By Shyam Saran
NEW DELHI, Apr 6 2016 (IPS)

It was in 2001 that the Chief Economist of Goldman Sachs, Jim O’Neill, coined the acronym, BRICs, to denote the special category of large emerging economies, which he predicted were destined to transform the structure of the global economy, through sustained growth in the twenty first century. According to him, the BRICs, namely, Brazil, Russia, India and China, which at the turn of the century accounted for 25% of global Gross domestic product (GDP), could double their share to 50%.

Shyam Saran

Will it be able to narrow the as yet expanding gap with China, which is a 11 trillion dollars economy to India’s 2 trillion dollars GDP?India enjoys sound economic fundamentals. It has a large and still growing young population, which with proper education and skills, could constitute a “demographic dividend” precisely when most advanced economies, as well as China, are confronting challenge of an ageing population. The country has followed a policy of fiscal prudence and conservative monetary policies which create a stable environment for investments and innovation.

The latest budget has pegged the fiscal deficit to 3.5% of the GDP. It has introduced several important reforms such as allowing foreign direct investment (FDI) into agro-processing and marketing which has the potential of transforming Indian agriculture. A bankruptcy law is in the offing and legislation has been passed on linking all subsidies and benefits to the ‘Aadhar’ , or the unique identification number which has by now enrolled over 900 million Indians (out of a total population of 1.2 billion). This will allow direct benefit transfer, through bank accounts, to those entitled to subsidies, such as on LPG, kerosene and essential food items. This is expected to reduce leakages and corruption significantly. However, the Government has so far been unable to pass legislation instituting the General Sales Tax (GST) which is indispensable to creating a true national market and reducing barriers to inter-State commerce and movement of goods.

India today has a pro-reform and pro-business government, led by Prime Minister Narendra Modi. A most important change from the past has been the public embrace by the political leadership of economic reforms, including unrolling a welcome mat for foreign investment, a commitment to improving the ease of doing business and providing incentives for the burgeoning start-up domain. The Prime Minister has been unequivocal in courting foreign direct investment, this being a major priority in his foreign visits. In this sense, India is no longer engaged in “reforms through stealth”. Reforms have entered the political mainstream and this provides assurance and predictability on the sustainability of the reform process.

Despite this congenial political environment for economic reforms, there has been mixed record of progress on the ground. This is, to some extent, the result of a much less favourable international economic environment since the global financial crisis erupted in 2007- 2008. The advanced economies of the U.S., Europe and Japan, are struggling to restore health to their severely impaired economies. The Chinese economy, which had emerged as the engine of global economic growth in the past 3 decades, is now slowing down more precipitously than expected.

Global trade, which was growing at double the rate of global GDP (6% against the GDP growth of 3% per annum) since 1990, is now expanding at a slower rate than global GDP (2.5% per annum). Since the 2007 – 2008 crisis, protectionist trends in major economies are on the rise, further shrinking market access for goods and services from emerging economies like India. Thus, the investment and export driven strategies which were successful in transforming East Asian economies, including China, are not as effective as before. India will need to find other drivers of growth, including within its domestic economy, to sustain accelerated growth. In this context, innovation becomes important. The surge in start-ups in India is an encouraging development. In having to deal with a more competitive and slower-growing global market-place, India will need to leverage is strengths. One key asset it has is the very size of its market and its significant growth prospects. For example, it has a mobile market of 900 million and the prospects for similar growth in its smart-phone market are immense. Its e-commerce sector is expanding at a rapid rate. It is in these new lines of business that opportunities for leap-frogging exist. However, the Modi government has not so far been able to formulate an overall economic strategy which takes into account the altered global economic environment and the implications for India’s economic prospects. Exports have been declining 15 months in a row and domestic investment is at a standstill. The banking sector, in particular, public sector banks, are heavily exposed to non-performing assets and foreign investors are confused by bureaucratic decisions which contradict the Prime Minister’s positive messaging. There appears to be a lack of capacity and leadership at the ministerial and senior bureaucratic level, leading to contradictory policies and lack of implementation. More recently the development narrative which won the elections for Modi has been in danger of being overwhelmed by the politics of polarization and communal and sectarian divide which appear to be driven by short term electoral calculations. This also acts as an inhibiting factor on foreign investment .

While India may have the best prospects today among emerging economies, it is likely to achieve only sub-optimal results unless some of these structural problems are resolved.

(End)

Excerpt:

“Just as the world is moving towards multi-polarity, so is Asia … The economic fragmentation of the region and the competitive pursuit of security interests may well consign the Asian Century into a brief interlude rather than a millennial transformation”. Photo credit: Public domain via Wikimedia Commons

By Shyam Saran
NEW DELHI, Jun 1 2015 (IPS)

It has been apparent for some time that we are in the midst of a historic shift of the centre of gravity of the global economy from the trans-Atlantic to what is now becoming known as the Indo-Pacific.  

This is an emerging centre of economic dynamism and comprises what was earlier confined to the Asia-Pacific but now includes the South Asian region as well.

This is a region which now accounts for nearly 40 percent of world gross domestic product (GDP), which is likely to rise to 50 percent or more by 2050.  Its share of world trade is now 30 percent and growing.

Shyam Saran

This year, the region has become the largest source of foreign direct investment (FDI), surpassing the European Union (EU) and the United States. China has been the main driver of this historic shift, but other Asian economies have also made significant contributions.

As the Chinese economy begins to slow, India shows promise of regaining an accelerated growth trajectory under a new and decisive political leadership. This will help extend the scale and direction of this shift. Its geopolitical consequences will be profound.

It must be recognised that the economic transformation of Asia, in particular the spectacular growth of China, has been enabled by an unusually extended and liberal global economic environment, underpinned by the faith in globalisation and open markets.

It has also been enabled by a U.S.-led security architecture in the region which kept in check, though did not resolve, the long-standing political fault lines and regional conflicts over competing territorial claims and unresolved disputes.

This relatively benign and supportive economic and security environment is in danger of unravelling precisely at a time when the situation in the region is becoming more complex and challenging.  Paradoxically, this is partly a consequence of the very success of the region in achieving relative economic prosperity.“The danger is that instead of an inclusive and regionally integrated Asia, we may end up with exclusive and competing clusters, moving at different speeds, with different norms and standards. This may well undermine the very basis of Asia’s economic dynamism”

We are witnessing new trends in the region which, unless managed with prudence and foresight, may well sour the prospects of an Asian Century.

The relatively open and liberal trade and investment regime, in particular access to the large consuming markets of the United States, European Union and Japan, is now under serious threat.

Protectionist trends are already visible in these advanced economies as they struggle with prolonged economic stagnation which is the fall-out of the global financial and economic crisis of 2007-2008.

Instead of the consolidation and expansion of the open and inclusive economic architecture that had hitherto been the hallmark of the regional and global economy, we are witnessing its steady fragmentation.

In the Indo-Pacific region, there are competing regional trade arrangements and investment regimes, with no clarity on the contours of a new and emerging economic architecture.

The United States is spearheading its Trans-Pacific Partnership (TPP) which will include some Asian economies, but not India and China.

China has countered by proposing a free trade area encompassing the current Asia-Pacific Economic Cooperation (APEC) membership.  This will include China and the United States but not India and some of the Association of Southeast Asian Nations (ASEAN) economies.

The Regional Cooperation Economic Partnership (RCEP) would include all ASEAN countries plus China, Japan, Republic of Korea, India, Australia and New Zealand, but not the United States.

And finally, there is the East Asia Summit process (EAS) which includes all the above-mentioned countries but also the United States and Russia.

The danger is that instead of an inclusive and regionally integrated Asia, we may end up with exclusive and competing clusters, moving at different speeds, with different norms and standards.  This may well undermine the very basis of Asia’s economic dynamism.

In the security field, too, we are witnessing a growing salience of inter-state tensions and competitive military build-up.

The U.S.-led security architecture remains in place formally but its erstwhile predominance is diminished.

The gap between the military capabilities of China and the United State is closing steadily. As China’s security footprint expands beyond its shores, it will inevitably intersect with the existing deployment of the forces of the United States and its allies and partners.

Faced with an increasingly uncertain security environment and threatened by a more insistent assertion of territorial claims by China, the countries of the region, including Japan, Republic of Korea, members of ASEAN, Australia and India are building up their own defences, in particular maritime capabilities, and this itself is escalating tensions.

There is as yet no emerging regional security architecture which could help manage inter-state tensions in the region. This includes the growing possibilities of confrontation between the United States and China.

In the absence of such a regional security architecture, based on a broad political consensus and a mutually acceptable Code of Conduct, the region may well witness a heightening of tension and even conflict.  These developments would inevitably and adversely impact on the dense network of trade and investment relations that bind the countries of the region together and erode the very basis of their prosperity.

In this context, mention may be made of the Chinese One Belt One Road (OBOR) initiative which seeks to deploy China’s surplus capital to build a vast network of transport and infrastructural links not only across the Indo-Pacific but also straddling the Eurasian landmass.

The newly established Asian Infrastructure Investment Bank (AIIB) initiated and led by China would become a key financing instrument for the OBOR.  China has also recently come out with a new Defence White Paper, which puts forward a new strategy of Open Seas, shifting the emphasis from coastal and near sea defence to an expanding naval presence which matches China’s growing global profile and world-wide location of Chinese-controlled economic assets.

While China’s investment in regional infrastructure in Asia may be welcome, it will inevitably be accompanied by a security dimension which may heighten anxieties among countries in the Asian region and beyond.

It is apparent from the above analysis that it is no longer possible for any major power in the Indo-Pacific to unilaterally seek a position of overweening economic dominance or military pre-eminence of the kind that the United States enjoyed over much of the post-Second World War period.

Just as the world is moving towards multi-polarity, so is Asia.  It is now home to a cluster of major powers with significant economic and security capabilities and interests. The only practical means of avoiding a unilateral and potentially destructive pursuit of economic and security interests would be to put in place an inclusive economic architecture underpinned  by a similarly inclusive security architecture which provides mutual reassurance and shared opportunities for promoting prosperity.

The economic fragmentation of the region and the competitive pursuit of security interests may well consign the Asian Century into a brief interlude rather than a millennial transformation. (END/COLUMNIST SERVICE)

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

Excerpt:

By Shyam Saran
NEW DELHI, Jul 23 2014 (IPS)

The sixth BRICS Summit which has just ended in Brazil marks the transition of a grouping based hitherto on shared concerns to one based on shared interests.

Since the inception of BRICS (bringing together Brazil, Russia, India, China and South Africa) in 2009, it has been seen as a mainly flag waving exercise by a group of influential emerging economies, with little in terms of convergent interest other than signalling their strong dissatisfaction over persistent Western dominance of the world economic, financial as well as security order, but unable to fashion credible alternative governance structures themselves.

However, with the Fortaleza Summit finally announcing the much awaited establishment of the New Development Bank (NDB) with a 50 billion dollar subscribed capital and a Contingency Reserve Arrangement (CRA) of 100 billion dollars, the monopoly status and role of the Bretton Woods institutions – the World Bank and the International Monetary Fund (IMF) – stand broken.

Shyam Saran

True, it may take the NDB and the CRA considerable time and experience to evolve into credible international financial institutions but that clearly is the intent.

BRICS leaders have kept the door open for other stakeholders, but will retain at least a 55 percent equity share. They have also been careful to declare that these new institutions will supplement the activities of the World Bank and the IMF, and this has also been the initial response from the latter.

Nevertheless, the emergence of an alternative source of financing with norms different from those followed by the established institutions will alter the global financial landscape irreversibly.

It may be noted for the future that the one component of the global financial infrastructure where Western companies still remain supreme is the insurance and reinsurance sector. Global trade flows, in particular energy flows are almost invariably insured by a handful of Western companies which also determine risk factors and premiums.

In Brazil, the BRICS countries have given notice that they will examine the prospect of pooling their capacities in this sector. A more competitive situation in this sector can only be a positive development for developing countries.“The emergence of an alternative source of financing [BRICS Bank] with norms different from those followed by the established institutions will alter the global financial landscape irreversibly”

The BRICS initiatives were born out of mounting frustration among emerging countries that even a modest restructuring of the governing structures of the Bretton Woods institutions, to reflect their growing economic profile, was being resisted. The commitment made in 2010 at the G20 to enlarge their stake in the IMF remains unfulfilled while the restructuring of the World Bank is yet to be taken up.

The longer the delay in such restructuring, the more rapid the consolidation of the new BRICS institutions is likely to be. It is this factor which played a role in helping resolve some of the differences among the BRICS countries over the structure and governance of these proposed institutions.

The setting up of the BRICS institutions owed a great deal to the energy and push displayed by China. It is doubtful that the proposals would have been actualised had China not put its full weight behind them and showed a readiness to accommodate other member countries, in particular India. Russia became more enthusiastic after being drummed out of the G8 and subjected to Western sanctions.

Chinese activism on this score must be seen in the context of other parallel developments in which China has also been the prime mover and sometimes the initiator. These are:

1. The proposal for setting up an Asian Infrastructure Investment Bank (AIIB) to fund infrastructure and connectivity projects in Asia, in particular, those which would help revive the maritime and land “Silk Routes” linking China with both its eastern and western flanks. The parallel with the NDB is hard to miss.

2. The consolidation of the Chiang Mai Initiative Multilateralisation (CMIM) and the associated Asian Multilateral Research Organisation (AMRO) among the Association of Southeast Asian Nations (ASEAN) + 3 (China, Japan and the Republic of Korea). The CMIM is now a 240 billion dollar financing facility to help member countries deal with balance of payments difficulties. This is similar to the 100 billion dollar CRA set up by BRICS.

AMRO has evolved into a mechanism for macro-economic surveillance of member countries and provides a benchmark for their economic health and performance. This would enable sound lending policies and may very well be linked in future to the AIIB. The CMIM and the AMRO thus provide building blocks which could serve as the template for the NDB, the CRA and the AIIB.

3. In addition to the CMIM and the AMRO, there are ongoing initiatives within ASEAN + 3 to develop a truly Asian Bond Market which could mobilise regional savings into regional investments through local currency bonds. To support this initiative, a regional Credit Guarantee and Investment Facility has been established. A Regional Settlement Intermediary is proposed to facilitate cross-border multi-currency transfers.

These developments are taking place just when there is a rapidly growing Chinese yuan-denominated bond market, the so-called dim-sum bonds, which have become an important source of corporate financing. This reduces the dependence on euro and U.S. dollar-denominated bonds. The NDB could tap into this market to build up its own finances.

It is important to keep in mind this broader picture in assessing the significance of the decisions taken at the Fortaleza Summit. In systematically pursuing a number of parallel initiatives, China is attempting to create an alternative financial infrastructure which would have it in the lead role. The dilemma for other emerging countries is that there appear to be no credible alternatives, especially since the Western countries are unwilling to cede any enhanced role to them.

The Fortaleza Summit marks the beginning of the end of the post-Second World War Western dominance of the global economic and financial order. The existing institutions will now have to share space with the new entrants and may be compelled to adjust their norms to compete with the latter.

The prime mover behind the establishment of a rival network of financial institutions is China, whose global profile and influence is likely to increase as the various building blocks it has put in place come together to shape a new global financial architecture. This is still in the future but the trend is unmistakable. (END/IPS COLUMNIST SERVICE)

Excerpt:

By Shyam Saran
NEW DELHI, May 24 2014 (IPS)

Even though there has been a broad political consensus over the major tenets of India’s foreign policy across successive governments in the past, the assumption on May 26 of a BJP-led government in India will have some visible impact on external relations, precisely because of the prospects of a strong government at the centre and a decisive and charismatic leader at its head.

Prime Minister-designate Narendra Damodardas Modi will have more room for manoeuvre and will be less subject to pressures from coalition partners and opposition parties than his recent predecessors.

"Modi will have more room for manoeuvre and will be less subject to pressures from coalition partners and opposition parties than his recent predecessors"
We already have some indication of his foreign policy priorities. Invitations have been extended to all leaders of the South Asian Association of Regional Cooperation (SAARC) to attend the swearing-in ceremony of the new government.  This reflects the importance that will be accorded to India’s immediate neighbourhood and Modi’s intention to engage with South Asian leaders without delay.

This augurs well for the region, particularly if the new government in Delhi is able to push through an active and ambitious agenda for regional economic integration.  If the Pakistani Prime Minister, Nawaz Sharif, is able to overcome domestic opposition and avail of Modi’s invitation, India-Pakistan relations could well see a fresh opening.

Both leaders are known to be advocates of increased economic and commercial exchanges between the two countries.  The hurdle will continue to be the reluctance on the part of Pakistan to abandon cross-border terrorism as an instrument of state policy.  Similar and positive opportunities in the past have been disrupted as a result of serious terrorist attacks by elements based in Pakistan, tolerated and often sponsored by the state.

The forthcoming political and security transitions in Afghanistan, including a resurgence in Taliban-led hostilities, may sharpen tensions between India and Pakistan.  It appears likely that despite the risks to its own internal security, Pakistan may well support the Taliban, who have enjoyed sanctuaries on its territory for several years, in a bid to recapture power in Kabul.  This will confront the countries of the region with a renewed threat of religious extremism and jihadi terrorism and India may be a major target.

Shyam Saran

Just when peace sentiments are in the air, there was a terrorist attack on May 23 against the Indian consulate at Herat in western Afghanistan.  India and Pakistan must work together to prevent political instability and armed conflict in Afghanistan.

Modi has been impressed by China’s spectacular economic growth and its pursuit of what it calls “comprehensive national power”.  We will witness a renewed focus in India to putting the country back on a high growth track and foreign policy will have a distinct economic focus.  While there will continue to be wariness about China in the security field, closer economic and trade relations with that country would be pursued as contributing to India’s development prospects.

The same motivation may drive a much closer relationship with Japan, which has already become a significant source of capital and modern technology.  It is likely that Japan will be one of the first countries Modi will visit after taking office.

It will be interesting to watch the trajectory that India-US relations will take after a Modi government is installed in Delhi.  On the U.S. side, there will be a need to repair the damage done by an earlier decision (in 2005) to deny a visa to Modi on account of charges of complicity in the communal riots in Gujarat in 2002. More recently, some top U.S. business corporations have spear-headed a hostile campaign against Indian policies on corporate taxation, intellectual property rights and regulatory measures.

India is reluctant to join U.S. sanctions against Iran, and now against Russia.  There is also no clarity as to how the United States will handle the post-2014 situation in Afghanistan and how much India’s interests and concerns will figure in U.S. calculations.

Despite these differences, India and the United States share important, long-term interests, in particular, the management of the rise of China and shaping the emerging security and economic architecture in the Indo-Pacific region.

A turnaround in the Indian economy will also create major opportunities for U.S. business and industry at a time when U.S. economic recovery continues to be weak.  India has also emerged as a major market for US defence hardware and this is likely to expand in the coming years.  Therefore, there is every reason for them to seek to revive the flagging relationship.

An economically vibrant India, with a politically focused and coherent leadership, will be a more influential actor in regional and global fora.  Modi will soon be attending the BRICS (Brazil, Russia, India, China and South Africa) Summit and may go to the U.N. General Assembly later in the year.  His participation in these fora will be watched with keen interest precisely because India’s voice, having become somewhat muted in the recent past, will once again be heard with attention.

There is a growing awareness in India that the old divisions between domestic and external are becoming increasingly blurred.  What happens beyond India’s borders impacts on the country’s internal security and economic prospects. Similarly, developments within India have an impact in the region as well as globally.

Therefore, India’s foreign policy must ensure India’s continual and high level engagement with its neighbourhood, the wider region and the world.  We are likely to see steps in that direction early on in Modi’s tenure. (END/IPS COLUMNIST SERVICE)

Excerpt:

By Shyam Saran
NEW DELHI, Sep 17 2013 (Columnist Service)

The eighth G20 Summit convened in St. Petersburg on Sept. 5-6, 2013 was dominated by the Syrian crisis, deflecting attention from the mandate of the gathering to serve as the premier forum for international economic coordination.

When leaders of the most influential countries meet it is inevitable that the pressing political issues of the day take centre stage.

Shyam Saran

The G7 too began as a forum for economic consultation and coordination among the world’s advanced market economies in 1975, to cope with the fallout of the 1973 oil crisis.

Just three years later, in 1978, the G7 issued its first Political Declaration and became, thereafter, the political, security and economic steering committee of the most powerful nations.

The G20 has taken its first steps in the same direction and it is likely that its role as a political and security forum will evolve steadily though informally at first. This trend will be reinforced if the United Nations Security Council remains a relic of a bygone international order.

That the G20 provided a platform on which the U.S. and Russia initiated steps leading to an eventual understanding on Syria’s chemical weapons is an indication of the potential political utility of the forum. These steps were taken against a strong prevailing sentiment at the summit against a military strike against Syria, favoured by the U.S. and some, but not all, of its allies.

The emerging economies were able to reflect some of their key concerns in the Summit declaration. The unconventional monetary policies pursued by reserve currency countries such as the U.S. and lately Japan, involving significant injections of liquidity into the system and keeping interest rates at zero or near zero, have confronted emerging economies like Brazil and India with volatile capital flows and exchange rate instability.

The declaration acknowledged for the first time that monetary policies pursued by advanced economies should be “calibrated and clearly communicated”. This falls short of a coordinated approach of the G20 but will help calm markets by promising greater predictability.

Developing countries would also take satisfaction over the G20 consensus, reflected in the declaration that the profits of transnational corporations should be taxed in the country where they are generated. African countries, in particular, have been victims of the tax avoidance practices of such companies.

An Indian proposal to create an infrastructure financing facility at the World Bank to extend funding for infrastructure projects in developing countries will be the subject of a study. However, in a situation of financial stringency in most developed economies, it is doubtful whether any significant financing window for this purpose will see the light of day soon.

The leaders of BRICS (Brazil, Russia, India, China and South Africa) met on the sidelines of the G8 summit. Their deliberations focused on two landmark initiatives which were announced at their fifth regular summit in Durban on Mar. 27.

On the New Development Bank (NDB) it has been agreed that its initial capital will be 50 billion dollars, a somewhat modest amount given the expectations aroused when the proposal was first made. India had wanted a figure closer to 100 billion dollars.

It is still not clear how the equity will be distributed among the five partners. China has been willing to contribute a larger share but it is reported that Russia wanted each to have an equal share. South Africa is unable to contribute a significant amount given the smaller size of its economy.

On the Contingency Reserve Arrangement (CRA), the leaders announced a figure of 100 billion dollars, with China contributing 41 billion, Brazil, India and Russia 18 billion each, and South Africa five billion.

The CRA will serve as a multi-country currency swap mechanism which will help the BRICS deal with balance of payments problems. It is similar to the Chiang Mai initiative among ASEAN, China, Japan and South Korea, but which is currently 240 billion dollars and partially linked to a parallel though partial International Monetary Fund aid programme.

Whether the CRA will follow a similar pattern is not yet clear. Nevertheless China’s role as a leading partner among the BRICS is now amply apparent. It is possible that the equity distribution in the NDB may follow a similar pattern.

It may be noted that none of the BRICS members forms part of the U.S.-sponsored Trans Pacific Partnership (TPP) or the Trans-Atlantic Trade and Investment Partnership (TTIP) – regional trade arrangements which will fragment the global trading system and marginalise the emerging economies. It is surprising, therefore, that this challenge did not figure in the deliberations of the BRICS nor at the G-20 either.

China’s pre-eminence in the BRICS is a trend likely to be reinforced with the current economic slowdown and economic difficulties being faced by most emerging economies, in particular Brazil, India and South Africa.

Russia is a special case, not an emerging economy in the same category as the other BRICS members. It has escaped economic distress thanks to rising energy prices in the wake of spreading turmoil in the Middle East.

China’s economy is likely to decelerate in the coming months. Its growing debt, now over 200 percent of GDP, is causing concern. If the Chinese economy undergoes a major crisis as some analysts predict, its role as the prime mover in BRICS would certainly diminish.

For the present, however, China, with its seven percent growth and its three trillion dollars of foreign exchange reserves, is likely to be acknowledged as the most emerged of the emerging countries.

(END/COPYRIGHT IPS)

Excerpt:

The New York Stock Exchange, as seen from the boot of George Washington’s statue at Federal Hall. Credit: Dan Nguyen/CC-BY-2.0

By Shyam Saran
NEW DELHI, Jun 5 2013 (IPS)

The global economy is awash with successive waves of liquidity generated over the past few years by the four most advanced economies, viz., the United States, the European Union, (EU), Japan and the United Kingdom, known as the G4. This liquidity has taken the form of “quantitative easing” (QE).

When zero rates of interest have failed to stimulate their economies, these countries have resorted to large-scale asset purchases by their central banks, such as corporate bonds or mortgage backed securities, to pump more money into the banking system.

The aim is to extend credit to business and industry and encourage consumption.

In the immediate aftermath of the global financial and economic crisis in 2008, when there was a danger of financial collapse, both advanced as well as emerging economies adopted stimulus packages, to revive demand, maintain trade flows and avoid large-scale unemployment. During the crisis phase of 2008/09, QE played an important role in crisis management, helping advanced and emerging economies alike.

However, while emerging economies have weathered the crisis and seen a revival of growth, the G4 continue to experience economic stagnation, depressed markets and large-scale unemployment.

Their response has been to persist with even larger doses of QE as a means of propping up demand,encouraging banks to expand and boosting stock valuations.

Before the crisis, the U.S. held 700 to 800 billion dollars of Treasury notes. The current level is 2.054 trillion dollars. In the latest round, QE-3, the U.S. Federal Bank is committed to the purchase of 40 billion dollars of mortgage-backed securities per month as long as unemployment remains above 6.5 percent.

The European Central Bank (ECB) has pumped 489 billion euros of liquidity into the eurozone since the crisis, while in the United Kingdom QE has reached the level of 375 billion pounds.

Most recently, the Bank of Japan has decided to pump 1.4 trillion dollars in the next two years into its economy, aiming at a two-percent inflation rate by doubling the money supply.

The assets of the G4 central banks have expanded from a figure of 11-12 percent of their gross domestic product (GDP) to the current unprecedented level of 23 percent. These assets were 3.5 trillion dollars in 2007 before the crisis. They are now nine trillion dollars and rising. This is the scale of liquidity expansion we are dealing with.

Since interest rates in the G4 remain at zero and their economies remain stagnant, it is inevitable that there will be significant capital outflows to emerging and other developing economies, in quest of higher risk-adjusted returns.

According to one estimate, about 40 percent of the increase in the U.S. monetary base in the QE-1 phase leaked out in the form of increased gross capital outflows, while in the QE-2 phase, it may have been about one-third.

This massive and continuing surge of capital outflows to emerging and other developing economies is having a major impact. Corporations, which have a sound credit rating, are taking on more debt, and increasing their foreign exchange exposure, attracted by low borrowing costs.

Their vulnerability to future interest rate changes in the developed world and exchange rate volatility will increase. Such inflows put upward pressure on exchange rates, stimulate credit expansion, and cause inflationary pressures, which pose a major challenge to policy-makers in the developing world.

Most of the capital inflows are in the nature of portfolio investments, which are prone to sudden and volatile movement and puts emerging economies at greater risk. The volatility one has witnessed in the Indian stock market is a case in point. In general, we may conclude that the overall impact of these capital flows is expansionary and distortionary.

There has been considerable criticism of the G4’s unconventional monetary policies from the emerging economies, including the BRICS (Brazil, Russia, India, China and South Africa).

The magnitude of QE has had unintended consequences beyond the borders of the G4, especially because their currencies are not only fully convertible but, together, constitute the pillars of the global financial system.

The U.S. dollar is the world’s leading reserve currency, and the euro, the British pound and the Japanese yen together constitute the basket of currencies the International Monetary Fund (IMF) uses to value its Special Drawing Rights. Thus, the nature of the G4 currencies and their significant role in the global financial market ensures that QE undertaken by them has a global impact on economies across our globalised and interconnected world.

It is necessary, therefore, for the G4 to act with great responsibility and to work together with the emerging economies, to minimise the adverse effects of their QE policies. It would be particularly important to forge a consensus on how to handle the potential financial turmoil and disruption that may afflict developing economies once the QE is sought to be retired and interest rates once again become positive in the G4. The sudden and large-scale reversal of capital flows is a likely scenario that would need to be anticipated and managed.

The Asian financial crisis of 1997/98 was, in part, triggered by an earlier version of QE pursued by Japan in the aftermath of the bursting of its property and asset bubble in the early 1990s. Then, too, the large inflow of low-cost yen loans led to the asset price bubbles, inflationary pressures and currency instability in the Asian economies. They paid a heavy price in the bargain.

A larger, more pervasive crisis may await the emerging and developing economies unless there is a much more coordinated and careful handling of the risks that are already building up. The G20 should have this issue at the top of its agenda.

(END/COPYRIGHT IPS)

Excerpt:

The seventh G-20 Summit at Los Cabos, Mexico, concluded on Jun. 19 with results that may seem encouraging in the short-term, but embedded with additional risks for the medium and longer-term.

There was a shift of emphasis from fiscal consolidation and macro-economic balancing to promoting growth and employment. This could lead, at least temporarily, to economic recovery and higher growth in the advanced industrialised economies. However, this would also imply further postponing the inescapable need to address the severe structural imbalances that lie at the root of the current global financial and economic crisis. A massive amount of liquidity has already been injected into the global economy. This has not kick-started recovery, as banks remain averse to lending and companies, sitting on huge piles of cash, are wary of investing. Once recovery does commence, there is every danger that all this stored liquidity will unleash an inflationary upsurge.

Quite predictably, the Eurozone crisis dominated the proceedings, just as it had the earlier Cannes G-20 Summit. The difference lies in the greater specificity of measures listed for dealing with the crisis. These include a reference to the EU Fiscal Compact, the establishment of the European Stability Mechanism, the move towards greater banking integration and Eurozone-wide deposit insurance. In line with the shift of emphasis towards growth, the Declaration also refers to the role of the European Investment Bank in promoting growth and financing employment generating projects.

Taken together, these elements reflect greater political pressure on Germany, which has been a champion of austerity and fiscal discipline within the Eurozone. However, German Chancellor Angela Merkel relented on growth only with a parallel commitment to greater European integration and policy coherence.

The EU Summit, scheduled to be held at the end of this month, will give a clearer indication as to whether the move towards greater integration will command consensus and how rapidly it could be implemented. Several countries including France may find it difficult to mobilise domestic political consensus in favour of the loss of sovereignty and autonomous decision-making that further integration would imply.

One could say that the G-20 made an important contribution to boosting international confidence by significantly adding to the rescue funds available to the International Monetary Fund (IMF). Thanks to pledges made by the BRICS countries (India contributed 10 billion dollars), IMF Director-General Christine Lagarde was able to announce an additional 430 billion-dollar increase in IMF reserves. These additional funds, together with the previous augmentation committed by members, give the IMF much more “firepower” to deal with liquidity crises among Eurozone countries as well as others. In this case, the major emerging countries stepped up to the plate. The U.S. was not among the contributors. It is true that the pledges made to increase IMF reserves will make only a marginal impact in view of the scale of the sovereign debts, which have piled up in Eurozone countries. However, taken together with measures announced by the EU itself, the G-20 initiative may contribute to market confidence.

In previous Summits, emerging country leaders, but particularly the Indian Prime Minister, have been advocating a significantly increased flow of capital to finance infrastructural development in developing countries. This would promote much needed development in developing countries, while contributing to recovery in developed countries. While this was reflected in the earlier Summit declarations, it finds a more prominent place this time. Since private investment flows are currently depressed, infrastructure development will require increasing the funds available with Multilateral Development Banks to enable increased lending to developing countries. Whether this will happen in practice remains to be seen.

At the Seoul G-20 Summit, a parallel B-20 business summit was convened. At Cannes, an L-20 consisting of representatives of labour and trade union organisations, also met on the sidelines. An interesting departure from earlier meetings was the issue of a joint B-20/L-20 communiqué calling upon G-20 leaders to take urgent and significant steps to promote recovery and employment in the global economy. The unusual coming together of both business and labour representatives reflects the seriousness of the crisis that countries across the world confront today.

Compared to the previous summits in Seoul and Cannes, the Los Cabos meeting appears to have salvaged some of G-20’s credibility as the self-appointed steering committee for global economic governance. What it needs to guard against is the inevitable tendency of such a forum to take on an overloaded agenda and get enmeshed in a forest of technical detail. Its value has been its informal and political character. Its future may depend upon its ability to resist a manifest slide into verbal inanity. Emerging economies have the greater stake in the success of the G-20 and it is up to them to ensure that leaders focus on a more limited agenda and come up with substantive outcomes expressed in brief and simple language. Only then will the rest of the world listen.

(END/COPYRIGHT IPS)

* Shyam Saran is a former Foreign Secretary with the Government of India.
He is currently chairman of the Research and Information Systems for Developing Countries (RIS) think-tank and senior fellow at the Centre for Policy Research (CPR) in New Delhi.

The Delhi Declaration and Action Plan adopted at the 4th BRICS Summit in New Delhi on March 29, 2012, would have quickly laid to rest any residual anxiety in Western capitals that a serious rival focus of power and influence was beginning to take shape in the Indian capital.

One look at the wholly pedestrian Action Plan and any illusion of substantive intent would be quickly dispelled. Following a Declaration which promises much, the Action Plan reads like a “trivial pursuit”.

It should have been billed as a tentative calendar of prospective meetings and events rather than be given the status of an Action Plan. The Declaration bears the clear imprint of China and, to some extent, Russia on some key economic and political issues.

The most notable example of this is the thinly veiled but unusually harsh criticism of the U.S.-sponsored Trans-Pacific Partnership (TPP), which is seen as mainly directed against China.

The Declaration says: “We do not support unilateral initiatives that go against the fundamental principles of transparency, inclusiveness and multilateralism.

We believe that such initiatives not only distract members from striving for a collective outcome but also fail to address the development deficit inherited from the previous rounds.” Unless India has been told it will have no place in the Partnership why close our options?

The Declaration obliquely criticises the U.S. for causing excessive dollar liquidity. China is concerned because this reduces the value of its massive dollar assets and triggers hot money inflows. Brazil, too, has suffered as a result.

But India would prefer that stimulus measures in the U.S. continue so that export demand for its goods and services is not threatened. Despite the risks, India appears eager to receive “hot” money flows at a time when investment levels are depressed.

Political positions articulated in the Declaration are on the expected lines but the language is reflective of the stronger stance taken by Russia and China both on intervention in Syria and the imposition of sanctions on Iran.

In Western capitals these formulations will be seen as endorsement of the Chinese and Russian positions, despite the fact that India, Brazil and South Africa have a more nuanced posture.

On U.N. reform, the Declaration adopts the well-known Chinese position of offering to support the aspirations of Brazil, India and South Africa “to play a greater role in the U.N.”, without endorsing their candidature for permanent membership of the Security Council.

Russia, which had formally supported India’s candidature, has now aligned itself with China. Two agreements were concluded among the Exim Banks of the five countries during the Summit. The “Master Agreement in Extending Credit Facility” in local currencies is to implement an essentially generalised currency swap arrangement among the participating countries.

This would provide an alternative to the use of the U.S. dollar in trade settlement. However, a serious challenge from BRICS currencies to the dollar would only emerge if and when they become truly convertible and are backed by the kind of dense and varied financial and banking infrastructure that exists in the U.S. and other Western economies.

The second agreement is the “BRICS Multilateral Letter of Credit Confirmation Facility Agreement”, which, too, is a trade facilitation measure. Once implemented it is likely to reduce transaction costs of intra-BRICS trade.

The BRICS Business Forum, which met on the eve of the Summit, recommended a target of 500 billion dollars of intra-BRICS trade by 2015 compared to 230 billion dollars currently. The issue of liberalising business visas was flagged but with no commitments.

There was strong anticipation that the Summit would announce the setting up of a BRICS development bank on the lines of the World Bank but focused on financing projects in BRICS and other developing countries. However, caution seems to have won the day.

The BRICS Finance Ministers have been tasked with examining the feasibility and viability of the proposal. An initiative that would have been seen as a major contribution by emerging economies in promoting growth and recovery in their own and other developing countries; strengthened their hands in pushing for the reform of international financial institutions; and marked the grouping as a serious and influential player on the global stage, was instead consigned to a committee.

BRICS is here to stay as a familiar feature on the international landscape. It has the economic and political heft to play an influential role provided it is able to act together on key issues. In that sense, the Delhi Summit remained mostly a flag-waving exercise.

Unlike the G-7 earlier, the group lacks a common ideological and cultural underpinning. The security perspectives of its members are not aligned.

In terms of economic objectives, they have both convergent and divergent interests. In the foreseeable future the most realistic prospect for BRICS may be their working as a coalition on issues of common interest such as reform of the international financial institutions, resisting protectionism and promoting development in developing countries.

There is no doubt that being part of this group gives each of its members that little extra room for manoeuvre vis-Ã -vis the established advanced countries. India and China working together in BRICS may mitigate the elements of confrontation between them.

It is clear, however, that China is emerging as the preeminent partner in the group. (END/COPYRIGHT IPS)

(*) Shyam Saran is India’s former Foreign Secretary. He is currently chairman of the Research and Information System for Developing Countries (RIS), think-tank and senior fellow at the Centre for Policy Research (CPR) in New Delhi.

By Shyam Saran
NEW DELHI, Jun 13 2011 (IPS)

Despite the loud rhetoric about how the centre of gravity of the global economy and, with it, political influence, have moved from the trans-Atlantic to Asia, there continues to be strong resistance to reflecting this shift in the institutions of global governance.

The G-20, which has been acknowledged as “the premier forum for our international economic cooperation”, agreed at Pittsburg in 2009 that in the International Monetary Found (IMF), there would be a shift in quota share of at least 5% to dynamic emerging markets. This was raised to 6% at the G-20 Seoul Summit in 2010. The Pittsburg Summit also agreed that there would be an open selection process at the international financial institutions rather than the unwritten tradition of an American heading the World Bank and an European heading the IMF. However, it is clear by now that a European, Christiane Lagarde of France, will succeed her now disgraced compatriot, Dominique Strauss-Khan, at the helm of the IMF.

This is not really a surprise. The sense of entitlement that comes from prolonged ascendancy is difficult to abandon even though underlying power relations may have changed irreversibly.

Then, of course, there is the numbers game. Between them, the US and Europe still command over 45% of the IMF vote. Even if the 6% shift in votes towards emerging economies were implemented -and it hasn’t been- there would be no way a candidate from Asia would be able to succeed in gaining the coveted post on the basis of votes. [if the US and Europe opposed]

But the reality of the global economy has also changed. Not only is Asia’s share of global GDP close to 50%, but it is also growing at an accelerated pace. The world’s second and third largest economies today are from Asia (China and Japan) and in the next couple of decades, India may well capture third place.

If India and China, together with other emerging economies represented in G-20 -for example, Brazil, South Africa, Mexico and Indonesia- were to come together to endorse a candidate, I doubt whether the US and the Europeans would be able to offer much resistance. The health of the global economy, and in particular, of the world’s financial markets, depends on the cooperation of the emerging economies. The post of IMF Director-General is going to France, once again, by default. And the emerging economies did not launch a credible and determined challenge.

First, there were no firm demands by the emerging economies to press for a candidate from their ranks. The BRICS statement, pushing for a candidate from a developing country, was issued by the Executive Directors representing their member countries at the IMF. This was too low a level of demarche to reflect any strong political commitment and seriousness. There should have been a common statement at the Head of State/Government level if the demand was to be taken seriously.

Second, the emerging countries, ideally all those represented at the G-20 or at least the BRICS, should have quickly consulted each other and agreed upon a common candidate, someone with an international reputation and acknowledged expertise. This could have been an Indian. It could well have been a Mexican who is already a declared candidate. This would have reflected the seriousness with which the emerging economies view this issue. But it did not happen.

It would also appear that the French played their cards well to prevent a BRICS or emerging country consensus. Knowing how keen the Chinese were on the inclusion of the Chinese yuan in the IMF basket of currencies, Lagarde lost no time in making it known that she would support this. The French have also indicated that they would be open to supporting regional monetary arrangements and the “globalisation of emerging currencies”, which is on China’s agenda and is also welcome to those countries that would like to see a decline in the prominence of the US dollar in the world’s financial and trade markets. No wonder Lagarde obtained tacit Chinese support for her candidacy.

Led by the Chinese, the East Asian economies are moving deliberately and systematically towards the establishment of an Asian Monetary Fund (AMF) which could be anchored by the currencies of China, Japan and South Korea. The AMF will be the next step in the evolution of the Chiang Mai Initiative Multilateralisation (CMIM), which comprises the ASEAN+3 (China, Japan and Korea). There was a recent decision to merge the original USD 120 billion crisis fund set up under the CMIM with the recently established ASEAN+3 Macro-Economic Research Office (AMRO), which, like the IMF, will serve as a surveillance and monitoring mechanism for the proposed AMF.

How will this impact India’s economic prospects and standing in East Asia, the most dynamic area of its external economic relations? Should we seek to join the AMF or should we focus on an effective global architecture instead? What is our view of the emergence of the yuan as an international currency? My fear is that several significant developments are taking place in the global economy, including the financial markets, which may have major implications for our own economic future. We need to reflect carefully on these developments, analyze their impact on us and formulate strategies to deal with them. Otherwise, we may find ourselves marginalised both in the region and in institutions of global governance. (END/COPYRIGHT IPS)

(*) Shyam Saran, India’s former foreign secretary and chief climate change negotiator is currently Chairman of the Research and Information System for Developing Countries and Senior Fellow at the Centre for Policy Research in New Delhi.

Excerpt:

By Shyam Saran
NEW DELHI, Jun 11 2011 (IPS)

Despite the loud rhetoric about how the centre of gravity of the global economy and, with it, political influence, have moved from the trans-Atlantic to Asia, there continues to be strong resistance to reflecting this shift in the institutions of global governance.

The G-20, which has been acknowledged as “the premier forum for our international economic cooperation”, agreed at Pittsburg in 2009 that in the International Monetary Found (IMF), there would be a shift in quota share of at least 5% to dynamic emerging markets. This was raised to 6% at the G-20 Seoul Summit in 2010. The Pittsburg Summit also agreed that there would be an open selection process at the international financial institutions rather than the unwritten tradition of an American heading the World Bank and an European heading the IMF. However, it is clear by now that a European, Christiane Lagarde of France, will succeed her now disgraced compatriot, Dominique Strauss-Khan, at the helm of the IMF.

This is not really a surprise. The sense of entitlement that comes from prolonged ascendancy is difficult to abandon even though underlying power relations may have changed irreversibly.

Then, of course, there is the numbers game. Between them, the US and Europe still command over 45% of the IMF vote. Even if the 6% shift in votes towards emerging economies were implemented -and it hasn’t been- there would be no way a candidate from Asia would be able to succeed in gaining the coveted post on the basis of votes. [if the US and Europe opposed]

But the reality of the global economy has also changed. Not only is Asia’s share of global GDP close to 50%, but it is also growing at an accelerated pace. The world’s second and third largest economies today are from Asia (China and Japan) and in the next couple of decades, India may well capture third place.

If India and China, together with other emerging economies represented in G-20 -for example, Brazil, South Africa, Mexico and Indonesia- were to come together to endorse a candidate, I doubt whether the US and the Europeans would be able to offer much resistance. The health of the global economy, and in particular, of the world’s financial markets, depends on the cooperation of the emerging economies. The post of IMF Director-General is going to France, once again, by default. And the emerging economies did not launch a credible and determined challenge.

First, there were no firm demands by the emerging economies to press for a candidate from their ranks. The BRICS statement, pushing for a candidate from a developing country, was issued by the Executive Directors representing their member countries at the IMF. This was too low a level of demarche to reflect any strong political commitment and seriousness. There should have been a common statement at the Head of State/Government level if the demand was to be taken seriously.

Second, the emerging countries, ideally all those represented at the G-20 or at least the BRICS, should have quickly consulted each other and agreed upon a common candidate, someone with an international reputation and acknowledged expertise. This could have been an Indian. It could well have been a Mexican who is already a declared candidate. This would have reflected the seriousness with which the emerging economies view this issue. But it did not happen.

It would also appear that the French played their cards well to prevent a BRICS or emerging country consensus. Knowing how keen the Chinese were on the inclusion of the Chinese yuan in the IMF basket of currencies, Lagarde lost no time in making it known that she would support this. The French have also indicated that they would be open to supporting regional monetary arrangements and the “globalisation of emerging currencies”, which is on China’s agenda and is also welcome to those countries that would like to see a decline in the prominence of the US dollar in the world’s financial and trade markets. No wonder Lagarde obtained tacit Chinese support for her candidacy.

Led by the Chinese, the East Asian economies are moving deliberately and systematically towards the establishment of an Asian Monetary Fund (AMF) which could be anchored by the currencies of China, Japan and South Korea. The AMF will be the next step in the evolution of the Chiang Mai Initiative Multilateralisation (CMIM), which comprises the ASEAN+3 (China, Japan and Korea). There was a recent decision to merge the original USD 120 billion crisis fund set up under the CMIM with the recently established ASEAN+3 Macro-Economic Research Office (AMRO), which, like the IMF, will serve as a surveillance and monitoring mechanism for the proposed AMF.

How will this impact India’s economic prospects and standing in East Asia, the most dynamic area of its external economic relations? Should we seek to join the AMF or should we focus on an effective global architecture instead? What is our view of the emergence of the yuan as an international currency? My fear is that several significant developments are taking place in the global economy, including the financial markets, which may have major implications for our own economic future. We need to reflect carefully on these developments, analyze their impact on us and formulate strategies to deal with them. Otherwise, we may find ourselves marginalised both in the region and in institutions of global governance. (END/COPYRIGHT IPS)

(*) Shyam Saran, India’s former foreign secretary and chief climate change negotiator. He is currently Chairman of the Research and Information System for Developing Countries and Senior Fellow at the Centre for Policy Research in New Delhi.

Excerpt: