Global Banking Institutions WB IMF ADB AIIB NDB watch

[K Mehta]

This thread is being created for discussion on news and discussion on global banking institutions like World Bank, International Monetary Fund, Asian Development Bank, Asian Infrastructure Investment Bank, New Development Bank (BRICS Bank) etc. and their effect on global economy as well as Indian Interests.

[K Mehta]

Russia to apply for China-led infrastructure bank AIIB – Deputy PM
Russia decided to apply to join the China-led Asian Infrastructure Investment Bank (AIIB), the country’s Deputy Prime Minister Igor Shuvalov said on Saturday.

“I would like to inform you about the decision to participate in the AIIB,” which was made by Russian President Vladimir Putin, Shuvalov said at the Boao Forum for Asia.

Shuvalov added that Russia welcomes China’s Silk Road Economic Belt initiative and is happy about stepping up cooperation.

"We are delighted to be able to step up cooperation in the format of the Eurasian Economic Union (EEU) and China...the free movement of goods and capital within the EEU brings economies of Europe and Asia closer. This is intertwined with the Silk Road Economic Belt initiative, launched by the Chinese leadership," he said.
Britain and Switzerland have been formally accepted as founding members of the AIIB, China's Finance Ministry confirmed Saturday. This comes a day after Brazil accepted an invitation to join the bank.

"We should push forward with the creation of a regional hub for financial cooperation," Chinese President Xi Jinping said Saturday, Reuters reported.

China should "strengthen pragmatic cooperation in monetary stability, investment, financing, credit rating and other fields," Xi said.
AIIB has 30 founding members with applications still coming in, according to China's Finance Ministry. Australia has recently applied to join the bank.

The application deadline has been set for March 31. Other nations will still be able to join the AIIB after the deadline expires, but only as common members, Chinese Finance Minister Lou Jiwei said last week.

China wants to see the AIIB operational before the end of 2015.
Washington recently shifted its tone towards the AIIB, which is seen as a rival of the US-led World Bank, the International Monetary Fund (IMF), and the Manila-based Asian Development Bank (ADB) which is dominated by Japan and the US.

The China-led infrastructure bank is expected to launch with an initial subscribed capital of $50 billion and focus on financing infrastructure projects across Asia – including energy, transport and telecommunications infrastructure, urban and rural development, and the environment.

[K Mehta]

South Korea Joins the AIIB
On Thursday, South Korea confirmed its intention to join the Asian Infrastructure Investment Bank (AIIB). The AIIB, an international financial institution conceived of and led by the People’s Republic of China, has generated a fair bit of controversy recently due to the the United States’ public opposition to its traditional allies and partners signing on to the bank. With South Korea’s announcement, another major U.S. ally has deemed it beneficial to join the burgeoning AIIB. In recent weeks, several U.S.-aligned states, including the United Kingdom, France, Germany, and Italy, have joined the AIIB ahead of a March 31 deadline for receiving “founding member” status. Australia, another major Asia-Pacific economy and U.S. ally, is considering joining the AIIB as well, provided certain conditions are met.

Following Seoul’s announcement on Thursday, shares in South Korean iron and steel companies rose amid expectations that South Korea’s AIIB participation would be a boon to these industries. An official in the South Korean finance ministry additionally noted that Seoul’s AIIB participation would also benefit several other sectors, including communications, transport, and energy. Seoul will join the AIIB as a founding member by ratifying the bank’s articles of agreement. The Chinese Ministry of Finance will allow any state which ratifies the articles by the end-of-March deadline to sign on as a “founding” member — a distinction that could lead to advantageous influence in the bank as the institution grows and matures. Currently, 27 states are signed on to be founding members.

The AIIB, despite U.S. grievances, addresses a major shortcoming in the supply of easy-to-acquire infrastructure financing for developing Asian states outside of the established rubric of the U.S.-dominated World Bank, and the U.S.- and Japan-dominated Asian Development Bank. The AIIB, which will launch with $50 billion in capital, won’t immediately fill the supply deficit but will greatly increase developing states’ ability to access credit.

Part of the United States’ anxiety about the bank, at least according to U.S. Treasury Secretary Jack Lew, is due to the bank’s poor governance standards and lack of compliance with established global lending norms. Lew’s concerns mask greater U.S. worries about the viability of new international institutions that purport to exclude the United States entirely while subsuming U.S. allies.

The bank’s main “competitors” — the World Bank and the Asian Development Bank — note the necessity of a new institution like the AIIB to address important gaps in regional lending. Jim Yong Kim, the current World Bank president, welcomed the AIIB last year. The ADB’s Japanese president, Takehiko Nakao, noted that the creation of the AIIB was “understandable” given regional realities.

The AIIB would mark China’s first foray into seriously leading and managing the growth of what could turn out to be an important global institution. The AIIB’s launch offers a small preview into the tension between the United States and China when it comes to issues of global governance — tensions that will likely intensify as China’s rise continues over the 21st century.

[panduranghari]

Though this may seem unrelated, I have to give a point of view with relation to AIIB.

Shanghai gold exchange was launched with lots of fanfare as they were going to settle contracts of gold in physical gold. They wanted to compete with COMEX and LBMA. They failed because they took care of supply side. They did not look at the demand side. The demand side was predominantly India. And why should India buy through SGE? India bought from anyone who supplied gold.

They are repeating the same mistake with AIIB.

Global economy needs dollars as they are short of it. Can China lend dollars? Yes up to a certain extent. But not as much as the world needs. To buy oil among other things. The demand is insatiable. Buy supply cannot match the demand. Never will. And then one may ask why not use yuan?

Oil trade is not settled in yuan. And that's what matters.

Besides what can yuan provide that dollar cannot? All this financial press stuff on AIIB is really and truly hot air.

[RamaY]

Panduranghariji,

Is China trying to create a situation where yuan will be considered as alternative world currency?

For example AIIB first transacts in USD, but occasionally it will push some yuan transactions here and there. And more and more consumers get comfy with AIIB, yuan share will increase.

Probably it will be (made to appear) too late by the time US tries to resolve this militarily. Something like too big to fail banks

[Neshant]

The IMF and WB predatory lending monopoly to developing countries is coming to an end with China setting up the AIIB.

China does not trust these western institutions since they operate primarily in western interests.

A good example is Greece.

1) EU countries get China (and India) to increase their contribution to the IMF.
2) IMF "loans" money to Greece.
3) Greece pays back the European banks it owes money with those IMF loans.
4) Greece then defaults on those IMF loans.

Effectively a portion of bad Greek debt gets transferred to China (and other lenders) while German and other banks get made whole.

[Neshant]

They did not look at the demand side. The demand side was predominantly India. And why should India buy through SGE? India bought from anyone who supplied gold.

China is the largest importer of gold in the world as of 2012. Not only that, they are the largest producers of gold in the world and currently consuming their entire production.

[pankajs]

AIIB will not make loan to fund oil purchase but for Infra projects / Debt refinancing, etc. WB and IMF is used to buy votes, arm twist smaller countries to fall in line with western agenda, impose western trade policies, labor policies, environmental policies, economic models, political model, etc in return for project finance/loans.

In short, WB and IMF are nothing but tools for furthering western imperialism/agenda. AIIB is going to challenge that and that is a good thing.

[pankajs]

http://www.brookings.edu/blogs/order-fr ... ib-pollack
Joining the club: How will the United States respond to AIIB's expanding membership?

The Obama administration insists that it is not opposed to the creation of the bank, but it argues that there are far too many unanswered questions to warrant endorsement of the AIIB, at least at present. Administration officials contend that the AIIB’s governance arrangements rest far too much on Chinese assurances, without the bank demonstrating its ability to adhere to existing norms, policies, and practices that would govern future lending. Senior U.S. officials also openly express wariness that China’s majority stakeholder position in the bank would enable it to dominate all lending decisions. Thus, notwithstanding Asia’s prodigious infrastructural requirements that the AIIB will help address, the United States believes the bank would largely serve to advance Chinese policy objectives. It would also potentially undermine, if not supplant, existing international economic institutions.

The highlighted and underlined part is the main issue. US has a set of norms, policies, and practices that it follows and imposes on anyone who needs help from the IMF/WB/ADB. They worry that the AIIB could lend outside these norms/policies/practices and thus pull client states away from the American led Institutions. Less clients means less places/countries to exploit.

E.g A country could be pushed to privatize its water supply by the IMF/WB to get a loan. Such privatization usually benefit some western concern. AIIB might be willing to loan the money on purely commercial terms without pushing for privatization of such critical sector. That would be one less racket to make a packet from the western POV. Such *less* conditional lending will pull away a large number of smaller states and thus influence.

The second point on advancement of Chinese policy objective is obvious.

[panduranghari]

Panduranghariji,

Is China trying to create a situation where yuan will be considered as alternative world currency?

For example AIIB first transacts in USD, but occasionally it will push some yuan transactions here and there. And more and more consumers get comfy with AIIB, yuan share will increase.

Probably it will be (made to appear) too late by the time US tries to resolve this militarily. Something like too big to fail banks

Saar,
Wouldn't India want its rupee to be used as a global currency? Then why wouldn't China?

What would be the incentive for say India to ditch the USD and build reserves of yuan? Remember USD did not become global currency because of some treaty.

In the wake of WWI (1914-1918) there was an international movement in Europe to return to the stability of fixed exchange rates between national currencies. But all of them had been inflated so much during the war that reestablishing the peg to gold at the pre-war price would have implied an overvaluation of currencies that would have led inevitably to a run on all the gold in the banking system, monetary deflation and economic depression. At the same time, they feared that raising the gold price would raise questions about the credibility of the new post-war regime, and quite possibly cause a global scramble into gold.

This "problem" with gold was viewed at the time as a "shortage" of gold. And so one of the stated goals of the effort to solve this problem was "some means of economizing the use of gold by maintaining reserves in the form of foreign balances. So to "economize the use of gold" meant to limit or reduce the use of gold.

Meanwhile, the United States had emerged from the war as the major creditor to the world and the only post-war economy healthy enough to lend the financial assistance needed for rebuilding Europe. And so even though the U.S. wasn't directly involved in the European monetary negotiations that took place in Brussels in 1920 and Genoa in 1922, it was acknowledged that any new monetary order was likely to be a U.S. centered system.

The Genoa negotiations were led by the English including British Prime Minister Lloyd George and Bank of England Governor Montagu Norman who proposed a "two-tier" system especially designed to circumvent "the gold shortage". The British proposal described a group of "center countries" who would hold their reserves entirely in gold and a second tier group of (unnamed) countries who would hold reserves partly in gold and partly in short-term claims on the center countries.

The proposal was named the "gold-exchange standard" (not gold standard).

The gold-exchange standard that officially came into being around 1926 (and lasted only about six years in its planned form) worked like this: The U.S. dollar was backed by and redeemable in gold at any level, even down to small gold coins. The British pound was backed by gold and dollars and redeemable in both, but for gold, only in large, expensive bars (like A 400oz LBMA good delivery bar). Other European currencies were backed by and redeemable in British pound sterling, while both dollars and pounds served as official reserves equal to gold in the international banking system.

Since only the U.S. dollar was fully redeemable in gold, you might expect that gold would have immediately flowed out of the U.S. and into Europe. At the beginning of the gold-exchange standard in 1926 the U.S. held 6000 tonnes of gold and by the beginning of Breton woods conference of 1945 they held over 20000 tonnes.

Now where does yuan fit in?

Other than very poor countries who have nothing to loose nor gain would willingly hold yuan reserves. But why will India hold yuan reserves? It gives us no advantage neither do we derive any benefits. We can't buy oil with yuan. We can't buy uranium from Australia with yuan. We can't give yuan to France for Rafale.

Unless 19 out of the G20 ditch dollar, yuan will gain no traction.

Besides most G20 and other smaller economies hold one asset par excellence which others willingly accept in return for anything they are offering to sell. Then why use yuan.

We, in the developing world, are just about coming out of the American dollar hegemony. Are we willing to accept Chinese Yuan hegemony in return.

[panduranghari]

China is the largest importer of gold in the world as of 2012. Not only that, they are the largest producers of gold in the world and currently consuming their entire production.

Neshant saar,

This Makes no difference. They can produce all, consume all, eat all, poop all, store all, Polish it all,hide it all.

They showed their cards too soon. Americans being Americans, never thought as early as 1972 to as late as 1995, that Chinese would compete with them. But they are openly in competition. America does not like it and they undermined the Shanghai Gold Exchange.

Chinese gold consumption is government lead right from the central bank to the SGE. In India the common man buys gold. Central bank wants to prevent indians from buying gold.

[panduranghari]

AIIB will not make loan to fund oil purchase but for Infra projects / Debt refinancing, etc. WB and IMF is used to buy votes, arm twist smaller countries to fall in line with western agenda, impose western trade policies, labor policies, environmental policies, economic models, political model, etc in return for project finance/loans.

In short, WB and IMF are nothing but tools for furthering western imperialism/agenda. AIIB is going to challenge that and that is a good thing.

To what end? Replace American bully for Chinese one? No thanks.

Chinese got no controlling interest over BRICs New development bank though they contributed the most, Chinese are dropping NDB as a hot potato. They will concentrate on AIIB now.

[pankajs]

Competition my dear sir ... it is always a good thing. My wish is for IMF/WB/ADB/AIIB/BRIC Bank to thrive and compete for business. No one country/set of countires will have the monopoly of lending institutions.

No where did I suggest that China will replace America as the financial hegemon.

[chanakyaa]

I do find myself agreeing with many points panduranghariji has highlighted.

Competition my dear sir ... it is always a good thing. My wish is for IMF/WB/ADB/AIIB/BRIC Bank to thrive and compete for business.

Having more international banking institutions competing for business is, IN THEORY, a good thing. But, if there is an agreement among readers that these institutions have historically used their weight in promoting their agenda, promoting their companies in contracts, propping up or bankrupting nations, then having variety does not fix anything; having competition does no good.

What would be the incentive for say India to ditch the USD and build reserves of yuan? Remember USD did not become global currency because of some treaty

Now where does yuan fit in?

Other than very poor countries who have nothing to loose nor gain would willingly hold yuan reserves. But why will India hold yuan reserves? It gives us no advantage neither do we derive any benefits. We can't buy oil with yuan. We can't buy uranium from Australia with yuan. We can't give yuan to France for Rafale.

+1

Here is my take on this AIIB business. Chinese are sitting on approximately $4 trillion (and counting) of foreign reserves (including all low yielding foreign govt bonds). Every dollar or euro they receive from selling manufactured goods ends up going back to US or EU, in purchasing their govt bonds. China, and other countries accumulating forex, have very limited options in terms what they can do with that forex. Chinese can't simply start buying land, mines, or companies in west, just because they are accumulating piles of forex. On the other hand, the same capital is welcome beyond bonds for investment in Asia, and it is welcomed by Asian countries with more respect than west. So, what do you do? Set up a lending institution to start doing the same thing in Asia, what IMF/WB did for the benefit of their creator for the last 50 years, i.e. use excesses (i.e. capital) in dictating the course in other countries, including acquiring claims on foreign assets, promoting home companies etc. Having more and more countries part of the coalition gives AIIB some legitimacy in terms of moving forward the agenda. AIIB may try to internationalize Yuan at some point but for the time being they will be circulating their forex excess capital before it is worth(less).

[Neshant]

China is throwing a monkeys wrench into the western plan to use induced exchange rate or balance of payments crisis in the developing world to forward IMF type economic subjugation agendas. By offering its lending facilities, it can effectively buffer any shock an economic attack will inflict on East Asia and elsewhere.

[panduranghari]

AIIB may try to internationalize Yuan at some point but for the time being they will be circulating their forex excess capital before it is worth(less).

I wonder what may be the reason for the speed with which they are working on NDB and AIIB? Something has changed. What?

[panduranghari]

In short, WB and IMF are nothing but tools for furthering western imperialism/agenda. AIIB is going to challenge that and that is a good thing.

I was thinking about this statement.

Competing companies produce end product which is cheaper for the consumers.
That's where the similarities end.

Competing countries produce wars.
Competing central banks produce inflation by debasing the currency so that they can fund infrastructure projects which can never be repaired once the initial phase of usage is completed. I do not know how can you think AIIB is going to be any better.

Asian Development bank is Japanese initiative to encourage yen usage. WB is an American initiative to encourage dollar usage. AIIB is an Chinese initiative to encourage yuan usage.

Other than it being a competition to USA and Japan, AIIB looks like a massive ego trip for the Chinese.

[chanakyaa]

That's right!! These esteemed global banking institutions don't have same kind hearted interest as your mom and dad; plus they tend to live longer nagging you forever

[Rahul M]

too much polemics and too little fact based discussion in this thread.

http://www.thehindu.com/opinion/op-ed/d ... 074432.ece

With even U.S. allies scrambling to get on board the AIIB, China looks set to lead the global economy.

China appears to be on course to reset the existing global economic order dominated by the West. The setting up of the Asian Infrastructure Investment Bank (AIIB), a multilateral financial institution, is a significant step in this direction, challenging the long-held dominance of the Bretton Woods system.

Formed largely with Chinese capital and initiative, AIIB aims to fund infrastructure projects across Asia. Indications are that this new multilateral bank could rival the World Bank and other long-standing international institutions established by the U.S. and its allies.

AIIB will have a subscribed capital of $50 billion, which will eventually rise to $100 billion. In comparison, the subscribed capital of the World Bank and the Asian Development Bank (ADB) are $223 billion and $165 billion respectively.
Dramatic turnaround

AIIB was formally inaugurated in Beijing on October 21, 2014 with 21 founding-members including China, India, Pakistan, Singapore and Vietnam. Many other countries had initially declined the Chinese invitation to join the new bank, with U.S. allies such as Australia and South Korea allegedly under pressure from the U.S. to keep away from the initiative.

A dramatic turnaround for the bank occurred in recent weeks, as the deadline to apply to become a founding member of AIIB, April 1, 2015, came close. The U.S. was dismayed when the U.K. announced its decision to sign up on March 12, 2015, but in the days that followed, many other countries including France, Germany, Italy and South Korea joined as well. Latest reports indicate that AIIB has now received applications from 47 countries to become founder-members. These include Israel and Taiwan. China will remain the biggest shareholder in the bank, while the shares of non-Asian countries will be restricted to 25 per cent of the total.

The U.S. and Japan continue to remain firm about not joining AIIB. The U.S. Secretary of the Treasury expressed concern about whether the new bank would be able to meet the “highest global standards” of governance or lending. However, it is notable that even close American allies queued up to join the China-backed bank despite stiff U.S. opposition. This is a clear acknowledgement of China’s growing economic influence in the world.
China’s rise

China’s large foreign exchange reserves, which stood at $3,880 billion in 2013, provide it the financial muscle to be on the driver’s seat in the global economy today. From 2001 onwards, China’s exports, especially of manufactured goods, have been growing at a much faster pace than its imports. As a result, China’s current account surplus — mainly, the surplus of the value of exports over imports of goods and services — has climbed sharply upwards. Its foreign currency receipts have soared too, due both to the large export earnings and the net inflow of foreign capital into the country.

China has invested a major part of its vast foreign exchange assets in U.S. treasury bonds, despite the very low returns they offer. For China, these investments in U.S. debt form part of a strategy to prevent the appreciation of its currency, Renminbi. Because of this, Chinese manufactured goods remain competitive in the export markets. For the U.S., China’s investments in its treasury bonds have been crucial to bridging its “twin deficits”, of the federal government and the current account. China’s continued purchase of dollar assets has also been vital to maintaining the hegemony of the U.S. dollar in the global economy.

So here is one of the anomalies of our contemporary world. China is a provider of cheap credit to the U.S., although China’s per capita income is only a fraction of that of the U.S. Chinese workers not only provide cheap goods but also transfer a part of their hard-earned savings to the Americans, so that the latter can continue purchasing their goods. No wonder, according to Hung Ho-Fung, a scholar on global political economy, China has been ‘America’s Head Servant’ (New Left Review, November-December 2009).

Both China and the U.S. have been seeking ways to break away from their mutually dependent relationship, especially in the wake of the global financial crisis. China, on the one hand, is trying to shift from an export-led to a more domestic consumption-led strategy for future economic growth. On the other hand, China is also looking for ways to strategically deploy its large foreign exchange assets.

It is with the above objective that China has been pumping a part of its foreign exchange reserves into the building of new global institutions, including AIIB. Last year, China along with other BRICS countries, established the New Development Bank, with a subscribed capital of $50 billion, headquartered in Shanghai. China is drawing up plans for a $40 billion “new Silk Road’ project connecting Asia with Europe. Chinese currency is likely to be recognised as an official reserve currency by the International Monetary Fund (IMF) by the end of this year. This will be a step towards reducing the global dominance of the U.S. dollar.

The present international financial institutions were created under U.S. leadership at the end of World War II. The U.S., Europe and Japan continue to wield enormous influence in them despite the relative decline of their economies. For instance, the U.S. still has a veto power on major decisions made by the IMF and the World Bank. At the same time, these institutions have failed to give due recognition to the growing weight of China and other emerging economies.

China’s massive investment and diplomatic efforts in recent years have been directed at shaking up the global financial architecture that has the U.S. at its helm. No wonder, then, that the U.S. and even Japan view Chinese moves with anxiety.

India has done well to join AIIB and other Chinese initiatives. Given its huge infrastructure needs, India could be a major beneficiary of AIIB. At the same time, it would be premature for India to imagine it holds economic power similar to China’s. Unlike China, India’s manufacturing sector is weak, its export earnings poor, and its current account almost always in deficit. More of the foreign capital flows to India are short-term in nature and hence volatile. For all these reasons, India will be unable to leverage its foreign exchange reserves the way China is doing.

The Chinese have promised that theirs will be “peaceful rise” as a global power. But the world outside is still circumspect. Be that as it may, China’s offer to provide alternatives to a world economy long used to the dominance of the “Washington Institutions” is, in itself, good news.

(Jayan Jose Thomas is an Associate Professor of Economics at the Indian Institute of Technology, Delhi.)

[panduranghari]

too much polemics and too little fact based discussion in this thread.

What are facts? The fact is we are all in debt. some more some less. Modern economics is not based on facts. May be I should stop posting on this thread. Its good that way. What we all need is just a news aggregation thread. No body cares about analysing the news. My last.

[Rishirishi]

The chinease got some 4trn. Dollars in reserves. What if they put 2 trillion into the bank and lent it out. It would imideately change shift the power away from US.

China could even "save the Greek economy by purchasing an island or 2"

[chanakyaa]

For chinese it makes sense to maximize their holding of the reserves by claiming tangible assets in Asia, buy goodwill, and promote chinese enterprises; instead of sending excesses overseas to purchase bonds.

In the meantime some thoughts from World Bank President Jim Yong Kim:

(Bloomberg) -- World Bank President Jim Yong Kim doesn’t see China’s launch of a new development bank heralding the end of the global economic order forged by the U.S. as Harvard professor Lawrence Summers has warned.

Instead, it could cement the World Bank’s influence for years to come. In a wide-ranging interview at Bloomberg headquarters in New York on Wednesday, Kim laid out his vision for how the World Bank will coexist with development banks led by China and other developing powers.

Kim said the lender is willing to go beyond just co-financing projects with China’s planned Asian Infrastructure Investment Bank, or AIIB. His institution is open to managing the procurement process and enforcing safeguards for the AIIB’s initial projects. He’d also be willing to send World Bank officials to help the AIIB build up a development agency to the standards of existing institutions.

It’s an example of the kind of expertise-sharing role Kim sees for the World Bank, which was conceived during World War II to help rebuild Europe, as the AIIB and other development banks enter the market.

“The World Bank Group has 2,000 Ph.D’s (WTF) -- some say it’s the most of any institution,” Kim said. “Yet these folks, men and women from all over the world, have had real experience trying to make things work.”

Poverty Lending

China will likely have its own advice to give the World Bank, said Kevin Gallagher, a professor of global development policy at Boston University. Until recently, the World Bank ’’all but abandoned’’ financing infrastructure projects in favor of “micro-interventions,” he said.

The World Bank is “far from the frontier of new thinking and practice on infrastructure,” Gallagher said in an e-mail. The World Bank doesn’t plan to get out of the lending business anytime soon. Kim said that if loan demand from developing countries continues at its current pace, the Washington-based bank may need its 188 members to increase its capital within three years, though he wouldn’t specify by how much.

Still, Kim says it’s inevitable that policy makers will have to accept the emergence of the AIIB and other institutions, if only because of the estimated $1 trillion in additional funding per year that the World Bank says developing countries will need to meet their infrastructure needs.

Kim’s endorsement of the AIIB contrasts with the position taken by the Obama administration, which has refused to join the Chinese venture even as allies including the U.K., Germany, South Korea and Australia signed up.

‘Embrace Multilateralism’

“When President Xi Jinping announced the AIIB, I think most people knew it was going to happen,” Kim said in response to a question about the Obama administration’s opposition. “I’m a really firm believer in multilateralism. Generally speaking, I would always encourage countries to embrace multilateralism.”

Kim added that, “to see this as one country versus another is to miss the point that this is a huge, important, powerful country making its first major step into being a sponsor of
multilateralism.”

Treasury Secretary Jacob J. Lew said in a March 31 speech that the U.S. is ready to welcome new institutions such as the AIIB, provided that they “complement existing international financial institutions and that they share the international community’s strong commitment to genuine multilateral decision making and ever-improving lending standards and safeguards.”

Lost Role

In a commentary on his website this week, Summers said the past month “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”

“I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the U.S. to persuade dozens of its traditional allies, starting with Britain, to stay out of it,” wrote Summers, a former U.S. Treasury secretary and World Bank chief economist.

The World Bank and International Monetary Fund were conceived in 1944 at a summit in Bretton Woods, New Hampshire to stabilize exchange rates and fund the post-war reconstruction of Europe. The U.S. should undertake a “comprehensive review” of its approach to global economics in the wake of the incident, he said.

Kim said the influx of capital from new institutions should boost the World Bank’s goal of ending extreme poverty -- defined as living on less than $1.25 per day -- by 2030. The World Bank, whose largest shareholder is the U.S., has $223 billion in subscribed capital. China is the third biggest borrower from the World Bank’s main fund, with $1.6 billion in committed loans.

The Japan-led Asian Development Bank has $163 billion in subscribed capital. The AIIB is expected to start with $50 billion. China plans to establish the AIIB’s charter by the end of this year, which would open the door for it to start lending in 2016.

[vipins]

KV Kamath appointed as BRICS bank chief

[Neshant]

Greece will default on IMF loans (which are currently being funneled to European banks as Greek debt repayment).

The result is the default loss will be born by the rest of the world - which is exactly why European countries put a stooge as head of the IMF (Lagarde) and got India & China to put tens of billions more into the IMF earlier on.

100% scam of transferring bad European bank loans to India & China.

In hindsight, getting India to contribute an additional $10 billion and China an additional $40 billion to the IMF was a pre-planned trap.

[Neshant]

Now they trying to spin greater voting rights as the IMF as a win for India & China. But the reality is, India & China have been cheated of billions of dollars in this Greek bailout (or should I say European bank bailout).

____

IMF board postpones decision on reform for three months

https://ca.finance.yahoo.com/news/imf-b ... iness.html

WASHINGTON (Reuters) - The International Monetary Fund's board on Friday decided to postpone by three months its decision on how to raise emerging countries' voting rights at the institution, as it seeks to get past U.S. foot-dragging on reforms.

The IMF's member countries agreed in 2010 to give more voting power to countries like China and India, double the fund's resources and reduce the dominance of Western Europe on its 24-member board.

[chanakyaa]

Out of the Bretton Woods

When China proposed the Asian Infrastructure Investment Bank (AIIB) in late 2013, it hoped to offer a regional alternative to the multilateral institutions of the Bretton Woods system that left Asia underrepresented. When 58 member nations bucked Washington’s warnings and joined the bank this year, including allies of the United States and G–7 stalwarts such as France, Germany, South Korea, and the United Kingdom, China realized that it had a potential vanguard for an alternative economic world order.

The creation of the AIIB means that the International Monetary Fund (IMF) and the World Bank—the two dominant players in development lending and international financial regulation—now have an Asian counterpart. Although all three banks seek to ensure global financial stability and foster economic growth in the developing world, they also actively promote the national interests and political worldviews of their most powerful members.

The similarities between the AIIB, the IMF, and the World Bank are apparent. But there are a few key differences. Western aid and development efforts are geared toward spreading liberal democracy and their own institutional frameworks. China, on the other hand, has stuck to its policy of distancing itself from the domestic affairs of other nations. In fact, the AIIB’s Articles of Agreement have remarkably similar (and broad) operating guidelines to banks within the Bretton Woods framework, but bar members from influencing political affairs.

Has the world reached a point at which political persuasion by dominant countries no longer has a place in development lending? If the AIIB provides any indication, major economies and less developed countries are open to the idea. In this new era, the Bretton Woods system cannot continue its promulgation of liberal democracy, free markets, and Western governance institutions if it wants to effectively head the economic world order. And, for that matter the United States’ leadership of the global economy would have to stop being partial to Western neoliberal orthodoxy.

FRUSTRATION WITH BRETTON WOODS

The AIIB was born out of two main grievances about the World Bank and the IMF shared by China and less developed nations. First, as the economies of these countries grew in the last 30 years, their voting powers within both organizations remained flat—which led to disproportionately low influence in both policy initiatives and lending programs.

In the World Bank and the IMF, the number of votes assigned to member countries is determined by a combination of their contributed capital and the size and stability of their economies. Currently, China’s vote share is lower than that of the United Kingdom, despite its larger economy. India is just shy of the list of top ten voting blocs, while Italy is smack in the middle. By 2013, emerging market economies accounted for more than half of the global GDP on the basis of purchasing power. However, voting power at the IMF and World Bank between advanced and developing economies is still split at around 60–40, and Washington’s voting bloc has remained constant at around 17 percent, even though 73 percent of developing countries have grown faster than the U.S. since the 1990s, to the tune of 3.3 percent a year.

The second grievance has to do with the conditionality of IMF and World Bank loans. Good institutions and economic policies, the thinking went, would lead to a greater likelihood that loans would be repaid and decrease the chances that a bailout would be needed in the future. And so loans were given only to those who promised to slash national budgets to avoid running deficits (with welfare programs usually the first to go), lower tariffs, and increase the openness of financial markets. Within the World Bank, the set of informal criteria known as the Millennium Development Goals evaluate how well a country has put its funds to use: humanitarian measures, such as infant mortality and the prevalence of epidemics, are benchmarked alongside assessments of a nation’s democratic practices and government transparency.

During the Asian financial crisis of 1997, criticism of conditionality reached a head. When the Thai bhat collapsed in the summer of that year, many blamed the IMF for forcing the country to open up its financial markets before there was a proper regulatory infrastructure in place. During the crisis, the Thai economy became vulnerable to speculation, and it paid the price when investors lost their bets. That same program of openness was applied through IMF lending in much of Asia, including programs in Indonesia and South Korea that subjected those countries to financial contagion. The IMF’s solution to the crisis was to implement austerity measures in the countries most heavily affected. As a condition of IMF bailouts, Indonesia and Thailand both had to slash their fiscal budgets, doing away with critical social services in the process, so that the interest on the loans could be repaid. Unemployment skyrocketed as a result, and Indonesians then took to the streets to protest the loss of jobs, stagnation in real wages (due to inflation), and the abolition of the nation’s fuel subsidy. In addition, the IMF recommended to South Korea that it immediately focus its central bank on independence and controlling inflation, a policy that would have done very little to further the recovery and would have instead encouraged the bank to remain unresponsive to politically popular measures, even if they were beneficial. South Korea decided to ignore the advice. For its part, Indonesia closed 16 private banks, leaving depositors without cover and driving them from the financial system altogether.

Latin America was perhaps the hardest-hit economic region outside of Asia in 1997. The IMF instituted the same policies there, and the reaction from local populations was even more pronounced. Without a safety net in the face of skyrocketing unemployment, urban violence and the rise of shadow economies spread throughout Argentina, Brazil, and Mexico, among other countries. As a result, many economies in Latin America have turned to alternative sources of funding that come without neoliberal policy conditions, and they have allowed their IMF agreements to expire.

IMF conditionality has not resulted in better economic policies over the long term. Checking in a few years after these crises, IMF rescue policies yielded disappointing results. In the early 2000s, the affected East Asian countries had incomes that were 30 percent lower than what would have been expected if the economy continued to grow at pre-crisis rates. For example, Indonesia had 5.3 percent less output in 2001 than it did in 1997. Thailand, which seemed to fare better under the IMF emergency measures than its neighbors, still had not returned to its pre-1997 level of growth. After Latin American countries began their IMF-guided transition to free markets following the hyperinflation of the 1980s, annual growth fell from 2.8 percent to 0.3 percent.

Other regions of the world that saw much IMF activity during the same period suffered similarly. Sub-Saharan Africa’s growth dropped to -0.8 percent per annum, in stark contrast to the 1.6 percent year on year growth in the twenty years prior. Postcommunist Eastern Europe only had five countries produce growth at 80 percent or more of their pre-1989 levels.

IMF conditionality has not resulted in better economic policies over the long term, either. In fact, these policies generally worsen structural adjustment programs, negating their effectiveness as a true impetus for reform. Perhaps even more troubling is the lenience that the IMF and World Bank demonstrate toward democratic countries in enforcing the conditions of economic reform programs, allowing leaders to pause reforms ahead of elections to endear themselves to the public. According to a 2007 study by German economist Axel Dreher and George Washington University professor Nathan Jensen, U.S. allies also enjoy a lower number of conditions than other countries receiving loans.

ATTEMPTS AT REFORM

To the credit of the World Bank and the IMF, these organizations have recognized that their inability to understand local conditions is a problem. In response, the two organizations have attempted two major reforms. First, they have tried to increase the voting power of developing countries. Second, they have reworked structural adjustment programs to grant more ownership of a project to the local leaders and increase the voting power. Critics have rejected these new guidelines, however, claiming that they hew too closely to the framework of prior conditions. Greece is the latest example of austerity’s grip on the IMF, reversed only when the world realized the nation had been fast-tracked to bankruptcy. In acknowledging that its emergency loan package was likely not repayable, the IMF cited Greece’s outstanding debts, its inability to collect taxes, and the nation’s shadow economy.

Assuming that neoliberal and free-market programs will remain at the heart of IMF and World Bank practices for now, there are other ways to bring these organizations in line with the realities of the global economy and the needs of the developing world. The reform package proposed in 2008 and agreed to in 2011 would bring the voting shares at the World Bank and IMF closer to current economic realities, increasing the voting power of smaller countries. Six percent of current shares would shift from developed countries (mostly Europe and the oil-producing nations of the Middle East) to emerging markets. Afterward, 102 out of the 187 member nations of the IMF (most of which are developing countries) would see their shares rise. None of the poorest nations would need to give up any voting shares, and Brazil, China, India, and Russia would enter the top ten stakeholders of the banking organizations. None of these reforms, however, can be implemented without ratification from the United States, the largest IMF stakeholder. Congress so far has refused to approve the reform package, and those nations not provided a proper seat at the bargaining table have taken their fiscal futures into their own hands.

This is where the AIIB comes in. It has taken a crack at fixing inequity. First, the bank’s regional nature ensures that Asian nations will be the predominant voice of the organization. The bank’s charter also mandates that 70 percent of its capital must come from within Asia, ensuring that China will remain the largest stakeholder. Beijing will therefore retain veto power over all major decisions, which require 75 percent approval in order to pass. China’s influence will be checked, however, by the equal percentage of voting rights given to founding members. Other sources of voting shares include the amount of paid-in capital. If China pays in 30 percent of the bank’s capital, as it is slated to, it will still only receive 26 percent of the organization’s voting shares. This contrasts with the policies of the IMF and the World Bank, as these organizations aligned ownership shares with original paid-in capital at the expense of other relevant metrics.

In a sense, then, the AIIB is set up as an experiment for China’s version of multipolarity: Beijing remains firmly in control of the organization, but does not mind giving a greater voice to its neighbors—as long as it still profits. The West is welcome to participate in the affairs of Asia, but on Asia’s terms. Last, and most important, the bank has vowed that politics should not enter into the discussion about whether and under what circumstances a development project is worth pursuing. China jealously guards its own internal affairs, and prides itself on having grown the fastest out of all developing nations in the post–World War II era. Beijing credits this to its steadfast rejection of neoliberal free-market orthodoxy. It firmly believes that its path may be a guide (though not a model) for other emerging countries that have not achieved the same levels of growth.

It is fair to ask how the AIIB will judge whether a loan should be provided if it does not take these considerations into account, even if it plans to be more equitable than its Bretton Woods counterparts. The answer is uncannily simple: the AIIB is returning to bank fundamentals of judging a borrower based on pure economic considerations.

As a nation flush with foreign reserves that is experiencing diminishing returns on its manufacturing-centered economy, China is hungry for profitable overseas investments. Its own state-owned development bank already lends more than the World Bank does. In the last four years, China’s foreign direct investment (FDI) has increased at a compound annual growth rate of 16 percent—twice the global average. According to a study by Ernst and Young, Chinese investment can be found in 6,128 overseas companies across 156 countries and regions last year.

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