximum of 10 Directors are already pre-determined. The Board of Governors elects a President from one of BRICS countries on a rotation basis. His term is five years and non-renewable. The first President is decided to be from India. While he conducts, under the direction of the Board of Directors, “the ordinary business of the Bank,” the Board of Directors is responsible for “the conduct of the general operation of the Bank.” These provisions do not delineate clear functions between the President and the Board of Directors. The NDB inherited the same ambiguity of these provisions from the World Bank Charter, and it will lead to difficult working relationships between them.

    The first president of the World Bank, Eugene Meyer, resigned six months after his assumption of the position in 1946 because of the president’s competing and conflicting powers with those of the Board of Executive Directors. In the end, the World Bank had to work out an understanding of the functional differences between the president and the Executive Directors: “The Executive Directors are responsible for the direction of all matters of policy in connection with the operations of the Bank, including the approval of loans” and “The Management is responsible for developing recommendations in all matters of policy requiring decision by the Executive Directors.”   　                     

    The matter is more complicated in the case of the NDB. First, its President is elected by the Board of Governors on a rotation basis unlike the president of the World Bank who is appointed by the Executive Directors, and secondly, four Vice-Presidents of the NDB, one from each founding member country except the country represented by the President, are appointed by the Board of Governors on the recommendation of the President.

    The NDB Charter provides that the President is responsible “for the organization, appointment and dismissal of the officers and staff, and recommendation of admission and dismissal of Vice-Presidents to the Board of Governors,” but it also stipulates that Vice-Presidents “exercise such authority and performs such functions in the administration of the Bank, as may be determined by the Board of Directors [emphasis added].” There is a serious conflict between the President’s power and the Board of Directors’ power with respect to who determines Vice Presidents’ authority and functions. But this confusion, I suspect, is an oversight, not intended, but committed by drawing on the Inter-American Development Bank with its different managerial structure.

    It is particularly unsettling because the Board of Governors’ appointment authority of Vice Presidents is not reserved to the Board of Governors as non-delegable to the Board of Directors. It means the Board of Directors may determine Vice-Presidents’ terms and conditions irrespective of the President’s recommendations.      

    These are the most salient features of the NDB power structure which is embedded with seeds of future internal troubles. The power structure of the NDB represents the combination of two old systems of the capitalists’ oligarchy and the communists’ total control by equal politburo members. And they call it, in an Orwellian fashion, “the New Development Bank”!

✳ Professor of Law at the Ateneo Law School, Ateneo de Manila University, Manila, Philippines, who was Deputy General Counsel, 1994-2002, the Asian Development Bank.