Tuesday 4 August 2015

Not just mirroring development banks

While Western values may seem to have been spreading their tentacles everywhere over the last century, the Asian values syndrome that roped in the idea of cultural determinism came up in the 1990s as a retort to the West from the leaders of Malaysia and Singapore, and the idea found widespread acceptance in China and other Asian countries. It almost illustrates Newton’s Third Law of Motion – every action has an equal and opposite reaction.
The coinage of the phases was praised by many and denounced by some. Some called it the perfect answer to Western values, others said it may also be an attempt to unify the region that was home to varying value systems under different religions. The idea this theory pushed for is that from human rights and tolerance to land laws and development, the definition and applicability of these terms changes with the lens you use to look at them under. While in the West, human rights were/are made to appear paramount, under the Asian values lens their understanding was said to be different to counter allegations about human rights violations, working conditions and tolerance. The debate around these variations in perspectives and universality of values has been highly informing over the years.


Founding members of the AIIB. Two institutions that directly take on the World Bank and IMF are taking final shape this year. This may change world politics profoundly. Competition in development funding and economics was long due too. Photo courtesy: AIIB 

But what’s new?
All this has been said about a million times before, if not more. What’s new? Well, most significantly it’s the setting-up of the New Development Bank (NDB) or the BRICS bank and the Asian Infrastructure Investment Bank (AIIB). While these are perhaps the first institutional challenges to the Bretton Woods system that ushered in the age of the World Bank and the International Monetary Fund (IMF), what’ll be interesting is to see how they will function. While both banks appear to have multilateral approaches, they are being led by China. The NDB is headquartered in Shanghai and AIIB in Beijing. Will the New Development Bank really embrace a Global South-enriched approach that’s true to its founding team then or will the framework and working borrow heavily from the IMF? Will it be true to it’s name – will it work in a new way? Will AIIB spread an Asian value system then, like the IMF and the World Bank pushed for liberal democracies (or Western values) through institutional or structural changes?


Examining the agreements of the banks

BRICS Bank or the New Development Bank
Article 21 of the agreement that was signed on July 15, 2014, in Fortaleza, Brazil, underlines the operational principles of the bank. There’s a marked shift in the way it talks about the power of the bank and there's an absence of any language that would push the member states to make structural changes. This is what the article says:

Article 21 (ii): The Bank shall not finance any undertaking in the territory of a member if that member objects to such financing.

Article 21 (iii):  In preparing any country program or strategy and financing a project… the Bank will not deem to have intended to make any judgment as to the legal or other status of any territory or area.

Article 21 (v) The Bank shall place no restriction upon the procurement of goods and services from any country member from the proceeds of any loan, investment or other financing undertaken in the ordinary or special operations of the Banks.


Asian Infrastructure Investment Bank
Article 13 of the AIIB agreement that was singed in Singapore on June 29, 2015, is what deals with the operational principles of the organisation. Representatives from over 50 states – from the UK and Italy to Australia and New Zealand – along with other states from the developing world signed it.

Article 13(3) of the AIIB agreement uses the exact same words of article 21(ii) of the NDB agreement. It says, “The Bank shall not finance any undertaking in the territory of a member if that member objects to such financing.”

Article 13(8) also echoes Article 21(v) of the NDB agreement. “The Bank shall place no restriction upon the procurement of goods and services from any country from the proceeds of any financing undertaken in the ordinary or special operations of the Bank.”

Another significant change in the aim and vocabulary of the agreement is the recognition of the importance of regional cooperation to sustain growth, that is mentioned under Article 1(1) of the agreement.


What did the IMF say then?
The IMF agreement was adopted at the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, in the US, on July 22, 1944. It’s been amended a few times since. As per section 1 of Article IV of the agreement of the IMF, member countries are obligated to: 

(i) endeavour to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment


While the wording of the agreement suggests it is an advisory, what it effectively does is to force nations to alter their monetary and fiscal policies and annual budgets so as not to promote high debt – a relative figure decided by the IMF. This essentially leads to budget cuts and structural changes in terms of a reallocation of resources and a social services overhaul among others, in order to maintain coherence with the liberal democratic or neoliberal model promoted by founders of the IMF and the World Bank.


Obligation: 75 vs 23+ 27
Another criterion, though abstract, is to judge these agreements on basis of the occurrences of the word 'obligation' in them. While the word is often used when talking about authorised and subscribed capital of the members states and the immunities of the employees of the bank, it was also used in the IMF agreement to set aside the general obligations of members in terms of policy changes needed for loans. What also needs to be kept in mind is that, while the IMF agreement was formed in 1940s, the other two mentioned agreements are products of evolving world politics in the 21st century. But then again, Google Ngram shows us that the popularity of the word has seen only a marginal decline over the last few decades. So, even with such reservations, it is still useful to count the number of times the word was used in the three agreements.



So, essentially, while the World Bank and the IMF funded a lot of development projects, helping economies grow, they also helped spread neoliberal values. The aim of this blog is not to criticise and evaluate the good and the bad these institutions did or do, but to point towards the change the AIIB and NDB appear to promise.
However, it is still imperative to note that, development banks, irrespective to their operational principles that may or may not demand structural changes from the countries accepting loans, still do tend to influence the political worldview of the recipient state. While the world has been edging towards a time when internal mechanisms of developing countries may be beyond intrusion for major world powers and developments banks led by them – something that the NDB and the AIIB agreements illustrate – the evaluation of how these changes affect the transfer of political knowledge across borders can only be undertaken over the next few years. The growing influence of transnational companies is another matter though. 
A core principle of Chinese foreign policy is non-intervention in another state’s internal affairs, and with the Asian giant leading two development banks that are the first to legitimately counter the established Bretton Woods institutions, these institutions hold the power to change the broader narrative around developmental funding and South-South and regional co-operation, in a constructive way.

KV Kamath (L), president of the New Development Bank, with other officials at the official launch of the bank in Shanghai on July 21, 2015. Photo courtesy: NDB BRICS 

The Dollar-dollar bills
Another aspect these agreements highlight is the acceptability for the US dollar across regions, irrespective of the US not being a member of any of the two newly formed institutions. It had in fact opposed the establishment of AIIB. Even though Article 19 of the AIIB agreement says that there must be no restriction on currencies being used, for all matters, the primary currency being used is the US dollar. While choosing another currency would have clearly caused problems across the numerous countries that have become founding members of the AIIB and NDB, the fact that there was no negotiation also to push for an alternative highlights the long-term vision of the founding members and the ability to prioritise development and co-operation over immediate currency wars.

The establishment of these development banks may literally be a watershed moment in world politics, especially if they are able to promote South-South and regional co-operation while aiding development across developing nations and emerging markets. It is clearly more than just mirroring the established development banks in an Asian or South-South setting.

It could also the precedent global institutions have been looking for to break away from West-dominated structures and working methods, for good or for worse. Think about the commotion around the International Criminal Court and it’s denunciation by many African states. Some may see this as the beginning of chaos and disorder with movement away from established rules, while others, like this blogger, view this as adding to the multi-polar understanding of the world that needs a new constructive rule book to play a new game, that’s not zero-sum. How do you see it? Could this be that special moment in International Relations evolution that the world may have needed?