Modi and economic diplomacy

The launching of a $100 billion New Development Bank at the Sixth BRICS Summit in Brazil on 15 July 2014 is a historic financing initiative among emerging economies, virtually throwing a challenge at the legitimacy of the post-war Bretton Woods Institutions with all their failings of the past.

Leaders of China, India, Russia, Brazil and South Africa signed the deeds to set up the NDB and for a Contingency Reserve Arrangement with $100 billion to help developing countries overcome short-term liquidity pressures, which opens an alternative window to IMF.

The New Development Bank, a major objective of promoting economic cooperation among emerging nations, had been agreed on at the Fifth BRICS Summit held in 2013. Now, its structure with an initial capital of 50 billion dollars to be shared equally by the five countries – instead of the major share from China as originally thought of – is more equitable. This is what Modi preferred. It will mainly finance infrastructure projects of developing countries. While NDB will be headquartered in Shanghai (China), India will nominate the first President of the new Bank, Russia will hold the first Chair of Board of Governors and Brazil the first Chair of Board of Directors.  Thus, each country is made to feel comfortable in an economically powerful grouping, whatever be geo-political issues at bilateral levels, such as the India-China border problem.

Here again, Modi’s talks with the Chinese President Xi Jinping may be said to have given a new momentum for an accelerated solution to the border problem, with the Chinese President making a fresh call for a ‘negotiated solution’ during Modi’s China visit scheduled for November. Continuing its charm offensive in India, as in a few other countries, the Chinese leaders are working on a grand strategy to clip the wings of America in the Asia-Pacific region in the wake of the Obama Administration’s ‘Asia Pivot’. International tensions and conflicts in the Middle East, where America is no longer asserting its traditional dominance and prefers collective approaches as in regard to Iran, are ideally suited for Beijing to pursue its own strategic pursuits.

While a $100-billion NDB would only be a fraction of global financing needs for infrastructure development, it is much more than a symbolic move. China hopes, as other nations, that this instrument would help to intensify economic cooperation among the five nations as well as become in course of time a dependable channel of assistance to other developing countries as well.

Both the development financing through NDB and the contingency financing mechanism seek to provide an alternative, however limited, to what the World Bank and IMF have been providing for emerging economies and other developing countries over decades. With their own Bank and CRA, the leaders expect intra-BRICS cooperation to be effectively promoted while these would also strengthen the existing global financing safety net and complement existing international arrangements, especially where large infrastructural and sustainable developmental projects are involved. Modi and other leaders have also committed themselves to further facilitating trade, enhancing financial cooperation and tackling tax-related challenges. BRICS would now become more effective, both within G-20 as well as in the wider international fora, in the evolution of global economic and financing policies, apart from raising economic cooperation among themselves to new levels.

The 2010 reforms to give greater legitimacy, credibility and relevance to IMF with greater voice in decision-making for leading emerging nations including China and India and other developing countries have been ratified by all nations except for the largest quota-holder, USA. The Congress never passed the Administration Budget in which the provision for IMF was embedded and Republicans have so far ignored the Administration requests for expeditious clearance of the reform proposal. The reforms were to come into force in 2012. IMF managing Director Christine Laggard had hinted if USA approval, pre-requisite for the mandated 85 per cent votes in favour, was not forthcoming, the Fund would have to consider ‘other options’. BRICs leaders at their Summit, without directly blaming USA, noted that the continuing delay in IMF reforms coming into effect ‘negatively impacts IMF’s legitimacy, credibility and effectiveness’. They urged IMF to move ahead with developing options for reform, in case the 2010 package did not get enforced by the end of 2014.

China is wary of American ‘intrusions’ in the Asian-Pacific region, in the context of its string of disputes with neighbouring countries over its claim for sovereignty over the entire South China seas. China is militarily backing its hold and blocking countries like Viet Nam with claims to explore for oil/minerals.

There have been clashes between China and Viet Nam, and recently Beijing completed drilling in a part of the sea claimed by Viet Nam. The Philippines, with equal claims, has sought international arbitration on the dispute, as favoured by the United States which has urged all nations to respect and safeguard the international waterways and resolve disputes bilaterally or through United Nations. In this first major visit abroad, Modi held talks earlier with President Putin of Russia and the Brazilian President Dilma Rousseff along with his extended discussions with President Jinping on bilateral trade and economic issues but the major focus was on the border problem. China has been trying to court Modi to take India-China cooperation to new levels and its leaders have always tended to emphasise generalities such as two great countries speaking with ‘one voice to make the world listen’.

But Modi has reportedly left no doubt as to how seriously India looked upon an early settlement of the border conflict and Jinping has given the impression of being more receptive to India’s stand. The Chinese President is due to come to India in September.

Our prime minister has a tight schedule of visits abroad for the rest of the year beginning with his visit to the United Nations General Assembly in September. He will go to Washington at the invitation of President Obama for a White House meeting then. Since China hosts this year’s APEC Summit, President Xi Jinping has invited Modi to attend the Summit, another diplomatic ploy, though India’s application for membership of APEC had been kept pending. India had, for long, not been regarded as a Pacific rim nation for APEC membership.