Multilateral competition

Bretton Woods institutions must change to stay relevant

Don't want to miss the best from Business Standard?

For almost seven decades, the World Bank and the International Monetary Fund (IMF), the two financial institutions set up under the Bretton Woods agreement of 1944, dominated the global economic landscape. For perhaps the last of those decades, there have been searching questions about the relevance and value of these institutions. The IMF, whose mandate was originally to support developing economies in crisis situations on account of their balance of payments, has been focused on rescuing Europe from a breakdown over the past couple of years, with funds being raised partly from those very developing economies. The World Bank's hegemony over finance for long-term development purposes has been increasingly challenged by alternatives, particularly private capital flows. Yet the governance and control of these two institutions seem oblivious to these fundamental changes. The advanced economies continue to view them as captive institutions, in terms of both voting rights and, particularly galling to the emerging economy group, the right to appoint the heads of both institutions. This was always going to be an untenable balance and its intrinsic contradictions are now manifesting in the emergence of two structures to compete with the Bretton Woods duo.

The five BRICS countries - Brazil, Russia, India, China and South Africa - came together last year to set up the BRICS Bank, to be headquartered in Shanghai and headed in the first instance by an Indian. It will be financed by capital contributions from the five and focus on financing infrastructure in the member countries. They also agreed to set up the Contingent Reserve Arrangement, which pools their considerable foreign exchange reserves to help any of the members facing balance of payments difficulties. There is considerable scepticism about the impact of the bank, which is limited by the resources and demands of its founding countries. However, China is also at the centre of what appears to be a more attractive model, the Asian Infrastructure Investment Bank, or AIIB, which will have a larger resource base and lending mandate. Strikingly, in a conference in Beijing a couple of weeks ago, both the IMF and the Asian Development Bank endorsed the idea as a significant addition to the capacity for global development finance. The United Kingdom also jumped on the bandwagon, seeing significant business opportunities. The only major holdouts were the United States and Japan, both dominant stakeholders in the Bretton Woods legacy.

India will certainly be one of the largest global seekers of infrastructure finance. Equally, however, it cannot afford to become dependent on China's goodwill for that finance. If the AIIB framework manages to successfully avoid Chinese dominance through the participation of several other large economies, then India would benefit greatly from both meaningful participation in its governance structure and a new and significant source of funding. The government should take steps to ensure constructive participation in the setting up of the institution and its management and governance. The big losers, inevitably, will be the Bretton Woods institutions, which must now think about what they need to do to remain relevant and valued by the global community. Meaningful governance reforms, too long delayed, are the inevitable first steps.