Friday, 17 October 2014

BRICS Bank: Tall Claims

Image source: Reuters. R. Carrera (16/07/2014)

BRICS Bank, or New Development Bank (NDB) in part, was created with the intention of shifting the balance of financial prowess, which at this time is heavily skewed in West's favor on the one hand, and a sense of apathy from the global north towards the increasing financial and economic reach of the global south on the other. Even President of the World Bank, Dr. Jim Yong Kim welcomed the NDB and said that the common challenge was poverty and not another development bank. The President echoed that any bank or any group of institutions that try to tackle the problem of infrastructure investment in order to fight poverty was welcome. The Indian Prime Minister furthered these sentiments, by advocating a need for quick execution of tasks as the world demanded speed for growth and fighting poverty.

BRICS Bank, or New Development Bank (NDB) in part, was created with the intention of shifting the balance of financial prowess, which at this time is heavily skewed in West's favor on the one hand, and a sense of apathy from the global north towards the increasing financial and economic reach of the global south on the other. Even President of the World Bank, Dr. Jim Yong Kim welcomed the NDB and said that the common challenge was poverty and not another development bank. The President echoed that any bank or any group of institutions that try to tackle the problem of infrastructure investment in order to fight poverty was welcome. The Indian Prime Minister furthered these sentiments, by advocating a need for quick execution of tasks as the world demanded speed for growth and fighting poverty.

The obvious question is: Is everything right with BRICS Bank or NDB? Let this be an initial probe.

NDB is governed at three levels. The first is the Board of Governors, which is represented by the finance ministers of the member countries. Even though, they have no executive powers, they are to meet and accept reports on the Bank and its progress. The second level is the Board of Directors, which represents all the shareholders and approves credits over a certain amount, with the condition that none of the five BRICS shareholders be less than 55% of the total. The third level is the Executive Board, which comprises the President, 4 Vice-presidents, and the credit committee, which could have any member country of the UN as a member, though not subject to credit. On the other hand, during the meet at Fortaleza, there were discussions on the possibility of stakeholders to be members, though no resolution was reached on it.

Comparing this 3-tiered structure with that of the World Bank, the difference or identity between the two could be gauged. BOG of the WB is the ultimate policy maker, whereas in case of NDB, one is likely to miss this function, since the BOG has no executive powers invested in it. But, even without the executive powers, they have all the leverage to accept, suggest changes to the reports and direction of NDB, and influence the Executive Directors, who unlike the case in WB would represent their own geographies. But it could be different over time, when any member of the UN would become member of NDB. When this materializes, leverage would be decided by financial muscle and a position in global relations. There could be a horde of inflating the clout of influence by the member countries, especially the likes of China, Russia and India, and with a disparity in what goes on to create the Contingency Reserve Agreement (CRA), some of the member countries could find themselves left behind, or even decelerate in the process.

Why should the Bank even begin to operate under the US Laws and New York Tribunals? Strangely, this has been even agreed to by China, who has been at least for the past two decades waging a currency war with the US. A need to drive away from US Dollars and subsequent Rupees-denominated-bonds did successfully register itself due to IFC, and there are even moves of such bonds being floated by the Asian Development Bank (ADB). It is the fragility of the US-Dollars-denominated-bonds due to extreme fluctuations in exchange rates that could even lead to currency depreciation in BRICS if another global financial crisis were to surface.

The BRICS claim they have a neoliberal content. Consider this: “Our economic growth and social inclusion policies have helped stabilize global economy, to foster the creation of jobs, to reduce poverty, and to combat inequality, thus contributing to the achievement of MDGs. In this new cycle, besides contribution in fostering strong, sustainable and balanced growth, BRICS will continue to play a significant role in promoting social development and in contributing to define the international agenda in this area building on its experiences in addressing the challenges of poverty and inequality.” Now, this communiqué at the conference in Fortaleza is indeed scaling tall claims. India has a dwindling manufacturing sector with rising levels of unemployment and growing gaps of inequality. China's domestic sector is tanking, unemployment is rising, while its housing bubble seems to have busted. Russia is crony capitalist and is showing its imperialist inclinations, with the case of Ukraine being a major point of global imbalance. These parameters are logical enough to note hindrance to fight against poverty, inequality, and the growing divide between the haves and the have-nots. Moreover, according to the new definition of poverty levels, thanks to the statistical jugglery at World Bank, poverty levels are to be calculated based on Purchasing Power Parity (PPP), which would significantly reduce the number of poor people in the world, and most importantly in the third world, thus coming closer to achieving the MDG. With PPP, a country like India would lose more than 50% of its already-declared poor population on paper and in records, without an iota of a change in the lifestyle of these populations.

During the conference in Fortaleza, it was mentioned that international reserves of member countries of BRICS were in good shape. How could we forget that India in very recent times barely managed to avoid the Balance of Payments (BOP) problem, and was only a few weeks away from knocking at the IMF? If the US FED again decides on Quantitative Easing, then in all likelihood, all of the past laurels of the growth story of India and even other member countries of BRICS might be written down in History and that would be the end of the chapter.

These are some of the schematic issues that BRICS would find imperative to address before claiming its Bank as an answer to the WB and the IMF. With all criticisms of the western-dominated financial institutions, they at least have recourse mechanisms, where grievances caused by their interventions could be raised. Whatever might be the efficacy of such mechanisms, they present themselves as autonomous actors within those institutions to check on adherence to safeguards and guidelines. In case of NDB, such a mechanism is unheard of, and even safeguards and guidelines are deliberated upon. With a focus largely on funding infrastructure projects in member countries to begin with, and then venturing into the third world, possibility of little or no significance to environmental and social impact assessment studies cannot be ruled out. Additionally, what role would the legislatures in these countries play is mired in ambiguity? The legislature arm of the governance structure in a country should obligate an oversight into categories of funding flowing into a country, for ultimately it serves what it represents.

Despite euphoria about the NDB, it has miles to go before it could realize those tall claims as an alternative to WB/IMF. But, most crucially, it should be conscious of being different from WB/IMF, whose hegemony has wrought devastation in the third world, and are unwilling to give participatory stakes for the third world despite fighting for the poor in these parts. NDB must shy from the hypocrisy of the BrettonWoods Institutions in order to be different. And, these are indeed tall claims at the moment. 


Anti-coal movement hits International Financial Institutions in the wall

Photo courtesy: Sanjeev Thareja at link

Last year, President Barack Obama resolutely declared the urgency to fight climate change at home by cutting carbon pollution and prodded other countries to follow suit. What was started by him as a campaign way back in 2008 has been made good on that promise by methodically dismantling America’s coal industry. It was pronounced as a war on coal. The announcement seemingly set the ball in motion, and was followed quickly by the Washington DC-based powerhouse, World Bank, which declared a forthcoming arrangement on its lending terms and conditions for new coal-fired projects, and restricting financial support to those countries with no accessible alternative to coal. 

What would this signify? Would this signal a turn-around in the risky investment and any tangible impacts as a result of this energy strategy? The impacts felt could be far and between, since bilateral and other multilateral development banks and financial institutions would continue funding coal, and unless the latter join the bandwagon, any guaranteeing that World Bank could stick on to this decision for long would be very questionable indeed. It must be mentioned here that the Bank has backed increased support for hydro-electric power thus reversing its decisions to abandon these projects in the 1990s. Such a repetition with coal isn’t to anyone’s interest at all. 

But, if one is go by the statement made by Holly Shulman, spokeswoman for the Treasury, “The US is trying to help level the playing field for US coal-related energy exporters and bring other countries’ financing practices in line with their climate change policies”, an element of seriousness in driving such lending practices isn’t hard to notice. But, this is far from truth, as we presently note. The first hindrance to Obama’s declaration has from within the US with Export Import Bank of the United States putting its ban on hold. Elsewhere, Japan is quenching energy-thirsty emerging markets and Germany isn’t throwing any caution to the wind either. There are speculations rife that BRICS Bank is also unlikely to follow strict coal-limits, when its starts its lending in 2016. When the US raised issues pertaining to such proposals at multilateral forums like the G20, Japan and Germany openly rebuffed these, and China appeared unmoved on the fact that public funds could play a crucial role in developing less carbon-intensive technologies. 

How could all of this transcribe for India? If the US and Europe were to give coal a pass, Japan with its JBIC more than likely becomes the leader in lending for coal. Their enormity could be gauged by the fact that for the period 2007 to 2013, the country has invested a whopping US $19.3 billion in coal projects overseas. One logical implication for this move, especially in the latter half of the period mentioned above is attributable to post-Fukushima disaster, when Japan naturally inclined itself towards coal technology to boost economy and exports. Moving across to Europe, Germany’s KfW during almost the same period lent US $3.7 billion for coal-based projects around the world, with India being a major benefactor of these funds. The logic behind Germany’s entity was supporting countries that could not move immediately away from reliance on fossil fuels and its involvement is easily dwarfed by its lending and investment in environmental protection. 

If there is a visible ambiguity in the way International Financial Institutions (IFIs) are approaching fossil fuels, in India National Financial Institutions (NFIs) are exhibiting no truck with such ambiguity. NFIs are relentlessly in pursuit of such mechanisms of financing despite tremendous losses through either bad loans, or economic unviability these projects are mired in. As one policy analyst from Sierra Club nailed it on conditions of anonymity in regards to BRICS Bank’s likely trajectory, “This kind of warning signal (on coal), as the actual reality of investing in coal plants today, is just as important as whether the BRICS Bank announces new restrictions.” Make no mistake, the proportion of NFIs’ involvement in comparison to IFIs’ is highly skewed, with the former clearly emerging giants in meeting the so-called ‘stated’ objective of meeting India’s power needs, which are admissibly poor, but projected in much poorer light.


Sunday, 12 October 2014

Poverty Quantified: conjuring mathematics of IFIs

Thus spake Angus Deaton, the Princeton economist in his ‘The Great Escape’, “Poverty measurement is ultimately a measure of democratic consensus and not scientific calibration, a continuing exercise based on what is acceptable to the policy makers and the public, including the poor themselves.”

The argument is interesting to the point that it keeps away the spell of numbers and number crunching jugglery that the likes of World Bank/IMF, ADB and the UN engage in. But, how is it possible to count the number of poor, when there is ambiguity clouding the definition of poverty? Or, why is it so difficult for the policy makers to accept that poverty is not quantifiable, but only recognisable?

So, how do numbers juggle? According to a standard, as defined by the World Bank, the global poverty line frozen at $1.25 a day was calculated by keeping 2005 PPP (Purchasing Power Parity) index as the yardstick. This bracketed 400 million Indians as living below the poverty line in 2010. But, the singing hymns to the growth story over the last decade has obviously moved the purchasing power of the country higher, an obvious side-effect of investing trust in the manner numbers qualify the story. According to the International Comparison Program, the revised rates of PPP not only elevated India as the third largest economy in the world, but even held the country accounting for 6.4 per cent of the world’s total Gross Domestic Product (GDP). Now, with a better purchasing power, the trade off is the number of people designated poor, a neat logical consequence in its own right. But, what exactly is this PPP index and how does it measure the health of the economy?  The index tries to compare the purchasing power of the dollar in different countries for a same basket of goods. This basket might differ for different countries and hence it loses its significance as a uniform one across the board. It also depends on the variations on use or consumption of goods within the basket. Obviously, there is a prejudice against the developing nations that cannot hide in this case, and hence banking on PPP as uplifting the poor from a state of wretched existence is a hollowed faith.

Moreover, things get a little murky when we bring in UN’s Millennium Development Goals (MDGs). One of the tenets of MDGs is halving the number of poor between 1990 and 2015, and further on continuing with the Sustainable Development Goals (SDGs), which would advocate a complete eradication of poverty from the world. This is where the conjurer’s tricks come in. With a likelihood of the standard being raised to $1.75 a day, the number of poor in the country would reduce from 400 million in 2010 to around a 100 million in present times, thus proving it once more that not only PPP is a good signal of country’s economic health, but even an instrument furthering eradicating poverty, or fulfilling the goal of MDGs and continuing to target SDGs. This is an illusion created at the behest of numbers.

If the world Bank is still thinking on zeroing in on a new standard, Asian Development Bank (ADB) has gone a step further, and revised its standards to $1.51 a day. Now, this is where numerals of the two gigantic international financial institutions clash. This not only swells the number of poor before 2010, but even claims that almost half of India’s population (close to 580 million) lived below the poverty line in 2010. Interestingly, both the figures by the WB and the ADB were calculated with 2005 PPP index at the hinge. But, there is more surprise in store here. Asian Development Bank, which uses income distribution as a cardinal indicator for drawing the poverty line had to change direction and move towards using expenditure as an indicator, because India does not come out with official estimates for income distribution. The rationale behind redrawing the line because it was inadequate in reflecting costs incurred to maintain a minimum standard of living held weight, until ADB spelt out its consequences on the number of poor in the country. Now, with a back on the envelope calculations, it could be deduced that the number of poor in the country from 2010 to the present times with the latest PPP estimates would drop more significantly compared to what the World Bank advocates. 

These calculations have even puzzled the economists at the World Bank. In the words of Martin Ravallion, (His WB blogs are here) Senior VP, WB, “When a developing country grows, one expects the Price Index (PI) to rise, the real wages to rise, thus making goods that are not traded internationally becoming more expensive.” Price Index (PI), a ratio of PPP and the market exchange rate fell from 0.333 to 0.324 for India for the period 2005 to 2011. For Ravallion, ADB merely manipulated the GDP figures on 2005 using the mechanism of GDP deflator and reached a new level of PI, which was lower. It should, however be noted that a higher PI depresses per capita expenditures, and this would have failed the purpose that ADB set out with.

It is pretty evident that both multilateral financial institutions are crunching numbers to come close to a goal as set in the MDGs. Well, it is not to be taken literally as a be all-end all, but with a caution that even words from eminent economists went unheard. A significant case in point here World Bank’s very own Chief Economist, KaushikBasu, who had this to say in his blog entry, “We should simply recognise that PPP has inherent shortcomings and treat statements of country size and power with, let us say, a fistful of salt.” This statement has an underlying truth, but is accorded otherwise. Taking the quotes at the beginning and end of this short piece into cognisance, it is not very difficult to make out the fate of the poor as sandwiched between different sets of tools and instruments that purportedly guide schemes meant for the people who need it the most, but end up as lines drawn on sandy shore, where their efficacy is scribbled as notes, but in practice remains no more.