Global Significance of Chinese Investments. My Deliberations in Mumbai (04/03/2018)

Legends:

What are fitted values in statistics?

The values for an output variable that have been predicted by a model fitted to a set of data. a statistical is generally an equation, the graph of which includes or approximates a majority of data points in a given data set. Fitted values are generated by extending the model of past known data points in order to predict unknown values. These are also called predicted values.

What are outliers in statistics?

These are observation points that are distant from other observations and may arise due to variability in the measurement  or it may indicate experimental errors. These may also arise due to heavy tailed distribution.

What is LBS (Locational Banking statistics)?

The locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty, and by nationality of reporting banks. Both domestically-owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. This is consistent with the residency principle of national accounts, balance of payments and external debt statistics.

What is CEIC?

Census and Economic Information Centre

What are spillover effects?

These refer to the impact that seemingly unrelated events in one nation can have on the economies of other nations. since 2009, China has emerged a major source of spillover effects. This is because Chinese manufacturers have driven much of the global commodity demand growth since 2000. With China now being the second largest economy in the world, the number of countries that experience spillover effects from a Chinese slowdown is significant. China slowing down has a palpable impact on worldwide trade in metals, energy, grains and other commodities.

How does China deal with its Non-Performing Assets?

China adopted a four-point strategy to address the problems. The first was to reduce risks by strengthening banks and spearheading reforms of the state-owned enterprises (SOEs) by reducing their level of debt. The Chinese ensured that the nationalized banks were strengthened by raising disclosure standards across the board.

The second important measure was enacting laws that allowed the creation of asset management companies, equity participation and most importantly, asset-based securitization. The “securitization” approach is being taken by the Chinese to handle even their current NPA issue and is reportedly being piloted by a handful of large banks with specific emphasis on domestic investors. According to the International Monetary Fund (IMF), this is a prudent and preferred strategy since it gets assets off the balance sheets quickly and allows banks to receive cash which could be used for lending.

The third key measure that the Chinese took was to ensure that the government had the financial loss of debt “discounted” and debt equity swaps were allowed in case a growth opportunity existed. The term “debt-equity swap” (or “debt-equity conversion”) means the conversion of a heavily indebted or financially distressed company’s debt into equity or the acquisition by a company’s creditors of shares in that company paid for by the value of their loans to the company. Or, to put it more simply, debt-equity swaps transfer bank loans from the liabilities section of company balance sheets to common stock or additional paid-in capital in the shareholders’ equity section.

Let us imagine a company, as on the left-hand side of the below figure, with assets of 500, bank loans of 300, miscellaneous debt of 200, common stock of 50 and a carry-forward loss of 50. By converting 100 of its debt into equity (transferring 50 to common stock and 50 to additional paid-in capital), thereby improving the balance sheet position and depleting additional paid-in capital (or using the net income from the following year), as on the right-hand side of the figure, the company escapes insolvency. The former creditors become shareholders, suddenly acquiring 50% of the voting shares and control of the company.

The first benefit that results from this is the improvement in the company’s finances produced by the reduction in debt. The second benefit (from the change in control) is that the creditors become committed to reorganizing the company, and the scope for moral hazard by the management is limited. Another benefit is one peculiar to equity: a return (i.e., repayment) in the form of an increase in enterprise value in the future. In other words, the fact that the creditors stand to make a return on their original investment if the reorganization is successful and the value of the business rises means that, like the debtor company, they have more to gain from this than from simply writing off their loans. If the reorganization is not successful, the equity may, of course, prove worthless.

The fourth measure they took was producing incentives like tax breaks, exemption from administrative fees and transparent evaluations norms. These strategic measures ensured the Chinese were on top of the NPA issue in the early 2000s, when it was far larger than it is today. The noteworthy thing is that they were indeed successful in reducing NPAs. How is this relevant to India and how can we address the NPA issue more effectively?

For now, capital controls and the paying down of foreign currency loans imply that there are few channels through which a foreign-induced debt sell-off could trigger a collapse in asset prices. Despite concerns in 2016 over capital outflow, China’s foreign exchange reserves have stabilised.

But there is a long-term cost. China is now more vulnerable to capital outflow. Errors and omissions on its national accounts remain large, suggesting persistent unrecorded capital outflows. This loss of capital should act as a salutary reminder to those who believe that China can take the lead on globalisation or provide the investment or currency business to fuel things like a post-Brexit economy.

The Chinese government’s focus on debt management will mean tighter controls on speculative international investments. It will also provide a stern test of China’s centrally planned financial system for the foreseeable future.

Global Significance of Chinese investments

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Conjuncted: Balance of Payments in a Dirty Float System, or Why Central Banks Find It Ineligible to Conduct Independent Monetary Policies? Thought of the Day

If the rate of interest is partly a monetary phenomenon, money will have real effects working through variations in investment expenditure and the capital stock. Secondly, if there are unemployed resources, the impact of increases in the money supply will first be on output, and not on prices. It was, indeed, Keynes’s view expressed in his General Theory that throughout history the propensity to save has been greater than the propensity to invest, and that pervasive uncertainty and the desire for liquidity has in general kept the rate of interest too high. Given the prevailing economic conditions of the 1930s when Keynes was writing, it was no accident that he should have devoted part of the General Theory to a defence of mercantilism as containing important germs of truth:

What I want is to do justice to schools of thought which the classicals have treated as imbeciles for the last hundred years and, above all, to show that I am not really being so great an innovator, except as against the classical school, but have important predecessors, and am returning to an age-long tradition of common sense.

The mercantilists recognised, like Keynes, that the rate of interest is determined by monetary conditions, and that it could be too high to secure full employment, and in relation to the needs of growth. As Keynes put it in the General Theory:

mercantilist thought never supposed as later economists did [for example, Ricardo, and even Alfred Marshall] that there was a self-adjusting tendency by which the rate of interest would be established at the appropriate level [for full employment].

It was David Ricardo, in his The Principles of Political Economy and Taxation, who accepted and developed Say’s law of markets that supply creates its own demand, and who for the first time expounded the theory of comparative advantage, which laid the early foundations for orthodox trade and growth theory that has prevailed ever since. Ricardian trade theory, however, is real theory relating to the reallocation of real resources through trade which ignores the monetary aspects of trade; that is, the balance between exports and imports as trade takes place. In other words, it ignores the balance of payments effects of trade that arises as a result of trade specialization, and the feedback effects that the balance of payments can have on the real economy. Moreover, continuous full employment is assumed because supply creates its own demand through variations in the real rate of interest. These aspects question the prevalence of Ricardian theory in orthodox trade and growth theory to a large extent in today’s scenario. But in relation to trade, as Keynes put it:

free trade assumes that if you throw men out of work in one direction you re-employ them in another. As soon as that link in the chain is broken the whole of the free trade argument breaks down.

In other words, the real income gains from specialization may be offset by the real income losses from unemployment. Now, suppose that payments deficits arise in the process of international specialization and the freeing of trade, and the rate of interest has to be raised to attract foreign capital inflows to finance them. Or suppose deficits cannot be financed and income has to be deflated to reduce imports. The balance of payments consequences of trade may offset the real income gains from trade.

This raises the question of why the orthodoxy ignores the balance of payments? There are several reasons, both old and new, that all relate to the balance of payments as a self-adjusting process, or simply as a mirror image of autonomous capital flows, with no income adjustment implied. Until the First World War, the mechanism was the gold standard. The balance of payments was supposed to be self-equilibrating because countries in surplus, accumulating gold, would lose competitiveness through rising prices (Hume’s quantity theory of money), and countries in deficit losing gold would gain competitiveness through falling prices. The balance of payments was assumed effectively to look after itself through relative price adjustments without any change in income or output. After the external gold standard collapsed in 1931, the theory of flexible exchange rates was developed, and it was shown that if the real exchange rate is flexible, and the so-called Marshall–Lerner condition is satisfied (i.e. the sum of the price elasticities of demand for exports and imports is greater than unity), the balance of payments will equilibrate; again, without income adjustment.

In modern theory, balance of payments deficits are assumed to be inherently temporary as the outcome of inter-temporal decisions by private agents concerning consumption. Deficits are the outcome of rational decisions to consume now and pay later. Deficits are merely a form of consumption smoothing, and present no difficulty for countries. And then there is the Panglossian view that the current account of the balance of payments is of no consequence at all because it simply reflects the desire of foreigners to invest in a country. Current account deficits should be seen as a sign of economic success, not as a weakness.

It is not difficult to question how balance of payments looks after itself, or does not have consequences for long-run growth. As far as the old gold standard mechanism is concerned, instead of the price levels of deficit and surplus countries moving in opposite directions, there was a tendency in the nineteenth century for the price levels of countries to move together in the same direction. In practice, it was not movements in relative prices that equilibrated the balance of payments but expenditure and output changes associated with interest rate differentials. Interest rates rose in deficit countries which deflated demand and output, and fell in surplus countries stimulating demand.

On the question of flexible exchange rates as an equilibrating device, a distinction first needs to be made between the nominal exchange rate and the real exchange rate. It is easy for countries to adjust the nominal rate, but not so easy to adjust the real rate because competitors may “price to market” or retaliate, and domestic prices may rise with a nominal devaluation. Secondly, the Marshall–Lerner condition then has to be satisfied for the balance of payments to equilibrate. This may not be the case in the short run, or because of the nature of goods exported and imported by a particular country. The international evidence over the past almost half a century years since the breakdown of the Bretton Woods fixed exchange rate system suggests that exchange rate changes are not an efficient balance of payments adjustment weapon. Currencies appreciate and depreciate and still massive global imbalances of payments remain.

On the inter-temporal substitution effect, it is wrong to give the impression that inter-temporal shifts in consumption behaviour do not have real effects, particularly if interest rates have to rise to finance deficits caused by more consumption in the present if countries do not want their exchange rate to depreciate. On the view that deficits are a sign of success, an important distinction needs to be made between types of capital inflows. If the capital flows are autonomous, such as foreign direct investment, the argument is plausible, but if they are “accommodating” in the form of loans from the banking system or the sale of securities to foreign governments and international organizations, the probable need to raise interest rates will again have real effects by reducing investment and output domestically.

Balance of Payments in a Dirty Float System, or Why Central Banks Find It Ineligible to Conduct Independent Monetary Policies?

Developing Countries: The developing countries, marked in light blue, may prefer a fixed or managed exchange rate to a floating exchange rate. This is because sudden depreciation in their currency value poses a significant threat to the stability of their economies.

Here is Von Mises on Balance of Payments:

The surplus of the balance of payments that is not settled by the consignment of goods and services but by the transmission of money was long regarded as merely a consequence of the state of international trade. It is one of the great achievements of Classical political economy to have exposed the fundamental error in this view. It demonstrated that international movements of money are not consequences of the state of trade; that they constitute not the effect, but the cause, of a favorable or unfavorable trade balance. The precious metals are distributed among individuals and hence among nations according to the extent and intensity of their demand for money….the proposition is as true of money as of every other economic good, that its distribution among individual economic agents depends on its marginal utility … all economic goods, including of course money, tend to be distributed in such a way that a position of equilibrium among individuals is reached, when no further act of exchange that any individual could undertake would bring him any gain, any increase of subjective utility. In such a position of equilibrium, the total stock of money, just like the total stocks of commodities, is distributed among individuals according to the intensity with which they are able to express their demand for it in the market. Every displacement of the forces affecting the exchange ratio between money and other economic goods [i.e., the supply and demand for money] brings about a corresponding change in this distribution, until a new position of equilibrium is reached.

Balance of Payments – whether this is a monetary or a real phenomenon? The Monetary approach stresses that the balance of payments is essentially a monetary phenomenon. To be specific, it claims that money plays a vital role in determining the balance of payments. This approach does not deny the importance of non-monetary factors such as productivity changes, tariffs, government spending and taxation on the balance of payments. Indeed, it stresses the links between these factors and the money market. The Monetary approach does not assert that balance of payments problems are caused solely by monetary mismanagement or that monetary policy is the only possible cure. Rather, it emphasizes that the monetary process will bring about a cure of some kind (not necessarily very attractive) unless frustrated by deliberate monetary policy action. Policies that neglect or aggravate the monetary implications of deficits or surpluses will not be successful in their declared objectives.

The Monetary approach to the balance of payments applies specifically to a fixed exchange-rate regime. In this environment, it is the money supply that adjusts to money demand through international flows of money, which brings about equilibrium in the balance of payments. In this case, the money market determines the balance of payments. In a regime of flexible exchange rates, it is the money demand that adjusts to the money supply, which in turn is determined by the central bank. In a “managed float”, or “dirty float” scenario, in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries’ exchange rates by buying and selling currencies, both international money flows and exchange rate changes are anticipated, given the nature of the central bank intervention.

The Keynesian approach focuses mainly on the merchandise trade account, with the capital account incorporated in the analysis at a later date. Disequilibrium in the balance of payments is caused by both the current account and the capital account. The current account, however, is considered to be more important than the capital account for the balance of payments disequilibrium. The relative prices and relative income levels of domestic and foreign countries are responsible for the balance of payments disequilibrium condition.

The relative prices and exchange rate of a country, vis-à-vis its trading partners, will determine the competitiveness of that country’s goods and services. An adverse movement in the relative price structure of a country, ceteris paribus, would decrease its competitiveness relative to its trading partners. Keynesians argue that a devaluation of a country’s currency will improve the trade account and enhance competitiveness. In time, equilibrium will be restored in the trade account. From the Monetary approach’s point of view, the money market is the principal vehicle, if not the only one, that is responsible for a balance of payments disequilibrium. For the Keynesians, it is differences in relative prices and domestic absorption rates that determine the balance of payments outcome. In short, real factors are more important than monetary factors in determining the balance of payments outcome.

The Monetary approach states that in the long run, monetary variables cannot affect real variables such as output, employment and, in the case of the balance of payments, the trade account. In the short run, monetary variables will affect real variables. This is true in the case of the money supply, money demand, exchange rates, and interest rates. The influence of interest rates on foreign direct investment is not made clear in the Monetary approach. This is because the approach does not distinguish between different types and durations of capital flows and the money account.

The Keynesian approach considers the balance of payments as a real phenomenon. Factors such as relative prices, devaluations, and aggregate demand affect the real variables in the short as well as the long run. In addition, capital flows are divided into short and long term. Protagonists of this approach argue that it is the short-term capital flows and long-term portfolio investments that respond to monetary factors.

For the Monetary approach, the demand for money is a stable function of a few variables. In a world of stable money demand functions, the assumptions of this approach are all valid. However, the Keynesian approach is not anchored on the premise of a stable demand function. In fact, for Keynesians, money demand functions are not considered stable since velocity is not stable. Hence, the Monetary approach’s conclusions are not valid for the Keynesians. The Monetary approach does not specifically identify whether it is the current account or the capital account that is responsible for a balance of payments deficit or surplus. However, it may be important to be able to clearly attribute the deficit or surplus to either the current account or the capital account. This would have an implication on the determination of the net worth of a country. For example, a change in the net worth of country will occur if the capital account is in deficit, ceteris paribus. However, net worth declines if the deficit is in the current account. The Keynesian approach specifically identifies which account is responsible for balance of payments deficits or surpluses. The reason for this identification is due to the importance of a country’s net worth over time.

The Monetary approach argues that the response of wages to a change in the money supply is not symmetric due to resistance from workers and unions to wage reductions following a decrease in the money supply. Conversely, with an increase in the money supply, wages rise following an increase in prices caused by the money supply expansion. Strong resistance to a drop in wages may be due to contractual agreements and institutional rigidities. According to the Monetary approach, a given change in the money supply is similar to a change in exchange rates in terms of percentage changes. For the Keynesians, however, this is not the case. It is their belief that in the real world, exchange rates are motivated in part by political reasons as well as economic and monetary factors. Keynesians argue that the reaction of wage earners and unions to a decrease in the money supply compared to their reaction to a devaluation is different. A decrease in the money supply will reduce nominal wages, and such a reduction is unacceptable to labor and labor unions. On the other hand, all other things remaining equal, a devaluation lowers the real wage rate by increasing domestic prices. However, a devaluation normally does not bring forth resistance from labor unions, despite the fact that an outcome similar to a decrease in the money supply is produced. It is possible that labor unions tend to focus on the immediate, direct effects on wages rather than on the delayed, indirect effects produced by a devaluation. In essence, the results of a decrease in the money supply or a devaluation are the same in the Keynesian view.

The Keynesian approach regards the exchange rate as a relative price of domestic and foreign goods. A change in relative prices will lead to a decrease in exchange rates. In the case of a devaluation, domestic prices of the devaluating country will decline in terms of foreign (goods) prices by the amount of the devaluation in percentage terms. In a regime of flexible exchange rates, the outcome of the current and capital accounts determines the exchange rate. According to the Keynesians, it is the capital account that exerts a more significant influence on exchange rates. This view is different from the Monetary approach, which argues that it is the money market outcome – money supply and money demand – that determines the exchange rate. The factors that influence the money supply and money demand will indirectly influence the exchange rate.

Foreign Exchange Regimes: The above map shows which countries have adopted which exchange rate regime. Dark green is for free float, neon green is for managed float, blue is for currency peg, and red is for countries that use another country’s currency.

The two approaches hold different views on currency substitution. The Monetary approach assumes the substitution of currencies and believes that in practice, this occurs to a high degree. This implies that monetary policy is independent. In the Keynesian approach, currencies of different countries are not really substitutable, and hence, monetary policies are not independent. In a managed float regime, changes in exchange rates as well as monetary flows will occur to restore equilibrium in the monetary market and in the balance of payments, because of the money flows generated by intervention, and thus central banks cannot truly be independent in conducting their monetary policies.

Monitoring Policy/Legislation: A Case of IFIs and Legislative Oversight in the Indian Laboratory – My Upcoming Talk in Trivandrum, Kerala

Legislative oversight “is the obvious follow-on activity linked to lawmaking. After participating in law-making, the legislature’s main role is to see whether laws are effectively implemented and whether, in fact, they address and correct the problems as intended by their drafters.” — National Democratic Institute, “Strengthening Legislative Capacity in Legislative-Executive Relations”, Legislative Research Series, Paper #6, Washington, DC, 2000, p. 19.

Parliaments are indispensable institutions of democratic governance with a common goal to represent people and ensure public policy as informed by the people whose lives they impact. This fact is to be underlined across the spectrum, even if country-specific rules have molded Parliaments to uniqueness. For a true representation, citizens must have access to information about parliamentary proceedings, legislation, and policy, and be able to engage in continual dialogue with the parliamentarians. Lets call this engagement vertical for the sake of brevity. Horizontal, or lateral is when parliamentarians engage with one another as defined by stipulations of the institution in order to keep track of government’s dealings both internally or externally, and keep apace of regulatory changes, policy shifts, or governance frameworks. Complexity, undoubtedly is built into the very architecture of this institution, but in no way should act as a deterrent to control ex ante(1) engagement. If such deterrence exists, it becomes one of the common challenges facing any Parliament. In other words, such deterrence creates opacity about functioning of the Parliament, not just vertically, but even horizontally(2). Before getting cornered by allegations of a fallacy, or the above premise (or sets thereof) as begging the question, lets take a detour into analysis of why such a claim holds on tight.

1. Public influence over the Parliamentary deliberations, even if improving, has a lot of catching up to do. It is true that opacity is getting traded (in some quarters at least), but, not by transparency, rather by translucency. Instruments disclosing information, mechanisms of public consultations, even if only of administrative nature are progressive attempts at making representation ‘truly’ representative. But, enter deterrence in the form of likelihood of growing influence as exacerbative of expectations, and curbs follow suit. This is vertical as well as horizontal.
2. Parliamentarians are obligated to account for their functions more publicly. This appears a derivative of the earlier point, but crucially calls upon timely and routine accountability. A legitimate sense of ownership is enhanced here, by a tenor of codified conduct. But, enter deterrence in the form of compartmentalized nature of work at one end, and growing complexity of institutionalization at the other of the spectrum. This is consequential vertically, but touches aspects horizontally, more so in an implicated manner.

Though, the likelihood of other reasons strengthening the above analysis cannot be ruled out, the terrain is far from the context of this study, in that it primarily highlights gaps and then recommends solutions. As recommendations are to be kept at bay, it does not necessarily rule out resolution, which is principally to address premises and/or hypothesis for the study. Switching gears here from generic to specific, but still open to fluctuating for argument’s sake.

Parliamentary Oversight or variously called Legislative Oversight is an instrument of transparency, accountability, and responsible governance in a parliamentary-rooted democratic polity, when such a polity engages with International Financial Institutions, be they multilateral like the World Bank/International Monetary Fund/Asian Development Bank/European Investment Bank, or bilateral like JBIC/Chinese Development Bank/Exim banks.

This still is skeletal, and hence the imperative to add flesh to the bones. Continuing with engagements, these could be variegated ranging from decisions wrought by these institutions in order to effectuate policy-wide changes in democracies covering large swathes of economy like advocating neoliberal policies in line with what these institutions promulgate, bailing out countries in times of economic distress by imposing stern austerity measures as in the case of Greece(3) in EU at the moment, or Argentina(4) in South America a decade and a half back, or even India in 1981 or in 1991 (these need an elaborate treatment and will be dealt with beginning next paragraph), or pumping in capital under different garbs to erect projects with the intentional poverty alleviation programmes that ironically further neoliberal agenda, and as a result often times lead to tearing of the social fabric, economic slump and imprudent governance. The malaise is precipitated by lack of awareness and literacy, extreme levels of corruption, submission of population to oppression by either wide-scale displacement, forced evictions accompanied by unleashing law and order atrocities in collusion with those having myopic considerations for the vulnerable; severing economic means of livelihood, and subjecting vast populations to financial woes, and generally tearing down life where human rights are majorly realized only in terms of violations. Undoubtedly, these are some of the reasons very dear to sociologists, but an important reason that goes missing here and is not talked about often is the very system of democratically elected government invested with protecting and safeguarding its own people on the one hand and receptive to participatory forms in that form of government. In a nutshell, participatory form is always compromised in such engagements, and this is seen to occur not just the level of those who exercise their suffrage to elect the government, but also at the tier of those very elected representatives supposedly safeguarding their mass base(5). It is at this tier the need for parliamentary oversight is most strongly desirable. Well, this graft is in all likelihood an alleged screed or a harangue despite efforts to stay clear, and therefore, channeling it off course becomes imperative for the moment.

Back in 1981, the largest loan being concluded in the IMF’s history, the SDR(6) 5 billion that took many months in materializing, and thrashed by several informal meetings and negotiations was mired in extreme secrecy by the Fund and Government of India. But, how much ever hard it was to keep the deal clandestine it wasn’t much of a success either. “On the whole it is fortunate for journalism, scholarship and for the general right to know but unfortunate (at times mortifying) for the participants,” quipped N Ram(7), then based at Washington DC for The Hindu Group, and the prime archaeologist/excavator of this deal!! The record Extended Fund Facility (EFF) loan to India has, obviously, its precursors. But its size, scope and terms, the rising controversy over it, the unsubtle pressure exerted on the IMF management to tighten the screws on the “structural adjustment” loan do not appear to signal a new and toughened phase in the Fund’s relations with developing countries, big and small. But who can show that a multi-billion “medium-term” loan to a government in economic difficulty from a highly conscious institution (specializing in the business of shaping national monetary, fiscal and economic policies) does not tend to introduce powerful pressures and external modes of consultation, guidance and decision-making into a national economy?(8) N. Ram nails it perfectly here, for here arises the whole equation of national policies of such a magnitude getting decided internationally, and that too even without the Parliament aware of it. What of the people then, who are represented in the Parliament? It is anybody’s guess. This case obviously goes down as a golden moment in the annals of investigative journalism in the country, and in the records of the Fund, “because of the sensitivity of the information and the delicacy of the negotiations, [the IMF] management regarded this leak as ‘quite possibly the most serious and damaging…in the history of the Fund.’”(9)

Fast-forward by a decade and the IMF’s involvement takes a turn. Before getting to that, a little backgrounder is deemed essential. In 1985, India had already started to experience problems with its Balance of Payments (BOP), and by the end of 1990, it had inflated to a full-blown economic crisis, with the Government coming close to default and the Central Bank of the country refusing any further credit, sinking the foreign exchange reserves to a point where the country could finance barely three weeks of imports. This led India to airlift gold reserves as pledge with the International Monetary Fund for a loan. The main worries and causes were currency devaluation, current account deficit (CAD), and depreciating investor confidence in the country. During the Gulf crisis, India’s oil imports swelled and exports shrunk. By the middle of 1991, the exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian Rupee. Authorities at the Reserve Bank of India acted by defending the currency by expending international reserves, thus slowing the decline in value. But, with foreign reserves on the verge of depletion, the Government permitted a sharp depreciation on the 1^st and 3^rd of July 1991 against the major currencies. Within weeks from defaulting, India had to airlift 47 tonnes of gold to the Bank of England and 20 tonnes to the Union Bank of Switzerland to raise US $600 million in a move that outraged the national sentiments. When PV Narasimhan Rao was sworn in as the Prime Minister during the 10^th Lok Sabha, he sent a clear signal to the nation as well as the IMF that the country faced no “soft options” and must open the doors to foreign investment, reduce red tape that often crippled the initiative and streamline the industrial policy. Subsequently, in a report by the World Bank titled “India 1991 Country Economic Memorandum”(10), the development powerhouse credited the Government on impressive steps taken to set in motion fundamental structural changes, and advised on major policy reforms that required to be implemented. These,

1. Reduce public expenditures and increase their returns to the economy,
2. Reform the tax system with a view to reducing its dependence on trade taxes,
3. Liberalize the trade regime, which at the moment was the single biggest obstacle to international competitiveness and higher growth in India,
4. Complete the process of industrial deregulation begun in July 1991,
5. Increase the efficiency of the financial sector,
6. Restructure public enterprises with a view to increasing their efficiency, and
7. Reduce dependency on NRI deposits and rely on other instruments with longer maturities and predictable servicing profiles

were largely adhered to.(11) 1991 heralded the liberalization era in India, and was aptly captured by Manmohan Singh’s Budget Speech of 1991-92 on the 24^th of July 1991, when he quoted Victor Hugo,

‘“No power on earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide-awake. We shall prevail. We shall overcome.’ 

Reference(12)

Question/Point:

Yashwant Sinha: Madame Deputy Chairman, the issue which I want to raise in this House is a matter, I think, of great concern for the functioning of democracy of this country, for the functioning of the Parliament. Madame, today, the Indian Express has carried a report stating that the draft of the Eight Five Year Plan has been shared with the World Bank without this draft being shared with the Parliament of this country. The WB has now sent its comments to the Government of India on the draft Plan. From the comments, which have been received, it appears that the WB has severely criticized the draft prepared by the Planning Commission and approved by the Council of Ministers of the Cabinet. I would like to draw your attention to one portion of this report in regard to the Industrial Policy:

“…the World Bank has accused the Plan document of a continued allegiance to ‘past policy shibboleths’ by encouraging regional dispersion of industries through growth centers in backward areas and encouraging R&D for assimilation, adaption and improvement of imported technology…”

Now, the point is these are cherished goals of our economic policy….I am sure members sitting on that side will also agree that these are cherished goals, which are being described as ‘past policy shibboleths’ by the WB. Are we here in this Parliament to bear this insult from that organization? What has the Government of India come to? Have we really got into a state of the banana republic? Everyone in the world knows that this country has enough experts as far as planning is concerned. Our planning experts go abroad to advise other countries about how they should formulate their plans. This is what we are reduced to today that the WB will tell us what our policy directives should be, what our policy priorities should be? I want the government to respond here and now as to what exactly is the state of affairs in this regard? And, if it is true then I am not wincing my words. I will say this is a complete surrender of our sovereignty, of all our initiatives as an independent nation.

Why is this oversight needed? It is noticeable that questions of circumventing the Parliament, surrender of sovereignty and succumbing to extreme pressure are some of the reasons why Parliamentary Oversight becomes an imperative. Further, staying on with the specifics still, extensive research and studies conducted over the years have unearthed a democratic deficit between these financial institutions and countries engaging with those. What might sound a bit ironic is that even the WB/IMF have brought to notice that there is a lack of effective involvement of parliaments and/or formal mechanisms in such engagements, and wherever it is present is present on meager scales to be really effective. Parliamentary Oversight has the potential to become the bedrock of good governance, since there cannot conceivably be a true ownership of the terms and conditions attached to loans, policy framework makeovers, or debt/relief bailout without it.(13) So, unless the Parliament reiterates its sovereignty in dealings with these financial institutions in bringing to light their agenda, ownership rights would never trickle down to the most important pillar of democracies, the People themselves. Unless the Parliament decides that its voice should hold value and weight over the voice of a coterie(14) that in many a cases clandestinely strike a deal or co-opt one with these bodies(15), people who are represented in the highest office of a country would cease moving mainstream from the margins. Finally, by way of edging closer to a recommendation, unless the Parliament moves in to bring this oversight into effect, any talks of a mature and nurturing democracy would be largely vapid, and therefore it is with such intentions that a strikethrough of undemocratic processes, civil unrest and legacies upon legacies of economic failures can be achieved. The Parliament or generally the elected representatives need to work in close cooperation with civil society, for it is only with such cooperation, levels of awareness could be raised amongst the people who are often in the dark regarding massive implications a country can bring on them in its engagements with International financial Institutions (IFIs). Only when this aim is reached, could there be alleviation in the fragility of polity that mushrooms in the face of irreparable damage. Hence, the need for Parliamentary Oversight becomes all the more justified. In order to strengthen the Parliamentary Oversight, with the goal of providing enhanced government accountability and transparency, and as part of the governance programme, the Poverty Reduction and Economic Reform Division of the World Bank Institute has taken up the responsibility. The objective is two fold: first, the oversight activity can actually contribute to improving the quality of policies/programmes initiated by the government; second, because as the government policies are ratified by the legislative branch, such policies acquire greater legitimacy(16). Even though, the Bretton Woods Institutions are gearing for legitimizing parliamentary interference in their engagements with countries, the real break-through came when these institutions called for oversight as a plank for good governance in addition to lending credibility to the whole concept of ownership rights. In February 2005, to mark the 60^th anniversary of the coming into existence of WB/IMF, the Parliamentary Network on the World Bank (PNoWB)(17), an international NGO spearheaded participation in Poverty Reduction Strategy Papers (PRSP)(18) by explicitly calling forth development strategies in low-income countries as “country owned”. Though, the governments are empowered to lead an active participation, many a times, it is seen that parliaments are regularly by-passed during the process of making economic policy decisions, so much so that parliamentarians and going down the vertical tier, the public are not even aware of the conditions that will have massive implications on their society. Consequently, national sovereignties are undermined or simply overridden by the involvements of these mega institutions. The polity, which is already fragile, gets to face the brunt of cracks further. If this sounds like a tirade, then make no mistake that even the World Bank and the IMF have echoed it. According to Operations Evaluation Department (WB)(19),

“The Bank management’s process for presenting PRSP to the Board undermines country ownership. Stakeholders perceive this practice as “Washington signing off” on a supposedly country-owned strategy…And the involvement of parliaments has been a particularly weak aspect of the process…”

Undoubtedly, parliamentary involvement becomes a condicio sine qua non for improving public access to decision-making processes. The real break-through talked a whole back was the culmination of this mobilization into a petition for democratic oversight of IMF and World Bank Policies, urging the governments to ensure that developing countries’ parliaments have the rights and the obligations to be fully involved in developing, scrutinizing and agreeing all policies related to IMF and WB to further the cause of transparency and accountability, and eventually resulting in reforming the boards and voting shares, and having a fair and transparent process for the heads of these institutions.

The Indian Laboratory

The title of this section is dual purpose. Laboratory? The reasons should be alluded to in the next paragraph. In the words of one Bank official(20),

“India has long been the Bank’s most important client. For nearly forty years, India was the jewel in the crown of the world Bank…the reputation of the World Bank tended to be measured in terms of what it could do for India.”

The statement was made almost a couple of decades back, but in the unfolding years, the country has become the largest borrower from the WBG. Indian economy stands close to US $2 trillion making it the second largest emerging economy in the world, and if one were to go by the predictions of World Bank and IMF of late, slated to become the largest by 2017 by overtaking China.(21) The journey from the Nehruvian socialist era to liberalization and ensconced today in liberalization, India also happens to be the largest borrower from the World Bank as well as the largest multilateral development financial institution in Asia, the Asian Development Bank. The quantum of funds that these multilateral development funders pump into the country makes it not just a haven for latter’s presence in the country, but also open up vulnerabilities where such finances lead to projects and policies getting haywire in that the repercussions of these massive investments on people purported to benefit are reckless to say the least and causing gross human rights violations to say the most. With such embedded relationships Parliamentary Oversight could help arrest the onslaught of corporations(22), calling for increased transparency and accountability at all levels and scrutinizing and monitoring such engagements becoming the buzzwords/catchwords. With newer forms and mechanisms of capital in the form of Development Policy Loans, Financial Intermediaries, Public Private Partnerships becoming the keywords, monitoring the international financial institutions has become indispensable. For the full fruits of democracy to be accrued, it is additionally required that openness is practiced within the Parliament as well, in that, appointments made to these lenders are done with full knowledge of people’s representatives, laws enacted become Acts with Parliamentary approval rather than merely promulgating ordinances to expedite the growth-led development agenda by removing the red tape, the presence of which ironically comes to the rescue of the marginalized. Only when people’s representatives are held accountable and when these representatives are themselves subject of transparency and accountability of engagements within the highest decision-making office in the country, could one say to have brought about perfect Oversight. When such an Oversight is in place, it is truly a step closer to participatory form of democratic system of governance.(23)

Marching on, it is appropriate to untie the lateral or horizontal nature of compromise associated with transparency and accountability a bit more. As is relatively obvious by now that Parliament should be trusted with the role of final arbiter of assistance from these International Financial Institutions (IFIs), since it has a democratically mandated power to scrutinize, debate, question, input, approve and monitor the transactions of the Government with these institutions, the reality is far from this ideal. At present, only the Department of Economic Affairs (DEA) under the Ministry of Finance and its bureaucrats are responsible for negotiating, facilitating, and approval of these loan projects having the final authority to sign the lending documents also, completely undermining the Constitutional authority, rights and privileges of our elected legislatures. These in turn need to be involved and be made responsible for reviewing the development effectiveness, negative impacts and long term impacts on critical sectors of the loans and grants of IFIs and WB, recommend ways to the decision making process of availing loans and grants from IFIs in a more democratic, transparent and accountable, manner thereby respecting the Constitutional Duties and Responsibilities provided to our elected representatives and also examine the circumstances in which huge commitment charges are paid to IFIs for the non-utilization of funds, and recommend steps to avoid it in future.

Getting oblique, or rather vertical once again, Parliamentarians need to review the impact of World Bank loan policies on the sovereignty of the country; the extent of the World Bank’s involvement in India’s policymaking and legislations; influence of the Bank on the government; and policies pushed by the Bank which eventually disempower the poor and the marginalized and benefit only a few, especially big private corporations. The lending and non-lending products of IFIs, including the WBG (World Bank Group is the umbrella-term for all the five arms: IBRD, IDA, IFC, MIGA and ICSID) and ADB, cause irreversible damage to people, society and ecology by influencing major policy changes in favour of private capital and withdrawal and bypassing of state support from access to essential services to the poor or safeguarding of fundamental rights. While ADB and other IFIs are obligated to comply, the design and implementation are often conducted in opaque and non-inclusive processes, making public participation meaningless, risk mitigation too weak, safeguards feeble, developmental impacts unknown and money flows highly secretive.

Collating the previous two paragraphs brackets the rationale behind Parliamentary Oversight in the Indian context, or what is being called the Indian Laboratory. Put differently, the overarching working premise of this study entails furthering a dialogue, discussion and debate in India leading to informed discursive practices by bringing democratic principles to have a bearing on development. The evidence of the last six decades suggests that in the absence of this, not only does irreversible damage and destruction result, but also a country loses significant elements of its sovereignty.

Here are some of these plausible mechanisms, which are more of reinforcement tools for efficacious sustainability of economic development:

1. A participatory, country-driven and owned contribution rises up from latency channeling citizenry into framing policies and assigning perceptive cooperation and eventual legitimacy.
2. Flattening the geographic divide in line with political spread, sector-wide diversity towards a more coherent viewpoint driven by motivation to positive contribution.
3. Decisional prerogatives mapping into policies, projects, constitutional entitlements towards enacting laws.
4. Temporal perspectives in either short-term or long-term, partisan or non-partisan towards a multi-partisan inclusivity.

________________________

(1) This is attributed to Italian political scientist Roberta Maffio, who talks about instruments on oversight (more on that to follow) on a 2-dimensional basis. If legislative oversight (just a note for the time being, before an exhaustive treatment starts) is performed before the government enacts a specific policy or becomes engaged in a specific activity, then the oversight tools are “instruments of control ex ante”. Hearings in committees, hearings in the plenary session of the Parliament, along with request of documentation are all tools that can be used ex ante. Contrarily, if oversight happens after such an enactment has occurred, or such an engagement has been undertaken, the oversight tools are instruments of control ex post. Questions, interpellations, and creation of committees of inquiry are the tools that are used ex post. This is empirically visible, in the India context at least. The second dimension is the establishment of these tools either within or without the Parliament. Questions, question time, interpellations, public account committees belong to the former, whereas auditors and/or ombudsman belong to the latter. Relied largely on translation for this note, but Italian knowers can refer to Roberta Maffio, “Quis Custodiet Ispos Custodes? Il Controllo Parlamentare dell’Attivitá di Governo in Prospettiva Comparata”, Quaderni di Scienza Politica, .. pp. 333-383.

(2) It should be noted here ‘contextually’ that horizontal opacity breeds vertical opacity.

(3) Greece is the current cradle of anti-austerity. Well, that is political. In a nutshell, what is the Greece issue all about? On May 9, 2010, a joint mission of the IMF and the European Commission concluded negotiations on a loan package to be provided to the Greek Government. The amount of these loans as well as the volume of the adjustment effort that is to be delivered by Greece is staggering. In return for an (additional) 30 billion euro austerity program, Greece will receive 80 billion euros of European bilateral loans and 30 billion euros of IMF loans over the next three years. The only thing the rescue package really achieves is a major change in the ownership of debt. With Greek sovereign debt being transferred from the balance sheets of banks to the balance sheet of European governments, the real purpose of the entire operation is to save European banks by relieving them from holding debt titles upon which a potential default could be looming.

(4) Argentina transited from being a poster child of the IMF to bankruptcy. In 1999, Argentina fell into recession after its main export competitor Brazil had just devalued the real in response to the fallout of the Russian default of 1998 and the East Asian financial crisis of 1997. In late 2000, as it became clear that Argentina might go down the same road, the IMF disbursed its first bailout funds to the government of the new President, Fernando De la Rúa, so it could keep repaying its outstanding obligations to foreign creditors – mostly US-based institutional investors like mutual funds and large pension funds. The initial $14 billion lifeline evaporated in a matter of weeks as investors panicked and Argentina’s borrowing costs shot up.

(5) Note here the resemblance to vertical and horizontal.

(6) Special Drawing Rights (SDR) are supplementary foreign exchange reserves maintained by the IMF, and is based on a basket of key current international currencies viz. US $, UK £, Euro €, Japanese ¥, and Chinese Yuan. SDR is not a currency per se, but a representation of a claim to currency held by the IMF member countries for which they may be exchanged.

(7) N. Ram. “Secret India-IMF discussions over months”. From Washington. 15 October 1981. The Hindu edition: 16 October 1981.

(8) N. Ram. “World’s most powerful supranational Govt.” The Hindu 20 October 1981.

(9) William Dale. Deputy Managing Director, IMF. “Statement at EBM/81/133”. 21 October 1981. p. 3.

(10) The Public Disclosure Authorized Report of the World Bank could be read at http://goo.gl/s5do0C

(11) To take stock of numbers here: IMF approved credits of SDR $1366.08 million, of which $720.08 million were received by the Government of India after terms and conditions were negotiated and ensured. World Bank gave US $1404 million towards restoration of international confidence of NRIs and augmenting capital flows to maintain Balance of Payments. Project-tied loans worth US $417 million were released by the Asian Development Bank (ADB). Strikethrough numbers, and International Finance Corporation (IFC) began negotiations and discussions with the private companies regarding raising funds from the international capital market. IFC, always looking for opportunities to make equity investments was exploring the possibilities of encouraging FDI through these discussions.

(12) Not really questions, but nevertheless instrumental in instigating a healthy discussion with several MPs drawn into it. This occurred on 16 July 1992 in Rajya Sabha, under the title “Alleged Leakage of Draft Eight Five Year Plan Document to World Bank and IMF Officials”. 22 MPs participated in this debate, including the Deputy Chairman of the House. This won’t be reproduced in entirety, but an attempt to draw the gist of the discussion will not be compromised. The questions entered were in English and Hindi.

(13) This might sound a bit quixotic, but it really isn’t.

(14) This word ‘coterie’ might sound a bit harsh in this context, but is nevertheless painting the essence. For instance, appointments to these Multilateral Development Banks or even the World Trade Organization for that matter, are done by Appointments Committee of the Cabinet, which is generally composed of the Prime Minister (Chairperson), Minister of Home Affairs and Minister-in-charge of the concerned ministry. This Committee decides all higher-level appointments in the Cabinet Secretariat, Public enterprises, Banks and Financial Institutions. Clearly, the composition is indicative of the fact that Parliament is by-passed here in decision-making and any engagement with the Committee would occur only ex post. This has been a contentious issue in its own right, as it is always facing up to allegations of nepotism. This also incidentally happens to be one of the parameters of the present study undertaken.

(15) Recollecting the 1981 Indian case as mentioned, a brief rejoinder: The Letter of Intent (28 September 1981) from the Finance Minister, R. Venkataraman to the IMF’s Managing Director J De Larosiere, the attached 15-page memorandum titled “statement of economic policies”; the year-by-year progression of the three-year arrangement; the data provided to the Fund, a significant portion of which has been withheld from publication in India…(Point driven).

(16) West & eCooper. “Legislative Influence v. Presidential Dominance: Competing Models of bureaucratic Control.” Political Science Quarterly. 1989 Vol 104, pp 581-606.

(17) Founded in 2000, the Parliamentary Network is an independent, non-governmental organization that provides a platform for Parliamentarians from over 140 countries to advocate for increased accountability and transparency in development cooperation. Alain Destexhe is the current Chair of the Parliamentary Network. It provides a platform for MPs and civil society to hold to account their own governments, as well as International Financial Institutions (IFIs), for development outcomes. For more, visit http://www.parlnet.org

(18) The WB/IMF require countries to produce a Poverty Reduction Strategy Paper as a condition for debt relief through the Heavily Indebted Poor Countries initiative and other monetary aid. PRSPs are intended to help aid recipient countries meet the Millennium Development Goals (MDGs). They detail a country’s plan to promote growth and reduce poverty through implementation of specific economic, social and structural policies over a period of three years or longer. PRSPs give an assurance that aid-receiving countries will utilize aid to pursue development outcomes that have been elaborated in the PRSPs and approved by lenders.

(19) For a detailed read, visit Parliament and Poverty Reduction Strategies – PRS http://goo.gl/YhdWgE

(20) The Holiest River http://goo.gl/50KWQQ

(21) Though the formula for such a calculation depends on Purchasing Power Parity (PPP), this does not bestow absolute economic prowess.

(22) It very well could be even the non-corporate entities, and they are present there invariably, but the use of corporations is the signal the new mechanisms of financing, like the Private-Public Partnerships (not to be confused with Purchasing Power Parity, the other PPP), for instance.

(23) All of this might sound a bit repetitive, as well as jumping the gun, but be apprised that in research, methodologically, this process is called “Basin of Attraction”, where the agenda is quite apparently redundantly getting stamped on the run. Though, methodology would be discussed separately, it nonetheless is already making its mark felt, as a careful reading would make highly certain. The analogy is of course taken from ‘Wash Basin’, where the trickle or flow is most certainly towards the sink.