Last week, when the Asian Infrastructure Investment Bank (AIIB) formally opened for business and appointed Jin Liqun as President, it played the multilateral development bank (MDB) game to the script -- create an institution, widen its mandate beyond a nation to a region or the world, and control the chair.
But in this game, the China-led institution may actually be doing good by democratising, through competition, this haloed world of high finance. Scholars are worried that such competition could lead to the demise of the Big 2 -- the World Bank Group and International Monetary Fund (IMF) -- in this market.
Just the announcement of AIIB had pushed the buttons of the informal establishment of the US-owned World Bank and the Europe-owned IMF (the word ‘owned’ is used not in terms of shareholding, to which we come later but in terms of control behaviour), who are wondering how to deal with AIIB.
Suddenly, discussions on how to save these decaying institutions has come out of the woodwork. Ngaire Woods, dean of Blavatnik School of Government and director of the Global Economic Governance Program at University of Oxford, for instance, wonders how to save the World Bank in a Project Syndicate piece. I ask: why save it at all? And the philosophical roots of my question lie in the economic intellectual base that the West has been proselytising like a religion for several decades now.
After teaching us, the third-world nations, that Capitalism is God, Markets are Goddesses and creative destruction is their playfield, the attempt to save a dying institution seems out of synch.
Through words underlined by economic nationalism, using ideas powered by ideologies and by actions that supported both, we have been told that capitalism, markets and their interplay are sacrosanct, that we are not to interfere in their efficient, almost sacred allocation of resources. So what if citizens of some Latin American nation suffered in the 1970s or it created a meltdown in some Asian countries in the 1990s.
Led by IMF, the ideologically laced prescription for financial diseases in third-world nations was to reduce government spending, cut deficits, raise interest rates --- and most important, allow insolvent banks and financial institutions to fail, so that inefficient firms can collapse, overheated assets can crash, millions can become jobless, hundreds of thousands turn homeless.
Here’s how. As part of ‘fast-track capitalism’, the high interest rates attracted hot money by the billions but did little to build nations. Instead of going into manufacturing or even agriculture that would have created jobs and leveraged the demographic strength of countries over the medium term, the money herded up before speculative sectors like stock markets and real estate, leading to a bubble that finally burst with the same hot money stampeding out, leading to serial devaluations and meltdowns in Thailand, the Philippines and Malaysia, putting a pause on the ‘Asian miracle’.
A strategy that destroyed or at least injured several nations in the 20th century has been conveniently discarded in the 21st century, when the source of the new financial disease and the resultant crises is the US and Europe, both of which control these two MDBs.
Just five countries -- the US, the UK, France, Germany, Italy and Japan -- control 38.43% of voting power at the International Bank for Reconstruction and Development (loosely known as World Bank) and 34.2% of voting power at IMF. India and China together have a voting power of 7.8% at World Bank and 6.2% voting power at IMF, approximately the same as Japan’s.
What does this power mean? It means that since its inception in 1944, with the aim of rebuilding Europe reeling under the economic burden of World War II, all -- repeat all -- Presidents of World Bank, from Eugene Meyer to incumbent Jim Yong Kim, have been and continue to be US citizens.
Likewise, all -- repeat all -- Managing Directors of IMF, from Camille Gutt to Christine Lagarde, have been and continue to be European: five from France, two from Sweden and one each from Belgium, the Netherlands, Germany and Spain.
This asymmetry does not belong to this century. Either, the word ‘World’ needs to be removed from World Bank and ‘International’ from the IMF, or we need to see a greater democratisation of power, including the process of top appointments, which, hiding behind ‘consensus’ deteriorates it into
monarchy-like, ignoring capitalist ideals of merit.
To go one step deeper, as the world’s second largest economy, China’s voting power is less than two-third’s of the third-largest economy Japan’s, while the world’s 9th largest economy India’s 2.3% voting power is marginally higher than the world’s 16th largest economy the Netherlands and significantly lower than the world’s 19th largest economy Saudi Arabia.
The failure of World Bank stems from this inequality. As a result, when developed economies misbehave and indulge in financial imprudence led by little more than personal greed of the few, neither the IMF nor the World Bank has the intellectual or executive conviction to force third-world conditions like raising rates, cutting deficits, controlling government spending on them.
On the contrary, overnight -- on September 15, 2008 to be precise -- when the Lehman Brothers collapsed and led to what is now known as the ‘global economic crisis’, not an ‘American economic crisis’ or a ‘European economic crisis’ -- an army of economists, who allegedly worked with data, analysed trends and propounded theories based on those secular indicators, retreated. Forget third-world nations, they don’t care for their own citizens, who lost jobs and homes and gained financial hardship leading to epidemics like ‘Occupy’ and ‘99%’.
So, seven months ago, in June 2015, when the AIIB was able to garner support from the world -- it has 57 prospective founder members, from the UK to Germany, India to Russia, Brazil to France, Australia to Israel -- the sole exception was, and remains, the US.
As a senior official in one of the MDBs told me last month, “AIIB means business”. It is recruiting the best people, particularly in governance and processes, the areas that Woods has rightly pointed out as World Bank’s operational weaknesses -- core fee-paying clients seeking other lenders, expenses rising over costs and it becoming welfare-dependent and the looming threat of donor governments holding back the donations.
With AIIB now ready for business, expect a long-awaited creative destruction in the MDB space. To use the modern vocabulary of the West, the keyword is ‘disruption’. But the disruption goes beyond MDBs -- the new actors are commercial banks and bond markets, to which countries like Ghana, as Woods points out, are willing to pay interest rates that are multiples of those offered by World Bank rather than wait 25.2 months for disbursal. With changing technology and shorter project executions, the cost of time has become greater than the cost of money.
This is not to say that it will remain this way. It could well be possible that World Bank may reinvent itself to the changing ground realities of disruptive technologies leading to greater options for borrowers at a time when economic power is slowly shifting to the East.
Perhaps, AIIB may degenerate and become a mirror of the very MDBs it seeks to replace. It could even be that the age of MDBs is getting over and soon countries will return to financing their development with commercial banks. All these are speculations.
But to intervene in the process of market correction and resuscitate a terminal organisation, with a bloated bureaucracy and vested interests feeding on it, is neither praying to God Capitalism nor kneeling before the Goddess Market.
If the World Bank it is not reforming, changing and adapting to the realities of 21st century, let it self-destruct. That’s how creative destruction works.
Updated Date: Jan 21, 2016 10:01 AM