GLC Policy Conclave
Session 1: The New Financial World Order
Shashank Bengali (SB): So, Rajrishi, can you tell us basically what the circumstances were that led to the development of these new multilateral institutions? How did we get here?
Rajrishi Singhal (RS): Thank you everybody for having us here this afternoon. I think we should start off with the context first- the conditions under which the old Bretton Woods institutions were created. They were largely a part of a post-war reconstruction effort when the world economy was different. It was recovering from a lengthy and bloody war. And it must be remembered that the discussions that took place in Bretton Woods- the US was trying to create a new space for itself, create a new trade rating, a new currency market and was trying to fill in the gap left by the Sterling area. And I think if you haven’t read Benn Steil’s book called ‘The Battle of Bretton Woods’, you should do that now. It is an engaging book, it provides you behind the scenes details of how the negotiations worked and the politics that played behind the negotiations. And so USA and Europe pretty much carved up the Bretton Woods institutions between themselves. Even today, the President of the World Bank is from the USA and Managing Director for IMF is from Europe. And the shareholding, somehow does not reflect the economic power, or the shift in the economic power in the globe. And so for example, Belgium today has more shares, or a larger shareholding than, say, China, when China is 10 times the size of Belgium. The BRICS economies together hold 11% shareholding in IMF, when their share of world GDP is 22%, give or take. That kind of reflects the misalignment in the current multilateral development banks. On top of this, starting 2008, when the global financial crisis occurred, G20, which was till then a grouping of finance ministers and central bankers, was converted into a grouping of world leaders, and there were noises made that there should be reforms in the IMF and World Bank. But it was blocked by a very interesting body called the US Congress, which had no role to play in this. And so the US Congress in all these years has blocked any reform in the IMF and World Bank. There is also another factor, and that is the kind of medicines that the IMF has been prescribing for countries hit by balance of payments crises. And the Southeast Asian crisis is a good example because it is the most recent. The IMF came out a couple of years ago with an admission that it may have been wrong in prescribing the kind of medicine it had been all these years, namely capital account convertibility for all the economies that were hit by balance of payments crises. And because this one size fits all remedy left many countries ravaged and really weak and vulnerable, it gave all the BRICS and the other emerging and developing economies – all of this put together, actually, I think compelled all the emerging economies and the developing economies to think of a bank that would, you know, treat sustainable development differently. That would look at their development imperatives differently, from the orthodoxy that has been practiced in IMF and World Bank. And I think that’s the reason why you have the NDB and the AIIB.
SB: Thank you. As I said, we’ll focus on these two banks that Rajrishi mentioned, the NDB and the AIIB. So if we could turn over to Kevin and ask what is the current architecture of existing institutions and a brief overview of what the new architecture might begin to look like.
Kevin Carmichael (KC): Thank you, and thank you all for coming out on the long holiday weekend to listen to the three of us. It’s a nice feeling. There’s something of a hierarchy that exists now in the global financial order. We are focusing on the AIIB and the New Development Bank. These are just two banks of a cluster of these sort of regional development banks that exist throughout the world. There’s one through Latin America, there’s already an Asian Development Bank, there are banks in Europe, there are development banks that focus on Africa. These institutions all sort of interact and overlap at various points. But sitting at the top of the structure is the IMF and the World Bank, especially the IMF. The IMF is sort of different from these development banks in that it does not go into countries and finance on the ground projects per say. It’s more of a macro institution. Its role in the world is to come into countries and bail them out when they’re in particular trouble. And this is why it has, it’s sort of, the IMF is as infamous as it is. It has this sort of tarnished reputation around the world because it has a long history of going into places, trying to insist on a particular way of doing things, sort of a US way of doing things that hasn’t always gone down in Asia and other parts of the world. It’s resulted in significant backlash that has indeed led to some of the things my counterpart mentioned. I feel though I should add a nuance to the way things are shifting on the ground in Washington. It’s very true that countries such as India are horribly under-represented in these two institutions. There’s a broad recognition of that, there’s a broad desire to fix it. It’s being blocked by the US Congress, because of the way the IMF and the World Bank were set up in the beginning. The US Congress was left with basically the final say on the US involvement in these sorts of institutions. The people making these institutions, however, realise the power is shifting to Asia, shifting to emerging markets, and they are doing what they can to recognise that on a day-to-day level. There’s a great amount of frustration in countries in Europe and other parts of the world, inside the G20, about the delay in fixing these institutions. So, I’ll leave this with just a note that it’s not like the IMF and the World Bank are sitting there in Washington continually trying to push 30 year old ideas on the world. They are adjusting with time, they have learnt from their mistakes with Asia, they have changed their economic orthodoxy, to the point that they now tend to go against the G7 countries- Europe, the US, Canada- these sort of countries often find themselves in policy conflict with the advice of the IMF.
SB: Thank you, Kevin. So both of our panelists basically mentioned the US Congress as an impediment to the, sort of, fair functioning of these institutions- the existing ones. As the lone American on the panel I’ll try not to take that personally. But the clear point that I think that both of our panelists mentioned is that there is a broad recognition that there needs to be some sort of change in the system. And so we have these new banks, these new investment bodies that have been launched in the last 24 months or so. Kevin, if I could just keep on you for one more moment, how do you envision, or how are the NDB and the AIIB envisioned to work in the current structure? Do they compete with the Bretton Woods banks? Do they complement them? How will they differentiate themselves? Tell us a bit more about that.
KC: I think competition is inevitable. That’s not necessarily a bad thing. In fact, that’s probably a good thing. The World Bank has effectively had the run of the development space in the global context for a long time. So it will benefit the… the World Bank bureaucrats in Washington will benefit from other institutions with sort of a more entrepreneurial approach, with the energy of upstart pushing them to think about their ideas, to generate projects, to generate results. There is a desire and hopefully it’s a desire that will lead to something a little more concrete than just that- there is a desire for these development institutions to find a way to work together. The President of the World Bank talks about this often, every time he is presented with this notion that the AIIB, the New Development Bank are treading on his turf, they represent a threat to his institution – he always pushes back and says no, the more the merrier. The more money that we can put to work these development projects in the world, the better. And he talks of being very open to working with these institutions. I think it’s very important that the global community find a way to at least ensure that these institutions are talking to each other. We don’t need them to merge to become one mammoth, global development agency. That’s part of the reason that the World Bank has somewhat become sort of out of touch with the needs of the various regions it is representing. The World Bank is also spread too thin- it’s a broad agenda to tackle economic growth, to tackle health, to tackle the environment, to tackle a whole realm of things. I think Asia will benefit from an institution like the AIIB that is focused on infrastructure and basically infrastructure only. And if you want to take an optimistic view to this, then that’s a good thing. That will let the World Bank focus on different aspects of its mandate like health, like education, like these sorts of things. So the answer to your question is it’s very early days, it’s difficult to know how this will evolve. But there’s a certain optimism around the fact that we have more players joining, and this sort of energy coming out of Asia to spur the World Bank along and to sort of reclaim its role as a leader in this domain.
SB: Thank you. And so why don’t we, now having kind of given you the lay of the land, the circumstances that brought us to where we are, why don’t we drill down a little bit deeper into these two institutions, these new institutions that we’ve been talking about and kind of learn more about them – how they’ve been envisioned and what they might do. So, Rajrishi, if we could, over to you, to talk about the AIIB a little bit. As I mentioned in the beginning, this is a bank focusing on infrastructure, China is the key player in this bank and China is the majority shareholder in this bank. Obviously it would have a great deal of say in the course that it takes. So talk a little bit, if you would, about how AIIB has been set up, and China’s role and whether India, as a key stakeholder as well- how its interests would be aligned with the way this bank is set up.
RS: Thanks Shashank. You know, I think we will have to wait a bit before clarity really emerges on what AIIB proposes to do in terms of its governance structure. If you look at its website it said that it would start building its project pipeline in Fall 2015, which is somewhere now. And I think we will get a clearer picture of the kind of projects that AIIB proposes to do, starting this month or next month. But having said that, there are apprehensions that the original mandate – AIIB has this charter that it will provide funds for regional connectivity. There is a feeling that this word ‘regional connectivity’ is actually a euphemism for its ambitious project called ‘One Belt One Road’ in which it wants to appropriate the land and sea routes a) for acquiring raw materials and b) for sending out finished products. And India shares in some of that apprehension. We don’t know whether this is real or whether this is a sheer misgiving. But it’s up to China to probably dispel this notion. And China will have to work if it’s really serious in dispelling this notion. But coming back to the shareholding structure, yes, China has a majority stake share in AIIB, it has about a $30 billion capital. And India, which is the next largest shareholder in AIIB, has only $8.5 billion. So you can see the difference. And it doesn’t preclude somebody else coming in between, because nothing’s been said that precludes a party from coming in and providing money later on. But as of now India is number 2. And so what does it do for India? I think the crux here is a four letter word called “coal”. If you remember, President Barack Obama made it very clear that coal will not be sold from USA to coal fired power plants, as his commitment towards clean energy. And on cue, almost immediately, the World Bank also said it will stop financing coal-fired power plants. Now given that India is one of the largest reserves of coal, and India, in terms of its development evolution, still needs lots of power, and coal is a viable method of power generation in India or in China or elsewhere- coal becomes very critical for India. And so funding for coal power plants, albeit with you know, probably a lot of governance safeguards thrown in, on environment safe technologies, technologies that scrub the smoke which comes out of coal plants- all of that will probably be enforced. But I think in some ways, India is looking for institutions like AIIB and the NDB to provide development financing which has now been stopped from World Bank and elsewhere. And I think that’s what India’s play is in this entire game.
SB: And now what about the NDB? The NDB is often called the BRICS Bank. This is the bank that has the five BRICS countries, as I mentioned Brazil, Russia, India, China and South Africa – all five countries with equal voting rights. It’s seen as, sort of, the bank that has all five countries as equal players as opposed to the AIIB in which China is more dominant. Kevin, in light of that, what is the role of the NDB- can its structure, the way its set up, can it also rise along with the AIIB which has a lot more money behind it, coming from China?
KC: I’m going to have to admit that I am very skeptical about BRICS and especially about the NDB. To echo something I said further, I think as much money that its pooled together and then put back into development projects in these economies, attempting to alleviate poverty, there’s a focus on sustainable development by however much this money is eventually going to *unclear* by the NDB, that’s all for the good. But I will be pleasantly surprised if this money is ultimately deployed to the degree that the leaders of these countries say it will be. We had mention of how it’s not entirely clear where the AIIB is going at this point, but at least we know that this institution will be backed by several dozen countries. There is serious momentum there, something’s going to happen. The NDB is even more mysterious. Its website looks like it was designed in about 1994. There’s no clear indication there, or publically about where the institution is going, what it intends to do. So I guess perhaps I’m reflecting the Western point of view on the New Development Bank. There’s extreme skepticism I think, about whether any of the financing will ever come to be.
SB: It is true that the details are yet to be established for both of these institutions, but it’s also become clear in the past couple of years that there is a great amount of excitement in the developing world about financing that perhaps might come with fewer strings attached, fewer conditionalities that the IMF and western banks put on it. So one example is that the giant dam in the Democratic Republic of Congo in Central Africa- I just looked this up this morning. The proposal there is to build a dam, the Grand Inga Dam, which would generate 40,000 megawatts of power in one of the most electricity starved parts of the world- which is twice as much as the giant Three Gorges Dam in China, and would cost $3 billion. The government of Congo has already expressed interest in receiving funding for projects such as this from these new institutions. So I guess my question to Rajrishi is, although we may not know very much about how these banks are going to work, it’s clear that there is excitement from countries in the developing world to, sort of, leverage these institutions. What might the implications be, and what concerns are there *unclear* for projects such as this dam in Congo?
RS: Thank you Shashank. Let me just quickly revert to what Kevin said a short while ago. Yes, there is a lot of skepticism about NDB, and we were discussing this just before we got on stage. This is primarily because of the seeming incompatibility between the five BRICS partners. BRICS was created on an economic platform. It was suggested by Jim O’Neill of Goldman Sachs and they were considered to be the next, big, emerging powers. But if you look at the trade between BRICS nations, it’s pathetic. There is no investment to speak of. And so, despite this incompatibility, BRICS bank- or BRICS as a grouping, has been able to deliver on its promise of creating a bank. There is an agreement, there is a bank on the ground- a brick and mortar institution, which is writing its manual, its rule book, and which is figuring out how to go about providing an alternative development mechanism. Specially in trying to finance sustainable development, which is different from the way it’s been done so far. But having said that, there is, as you a rightly said, a great expectation from not just South Africa, but all African nations, for funding from NDB. And the Great Inga Dam is a good example, because the Great Inga Dam is actually the largest dam that would ever have been built. It’s actually larger than the Three Gorges Dam in China. And so there is a lot of expectation that NDB will provide money to non-BRICS countries. However my personal view is I think they’ll have to wait for a while. It will happen, and the NDB has said so, from public platforms, that they do intend financing non-BRICS country projects as well. But I think they will first provide finance to 2-3 projects from BRICS members. Like India, China, maybe Brazil maybe Russia – we don’t know. But from indications that we’ve got so far, they have two project proposals on the table already from BRICS countries. 2 very large project proposals, which they are whetting. And they will wait to write their rules- how they will play the game, what would be their governing structure. And I think there is a lot of misgiving about what will be their governance structure. Whether they will be lax with their credit policy, whether they will, you know, not adopt best practices. But I think from all kinds of public platforms, NDB senior officials have said that there will be no compromise on governance structures. But the proof of the pudding, as they say, is in the eating. We’ll have to wait and see the kind of loans that they give out, what are the conditions, the governance of the loan. And only then will we be able to pass judgment. But I think they are working on creating some kind of rule-book which incorporates best practices from across all institutions in the world. And I think they have a great source of best practices that they can fall back on, namely some of their central banks. I mean, Reserve Bank for instance, in India, has some of the best practices in terms of governance structures. And some of these governance structures can easily be incorporated into NDB. So I think in terms of ideas, there is no shortage of ideas. But we’ll have to wait and see whether they really are serious about that. But I think they are, because there is a whole deal of skepticism, that has greeted BRICS initially, and the idea of BRICS bank thereafter. And I think they want to show and prove that it’s not a flash in the pan- that it’s not an institution that will play fast and loose with rules and governance structures.
SB: Kevin do you want to take on any of that and also perhaps look at the idea of whether these banks could become instruments for China to leverage more of its foreign policy or these banks are basically just an extension of Chinese soft power.
KC: I’ll separate the NDB from the AIIB. The AIIB I think is certainly an extension of Chinese soft power, the same way the IMF and the World Bank are extensions of US and to a lesser extent, European soft power. China’s had 70 years to learn how to gain its place. The US set up the Bretton Woods institutions, the IMF and the World Bank, to ensure that it would continue to influence them throughout the decades, and it has done so. The US is the one country in the IMF and the World Bank that has a veto over every major decision. They had designed the voting structure so that that would probably always be the case. China has designed a voting structure in the AIIB that essentially locks in a veto for itself at that institution, going forward as well. It’s left room for other countries such as Japan and other big economies to join and have a certain amount of influence, but it would be very difficult for any other country to join that institution and water down China’s position there. So I think certainly that’s the case. That’s not necessarily a bad thing- we had this discussion. There’s always this dark shadow that seems to emerge when we talk about China and everything it’s doing as nefarious. I think that’s mostly because China isn’t as transparent as it could be about what it’s really doing. There’s a great deal of distrust in the world. But ultimately, as far as we can tell, China’s goals with these institutions are the same goal as the US has, frankly, and that is boosting trade and economic growth in Asia and in emerging markets. That’s going to benefit everyone. So while China has put itself in a position to steer this particular institution and all its efforts in the direction that it likes, it has also at the same time allowed others to come in and reap some of the rewards.
SB: And a bit more on India from Rajrishi, and we’ll probably make this the last question from me and turn over to questions from all of you. As a founding member of both these banks, and the second biggest shareholder in the AIIB, how can India make the most of its role in both these institutions, and how can it sort of, protect its own interests as these banks grow?
RS: I think what India can offer and the way, in terms of making the best of its shareholding in both the NDB and the AIIB, is offering some of the insights it has learnt in creating and running some large democratic institutions. I think the regulatory structure in say, banking, capital markets or telecom, is a good example of what it can offer to NDB and the AIIB. And today, if you look at capital markets in terms of plumbing- the microstructures of Indian capital markets, it’s among the best in the world. In terms of risk elimination, risk mitigation measures- if you look at banking, I think we are – forget the notion of public sector banks and the shareholding of public sector banks, because there’s very little that RBI can do there. But in terms of risk mitigation and anticipating risks, I think RBI has been stellar in its job. I think telecom is climbing the curve, and telecom regulators still have a long distance to cover. The pensions regulator is still new, wet behind the ears, so to speak. But I think banking, capital markets and telecom somewhat, we have some experience. And this is some of the stuff that we can offer to both NDB and AIIB, in terms of what best practices to execute and follow. In terms of what else it can offer, I think its prowess in IT, and in providing the knowledge for a virtual infrastructure. Because we’ve been talking about hard infrastructure all this time- roads, ports, pipelines. But there is need for virtual infrastructure in all of the BRICS countries as well as a large number of other developing and emerging economies. Payment systems, currency markets, settlement systems, pipelines for carrying mobile telephony, pipelines for carrying transactions over mobile networks. And to create the software to run all of this, the brainware, so to speak, I think India has immense capability in offering that to both NDB and AIIB. And that’s where I think India would be able to pull some weight in both these institutions.
SB: Thank you. We have a few minutes left and we’ll turn over to questions now….
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