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Some A(-musings) on BRICS and its Bank



The weekly digest on this Monday is postponed by at least three days, for this would be a recap of the event held on 14th September 2016 at the Constitution Club of India, where PFPAC launched its publication titled "Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability" followed by a Panel Discussion. The delay is on account of gathering media reports and importantly editing the video, the link to which would be provided on the digest. Requesting you to follow the blog and facebook.  

In the meanwhile, since the BRICS Summit is round the corner, and Goa is hosting it, we have decided to bring the NDB on radar with the concomitant hullabulla. On the first rung, I am reproducing an article that was written as an editorial for Vasudha Foundation (here is the pdf under publications) at a time when I was in between jobs a little less than an year ago. So, tenses are bound to be anachronistic, for a lot of water has flown under the bridge you name, but my cynicism for BRICS as a conglomerate retains its momentum, unless broken into this inertial frame by a tide that is turning. Post the article, which is coloured, follows some reflections that were exchanged, though refusing to expunge my scepticism about the bloc. Anachronism surfaces here as well, without actually paying attention to the virACtuality of linked n/w. Until next time, until any order is restored, this is perfect chaos. 

Editorial 

The BRICS bloc, a conglomerate of five of the biggest emerging economies is home to 43% of the world’s population with a share of 22% of the global GDP. These staggering statistics make Brazil, Russia, India, China and South Africa truly a force to reckon with. The bloc’s initiative to erect a development finance institution in the form of New Development Bank (NDB), is often attributed in the West as a reaction to the institutional sclerosis of Washington-DC-dominated World Bank and the International Monetary Fund (IMF), whereas it is a catalyst complementing rather than challenging the Bretton Woods institutions or the Asian Development Bank in fighting poverty in the emerging economies. Whatever be the attributions, the logic of fighting global poverty is itself steeped in controversies ranging from applying mathematical and statistical juggleries to determine the number of poor according to standards that are a far cut from realities on ground, to economic measures built upon the plinth of models that on many occasions forgo the human capital in a relentless pursuit of development agenda, which is meaningless if only persevered in concentrating on the extreme poverty and purblind to the gap yielding inequalities.

The world is watching with keenness on the mushrooming of New Development Bank, which was officially launched in Shanghai this July. What would be the underlying rationale of this model? How and where would the finances flow? If the investments were complemented to fill a vast infrastructural gap, how would the safeguards be architected to prevent socio-economic and environmental violations on ecologies? What of the democratic set-up that underlies the formation of this bloc and subsequently of NDB getting hijacked by the political and economic clout and prowess of China? These have been some of the pressing and contentious questions that could either derail the rationale behind this initiative or leave no stone unturned in replicating the western-dominated financial institutions that find themselves increasingly in the eye of the storm for fostering irreversible violations and damages. Aside from that, China’s growing eminence in G20 is a step to rival G8’s macroeconomy, international trade and energy capitalisation lending it legitimacy for a foreign policy geared towards a north-south dialogue in addition to the south-south dialogue efficacious through BRICS and G20. Moreover, China views G20 as an economic platform with other emerging countries on board for a resolve on international affairs. G20 along with BRICS Bank is a contrivance for a financial architecture that focuses on development issues on the one hand, and internationalising its currency on the other. Clearly, it is not a case of what Deng Xiaoping called for “China keeping a low profile”. So, is it merely a speculative materialism that is the engine behind China’s true intentions?

The Asian Development Bank has calculated an infrastructural gap worth $8 trillion in the Asia Pacific needing to be filled by 2020. This is where NDB would cash-in most, and likely create a polarity between infrastructural funding and other developmental concerns. But, what is infrastructure is as hazy as the fuzzy logic of the calculated gap. It is a prerogative to continuously industrialise the BRICS, of building and upgrading ports, gateways, intelligent transportation and communication, power generational and distributional capabilities to augment developmental agenda, which incidentally sets parameters for economic prosperity, the fruits of which permeate to the hitherto-considered peripheries in a fight against poverty. However, the Articles, according to NDB President KV Kamath have a purpose sketched out for the Institution, “To mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies, complementing the existing efforts of multilateral and regional development banks.” This is imperative of sustainability, pragmatism, innovation and speed of execution, of which the last could accelerate in a more experimental manner. The speed could pierce through bureaucratic red tapes, blunt operating procedures, and intensify delivery of massive infrastructural projects. Dang Xiaoping, in a rather philosophically pensive manner referred to reform as a process of feeling stones while crossing the river. Although, this should be the dictum NDB needs to seriously gravitate to, dangers of transgressions are lurking heavily.

The BRICS economies are undergoing economic upheavals, and China, the second largest economic power in the world with a nominal GDP more than the rest of bloc’s combined GDP is seeing NDB along with the Asian Infrastructure Investment Bank (AIIB) and Shanghai Cooperation Organisation (SCO) as cardinal tools of its foreign policy initiatives. All of the three have a vision to revive China’s economic might through One Belt One Road (OBOR) and Silk Route through regional collaboration on the one hand and transcending state boundaries for facilitating trade links on the other. How would this augur for India is as important a question as how would the Government in India prioritise its policies for the NDB to plug in? The Government has sockets in place to provide the necessary plug ins, be they in the form of new tax allocations providing more funding for the states in order to empower growth, set budgetary allocations in order to expedite transport, communication and power capacities, proposal to create National Investment in Infrastructure Fund with a base capital of $3.25 billion, to planning and implementing regulatory reforms keeping a steady eye on growing influx of private capital and associated technologies to finally expunge bottlenecks to growth-led development model as a result. This is crucial, not just for India but for the entire bloc as a whole, since NDB’s priorities will be in line with the national development banks of member countries in effectuating the removal institutional roadblocks to growth. With a stated lending of up to $34 billion every year to begin with for filling up the huge infrastructural gap, NDB will act as an additional source of funding for India where the estimated gap in infrastructure is up north of $500 billion till 2020.

For the vast number of Indians, reality is far from development modelled on growth as envisaged by the political machinery at the centre. Growth forecasts have been revised downwards fearing a significant deceleration in exports and a capital flight from the country, courtesy unfavourable investment climes and a pitiable ease of doing business standards. While the Index of Economic Freedom ranks the country at 128 on a scale that defines the economy as situated in a mostly “unfree” zone, socio-economic concerns like malnutrition, falling public health indices, extreme poverty and growing inequality continue to plague the country. NDB’s role will be put under an intense scanner in addressing such internal contradictions of a magnitude that cannot be resolved merely by an external makeover tied to a growth that belittles its own citizenry. Unless Human Development Index, which emphasises life expectancy, education and income and GINI Coefficient Index, which measures inequality representing income distribution to country’s citizens are brought to affect the rating agencies’ take on India’s investment climate, Government’s relentless pursuit of developmental ends would never reach the multitude of people caught between the scylla and charybdis of regimental vagaries.

With the upcoming India-Africa Summit to be hosted by New Delhi in October, (this is times past, and thus could be ignored here only with the intention of the piece written back in October last) there is a likelihood of trade relations between the two regions getting an uplift. Not only are India-Africa relations much softer compared to China’s scrambling for the African continent, it could also signal the way NDB gets projected by India in tune with its own foreign policy and diversify trade patterns seeking inroads into natural resources rich countries to augment a new investment destination for the increasing global profile of Indian corporate sector. As the Bank’s focus is concentrated on private investments, this gears in well with India’s investment in Africa in services and manufacturing sectors, roping in a vast population of non-resident Indians on the continent in a drive to foster economic regionalism on the one hand and throw around diplomatic weight on the other in a benign manner underlying India’s unique power equations. NDB could be a strong node bringing these realities to fruition, by promoting a reform in global economic governance with far-reaching significance and consequences. What remains to be seen is how much the NDB will abide by operation guidelines and procedures to see itself as not only different from other multilateral development institutions in terms of expediency, but also hold true to safeguards that protect vulnerabilities rather than exploiting and expropriating them. The latter is still a desiderata!!

Reflections

With all the fanfare surrounding AIIB, the initially thought of challenge to the WB/IMF and ADB, the New Development Bank (BRICS Bank) seems to be evaporating. In the International Global talks, NDB is hardly getting any air, and BRICS has also shrunk to BRIC (At least, that is how the discourse seems to be shaping up). 

Consider this: India has seen capital flows close to $900 million in the month of April alone. China is headlong smelling success with Silk Road and Maritime Belt + AIIB. Russia and Brazil are mineral rich exporters, which significantly depended on China's economic prowess, but are hitting dumps with Ukrainian crisis and its aftermath in the form of economic sanctions and crash landing, losing investor trust and sky-rocketing inflation respectively, while SA is merely a country in the southern part of Africa still wondering what it needs to do to win knock-out matches in Cricket tourneys and reviving rugby leagues!! Russia and Brazil have five years to revive, or more aptly put, survive.  Back to India concerns, foreign investors are required to pay MAT, the Minimum Alternative Tax, continuing the legacy of 80s. Though, originally designed to impact only Indian companies whose income tax returns were less than 18.5%, and who were then obligated to pay 20% MAT, the Government in 2012 decided to treat Indian firms on par with foreign firms. Some democracy somewhere and curating the level-playing field in the process. Not just that, MAT then was redesigned retroactively, for the foreign firms were to pay what they happily were sitting on over the last seven years. And the obvious begging the question was, why this additional tax, and for whose redemption? The great leader (sorry, I could never make it to North Korea) has signalled time and again that the economy is on an uptick, and then there are these constraining laws that benefit an easier flight out of country. So, something somewhere is wrong. 

How is all this related to BRICS? China is slowing, but not sleeping. With globe girdling roads and belts, China is not just the second largest economy, but is forecast to overtake US as the World's number 1. Eurozone is afflicted with Quantitative Easing, Abenomics is rewriting the basics of economic textbooks, and US, even with manipulative employment-surging data, and irreal dollar appreciation is still thinking through its FED to raise or go stagnant with its borrowing rates. In culmination, it is only the US and China as the remaining economic giants, even if the latter is unable to gain might militarily or technologically vis-a-vis the former. The World gets divided yet again, or rather branded yet again, and this time it is the G2. With all this fertility working in favour of our neighbour, AIIB mushroomed and acting like a basin of attraction for 56 different countries to become founder members, the Bank is a few days away from charting out its charter. 

At the recently concluded ADB Annual General Meeting in Baku, ADB Board welcomed the initiative of AIIB and called it to complement rather than compete for a $10 trillion (or something like that) gap in infrastructure in Asia alone over the next 5-10 years. Sorry, statistics was always based on theories of probability. It must be noted that AIIB had managed to draw allies of US and Japan as founding members, but not the two as they were indifferent to the idea of the newest kid on the bloc challenging them at the WB/IMF and ADB. But stands have softened as was evident in Baku, and even in Washington in April, where the need to complement AIIB was clearly spelled out in order to confront poverty. So, the trade off has happened to be rise AIIB, sleep BRICS Bank. Well, this doesn't really qualify for a slogan, or even a scribble from a failed poet, the reality is expressible in no other terms due to incapability on part of the author. 

Interestingly, a few days back, IMF recognised Yuan/Renminbi as fair valued, putting to rest Congressional attempts to always think of Chinese currency as devalued. This has a serious merit, in that the Chinese currency can now be used to replenish the IMF's SDR basket. Such progressions are nailing the NDB coffin and indicative of among other things or consequences considered, India playing the second fiddle. Second fiddle, or representing the world in a lightweight International arena is beseeching no imagination for India's economic future. This has started to feed into the BRICS Bank surviving on drips. How long will the life-support remain before the plug gets pulled is anybody's guess, or a miraculous escape. 

To address the valid point of why with 57 countries at the AIIB there are chances for better safeguards while with the NDB, 5 fixed countries with fixed commitments, there stands a better chance of safeguard violations. 

I look at AIIB as a nodal agency for bringing to effect the Chinese Road and Belt mentioned in the previous mail. Though, AIIB is not and would not rely primarily as that. With such a nodal agency, the dominance of China is likely to succumb as there would still be other 56 countries who are nominal contributors (though not all of them are nominal), and have sovereign rights that China will find increasingly challenging to circumvent. With such jurisdictions not easy to bypass, approval of projects and finances by these countries would shape or modulate China’s involvement. 57-countries share this Bank, even if it is China-backed. 

Other reason is AIIB standing up to TPP (though on different platforms: one being an infra bank, while is a trade partnership), which instrumentalizes mechanisms to bypass state sovereignty with ISDS (Investor State Disputes Settlement) and thereby granting an investor a right to using public dispute settlements against a foreign government. This invariably means AIIB to respect sovereignty, in turn to respect safeguards, in turn to have them good. 

On to Brazil, where at the moment political uncertainty over the fate of Dilma has settled and traded off with a right-wing government at the helm. Brazil was spiking interest rates until recently. The surprise at Brazil’s raising the interest rates: If the interest rates are low, there is more buying/borrowing capacity in the hands of the consumers. When this happens, naturally economy grows implying inflation. If this capacity increases, it would proportionately increase inflation further implying demand to overtake supply, and thus becoming mandatory to slow down money entering the economy, and hence a raise in rates becomes inevitable. But, why Brazil, and why the surprise? The rates hike there is forced through in order to check country’s rising deficit, which is caused by a slowing of demands for its commodities. The surprise element lies in ‘inflationary expectations’, and therefore no-need-for-the-time-being to tighten monetary policies. I totally agree on crude plunge differentiating the two BRICS countries and their manner of handling CAD. India is sound at the moment with its CAD, but the equations could change if the FED raises interest rates in the US thus furthering capital flight. But, let us be merely speculative for the moment. 3. Where do I see the currency propping up artificially. Well, nowhere really. Why did I mention it in the first post then? Again merely speculatively ‘what if?’. Real is not traded against a basket of currencies, and thus policy makers there would not get too adventurous in the face of market pressures to keep Real ‘Artificially Strong’. But, avenues for this makeover exist with the market report card and terms of trade showing signs of deterioration. Since, it is speculations galore here, let me get to another BRICS nation to drive the point home, China, which trades against a basket. While the "official" exchange rate may be different from the market rate a sovereign country can still be a market participant. A country that wants to hold down its fiat currency relative to another can always do so by simply offering to buy the other currency. As an example, let's say China wants the Yuan to be worth no more than $0.25. All they have to do is offer to buy dollars for 4 yuan each. They can print yuan so there's really no limit to their ability to do this. Now the market rate for yuan can never be above $0.25 because anyone who could buy dollars cheaper than 4 yuan would just flip them to the Chinese government for an instant profit. As China does this, it amasses huge reserves of dollars (since it has to keep buying them). They don't really know what to do with these dollars, so mostly they put them in treasury accounts that pay a tiny bit of interest. To prop the yuan up the Chinese government would need to sell dollars to buy back the yuan they've spent into the economy. Clearly, they could only do that so long before running out of dollars. It's possible that they could get someone to lend them dollars, but then they have a national debt in a currency they don't control anymore much like Greece. Trying to prop a currency up vs. the dollar is exactly what caused the crisis in Argentina in the early 2000s. And Brazil would not repeat Argentina, at least would not want to. Additionally, Currency is not exactly a free market. The way a sovereign country can control its own currency is by controlling the supply of their own currency or the rival currency. For example, yuan's real value is actually higher than market value because people are using more yuan for businesses and debts while the demand for US dollars drop or stay the same. Given that there is only a limited supply of yuan and dollars, the exchange rate should appreciate against the dollar. But the Chinese government can do two things, either print more yuan (but can increase inflation too quickly) to increase supply or buy dollars on the market to jack up dollar demand. This is what the Chinese government have been doing for a long time and why they have so much of their money locked into dollars. Currency manipulation is unfair and probably illegal because you are essentially artificially putting your country's manufacturers' at a distinct advantage because their goods are cheaper not because of better business practices or better process but because of cheap price differences. Another issue is also the fact the we are all using fiat currency which means our currency value is not tied to some tangible thing like gold. While some argue that this is inherently unstable currency, it allows a country to have some form of control of inflation and deflation.  On the other note, the reason why so many EU countries are facing financial problems is partly due to the fact they are using a strong currency EU, backed by strong economies such as Germany when they have actually very weak economies. This makes it very hard for them to turn around financial crisis because they cannot let the market determine the real value (or least allow some form of fiscal control) of their goods and services (which is not as strong as Euro) to make their economies more competitive relative to other economies. And, it is best that EU does not teach Brazil the steps of Samba. I won’t play into the dominant logic of capitalistic financial system here, for that’d take away the juice and blanket me with sorry-to-say, unnecessary socialistic/leftist dynamics. Just need to steer away from that driver/driving. To the point now: the basic pro-austerity argument is that budget deficits are inflationary, right, they are excess government spending over revenues, and that creates excess demand for goods and services that will drive up prices. And there's also the argument, of course, that the financial sector observes these budget deficits and in anticipation of inflation raises interest rates. So all together the argument is that budget deficits drive up prices, and austerity therefore will reduce these price pressures and reduce inflation. And, austerity involves lower domestic demand. However, if monetary policy can be loosened (e.g. lower interest rates or increased money supply) then the deflationary effects of spending cuts can be offset. Austerity is not as damaging if a country can devalue the exchange rate. This devaluation helps to restore competitiveness much quicker than relying on internal devaluation. The depreciation helps boost export demand. In summation, austerity is not as damaging if the rest of the world economy is doing well. If global growth is strong, export demand will be strong. However, if all countries are experiencing a recession, then deflationary fiscal policy will have a greater impact in reducing domestic demand. 

Why is BRICS becoming a ‘fragile five’? 

What really started off as a stimulus to counter the Eurozone crisis on the one hand, and ending the commodities super-cycle on the other only managed to exacerbate inflation streamlined by price controls for fuel and energy, ad-hoc tax breaks for industry, and increased credits from state-owned banks. However, the scene did not turn out as dark with importantly unemployment remaining flat. How else, could one describe the reelection of Rousseff? But, this wasn’t enough, for the looming threat of programmatic-oriented stimulus threatened the junking of investment grade credit rating. 

But, Petrobras, from where the intensity of concerns accelerated, if downgraded in its credit quality would cascade into risking Brazil’s banking industry and domestic capital markets. Speculatively, what is likely happen if Current Account Deficit in Brazil, and let us say for the time being even in India were to rise (We were pretty close to knocking on the doors at DC in the very recent past as it is)? With a better job record in the US, the Fed is right on the edge to raise interest rates mid-way through the year, and this might sound the knell for agglomerated vulnerability for the emerging market sell-offs. This in a way is why the Indian economy is driving home on the strengths of prescience with reforms to arrest another round of capital flight, and would hold equally true for Brazil and the ever increasing aggressive Russia. But, what could get the country out of this rut is a likelihood of embracing austerity, for thats a time-tested populist treatment. There is a Uruguayan saying: The populists love the poor so much that they multiply them. 

As China and India are bent on loosening the monetary policy, Brazil has shocked with raising its interest rates in an effort to arrest inflation. Who knows how are they convinced about this move propping up economic growth? Now, this hike, the third in a row is getting steep and shockingly comes in the wake of the country sliding into a deep recession. The consumer spending is falling, unemployment is rising, and thus the increase is what economists call a ‘drag’ on the already foundering economy. Well, to be truthful, there is probably no other avenue policy makers could see, as the particular economic treatment is geared at long-term stability with a trade-off of short-term to possibly continuing political instability as a resultant.  The route taken is via introductions of austerity programmes, which still need the approval of the hostile coalition at the centre there in what was once the “darling” of Wall Street. But, let us never forget that fiscal austerity plans successfully help tame inflation. Now, the economic plunge has cascaded to Brazil. The economy just imploded, and the first to be hit is in all likelihood the existing social security net. No surprises there, for the soft target is a prioristically hinged!!

The real question, however rests in the country keeping the currency “artificially strong” thereby wounding the economy further. Unlike, China, Brazil’s currency is not valued against a basket of currencies, but is pegged against the dollar. Keeping the currency "artificially strong" would amount to an expensive hitching a ride with the dollar, which seems to be gaining strength as the sole engine of world economic development at the moment. With a 1% contraction in GDP this year looming into reality, a inflation rate closer to 8% as against Government’s expectation of 4.5%, a dysfunction is the talk of the country. What could this mean might be unfolding a lot sooner than anticipated for BRICS (Russia is facing electric rock music emanating from the West with sanctions, a renewed cold war, and plummeting global oil prices), and the NDB. I say this more in a more prescient manner. There is a need for rethinking on BRICS and its Bank, for China alone would not be willing to play the role of the Asian growth engine. And India with its own Vedic mathematical conjuring acts can pump-up the economy any time it feels like going down!!!.  

Sarcasm, or what not, I bring to end this version. Once again, these are musings, and thus vulnerable to misguided missiles, which indeed these are. Until later....

HPD

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Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability

Public Finance Public Accountability Collective (PFPAC) released its first publication titled, "Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability" on 14th  September, 2016 at Constitution Club, New Delhi. 




Download @ Unfolding Crisis: The Case of Rising NPAs and Sinking Public Accountability
For ordering hard copies of the report, please drop a mail to: Himanshu Damle