Monday, 20 October 2014

India’s dismal Knowledge-Index position could open up doors for IFIs

Should this news for a country that happens to be the largest benefactor from the World Bank Group come as a surprise? Well, before an element of surprise takes over, this is a revelation from none other than the World Bank itself. Further, it was stamped out by a report released by the Asian Development Bank, titled “Innovative Asia: Advancing the Knowledge-based Economy”, which was incidentally built on a World Bank Index. The report consolidates the Knowledge Economy Index for the Asia-Pacific region at 4.39 compared with 8.25 for OECD (Organisation for Economic Co-operation and Development) countries. With a paltry score of 3.06, India is ranked 110th among 145 countries.

This indeed is a dismal position considering India’s projection around the world as a ‘Knowledge’ hub, and a service-sector-based economy. But, the report has more surprises in store. What is colloquially called the “Jugaadu Technology”, or “JT” for short (This could transliterate into Frugal Technology) emerges as a strong parameter from within rural pockets to lend respectability to this particular position, the absence of which could have further slid the number on the chart. In other words, of the factors that build up the knowledge economy like economic incentive regime, innovation, education, and Information and Communications Technology (ICT), it is innovation that scores the highest.

Does this mean that the Government should rope in technological innovations or innovative technologies from rural pockets, especially at a time when the country is witnessing urbanisation at an unprecedented scale? One way to stop the rural diaspora could be this. But, what this index does point to is the low point of hinging on knowledge-based industries, and addressing it through mechanisms involving fixing of weak primary education, restrictive policies on labour, and general difficulty of doing business in India. But, what is the guarantee of Asian Development Bank refraining from guiding policies intended to set the equation straight? It is hardly envisaged that such a refrain is possible, for in terms of the Creative Productivity Index (CPI), India’s ranking is still dismal with a 14 out of 24 countries. With a low score, CPI calls for investments in physical infrastructure and human capital. This is proclaimed by the ADB and Economist Intelligence Unit. This, on the one hand contrasts growing urbanisation that the earlier report purported, but also emphasizes the need for fixing certain weak indicators that the earlier report highlighted. How does one balance this act?

Ironically, one attributable reason for low productivity has been cited as low yield in agriculture, and innovation needs to come in this sector. There goes the frugality of Frugal Technology. The other way out is by making robust the vast pool of skilled English-speaking graduates to augment the service sector. The ink is still wet on the paper of the report, when a likely disruption comes from what ADB considers a major hindrance in the form of high tariffs impeding trade. According to the report, “The limited trade diversification in terms of both a narrow export basket and geographic trade partners has constrained progress in international markets,” and this lack of translatability into a broader economic model is where international financial institutions could cash in with policy and project recommendations. If growth-led development model is the answer the centre is projecting, then grounds are already fertile for these IFIs to sow in. Nothing could be more away from this fact when Bindu Lohani, VP of Knowledge Management and Sustainable Development at ADB says, “As countries seek to innovate to avoid middle-income traps, all governments, especially those with limited resources, need to be sure that their investments boost both efficiency and productivity, benefitting economies and people, and move to a knowledge-based economy.”

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.

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.