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The importance of the ADB

As the gap between India and China widens, India must strengthen multilateral options like the Asian Development Bank

Devesh Kapur
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The Asian Development Bank's (ADB's) Annual Meeting in New Delhi provides India with an opportunity to rethink its relationship with the institution and with international financial institutions (IFIs) more broadly.

India was one of the founding members of the in 1966. At the time it reached an informal agreement not to borrow since, given the small size of the ADB and India's large borrowing requirements, it would have crowded out smaller Asian countries. While the informal agreement was that a Japanese national would head the ADB, India pushed for its national to run the institution. On the other hand, the Philippines, supported by the US, lobbied for the ADB to be located in that country (in Manila). India, which instead pressed for a leadership role for an Indian in the organisation, made a major mistake in not bargaining for the ADB to be located in New Delhi. Physical location provides much greater benefits in the long run, with pecuniary and network externalities. It is also more permanent. The influence of the leadership of international organisations on advancing national interests is limited, and its effects for a specific country are more symbolic than substantive.

Following the third of the ADB in 1983, the enhanced capital resources allowed the organisation to begin lending to India in 1986 - by the end of 2011, the ADB had financed 178 projects with a cumulative lending of nearly $27 billion. As with the World Bank, apart from the occasional hiccups in lending - usually owing to pressures from the United States and some other members - these have waned in recent years. On the other hand, pressures from China have increased, which was apparent in 2009 when that country strongly protested the ADB's lending programme for India. China argued that the loan package encroached on a territorial dispute between the two countries since it included projects in Arunachal Pradesh. China's foreign ministry spokesman Qin Gang put it bluntly: "China expresses its strong dissatisfaction over this... The bank's move not only seriously tarnishes its own name, but also undermines the interests of its members." Following China's objections, India has had to abandon plans to obtain funding from the ADB and the for funding projects in Arunachal Pradesh.

But India, too, has engaged in similar behaviour. It blocked Pakistan from seeking financing from the ADB for the construction of the Diamer-Bhasha dam in Pakistan-occupied Kashmir. India argued that if it was granted, Pakistan could have a locus standi in waterworks and undercut Indian claims to the whole of Kashmir under the Instrument of Accession. Following pressure from the Indian government, the ADB asked Pakistan to get India's assent before approving the project. Pakistan, unsurprisingly, refused.

India's principal preoccupation with has been as a borrower. As a result, it saw these institutions through a North-South prism, seeking greater resources at minimal costs, both financial and non-financial (that is, conditionalities). It sought to address these goals by trying to influence the governance of these institutions through larger shareholding, but its position was undercut by its poorly performing economy. In recent years, another issue emerged: the monopoly of leadership held by the Americans in the World Bank and the Europeans in the International Monetary Fund (IMF). In public India pressed for unity among developing countries in voting for a common candidate. In reality, when it came to choosing new leaders, India backed the French (in the IMF) and American candidates (in the World Bank). What mattered in the end was private understanding as to whether the candidate would be helpful to India's interests, not the nationality. India's strong support for Takehiko Nakao, Japan's former vice-minister of finance for international affairs, as ninth president of the ADB has been similarly pragmatic. Like Deng Xiaoping, India too appears to have come to the private conclusion that it does not matter whether the cat is white or black, as long as it catches the mice that India is interested in.

Although the primacy of the borrowing relationship with IFIs is considerably less important for India today, a commensurate cognitive shift from a "borrower" mindset to an "owner" mindset in the country's strategic thinking regarding these institutions seems to have been missing. In the case of the ADB, in principle India has had a "Look East" policy. However, when it was invited to join the Asian Development Fund XI, with a nominal contribution of $10 million (barely a few million dollars a year), it declined on the specious grounds that if it did so, it would adversely affect its claims to the International Development Association. The larger point, that with China's inexorable rise India needed to put itself squarely within Asian multilateral fora to provide a countervailing view, was neglected.

Until the new millennium, control of the key IFIs where India had primary interests was clear: the Japanese controlled the ADB, the US the World Bank and the G7 the IMF. This mattered when India's relations with these powers were lukewarm. However, more recently, even as India - along with other emerging powers, especially China - acquires greater weight in these institutions, it has been quietly strengthening its strategic relationship with the US and Japan in particular. Now their control of these institutions appears to be less detrimental to India's interests - especially since the only plausible replacement, China, appears even less likely to act in India's interests.  

Multiple frustrations with the existing IFIs have led to calls for launching a BRICS development bank. Yet, as with many Indian multilateral initiatives, its rhetorical attraction is substantively greater than practical realities.

IFIs are financial intermediaries whose comparative advantage is their low cost of borrowings, which they can pass on to their borrowers. All other goals, or reinventions like the "knowledge bank", emanate from this fundamental USP. This has rested on three foundations: a substantial capital base, a large fraction of which is callable from non-borrowing major shareholders; substantial equity, which lowers the costs of funds; and borrowers' willingness to service their debts.

If the is to be a partnership of equals, then each country has to put in roughly equal amounts of capital. But then its size will be determined by its weakest member and it will be too small to matter. And if it is large enough to matter, then its membership will have to include existing major powers, which will make it similar to existing IFIs - raising the question, why reinvent the wheel? If not, only one of the BRICS nations has the financial clout to make it happen: China. If so, it is only reasonable that China will - as the US did seven decades ago - ask for a commensurate say in the institution's governance. For those in India who believe that will not be the case, perhaps they too should camp out in Daulat Beg Oldi.

As the gap between China and India widens, it becomes even more imperative for India to strengthen like the ADB, where other major powers are present. If the goal is to raise more capital for long-term infrastructure projects, improving governance within the country and deepening domestic bond markets should be the first port of call rather than the crutch of IFIs. If within the last year, Zambia could raise $750 million in a 10-year euro bond issue, Nigeria $500 million and Rwanda $400 million (also a 10-year euro bond issue), it means that a lack of capital is not the principal handicap that is holding back infrastructure investments. A BRICS bank will not solve that.


The writer is director of the Centre for the Advanced Study of India at the University of Pennsylvania

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