By Kandaswami Subramanian
The term of Robert Zoëllick as President of the International Bank for Reconstruction and Development (IBRD) or the World Bank is ending in June. It is somewhat intriguing that this has not led to a scramble for the post, especially among the BRICS. They were quite vocal last year when the post of Managing Director of the International Monetary Fund (IMF) fell vacant amid a sex scandal involving Dominique Straus Kahn. Sadly, the BRICS lost the crown.
There are interesting debates among financial analysts and reporters in the U.S. press about the suitability of a candidate being considered by the Obama administration for the post viz. Lawrence Summers. Developing countries, including China, have not so far evinced any interest and remained strongly silent. What is the background and what are the connected issues?
Robert Zoëllick succeeded Paul Wolfowitz as the Bank President in May 2007.
Paul was an iconic, swashbuckling hit man of the Bush administration who carried forward its foreign policy objectives. Though he was undeserving on all accounts, he was vaulted to the high office in 2005 in disregard of global opinion. As the World Socialist web site described [i], “His selection was a calculated slap in the face by the Bush administration to the vast majority of countries and governments which had in one way or another opposed the Invasion of Iraq.”
During his short stint in the Bank, Paul rode rough shod over senior staff and attempted to subvert its policies. He tried to turn them into a continuum of Bush administration policies. He showed scant regard for Bank’s rules, culture or norms. Rather, he looked upon the Bank as an extended arm of the State Department. He demoralized the Bank staff across the board and stymied its operations. Though he was despised or unwanted by most members and outraged the developing country members, they were helpless and could not remove him from the post. Ultimately, what brought his downfall was not his truculence or schizophrenia, but a sex scandal which exposed that he trying to help his girlfriend with a contract. Within days of Paul’s exit, Zoëllick was brought in.
Tempers did cool down with Zoëllick’s arrival. Those were halcyon, pre-crisis days when the U.S.’ writ ran unquestioned; and its sway over the Fund and the Bank were total. The charges such as the U.S.’ hegemony over the Bank or “democratic deficits” in the management of the Washington Twins became louder in later years, especially after the eruption of the financial crisis in 2008 and the formation of the G-20. There was no debate or election which led to the elevation of Zoëllick to the post. Indeed, there was the usual charade of consensus among Executive Directors which marks all the Board decisions. .
It is to the credit of Robert Zoëllick that he steered the ship away from the muddy waters left behind by Wolfowitz; and, very soon, built a rapport with the Bank staff, Member countries and, in particular, with the developing countries. He was a seasoned diplomat and had served successive administrations in the U.S. He belonged to the team of State Department hands who advocated a policy of treating China as a “stakeholder” in the global system rather than as U.S.’ ‘rival’ His stewardship of the Bank witnessed the induction of an eminent Chinese economist – Dr. Justin Lin Yifu- as the Chief Economist of the Bank.
He softened Bank’s approach to Sovereign Wealth Funds (SWFs). The Bank gave up its avowed aversion to SWFs and began to look to them as partners or benign investors. As a pragmatist, he recognized the growing role of China as a global investor and the need to work in tandem with them. He began to court China to supplement Bank’s resources at a time when global funding, even from its major (traditional) donors like the U.S., was shrinking.
It was clear that the Bank was losing its global pre-eminence in extending assistance to developing countries. Data revealed that loans extended by China’s banks were more than the assistance extended by the Bank. Fitch Ratings reported [ii] that the “State-owned EXIM lent about $67.2 billion to the world’s poorest region between 2001 and 2010 compared with the World Bank’s $54.7 billion.”
Under his leadership, the Bank has been exploring ways to co-operate with Beijing to avoid escalating competition over loan deals, especially in Africa. During one of his visits to China in 2010 he said, “One of the topics I have been discussing with the Chinese authorities is how we can work with them to share our mutual experience to support other developing countries, whether in south-east Asia or Africa.” [iii]
Surprisingly, Zoëllick had from time to time expressed views which were at variance with those held by the pundits in the I.M.F. His plea for Yuan’s inclusion in a wider basket for Special Drawing Rights (SDR) would have shocked the U.S. Treasury. He floated the idea of reverting to a gold standard type mechanism to resolve the currency rate conflicts. Of course this idea was laughed out of court by leading economists.
During the worst years of the crisis, especially in 2008 when food crisis hit famine levels in some countries in Asia and Africa, he was keen to safeguard their lives and showed readiness to put forward programs to save lives. He did reveal a compassion for the concerns over development and poverty alleviation in developing countries unlike those at the helm in the IMF obsessed with “austerity.” For once, it appeared that the Fund and the Bank were speaking with different voices! The jury is still out on the record of Zoëlick in the Bank. But he seems to have unhinged the Bank from Fund conditionalities. A successor to Zoëllick should continue with these policies and, in particular, the management style.
In the context of the continuing economic crisis which threatens to drive both the developed and developing economies into an abyss, the emerging economies would need the helping hand of the Bank more than the Fund. The Bank along with other multilateral development banks (MDBs) such as the Asian Development Bank, the African Development Bank, the Inter-American Development Bank, etc. may be more dependable than bilateral agencies. Given this compulsion, as we expressed earlier, it is intriguing why developing countries have not made any bid so far for the Bank’s top post.
Last year they made a bid for the IMF post and lost it to Europe. This was covered by a number of analyses I had undertaken when the battle was raging.[iv] The developing countries, especially the BRICS, could not unite and put forward a common candidate to challenge the nominee proposed by European members. As many analysts then commented, the battle was won even before Christine Lagarde’s candidature was proposed. China had its own agenda and, as I explained in another piece,[v] made its deal with Europe in advance of the election. And the BRICS lost the crown.
The appointment of Madam Lagarde as the Managing Director of the IMF has not showered the anticipated manna from heaven on the European members. The Euro zone is enmeshed in the worst financial crisis of the century. It threatens the survival of the European Union and also the future of the Euro as a common currency.
As days pass by, more problems arise and there are continuing squabbles within the E.U. Germany and France are pitted against each other; and the poorer southern countries on the periphery are pitted against both. Greek drama which was played in the early days was only the beginning and was the tip of an emerging deeper crisis. It is spreading to others like Portugal, Ireland, Italy, Spain, etc. Even France, with its sovereign rating downgraded by S&P, is not immune. As the frivolous quip goes: PIGS can’t fly!
The U.S. is distancing itself from the European quagmire though it could ill afford to forsake the interests of its banks which are deeply involved in European banks through derivatives, guarantees and many other subterranean devices. Between the U.S. and EU. there are no common objectives, policies or strategies. The U.S. is unwilling to get the IMF involved deeply into the European mess and wants the EU to find its own solutions based on its own resources and capabilities. The IMF, in its turn, is caught between the demands of the U.S. and the distress of the EU. There is a love hate relationship between the IMF and the European members, in particular those trapped in the crisis. The IMF prescriptions of austerity spell disaster for them. The Greek tragedy looms large in their horizon. The festering sores in Greece and the mass uprisings in other countries do not augur well for the Fund programs of austerity. There seems to be a greater concern to save the bond market than the welfare of the people trapped in the crisis losing jobs, houses, etc.
On date, there are talks or negotiations to build fire walls to arrest the spread of the crisis. The so-called stability funds (ESAC or ESC) remain up in the air without any finality about the contributions to be made by the EU members or the ECB. On top of these, there is the grim realization that the IMF does not have the resources to bail out Europe. It looks for contributions from developing countries with substantial foreign exchange reserves to come to its rescue. In a recent appeal issued last week, Lagarde has requested for a contribution of at least $500 billion to bail out Europe. In the earliest G-20 meeting held in London in 2009, the IMF could easily secure a commitment for $1 trillion. That consensus has now evaporated and the emerging economies are hesitant or unwilling.
Though some members of BRICS like Brazil have expressed sympathy outwardly and agreed to support, these are vague promises which cannot be backed by action. The ability of the members of the BRICS, other than China, to extend financial help is very much in doubt.
It is against this background that European leaders have not hesitated to seek help openly from China. Many of them seem to imagine that China which has a foreign exchange reserve of over $3.2 trillion has a moral duty to help them! They forget how shabbily they treated the heavily indebted poor countries (HIPC) in the past when they sought loan remission or rescheduling.
China has turned rather cautious and become aware of the risks attached to investments from its reserves. In the early years of the crisis (2008 and 2009) China appeared to play a rash hand by making investments in big banks and institutions which were in crisis. China lost heavily on some of them and there is a domestic backlash against such investments. Many Chinese leaders take the view that their reserves have come out of years of hard toil of its people through exports and should not be wasted away in trying to bail out richer countries in Europe. More importantly, the thinking at higher political levels seems to be that China’s financial assistance cannot come for free and has to be leveraged with hard bargains.
One demand is that the management structure of the IMF has to be radically reformed to reflect the latter day global economic balance and may not be allowed to continue as heretofore. Though loud communiques were issued repeatedly after G-20 meetings, except for minuscular (5%) changes in quotas, there has been no other change. In fact, while making these quota changes, the quotas of poorer African countries were reduced and given to middle income countries like China and India! Even after such changes in quotas or voting rights, the dominance of US and Europe continues unabated. Europe has not even given up the two extra board seats in the Bank.
The other demand is that if Europe wants huge financial assistance, it has to accord “market status” to China. This demand was made last year when the Chinese Premier made a trip to European countries and unveiled a program to buy Euro bonds and to make large value investments in Europe. Since then, China’s approach seems to have hardened. This became clear during the visit early this week of Chancellor Angela Merkel to Beijing. China also looks forward to long term investments in Europe getting higher returns.
Handelsblatt [vi] had a very gloomy report on the visit. Merkel was hoping to solicit help from China to save the euro. While Beijing is considering participation in European bailouts as a solution to the crisis, it does not plan on losing money. Prime Minister Wen Jiabao seems to have coldly announced that there would no promises to Europe of direct investment and “indebted countries will first have to make painful decisions and do their homework.” Another report suggests that China expects the following gesture in return: “EU recognition of China’s status as a market economy which would make it more difficult for European companies to take action against unfair competition or price dumping.”
For its own longer term interests, China has to be involved in European bailouts. There is an assessment that European crisis could hit China hard. This has been brought out in an IMF report [vii] released from its Beijing office. As the report says,
“The most salient risk is from an intensification of feedback loops between sovereign and bank funding pressures in the euro area, resulting in more protracted bank deleveraging and sizable contractions in credit and output in both Europe and elsewhere.
Should such a tail risk of financial volatility emanating from Europe be realized, it would drag China’s growth lower. The channels of contagion would be felt mainly through trade, with know-on effects to domestic demand. In the downside scenario.. China’s growth would fall by around 4 percentage points. The risks to China from Europe are, therefore, both large and tangible.”
Based on other available reports such as from Bloomberg, New York Times, Financial Times, etc. it is clear that China is has to help in its own larger interests and has to explore the mechanisms to help. Therefore Chinese leaders seem to suggest that they need to study in a closer way when the details of the firewalls such as European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) are spelt out. As Wen informed Merkel, China is “investigating and evaluating ways, through which the IMF, to be more deeply involved using the ESM or EFSF channels in solving the European debt issue.” [viii]
In short, China’s assistance will not be directly to EU but through the IMF. There are wheels within wheels. The E.U. has been seeking direct assistance from China to ward off the austerity trap. Sadly, the IMF is starved of cash and has to seek resources from China. At another level, there is evidence that the U.S. is unwilling to arrange large value assistance from China to Europe through the IMF. This will weaken its hold on the IMF. China, on its part, will not agree to any mechanism without driving in a heavy bargain. This may take the shape of more radical changes in the management structure and policies of the IMF. Such a development will undermine the dominance of the U.S. and Europe over the Fund. The net result is that Europe may have won the crown of getting the top IMF post in the last round; but it has lost the empire in the next round. This will result in profound and unexpected changes on the role of the IMF. Except in the early years of the IMF when it extended support to a couple of developed countries (U.K. and Finland?) in all its later years it has been functioning as an agency solely to assist developing countries which were perpetually in distress! Unfortunately, in the coming years, China willing, the IMF will have to spend most of its time and resources on developed countries, e.g. Europe!
This analysis takes us to the same conclusion put forward earlier: the World Bank has greater relevance for emerging economies than the IMF. If this assessment is correct, why is it that developing countries, especially the BRICS, have not staked a claim for the top post of the World Bank? This is odd as it is one of the demands which developing countries have been agitating for a long time and assumed louder dimensions with the formation of the G-20.
During the crisis and in the first two years of the crisis after the establishment of the G-20, there were several declarations and communiques on various macroeconomic issues such as financial stability, etc. One important issue related to the reform of the IMF and the World Bank. This was covered in the London communique and the statement issued after the Pittsburgh Summit. They were firmed up after the G-20 meeting in Gyeonghu, South Korea, on 24 October 2010. Managing Director Dominique Straus Kahn described them as, “This makes for the biggest reform ever in the governance of the institution.”
Both the London Communique and the Pittsburg Leaders’ Statement stressed that future criteria for electing heads of all international institutions need to be based upon qualifications instead of regional origin. Significantly they covered both the IMF and the World Bank. Unfortunately, the G-20 communiques did not provide details of such a process or the criteria included.
It is also interesting that at the BRICS Summit held in China in April last year the leaders issued a statement seeking to end West’s monopoly on leadership of the Bank and the Fund. They said that the management structure of the institutions needs to reflect changes in the world economy. “The selection calls for a bigger role for developing countries in the institutions.” Brazilian President Dilma Rousseff said, “We will insist on the fact that the governance at the IMF and the World Bank cannot be a systematic rotation between the U.S. and Europe, with other countries excluded.”
When the quota changes took place in the last week of April 2010, China overtook European nations in a shift in voting power in the World Bank. It increased the voting shares of some emerging and developing countries by 3.13 percent to a total of 47 percent. It put China’s share behind that of the U.S. and Japan but above Germany, Britain and France. “China’s share has increased because of its growth in the world economy,” said President Zoëllick at a news conference after Fund/Bank meetings. The U.S. maintained its majority stake of 16 percent and China’s share rose to 4.42 percent from 2.77. Zoë lick also added that the revision was not quite satisfactory and expressed the hope that for “the next review due in 2015 they would develop a new methodology to seek a more balanced voting system.” This was a tactful assurance given for the occasion more to assuage a few disheartened members than a firm commitment for action.
Many analysts have dismissed the changes made so far to the Bank’s management structure as more symbolic than substantive. After the minuscular quota changes, there has been no forward movement during the last two years. There was a flurry of statements and protestations when the battle for the IMF post was on. After that episode, there has been complete acquiescence of the BRICS on this front.
In fact, a High-Level Commission on Modernization of the World Bank Group Governance headed by Ernesto Zedillo, former President of Mexico and Director of Yale Center on Globalization, which had been constituted by the Bank had studied in depth the working of the Bank management and related issues. The report was issued in October 2009 [ix]. The Commission had criticized the manner in which the Bank Group functioned. It said, “The current structure risks producing strategies that do not enjoy widespread support among membership, alienating members and undermining their trust in the institution.”
Dealing with the leadership selection process in the Bank Group, it felt, it “is opaque and excludes most of the membership. There is no formal, transparent process for candidate searches. Though the Articles stipulate that the Executive Board appoints the President, in practice the selection process is ad hoc and takes place within the U.S. government t, with some consultation with other major shareholders.” It also noted that in every presidential selection process since the IBRD’s founding, there has only been one nominee- the one put forward by the U.S. Executive Director.” (Emphasis added.)
The Commission went into the reform of the election process and recommended a detailed process such as inviting member countries to nominate candidates, inviting nominations regardless of their nationality, evaluating the nomination and making a short list, and, finally, selection of a candidate by consensus and if there is no consensus, by vote. These recommendations which have been made post G-20 should not be disregarded.
There are straws in the wind foretelling the future. In an interview with Emerging Markets, [x] Zoëllick was asked whether he believed next year would see a president from an emerging or developing country. He said, “It was important the U.S. played a ‘larger role’ in multilateral institutions. He stressed the need for an American to head the Bank so that it could have close relations with the U.S. Congress. There were also reports last year that Hillary Clinton could be considered for the post. In no time it was denied by her and by the White House. One Senior Fellow in Brookings [xi] examined several options which Barack Obama has and also the political traps or pitfalls. He felt that an easy option would be for Obama to give one year extension to Zoë lick and leave the final choice to the next administration. He concluded, “Second best.. would be an open process with an American nominee who prevails in the absence of an emerging market nominee able to command broad support among the other 186 member countries.”
Bloomberg [xii] broke the news on 19 January that the U.S. Treasury was compiling a list of potential candidates to replace Zoëllick. It referred to Obama considering Lawrence Summers as a candidate. There were other reports too. It seems that his candidature has the support of inside officials in the administration, including Treasury Secretary Timothy Geithner and NEC Director Gene Sperling. The news has led to furious attacks on the proposal and the wisdom of nominating him. Everybody calls him ‘brilliant’ but his record is a series of tragic abortions.
Lawrence Summers has been a controversial economist who has attracted virulent criticism over the years about his views on many issues whether economic or non-economic. He carries a baggage of wrong doings or thinking. This is more so when viewed from the perspectives of developing countries.
One of the early assessments was by Charles Ferguson in The Chronicle.[xiii] Ferguson holds Summers responsible for the current financial crisis for which he did not any regret or apology. He refers to the revolving door relations between Treasury, Wall Street and academic power. As he puts, “summers’s career is the result of an extraordinary and unappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.”
During his early years in the World Bank as Chief Economist he worked against the interest of developing countries. He advocated a bizarre theme of fair distribution of toxic waste by working out an economic logic for dumping a load of toxic waste in the lowest wage country. This outraged developing countries and the report had to be withdrawn. Even otherwise, Summers is a neoliberal who has scant regard for the welfare aspirations of emerging economies. His record in Harvard where he doubted the ability of women to undertake scientific research is egregious and led to his ouster. He had also to leave Obama’s National Economic Council (NEC) due to his inability to get along with colleagues and other members. In his book Ron Suskind depicts Summers as the pre-eminently dysfunctional cog in the Obama White House’s financial decision-machine. No wonder he had to leave the White House and seek refuge in Harvard under his mentor Rubin.
Felix Salmon of Reuters [xiv] issued a strong plea to Obama against his nomination for the post. He explained that the Bank needs a superhuman manager. “The World Bank has more than 10,000 employees from over 160 countries, with offices in more than 100 countries around the world. The range of cultural expectations they bring to their jobs is truly enormous, and the amount of political jostling and mutual incomprehension which results is entirely predictable. In order to manage this rabble, you need a very high level of cultural and interpersonal sensitivity.”
Going by the past record of Summers whether academic, economic, political, personal or diplomatic he would be the least suited to hold the office. His appointment could create more or less the same situation which was seen when Paul Wolfowitz ran the show.
It is unlikely that developing countries will unite or suggest a common candidate. China seems to have conceded the post to the U.S. when it secured the elevation of Zhu Minh to a higher level in the IMF. It was called a “brand bargain.” Even if the G-20 does not suggest a common candidate, it is in its interest to stand against the nomination of Mr. Lawrence Summers. The U.S. may be persuaded to find another suitable candidate or give a short extension to Zoë lick. The U.S. may not be unwilling to concede their request notwithstanding Treasury-Wall Street- Summers cronyism.
(The writer is a Former Joint Secretary, Ministry of Finance, Government of India)
[i] Behind the World Bank’s ouster of Paul Wolfowitz, 19 May, 2007 available at http://www.wsws.org/articles/may2007/wolf-m19.shtml
[ii] China EXIM Lends More to Africa Than World Bank, Says Fitch, Dec. 28, 2011 available at http://www.businessweek.com/news/2011-12-29/china-exim-lends-more-to-africa-than-world…
[iii] Geoff Dyer and Jamil Anderlini, China’s lending hits new heights, Financial Times, January 17, 2011
[iv] Subramanian, K (2011 A), How the BRICS lost the crown, 6 July, 2011, Paper 4585, South Asia Analysis Group, available at htt://www.southasiaanalysis.org/papers46/papers4585 html
[v] -do- (2011 B), More on How the BRICS Lost the Crown: The Chinese Angle, 9 July, 2011, Paper No.4593, South Asia Analysis Group at http://www.southanalysis.org/papers46/paper4593 html
[vi] People’s Republic of China gets rid of Chancellor, Handelsblatt, 3 February 2012.
[vii] International Monetary Fund, China Economic Outlook, February 6, 2012, Beijing.
[viii] Wen Raises Prospect of China Aiding European Rescue After Meeting Merkel, Bloomberg News, Feb. 3, 2012.
[ix] World Bank, Repowering the World Bank for the 21st Century, Report of the High-Level C omission on Modernization of World Bank Group Governance, October 2009.
[x] Emerging Markets, Zoë lick hints US will retain grip on Bank presidency, 22/09/2011, available at http://www.emergingmarkets.org/Article /2905731/zoellick-hints-US-will-retain-grip-on-B
[xi] Lex Rieffel, New World Bank President? Another Tough Choice for Obama, Brookings, September 20, 2011, at http://www.brookings.edu/opinions/2011/0920-new-world-bank-president-rieffel,aspx?p..
[xii] Bloomberg, Obama Said to Consider Nominating Summers as World Bank Chief, Jan. 19, 2012. It referred to Obama
[xiii] Charles Ferguson, Larry Summers and the Subversion of Economics, The Chronicle Review, October 3, 2010 at http;?/chronicle.com/article/Larry_Summersthe/124790/
[xiv] Felix Salmond, Done’t send Summers to the World Bank, Reuters, January 18, 2012.