The global economic architecture is witnessing a gradual transformation of the institutions responsible for governing lending to the developing world. The international institutions formed during the Bretton Woods era, such as the World Bank, the IMF and the WTO have long served as multilateral institutions responsible for addressing critical issues in the international financial system. However, in recent years, large developing economies have started to enjoy an increasing role in the world economy and on political platforms. Due to issues such as “irrational conditionalities” (through Structural Adjustment Programs imposed in the past by the World Bank, IMF and austerity measures today; see W. Easterly), inadequate representation in institutional governance mechanisms (like IMF), unfair treatment meted to some of the emerging economies in organisations like the WTO (case of Agricultural subsidies) etc., these countries are now losing faith in the old Bretton Woods framework of multilateral economic governance.
China’s recent success in establishing the Asian Infrastructure Investment Bank (AIIB) has been widely regarded as a diplomatic fiasco for the United States. Looking at the larger picture, this rise of AIIB (now with more than 57 founding members) can be seen as the start of the institutional competition in global economic governance. For the developing countries, which are in greater need of capital to finance a sustainable growth-led development plan, this competition between the old “multilateral” financial order led by advanced economies against a new “regionally” focused financial order led by developing economies (like China, India and others) looks like a good thing for two reasons:
- Developing countries will be only too pleased to borrow without the restrictive conditions that the World Bank, IMF and existing regional development banks typically been attaching to their loans. For example, East Asia now is likely to get more of the roughly $8 trillion that the Asia Development Bank has estimated for the region to keep growing through 2020, in addition to getting infrastructural loans from AIIB.
- Both advanced and developing economies have been engulfed in crises due to a massive overhang of liquidity which has exacerbated debt levels. One may blame this on the unconventional nature of monetary and fiscal policies implemented in the advanced economies since the 2008 global financial crisis and the on-going Eurozone crisis. However, the development of new regional financial institutions (like AIIB and the BRICS New Development Bank) can undoubtedly help in dealing with such problems of liquidity through “target based” approaches to lending (based on long term goals of increasing competitiveness & financial inclusion for these emerging economies), while simultaneously also performing the role of acting as “knowledge banks” for such member nations.
The second reason here is of particular significance in (re)defining the nature of economic and financial governance for the future institutional architecture that shall govern developing countries. Problems like the lack of affordable access to credit are central to the financial problems faced by these economies today, where growth and development levels have been circumscribed due to deep-rooted challenges such as rising income inequality, insufficient job opportunities, low skill development, wide rural-urban disparity and so on.
All this raises fundamental questions on the goals and parameters that should be used by international/regional/inter-regional institutions in order to effectively finance long term economic growth and development. In the next section, I explore some of these benchmark indicators for developing countries.
Financing development in emerging market economies
The focus of this article is limited to presenting some key parameters that are quite often ignored in designing policies on financial lending to emerging/developing economies. I concede that multilateral forums like the World Economic Forum, IBRD, IDA, IFC etc. have made efforts to understand economic development better. However, there is a lack of a clear set of multivariate benchmark indicators that could also be drawn from some of the existing indices/frameworks and used by existing and new regional institutions as a basis for channelising the flow of institutional finance across emerging economies.
While deciding the process of financial lending, it is prudent to identify goals and take into account factors such as local ownership, private investment, innovation, multi-stakeholder partnerships accompanied with the process of institutional development through mutual accountability and transparency. Any set of multivariate benchmark indicators for developing countries in my opinion, thus, should include at least 4 of these key macro-development goals:
a) A focus on increasing competitiveness: a more competitive economy is likely to grow faster over time. This is especially important for emerging market economies like India, Brazil, Turkey, South Africa, Indonesia etc. In the Global Competitiveness Index, there are some key ‘pillars’ that can be used as benchmarks for institutional financing to emerging economies. The breakdown of the parameters used in computing the index gives us a clear idea between the sequencing of basic requirements, efficiency enhancers and innovation drivers based on the nature and stage of development within an economy. A measure like this can significantly help in planning the distribution of institutional finance based on an economy’s stage of development and areas of focus to raise its level of productivity.
b) Investing in financial inclusion: there is a proven demand for financial services at all levels of income, but for a variety of reasons the market has failed to meet those demands for poorer people, forcing many to rely on riskier and more expensive methods to borrow, save, and secure their assets. The financial inclusion process is critical for an economy to grow and develop sustainably. Measuring inclusion within economies can then help institutions channelise money for financial development accordingly.
For example, the World Economic Forum’s Global Financial Inclusion initiative engages a variety of stakeholders – from financial services and telecommunications providers, to retail and consumer industries, local and international development institutions, civil-society organisations, regulators, policy-makers and academia – to develop new collaborative models to promote improved and expanded access to financial services.
The Global Financial Inclusion (Global Findex) database in turn also offers a measurement index maintained by the International Finance Cooperation (IFC) providing in-depth data showing how people save, borrow, make payments, and manage risk. Currently, it is the world’s most comprehensive set of data providing consistent measures of people’s use of financial services across economies and over time.
c) Investing in Ease of Doing Business: The Doing Business studies conducted by the World Bank group and others presents international financial institutions (say like AIIB, NDB etc.) with a clear map to target financial investments and lines of credit to countries in areas where the business environment needs improvement. With prior knowledge of an economy’s weak areas (e.g. access to credit, electricity, infrastructural capacity etc.) institutions are also able to play a “knowledge bank” role in addition to granting developmental finance.
Of course, aspects such as property registration, enforcement of contracts, tax reforms etc. are governed by individual country governments and laws. However, any form of financial lending is accompanied by conditionality and if the conditions are set specific to a country’s business/financial milieu based on selected Doing Business parameters, it facilitates the process of providing a positive investment climate.
d) Banking on “Public-Private Partnership (PPP) models”: the 2015 Quadrennial Diplomacy and Development Review, released by the State Department and the US Agency for International Development, outlines a PPP framework designed to genuinely leverage multiple sources of money and expertise in broad coalitions pursuing the same fundamental goal of allowing the government to divest some of its spending by involving the private sector.
Power Africa, for example, includes six US government agencies. Together they have committed more than $7billion over five years in financing, trade credits, insurance small business grants and direct government support to the energy sector in six partner countries. These investments are thus, likely to leverage billions in private sector commitments, starting with more than $9 billion from a range of companies including the General Electric.
According to Anne Marie Slaughter, Power Africa takes a “transaction-centered approach” creating teams to align incentives among “host governments, the private sector and donors”. Unlike big government to government transfers, which can often end up in the pockets of officials, the point is here to ensure that deals actually get done and investments flow to their intended destination.
The Human Development Index is also one such indicator that the new/existing multilateral frameworks need to take more seriously. What is surprising is that in spite of the knowledge present on some of these goals through existing quantifiable measures, the policies of financial lending often ignore the essence of lending for guiding an emerging economy towards sustainable economic growth and development.
Thereby, any discourse on (re)defining the structure of economic and financial governance with the rising regional institutional mechanisms too must take into account the need for changes in the identification of goals and parameters to foster higher economic growth and sustained long term development in emerging market economies.
This article is a longer abstract version of a paper titled Governing Dynamics of a Global Economic Order: Case for Developing Countries, which explores how certain long term goals for developing countries can be used as the governing rationale for distribution of credit in a re-designed/new framework for international economic governance.
Cover image credit: flickr/janinsanfran (CC BY-NC-ND 2.0)
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