Beyond the consensus

“If you want to rob the people wholesale start a bank”, says a Chinese proverb. The validity of this ancient wisdom aside, China itself has moved a long way away from socialism to embracing the ‘to be rich is glorious’ philosophy – as part of its journey to become the globe’s economic powerhouse.

The Asian giant’s latest initiative, along with other Brics countries (Brazil, Russia, India and South Africa) of setting up a multilateral development bank as well as a similar fund has sprung up no surprises.

The New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA) are being projected alternatives to the World Bank and the International Monetary Fund (IMF) respectively – two of the three principal institutions of global economic governance (the third being the World Trade Organisation). The NDB will finance infrastructure and sustainable development projects with the initial capital of $50 billion, which will double over time, while the $100 billion CRA will help members in a financial crunch.

Great powers want to shape the world in their own fashion. The World Bank and the IMF, the Bretton Woods institutions, are the pillars of the international economic order put in place by the United States and its allies in July 1944. Therefore, by setting up these two institutions, incidentally also in the month of July, Brics, the leading economies in the developing world, are being seen as holding out the promise of an alternative global economic order. The question is: in what way will the Brics arrangements be different from the Bretton Woods institutions?

The birth of the World Bank and the IMF was part of the efforts to reconstruct the post World War-II economy. The purpose of the IMF was to help countries overcome their balance of payment problems and to ensure exchange rate stability. As opposed to the present times, that was an era of fixed exchange rates. In 1972, pushed mainly by Washington, the fixed exchange rate regime was replaced with floating (or market-based) exchange rates. Accordingly, the IMF’s role underwent a fundamental shift: from overseeing exchange rates, the Fund began to exercise surveillance over national economic policies.

The World Bank has two goals: to end ‘extreme poverty’ and to boost ‘shared prosperity’. What is known as the Washington Consensus guides the policies of the Bank as well as the IMF. The consensus provides for liberalisation of trade and investment regimes, privatisation and de-regulation of the economy, downsizing of the government machinery to achieve fiscal austerity, scaling down fiscal deficit, and currency depreciation – the components of neo-liberalism.

Typically IMF conditionalities, which govern credit flow from the multilateral agency, provide for such policy measures. The various programmes run by Pakistan with the IMF, including the one that is currently in place, also entailed a similar policy package.

These typical policy guidelines, together with the way they are governed, underlie much of the criticism of the Bretton Woods institutions. It is alleged that the policy package prescribed by these institutions, particularly the IMF, makes things worse for the client countries by making them, for instance, embark on economic liberalisation when they are not prepared to cope with its costs; that fiscal austerity puts brakes on the growth of the economy; and that the hands-off approach together with cuts in public spending hits the low-end sections of society hard and therefore such policy measures turn out to be anti-developmental.

Politically, the Bretton Woods institutions are criticised for the way they make decisions. The most common allegation is that these institutions are dominated by and serve the interests of the US and its western European allies at the expense of others, particularly developing countries. There is an element of truth in such allegations. The president of the World Bank has always been an American, while only a European has headed the IMF.

One may also look at the countries’ voting power in the IMF. The number of votes a member has is proportionate to its contribution (called quota) to the Fund. The US, being the largest contributor to the IMF, has the largest share in the total votes – 17 percent. Not only that, voting power does not truly reflect the economic size. For instance, China whose economy is larger than any European country has less voting strength than that of several European nations. Washington also holds the highest voting power in the World Bank for the same reason.

Will the new Brics institutions do away with such shortcomings? Among the Brics economies, China occupies a pre-eminent position – comparable to that of the US in the global economy since 1945. China’s GDP of $8.2 trillion is greater than the combined GDP ($6.9 trillion) of the other four nations. Chinese exports of over $2 trillion are almost double the combined exports ($1.2 trillion) of its Brics partners. China also holds the world’s largest foreign exchange reserves. These indicators should leave no doubt about Beijing’s capability to dominate the Brics institutions.

Alive to the need to restrain China, and pushed mainly by India, the other countries have made sure that the NDB’s initial capital would be equally divided among the five members and that no member can increase its share of capital without the consent of the rest. However, China with its $41 billion contribution will have the major share in the total CRA initial capital of $100 billion followed by Brazil, Russia and India ($18 billion each) and South Africa ($5 billion).

Brics was also locked in a dispute as to who will be the chief executive of the NDB and where it will be headquartered before deciding that the bank will be based in Shanghai, that its rotating presidency will start with India; and that the board of governors and the board of directors will be headed by Russia and Brazil respectively.

At present, the NDB membership is restricted to the Brics countries. However, in principle the bloc has agreed to expand the membership subject to the condition that the Brics countries will retain the majority capital share. The same condition will apply to the CRA membership.

Their structure and decision-making apart, what way would be the conditions for having access to the Brics institutions’ credit line? Would they go beyond the Washington Consensus? Will their conditionalities be softer?

A credit arrangement has two stakeholders – the creditor and the borrower. While the creditor insists that the grant of loans be governed by stringent conditions – so that frequent borrowing is discouraged and the principal is returned along with the interest – the borrower wants conditions as soft as possible. Besides, as the Bretton Woods institutions bear it out, in a multilateral arrangement lenders and recipients are typically different. Generally rich, developed countries are the major donors; poor, developing economies are the principal recipients. And, as the proverb goes, he who pays the piper calls the tune.

Therefore, it seems likely that the credit flow from the Brics institutions will also be subjected to stringent conditions going beyond economic restructuring to include political policy. That said, since the Brics countries are less committed to neo-liberalism than the US and its allies, their conditionalities may be a toned down form of the Washington Consensus. Beyond this any statement will be at best speculative.

The writer is a freelance contributor. Email: hussainhzaidi@gmail.com