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DAILY NEWS ANALYSIS

Monthly DNA

16 Nov, 2021

29 Min Read

AIIB and India

GS-II : International organisation Major International Organizations

GS-Paper-2 International organisation (PT-MAINS)

India and AIIB:

  • India was among the AIIB’s 57 founding members in 2016.
  • It is also its second-largest shareholder (with 7.62% voting shares) after China (26.06%).
  • It has received USD 4.35 billion from the Bank.
  • This is the highest of any country, with the bank so far approving loans of USD 19.6 billion to support 87 projects in 24 countries. Turkey is second with USD 1.95 billion.
  • AIIB has approved financing projects in India in a host of sectors like energy, transport and water including the Bangalore metro rail project (USD 335 million), Gujarat rural roads project (USD 329 million) and Phase 3 of the Mumbai urban transport project (USD 500 million).
  • In a recent virtual meeting, India said that it expects AIIB to introduce new financing instruments, provide financing for social infrastructure and to integrate the development of climate resilient and sustainable energy access infrastructure into AIIB’s recovery response to the Covid-19 crisis.
  • This implies that India is unlikely to alter its engagement with the China-led Asian Infrastructure Investment Bank (AIIB), despite a host of offensive measures announced recently to reduce its trade and investment links with China.

Chinese Angle:

  • In June 2020, AIIB approved USD 500 million for Covid-19 Emergency Response Fund and Health Systems Preparedness Project and another USD 750 million for Covid-19 Active Response and Expenditure Support, in a co-financing arrangement with the Asian Development Bank (ADB).
  • USD 750 million loan was approved two days after the clash in Galwan Valley in Ladakh along the India-China border.
  • It has supported several projects under the Belt and Road Initiative (BRI) framework, but is not formally linked to the plan.
  • India has concerns over the China-Pakistan Economic Corridor - a part of the BRI.

Asian Infrastructure Investment Bank

  • The AIIB is a multilateral development bank with a mission to improve social and economic outcomes in Asia.
  • Headquartered in Beijing (China), it began operations in January 2016 and has now grown to 103 approved members worldwide.
  • India should continue to engage with AIIB as it will be able to access resources for the financing of national and cross-border infrastructure projects from the Bank. AIIB is also significant as the World Bank is continued to be dominated by the USA while Japan has more influence over Asian Development Bank (ADB). Further, India needs to ensure that its own interests are served by its membership very explicitly. It should make sure that AIIB doesn’t end up becoming a tool of Chinese geopolitical agenda.

Source: TH

Asian Development Bank (ADB)

GS-II : International organisation Major International Organizations

Asian Development Bank (ADB)

  • Asian Development Bank (ADB) is a regional development bank established on 19 December 1966.
  • The Headquarters of ADB is in the Ortigas Center located in the city of Mandaluyong, Metro Manila, Philippines.
  • India is a founding member of the Asian Development Bank (ADB).
  • It aims to promote social and economic development in Asia and the Pacific.

Members of the Asian Development Bank (ADB)

  • The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly the Economic Commission for Asia and the Far East or ECAFE) and non-regional developed countries.
  • From 31 members at its establishment, ADB now has 68 members.
  • The ADB was modelled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with members' capital subscriptions.
  • ADB releases an annual report called Asian Development Outlook that summarizes its operations, budget and other materials for review by the public. ADB is an official United Nations Observer. https://www.aspireias.com/daily-news-analysis-current-affairs/Asian-Development-Outlook-ADO
  • As of 31 December 2016, Japan holds the largest proportion of shares at 15.677%, closely followed by United States with 15.567% capital share. China holds 6.473%, India holds 6.359%, and Australia holds 5.812%.

Roles and functions of Asian Development Bank (ADB)

  • ADB defines itself as a social development organization that is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration.
  • This is carried out through investments – in the form of loans, grants and information sharing – in infrastructure, health care services, financial and public administration systems, helping nations prepare for the impact of climate change or better manage their natural resources, as well as other areas.

Masala Bonds and ADB

  • Asian Development Bank (ADB) has listed its 10-year masala bonds worth Rs.850 crore on the global debt listing platform of India INX (BSE-owned exchange).

What are masala bonds?

  • Masala Bonds are rupee-denominated bonds i.e the funds would be raised from overseas market in Indian rupees.
  • Any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
  • Conditions of Masala Bonds:
  1. RBI mandates that the money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
  2. It also can’t be used for investing in capital markets, purchase of land and on-lending to other entities for such activities as stated above.

About the move and its significance

  • The proceeds would be used to support local currency lending and investment in India.
  • ADB’s masala bonds are listed on both the Luxembourg exchange and India INX.
  • This is the first time a foreign issuer and a supranational is doing a primary listing with India INX. This will help further in making GIFT IFSC (Gujarat International Finance Tec-City -- International Financial Services Centre) a global hub for fundraising by Indian and Foreign issuers.

COVID 19 and Asian Development Bank (ADB)

  • The Asian Development Bank has approved 1.5 billion dollars loan to India to help fund its fight against coronavirus pandemic.
  • The loan has been sanctioned with a view to support immediate priorities such as disease containment and prevention, as well as social protection for the poor and economically vulnerable sections. The quick-disbursing fund is part of a larger package of support that ADB will provide in close coordination with the government and other development partners.

Why in news?

  • The Asian Development Bank (ADB) and the Government of India today signed a $300 million loan as additional financing to scale up the improvement of rural connectivity to help boost the rural economy in the state of Maharashtra.
  • The Government of India and the Asian Development Bank (ADB) today signed a $112 million loan to develop water supply infrastructure and strengthen the capacities of urban local bodies (ULBs) for improved service delivery in four towns in the state of Jharkhand.

Source: PIB

World bank and IMF (International Monetary Fund)

GS-II : International Relations International Organizations

World bank and IMF (International Monetary Fund)

Part of: GS-II- International organisation (PT-MAINS-PERSONALITY TEST)

The World Bank (WB) is an international organization that provides facilities related to “finance, advice, and research to developing nations” in order to bolster their economic development. It plays a stellar role in providing financial and technical assistance to developing countries across the globe. It is a unique financial institution that provides partnerships to reduce poverty and support economic development. It is actually composed of two institutions namely the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). However, there are five institutions within the larger World Bank group. They are the following:

The World Bank Group consists of five organizations:

1. The International Bank for Reconstruction and Development

The International Bank for Reconstruction and Development (IBRD) lends to governments of middle-income and creditworthy low-income countries.

2. The International Development Association

The International Development Association (IDA) provides interest-free loans — called credits — and grants to governments of the poorest countries. It is called the soft loan window of the World Bank. Together, IBRD and IDA make up the World Bank.

3. The International Finance Corporation

The International Finance Corporation (IFC) is the largest global development institution focused exclusively on the private sector. It helps developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments.

4. The Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to promote foreign direct investment into developing countries to support economic growth, reduce poverty, and improve people’s lives. MIGA fulfils this mandate by offering political risk insurance (guarantees) to investors and lenders.

5. The International Centre for Settlement of Investment Disputes

The International Centre for Settlement of Investment Disputes (ICSID) provides international facilities for conciliation and arbitration of investment disputes.

Purpose and Function of the World Bank

The World Bank provides low-interest loans, interest-free credit, and grants. It focuses on improving education, health, and infrastructure. It also uses funds to modernize a country’s financial sector, agriculture, and natural resources management. The Bank’s stated purpose is to “bridge the economic divide between poor and rich countries”. It does this by turning “rich country resources into poor country growth”. It has a long-term vision to “achieve sustainable poverty reduction”.

To achieve this goal, the World Bank focuses on six areas:

  • Overcome poverty by spurring growth;
  • Help reconstruct countries emerging from war;
  • Provide a customized solution to help middle-income countries remain out of poverty;
  • Spur governments to prevent climate change;
  • It helps them control communicable diseases, especially HIV/AIDS, and malaria;
  • It also manages international financial crises and promotes free trade.

What is IMF (The International Monetary Fund)?

The International Monetary Fund (IMF) is an international organization that aims to promote global economic growth and financial stability meant to encourage international trade and reducing poverty. It is working to foster global monetary cooperation, secure financial stability, facilitate international trade, and promote high employment and sustainable economic growth. The primary purpose of the IMF is to ensure the stability of the international system- the system of exchange rates and international payments. Although the IMF is an agency of the United Nations, it has its own charter, structure, and financing arrangements. The IMF not only works with its 187 members, but it also collaborates with the World Bank, World Trade Organization, and agencies of the United Nations. To become a member of the IMF, countries must apply and be accepted by the other members. Because membership of the World Bank is conditional on being a member of the IMF, the World Bank also has 187 members. These members govern the World Bank through a Board of Governors. Apart from working with developing countries on individual projects, the World Bank also works with various international institutions, along with professional and academic bodies.

Similarities between the WB and IMF

  • Both the International Monetary Fund and the World Bank were formed together at Bretton Woods, New Hampshire, in July 1944. They are called Bretton woods twins.
  • Both were created to support the world economy in their own unique ways.
  • Both are headquartered in Washington D.C, the U.S.A.
  • They have the same membership as no admission to the World Bank is possible without the IMF membership.
  • The management structure of the World Bank is largely similar to that of the IMF. Voting rights in these institutions depend primarily on the capital contribution of the member countries.

Differences between the WB and the IMF

Despite similarities, however, the Bank and the IMF remain distinct. Following differences exist between them:

  • The World Bank is primarily a development institution but the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.
  • The IMF exists to preserve an orderly monetary system whereas the World Bank performs an economic development role.
  • Both have different purposes. The IMF supervises the economic policies of its members and expects them to allow the free exchange of national currencies. To keep this financial order, the IMF also acts as a provider of emergency loans to members who run into difficulties, in exchange for a promise from the member to reform its economic policies.
  • The World Bank finances economic development among poorer nations by funding specific and targeted projects, aimed at helping to raise productivity. The World Bank consists of two organizations: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD lends to developing nations at preferential interest rates, while the IDA only lends to the poorest nations, on an interest-free basis.
  • They have different funding sources. The IMF raises its money through membership fees, known as quotas. Each member country pays a quota based on its relative economic size so that the larger economies pay more. The World Bank raises most of its money through borrowing by issuing bonds to investors. It also receives grants from donors.
  • The IMF exists primarily to stabilize exchange rates, while the World Bank’s primary goal is to reduce poverty.

Criticism of the WB and the IMF

  • The International Monetary Fund promotes monetary cooperation internationally and offers advice and assistance to facilitate building and maintaining a country’s economy. The IMF also provides loans and helps countries develop policy programs that solve balance of payment problems. However, the loans offered by the IMF are loaded with conditions.
  • Critics are concerned about the ‘conditionalities’ imposed on borrower countries. The World Bank and the IMF often attach loan conditionalities based on what is termed the ‘Washington Consensus’, focusing on liberalization—of trade, investment and the financial sector—, and deregulation and privatization of nationalized industries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances. Additionally, the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries.
  • Both the WB and the IMF have been accused of coercing poor countries to undertake structural adjustment programmes (SAPs) under the aegis of economic globalization. Sometimes, this has led to the under-development of these economies bringing severe domestic crises in multiple dimensions. This contributes to a yawning economic gap between different countries across the globe.
  • The World Bank’s role in the global climate change finance architecture has also caused much controversy. Civil society groups see the Bank as unfit for a role in climate finance because of the conditionalities and advisory services usually attached to its loans.
  • The WB has been accused of financing unsustainable carbon-intensive developmental projects. Hence, there is an increasing call from environmental activists that the WB and IMF should finance only carbon-neutral sustainable development projects.
  • There are also concerns related to the accountability of the projects run by them, especially in the Third World countries.
  • The WB and the IMF have also been criticised for being Western-dominated undemocratic bodies. Decisions are made and policies implemented by leading industrialized countries because they represent the largest donors without much consultation with poor and developing countries.
  • The IMF has a quota system which is yet to give adequate weightage to emerging economies like India, China, and Brazil despite their increased economic importance in contemporary times. The global economic centre of gravity has shifted from the “global North” to the “global south”. But these Bretton woods institutions are yet to realize that even though there has been the formation of the BRICS bank and the AIIB.
  • There are also ethical issues related to the funding of types of projects by the World Bank. For example, the funding of hydroelectric dams in some countries by the WB has resulted in massive displacement of the indigenous peoples.
  • The WB’s propensity to privilege the private sector and market forces have brought about justifiable concerns regarding the sovereign decision-making capabilities of states getting tied funds from the World Bank.
  • The Bank’s private-sector lending arm – the International Finance Corporation (IFC) – has also been criticised for its business model, the increasing use of financial intermediaries such as private equity funds, and funding of companies associated with tax havens.
  • Critics of the World Bank and the IMF are also apprehensive about the role of the Bretton Woods institutions in shaping the development discourse through their research, training, and publishing activities. Their views and prescriptions may undermine or eliminate alternative perspectives on development.

Critical Role of the Bretton Woods Project

It was established in 1995 by the UK-based Bond Development and Environment Group (DEG) to support civil society to monitor the negative developmental impacts of World Bank and IMF policies and activities. The Bretton Woods Project (BWP) envisions a global economic system that operates on the basis of “primary principles of justice, equity, gender equality, human rights, and environmental sustainability”. It is supposed to work with “international institutions that are democratic, inclusive, transparent, accountable, and responsive to citizens, especially the poorest and most vulnerable”. The Bretton Woods Project focuses on the World Bank and the International Monetary Fund (IMF) to challenge their power. It is meant to “open space for civil society and social movements to contribute to the development of policies that are gender transformative, equitable, environmentally sustainable and consistent with international human rights norms”.

Conclusion

Many of the criticisms aimed against the WB and IMF are historical and may not hold true in contemporary times. The two institutions are trying to reorient themselves as per the changed geo-economic realities and changing developmental requirements. The internal assessment has also been catalysed by the geopolitical and geo-economic impact of the BRICS bank and the AIIB as a challenge to the Bretton Woods institutions. Hence, the national governments should undertake a calibrated economic liberalization maintaining the due autonomy of their decision-making to have a win-win situation in tune with sustainable development ethics.

Source: PIB

BRICS

BRICS is an acronym for the grouping of the world’s leading emerging economies, namely Brazil, Russia, India, China, and South Africa. History of BRICS The acronym "BRICS" was initiallyformulated in 2001by economistJim O'Neill, of Goldman Sachs, in a report named “Building Better Economic BRICS” on growth prospects for the economies… Read More

New Development Bank (NDB) - BRICS

History of New Development Bank (NDB) by BRICS Because of over domination of the USA and EU in IMF, at the fourth BRICS Summit in New Delhi (2012), the leaders of Brazil, Russia, India, China, and South Africa considered the possibility of setting up a new Development Bank to mobilize… Read More

Contingent Reserve Arrangement (CRA) – BRICS

Introduction Considering the increasing instances of global financial crisis, BRICS nations signed BRICS Contingent Reserve Arrangement (CRA) in 2014 as part of Fortaleza Declaration at Sixth BRICS summit. The CRA is generally seen as a competitor to the International Monetary Fund (IMF) and along with BRICS New Development Bank (NDB)… Read More

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