By Kunda Dixit*
TOKYO, Oct 12 – If anyone still needs proof that the epicenter of the world economy has shifted away from the Atlantic to the Pacific, the Annual Meetings of the World Bank and the International Monetary Fund (IMF) in Tokyo this week provided ample evidence.
Both Bretton Woods institutions have been part of a post-World War II trans-Atlantic project. The IMF was created to hold up the gold standard, tie it to a global exchange rate system linked to the US dollar, and to step in with “advice” and short-term loans whenever a macro-economic crisis hit.
The World Bank (which includes the International Bank for Reconstruction and Development and the International Development Agency) was originally supposed to lend to countries for post-war reconstruction, and later turned to lift countries out of poverty and to invest in infrastructure.
But as the role of the United States as a global military and economic power wanes, as Europe slides, and as the Pacific Rim countries become the engine of growth and sit on piles of cash, there is pressure on the IMF and the World Bank to change with the times.
In the past, the IMF has stepped in to rescue developing countries in the throes of economic crisis, as in 1974 to bail out Mexico from an oil price shock and Asian economies hit by crisis 15 years ago. But the IMF often became the bad guy as its rescue packages came with onerous conditionalities and mandatory austerity measures.
Today, instead of being entirely a short-term lender of last resort to emerging and developing economies, the IMF is now riding in as the knight in shining armour to save Europe. In the past year, the proportion of IMF lending to Europe has gone from zero to 56 percent.
The IMF is now being criticised not for its conditionalities, but for not giving enough priority to developing countries. The IMF’s Christine Lagarde’s speech at the conference in Tokyo on Thursday, in which she urged Europeans not to be too harsh on their ailing neighbours, drew a sharp rebuke from none other than the Germans.
There is also bitterness among Asian, African and Latin American countries that remember the strict austerity conditions imposed on them when they sought IMF bailouts in the past, and the kids-gloves treatment that Europe is getting in contrast. China, which is now the third largest contributor of cash to the IMF, is particularly unhappy that poor countries are being asked to help rich countries.
In a speech to the plenary session of the IMF-WB Annual Meetings Friday, Lagarde said that the globalised economy was so interconnected that the Euro slowdown was affecting Asian growth, too, so that rescuing Europe was important for Asian growth as well.
Despite this, there is a strong feeling among Asian delegates to the Fund and Bank meetings in Tokyo this week that the governance of the World Bank and the IMF, which has been monopolised by the US and France respectively for the past six decades, should be replaced by a fairer system that reflects new global economic realities.
Such sentiments are no longer restricted to rhetoric. The BRICS countries (Brazil, Russia, India, China and South Africa) agreed in New Delhi in March to set up their own parallel world bank to use their reserves to help poorer countries in their periphery. The BRICS Bank may still take time to take off, but the point has been made.
Much more dramatic has been the rise of new Chinese state-controlled lenders like the China Development Bank (CDB) and the Export-Import Bank of China. The CDB’s portfolio is now crossing 900 billion U.S. dollars, more than double that of the World Bank itself. China Ex-Im Bank has been entering even into private deals and recently lent 10 billion dollars to the Brazilian state oil company.
For many in developing parts of Africa, Latin America and Asia, this “Great Wall of Cash” is already an alternative to the World Bank and IMF.
Besides, the World Bank is already also competing with the regional focus and the starkly different priorities of regional multilateral lenders like the Asian Development Bank, the African Development Bank and the Inter-American Development Bank.
And the fun part for borrowing countries is that these loans do not come with any strict conditionalities. There are no cumbersome anti-corruption guidelines, there are no sensitive questions about governance and transparency, and the disbursement for infrastructure projects is quick.
To be sure, the recent flare-up in territorial tensions between Japan and China on the one hand and with Korea on the other has led to questions about whether the Asia-Pacific powers can work together. China’s retaliation by its high-profile targeting of Japanese products has seriously hit bilateral trade, and may affect Japan’s macro-economic recovery. China itself has pulled back on some of its aggressive forays into lending as the global slowdown hits home.
Still, the long-term question for the World Bank and the IMF will be how to respond to the shift in the epicenter of global growth from the Atlantic to the Pacific. There was glimmer of recognition of this shift in Tokyo this week, but their preoccupation with Europe showed that old habits die hard.
Will the Bank and the Fund come to terms the tectonic shift, adjust priorities and change standard operating procedures accordingly, or will they keep on looking at the world through their traditional trans-Atlantic perspective?
*Dateline Earth is a column written by Kunda Dixit, editor and publisher of ‘The Nepali Times’ during this TerraViva edition.