Tag Archives: IMF

Could the BRICS New Development Bank usher a New Bipolar Financial World Order?

Brics-bank

With the emergence of the New Development Bank, formerly known as the BRICS Development Bank, and the AIIB (Asian Infrastructure Investment Bank), the world is increasingly becoming Bipolar, with China and India together growing as the ‘Eastern power Bloc’ challenging dominance of the Western powers led by the United States. The Bank was created with an idea to counter the dominance of European countries and the U.S. in global financial institutions such as the World Bank and IMF.

Infrastructure is needed in much of still emerging Asia, and by providing the funding to construct it, China and India make stride towards achieving economic and political status at par with the United States. BRICS countries have also created a $100 billion Contingency Reserve Arrangement (CRA), meant to provide additional liquidity protection to member countries during balance of payments problems. The CRA, unlike the pool of contributed capital to the BRICS bank, which is equally shared, is being funded 41% by China, 18% from Brazil, India, and Russia, and 5% from South Africa.

China and India are among the fastest growing Economies in the world. The economies of the five BRICS nations account for almost 30% of global GDP and 40% of the world’s population. BRICS countries produce a third of the world’s industrial products and half of all agricultural goods. Trade between BRICS countries has increased by 70% since the group was established in 2009. Noone can deny the ubiquitous presence of both India and China in the world stage.

Besides, China has recently proposed the IMF to add its currency Renminbi as a reserve currency as part of the Special Drawing Rights (SDRs).This move has the potential to shift the global economy toward a bipolar order with two dominant reserve currencies-the U.S. Dollar and the Chinese Renminbi.

In the past IMF has been accused of practicing ‘one-size-fits-all’ approach and imposing liberalization indiscriminately even on those countries where financial institutions were not well-developed. IMF conditionalities allegedly ruined several developing economies. The World Bank along with the WTO has advocated protectionism against industries of the developing countries while protecting interests of the developed countries, such as the recent Agreement on Agriculture, which stipulates reduction of export subsidies on agricultural produce on which livelihoods of the poor in the developing countries depend.

Emergence of this new ‘Eastern power Bloc’ will motivate the IMF and the World Bank to function more normatively, democratically, and efficiently, in order to promote the reforms of international financial system as well as it will lead to democratization of international relations.

China is also undertaking ambitious project to build Maritime Silk Route connecting all major ports across South, South-East and Central Asia through land and sea to boost its trade and gain strategic importance. The initiative will push each economy to advance toward the goal of setting up deep integration of markets, multi-level communication, efficient network of land, sea and air passages, and closer cultural exchanges.

Recently India has also been accorded full membership of the Shanghai Cooperation Organisation (SCO) along with Pakistan at its Ufa summit held in Russia. SCO membership to India will have significant benefits from Economic point of view. It will open up trade, energy sector and strategic transit routes between India and Russia, Central Asia, China. As Iran has observer status in the SCO, it will serve as a platform for India to boost trade through the Iranian ports of Bandar Abbas and Chabahar. These ports are considered as India’s gateway to Central Asia through International North-South Transport Corridor (INSTC).

Thus, in this politically polarized world, SCO will play an important role in counter-balancing India’s perceived tilt on security issues towards U.S. and its allies. It can help to maintain full balance of India’s relations with the western powers.

Regional stability is the basis of the economic collaboration and economic development boosts regional stability. Therefore, both the BRICS and the SCO will jointly and effectively promote stability and prosperity in Asia and counter the hegemony of global institutions such as World Bank and IMF.

Unlocking the Greece Crisis: Is the world tilting towards socialism the wrong way?

grexit
Greek Debt Crises

The Greek crises is interesting, not just because it points to how bad government policies can bring a state on the brink of its own failure but also because it points to a much a deeper crisis within capitalism. Capitalism as a system has its inherent weakness in generation of excess capacity from overproduction of goods and services arising from the two of its own major tenets viz. competition and maximization of self-interest. When market forces fail to match demand with supply, it leads to unemployment and depression. This was the main reason for Great Depression in the free-market US Economy of the 1930s. In the 1930s Keynes gave a new lease of life to Capitalism with the ‘General Theory of Employment ,Output and Money’ wherein Government’s intervention through fiscal policies was advocated to raise aggregate demand and pull an economy out of depression. Hence State assumed a greater importance only after the world realized market forces are only invisible, and they need to be regulated and directed with State’s intervention.  But, isn’t this exactly what the Greeks did? Perhaps they over-did it.

In the years preceeding the US Financial Crises of 2007, the Greek Government had doled out huge pension plans and socialist schemes, the cost of which they could never meet. For years they had been fudging their fiscal accounts and understating their debt inorder to be able to borrow more and more money to finance their excessively costly socialist schemes. With years and years of mounting Debt, Greece ultimately had to be bailed out by the IMF and ECB in 2013 with a package of almost 200 bn$, further adding to their debt. The IMF in return had imposed its usual conditionalities on the borrowing state in the form of fiscal austerity measures. In the years that followed, Greece was pushed to a deeper recession with spending cuts and steep hike in taxes which lowered aggregate demand of the economy and led to deeper unemployment and humanitarian crises in the country.

In the normal course of action, an economy would seek to recover by devaluing its’ currency or lowering its’ interest rates to boost investment. But unfortunately, Greece being part of a Currency Union EU does not have that leverage of pursuing an independent Monetary Policy.  If Greece defaults on its sovereign debt and chooses to exit the EU i.e. a ‘Grexit’ then it may trigger a whiplash effect throughout EU as most of the major banks spread across Germany, Italy, Iceland, Spain, Portugal that are holding Greece debt may go bankrupt, leading to a recession of a wider magnitude. This may eventually threaten the very existence of EU.

Greece is totally stuck, and there seems to be no way it can get out. A ‘Grexit’ will only make things worse. It clearly will never be able to repay all that mountain of debt. It should rather focus on restructuring its fiscal policies and building stronger and transparent institutions to prevent recurrence of such a calamity in the future.