RISE OF NEW GLOBAL FINANCIAL ARCHITECTURE
Declining influence of Western financing institutions has led to the rise of regional alternatives
BY all accounts, Asia’s stock of economic power has been expanding in the last two decades. This has occurred on the back of the rapid and sustained growth of regional economies, not least of which are China and India, whose shares of global trade and gross domestic product (GDP) have increased considerably during this time.
If anything, the global financial crisis of 2007-2008 that crippled the economies of the United States and Europe, and the antiglobalisation sentiments it inadvertently precipitated rendered the shift of geo-economic power to Asia even more stark.
This shift has begun to have a potentially profound effect on the global financial architecture. The US-led Bretton Woods institutions — the International Monetary Fund (IMF) and World Bank — have been credited with providing a firm foundation for the post-World War 2 global financial and economic orders, from which Asia and the world have benefited greatly.
IMF was designed to promote macroeconomic stability, particularly the exchange rate system, while the World Bank and its subcomponents provided developmental assistance.
By the 1990s, however, economic powers, such as Germany and Japan, which by dint of having lost the war failed to acquire preferential decision-making rights in these institutions when they were formed, began agitating for a greater say in the two bodies that commensurate with demands for an increase in their respective contributions.
These efforts were consistently thwarted by the US, which sought to maintain its veto rights on all IMF decisions. While Germany did see its position enhanced, albeit obliquely via the tradition of having a European head the IMF, Japan’s frustrations led it to create the Asian Development Bank as its major channel of development funding.
By the turn of the century, China and India had emerged as potential Asian economic powerhouses and were casting suspicious eyes on American and European dominance of the Bretton Woods institutions.
Mindful of Japan’s failure to increase its influence in these institutions, the discourse on global financial architecture and governance began gradually to move beyond the matter of internal reform (of the Bretton Woods institutions) towards the creation of new institutions.
This shift in discourse would soon bear fruit.
These efforts first found expression with the Japanese proposal for an Asian monetary fund in the aftermath of the Asian financial crisis, an initiative that proved stillborn as a consequence of American opposition.
It, nevertheless, paved the way for what would come later in spirit, if not in form, the idea of a BRICS (Brazil, Russia, India, China, South Africa) development bank and the Asian Infrastructure Investment Bank (AIIB).
Unnerved by IMF’s role during the Asian financial crisis, Asean also proceeded to create its own crisis response mechanism — the Chiang Mai Initiative Multilateralisation — to perform functions similar to those of the IMF, yet with a regional flavour and in coordination with Asean’s “Plus Three” partners — China, Japan and South Korea.
What accounted for the emergence of these alternative institutions?
First, while the Bretton Woods institutions may underpin the global economic order, they have proven notoriously hard to reform to reflect more accurately the global shift in economic influence. Until recently, Asia’s share of global GDP and its share of the IMF quota — which accords member countries a say in its governance and, by extension, the global financial architecture — had been acutely misaligned.
In 2010, the IMF executive board had agreed to proposals for institutional reform to redistribute quotas away from the traditional economies to the emerging economies.
Even so, because the US holds the largest share of voting rights (16.5 per cent), effectively affording it a veto power, it took five more years before US congressional approval could be secured. As a result of these reforms, China received the largest quota share increase — more than two per cent — moving it from sixth to third largest contributor.
Then, in October last year, the IMF moved to include the Chinese currency, the renminbi, in its basket of Special Drawing Rights currencies. Yet, at the same time, influence on the executive board remains largely in American and European hands.
Second, because of this misalignment between the Bretton Woods governance structure and geo-economic realities, emerging economies are growing reluctant to privilege mechanisms controlled by the US or Europe should a new crisis erupt.
In the event, it was precisely regional reservations towards the IMF’s role during the crisis in 1997-1998 that prompted the creation of the Chiang Mai Initiative Multilateralisation.
Third, the emergence of an alternative global financial architecture expressed in the form of BRICS financial institutions or the AIIB is, to some extent, also an inevitable consequence of structural forces generated by the accumulation of reserves by China, India and other emerging economies due to high growth rates. As reserves exceed domestic demand for loans in these key emerging economies, they are recycled to other parts of the world.
Of course, the downside of relying on excess domestic reserves is that the efficacy of these nascent institutions will be dependent on continued sound performance of the economies where the reserves are invested. By that logic, these institutions may be rendered vulnerable should key members be afflicted by recession.
Fourth, there is one common, unmistakable thread running through all these institutions — the role of China. By virtue of being the main financier of the BRICS development bank and the AIIB, China’s role in this new financial architecture has been paramount.
Alongside these institutions stands President Xi Jinping’s flagship project, the ambitious Belt and Road Initiative, envisioned to enhance connectivity and infrastructure development across Eurasia, while also addressing the need for development in China’s western regions.