China as other pole?

The structure of the world economy has undergone substantial changes over last couple of decades mainly due to rise of a few emerging countries like China and India.

The US, Europe and Japan together had a share of 65 per cent in world GDP in 1990 which declined to 44 per cent in 2012 whereas China’s share has increased from meagre 3 per cent to almost 15 per cent of the world GDP during the same period.

Some of the other emerging economic powers are India, Russia, Brazil and South Africa.

Not surprisingly, the BRICS has become a formidable economic group which has the potential to restructure world financial and developmental architecture.

Today, the BRICS GDP with $16 trillion accounts for almost 30 per cent the world GDP in PPP terms and has a share of 20 per cent in the world trade.

Initiatives like the BRICS summit and the bank, the New Developmental Bank (NDB) as an outcome, is significant which may potentially restructure the balance of power in the world economy.

China is leading the pack and the recent announcement Asian Infrastructure Investment Bank (AIIB) led by China is another step in this direction.

The $100 billion NDB, the formal financial institution of BRICS to finance infrastructure and sustainable development projects, will have additional $100 billion contingent reserve fund for emergency financing in case of crisis.

China contributes $41 billion to the contingency fund of BRICS, apart from its equal contribution to the initial $50 billion funding.

The AIIB of China and 20 other Asian countries, being set up to help build regional infrastructure, particularly trade related infrastructure, is a welcome step and perfectly complements the NDB by BRICS countries.

China-led AIIB with an initial$ 50 billion fund, may be seen as a rival to the Asian Development Bank (ADB) and other multilateral financial institutions but, in reality, it is complementary.

This is the Asian century - and Asia will remain the world’s growth engine. However, sustaining high productivity growth needs huge infrastructure investment across Asian countries.

Infrastructure connectivity—particularly trade infrastructure, which the AIIB intends to finance—will reduce trade and transaction cost, and thereby improve trade competitiveness and trade.

An ADB study estimates that Asia-Pacific countries require an annual investment of $1 trillion from now to 2020 just to maintain the current growth rate, but the ADB – led by Japan and the US – lacks the required capital.

Most Asian countries are constrained by lack of government resources and are relying increasingly on the private sector and multilateral organisations.

Towards this end, the AIIB is not only another source of funding; it may encourage and facilitate the private sector to participate in regional infrastructure projects.

Historical limitations

The NDB and AIIB have come to existence due to some historical limitations of the Bretton Wood institutions such as the lack of governance reforms at the World Bank and IMF, and their inability to fulfil the developmental needs of developing and lower income countries.

Emerging economies like China, India and other developing countries have been demanding greater representation in the governance of international financial institutions, and rightly so.

However, due to US resistance, the IMF quota and World Bank voting systems have so far failed to address the demand.

For instance, the 2010 quota reforms proposed by IMF member countries are yet to win US approval, which holds 16.75 per cent of votes, without which the 85 per cent approval required for important decisions is not possible.

The voting rights—based on relative weights of member countries more than half a century ago—does not reflect the present strength and weights of the emerging economies such as BRICS.

China, being the second largest economy in the world, is assertive in showing its power by leading these initiatives like NDB and AIIB.

The NDB and AIIB are expected to serve two major purposes:

(1) they make up a fresh source of funding for developing BRICS and other future member countries without solely depending on Bretton Woods institutions, which generally put rigid conditions for market reforms; and

(2) they can work as a counterbalance and contribute to the emerging multipolar world and undermine the dominance of institutions like the IMF and World Bank, led by developed Western countries.

Though the NDB and AIIB are at the nascent stage and have limited resources, the rise China in the process for creating a new balance of power in multi-polar world is quite clear.

Though NDB avoids conflicts of power on paper by giving equal voting rights, its quite possible that the economic power of a country, say China, might influence the decision of four other members.

Many were sceptical that the there could be friction between China and India but to avoid this kind of a situation, the head quarter of the bank is in Shanghai whereas the presidency of the bank has been given to India in the first term ensuring the principle of equality.

Both NDB and AIIB aim to support infrastructure development and sustainable developmental projects, which in itself justifies the constitution of these institutions.

The financial need for infrastructure development as well as liquidity in the times of crisis is huge, but the institutions led by US and European countries lack the required capital and will.

Therefore, emerging countries try to complement their own programmes and development agenda with new financial institutions.

In this regard, China is certainly leading from the front. However, appropriate steps should be ensured for proper representation and international best practices for lending are followed.

(The writer is Associate professor, Institute of Economic Growth, Delhi University)