Subject: International Relations

This post continues from the series on International Relations for IAS Prep. Read the essential posts here –

• An IAS Aspirant’s guide to cracking International Relations
• Analysis | Previous year’s IAS Mains questions from IR

If you haven’t read part one of Bretton Woods institution, click here to read that first

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World Bank is a vital source of financial and technical assistance to developing countries around the world. This is not only a bank in the ordinary sense but a unique partnership to reduce poverty and support development.

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When? 1944

Headquarter: Washington, D.C.

Publications- global economic prospects, Ease of doing business index

There are 2 goals for the world to achieve by 2030 –

• End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3%
• Promote shared prosperity by fostering the income growth of the bottom 40% for every country

World Bank Group is not just World bank but comprises of 5 institutions managed by their member countries

These 5 institutions are as follows –

1. International Bank for Reconstruction and Development (IBRD)- Commonly known as the world bank. It is the single largest provider of development loans
2. International Development Association (IDA) – assists the poorest countries
3. International Finance Corporation (IFC) – supports private enterprise in developing countries.
4. Multilateral Investment Guarantee Agency (MIGA) – offers investors insurance against non-commercial risk and help developing country governments attract foreign investment <non commercial risks such as political instability, govt deciding to nationalise a private business etc.>
5. International Centre for the Settlement of Investment Disputes (ICSID) – encourages the flow of foreign investment to developing countries through arbitration and conciliation facilities

Except for ICSID, India is member of other four groups<We don’t like external interference such as arbitration in our decision making process, hence not the member of ICSID>

<India is one of the founder members of IBRD, IDA and IFC>

So, we will discuss this 3 institutions in detail, as are important for India –

International Bank for Reconstruction and Development (IBRD) (world bank)

IBRD provides loans and other assistance primarily to middle income and poor but credit worthy countries at interest rates slightly lower than that offered by other financial institutions but with long term maturity<countries which have the capacity to repay the loan amount with interest>

Members: 188

Origins: IBRD as the name suggest was created in 1944 to help Europe reconstruct/ rebuild after World War II. To be a member of IBRD, a country has t join IMF first.

Main function:

• Long-term capital assistance to its member-countries for their reconstruction and development
• It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity.

Other functions of IBRD Bank –

• Supports long-term human and social development that private creditors do not finance
• Preserves borrowers’ financial strength by providing support in times of crisis, when poor people are most adversely affected
• Promotes policy and institutional reforms (such as safety net or anti-corruption reforms)
• Creates a favorable investment climate to catalyze the provision of private capital
• Facilitates access to financial markets often at more favorable terms than members can achieve on their own
• Resources of the Bank consist of the capital and borrowings.

Before granting or guaranteeing a loan, the Bank considers the following matters –

• merit of the proposal
• The borrower has reasonable prospect for repayment i.e. credit worthiness
• The loan is meant for productive purposes and to finance foreign exchange requirements of specific projects of reconstruction and development.

How is IBRD financed?

• Simple as other banks are financed; float bonds in world financial markets. In fact, in these markets, IBRD is known simply as the World Bank
• shareholder are member states with governments paying in about $14 billion in capital in proportion to their IMF quota
• IBRD has maintained a triple-A rating since 1959. Its high credit rating allows it to borrow at low cost and offer middle-income developing countries access to capital on favorable terms in larger volumes, with longer maturities <What is a credit rating? How is it determined? What is the effect of a good or bad credit rating on the prospects of countries and corporations? Answer in the comments.>
• IBRD earns income every year from the return on its equity and from the small margin it makes on lending
• This pays for IBRD’s operating expenses, goes into reserves to strengthen the balance sheet, and provides an annual transfer of funds to IDA, the fund for the poorest countries

India and the IBRD

• India is the founder-banker of the Bank
• Bank has not been merely a lending institution to India but has also served as a worthy counsel whom India has approached for advice in difficulties
• India has been the single largest borrower of the Bank
• Main sectors for which IBRD assistance of US$ 3049 million has been provided are roads & highways, energy, urban infrastructure (including water & sanitation), rural credit, disaster management and the financial services sector
• The Bank has also been instrumental in the establishment of the India Development Forum, a consortium of donor nations to India.
• The massive financial assistance pledged by the consortium members has been the largest aid commitment and is a landmark in the history of development aid from developed countries to developing countries.

International Development Association (IDA)

IDA is the part of the World Bank that helps the world’s poorest countries

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When? 1960

Aim: To reduce poverty by providing loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.

Main Functions of IDA:

• IDA provides loans which are practically interest-free and for longer periods. Therefore, it is often referred to as the ‘soft loan window’ of the Bank.
• Only the poorest of the poor member countries (with per capita income below $1215 in 2016) are eligible for assistance.
• IDA complements the World Bank’s original lending arm, International Bank for Reconstruction and Development (IBRD)

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Structure of lending and credits by IDA

• IDA lends money on concessional terms. This means that IDA credits have a zero or very low interest charge and repayments are stretched over 25 to 38 years, including a 5- to 10-year grace period
• IDA also provides grants to countries at risk of debt distress <grants are donations i.e. not to be rapid>
• In addition to concessional loans and grants, IDA provides significant levels of debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI)
• IDA is a multi-issue institution, supporting a range of development activities, such as primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms
• These interventions pave the way toward equality, economic growth, job creation, higher incomes, and better living conditions

Borrowers of IDA

• 77 countries (plus India) are currently eligible to receive IDA resources
• Eligibility for IDA support depends first and foremost on a country’s relative poverty, defined as gross national income (GNI) per capita below $1,215 in fiscal year 2016
• IDA also supports a number of countries, including several small island economies, which are above the operational cutoff but lack the creditworthiness needed to borrow from IBRD
• Some countries, such as Vietnam and Pakistan, are IDA-eligible based on per capita income levels, but are also creditworthy for some IBRD borrowing. They are referred to as “blend” countries <receive loans from bot IDA and IBRD; India is also one such country>

Roadmap ahead for IDA

• Today’s fiscal environment presents challenges for all those involved in development from borrowing countries to donors<funds are simply not available after financial crisis>
• The new Sustainable Development Goals (SDGs) present a critical opportunity to end extreme poverty. That would need strong commitment and financing to meet the goals
• A number of countries are expected to exceed IDA’s per capita income threshold in the next decade, it is also clear that these countries will continue to be home to millions of poor people who will still need extensive support, particularly during the transition period from concessional to harder lending terms
• As the main instrument for implementing the global goals in the poorest countries, IDA will need to shift toward increasingly innovative approaches to deliver trans-formative results

India has exceeded IDA’s per capita income threshold of 1260$ and is thus technically not eligible to tap IDA window but India campaigned to extend the tenure of India’s concessional loans by several more years (till 2022), given the country’s high poverty levels and WB decided to continue it’s IDA concessional lending in view of 300m people living below poverty line.

International Finance Corporation (IFC)

Largest global development institution focused exclusively on the private sector in developing countries

When? 1956

Members: 184

Objectives of the IFC

• To further economic development by encouraging growth of private enterprise in member-countries
• Invests in private enterprise in member-countries in association with private investors and without Government guarantee, in cases where sufficient private capital is not available on reasonable terms
• Seeks to bring together investment opportunities, private capital of both foreign and domestic origin, and experienced management
• Stimulates conditions conducive to the flow of private capital – domestic and foreign – into productive investments in member-countries
• IFC investment normally does not exceed 40% of the total investment of the enterprise
• In case of its investment by equity participation, it does not exceed 25% of the share capital

IFC and India

• IFC makes strategic investments and advisory interventions to promote inclusive growth, help address climate change impacts, and encourage global and regional integration
• In India, IFC is sharpening its focus on increasing access to energy, finance and healthcare; providing sustainable infrastructure; and boosting regional linkages

Focus Areas –

• Building infrastructure
• Facilitating renewable energy generation
• Promoting cleaner production, energy and water efficiency
• Supporting agriculture for improved food security
• Creating growth opportunities for small businesses
• Helping reform investment climate

Let’s take a look at India-IFC ties

• Since 1956, IFC has invested in 346 companies in India, providing over $10.3 billion in financing for its own account and $2.9 billion in mobilization from external resources
• IFC’s committed portfolio in India is nearly $4.7 billion<India has IFC’s largest portfolio exposure>
• In FY14, IFC committed nearly $1.2 billion across 34 projects in India
• IFC also has a strong advisory program in India with a total portfolio value of $62 million across 74 projects.
• In FY14, three quarters of IFC’s advisory program had a footprint in India’s priority states

IFC also issue India’s first masala bonds to tap in foreign funding in local currency. similar IFC also issued first green masala bonds to raise investments to deal with climate change. Want to know what is masala bond, click here to read more

Concerns around World Bank lending and reform of World Bank

• As we learnt in the earlier part on Bretton Woods institution that main concern is around conditionalities and impact of world bank funded infrastructure projects on local population<displacement, loss of jobs etc.>
• The Bank’s undemocratic governance structure – which is dominated by industrialised countries – and its privileging of the private sector
• the Bank’s private sector lending arm (IFC) has been criticised for its business model<increasing use of financial intermediaries such as private equity funds and funding of companies associated with tax havens>
• World bank recently announced that it would not fund coal technologies for climate change reasons, it would make task of investing in clean coal technologies difficult for countries such as India

Reforms

• World bank’s governing structure need to be made more democratic
• Developing countries should be given a chance to shape the agenda
• There should be more transparency on the issues that come to the table
• More resources(increase the capital base) need to be put in so that it continue lending to poorer countries

Let’s revise World Bank in brief

Name	Main Function	Comment
IBRD (WB)	Infrastructure loan to poor middle income but credit worthy countries at just below market rates	India founder member, largest recipient of loan
IDA	Soft loan at virtually zero rate for poverty eradication to poorest countries	India founder largest recipient, has crossed the per capita threshold for funding but will continue to receive IDA funds
IFC	Private sector arm of WB group, supports private enterprises in developing countries	India founder, IFC launched India’s offshore masala bond
MIGA	Provide guarantee to investors against non-commercial political risk	India not founding member
ICSID	Resolve disputes through arbitration and conciliation	India not a member

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UPSC ke Sawal

#1. Which one of the following groups of items is included in India’s foreign-exchange reserves? (IAS pre 2013)

1. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
2. Foreign-currency assets, gold holdings of the RBI and SDRs
3. Foreign-currency assets, loans from the World Bank and SDRs
4. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

#2. ‘BioCarbon Fund Initiative for Sustain- able Forest Landscapes’ is managed by the (IAS pre 2015)

(a) Asian Development Bank
(b) International Monetary Fund
(c) United Nations Environment Programme
(d) World Bank

#3. The price of any currency in international market is decided by the (ias pre 2012)

1. World Bank
2. demand for goods/services provided by the country concerned
3. stability of the government of the concerned country
4. economic potential of the country in question

Which of the statements given above are correct?

• (a) 1, 2, 3 and 4
• (b) 2 and 3 only
• (c) 3 and 4 only
• (d) 1 and 4 only

#1. The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate. (IAS mains 2013)

#2. Does India Need the World Bank?

This post continues from the series on International Relations for IAS Prep. Read the essential posts here –

• An IAS Aspirant’s guide to cracking International Relations
• Analysis | Previous year’s IAS Mains questions from IR

This was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

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Where?

In Bretton Woods, New Hampshire in 1944 during the United Nations Monetary and Financial Conference at the Mount Washington Hotel <That’s why IMF and World Bank are known as Bretton Woods twins>

The aim was to help rebuild the shattered post-war economy ( WW2 had just finished in 1945) and to promote international economic cooperation.

Origins of Bretton Woods

Political origin lies in 2 key conditions –

• Shared experiences of 2 World Wars, with the sense that failure to deal with economic problems after the first war had led to the second <Treaty of Versailles demanding massive reparation amount from Germany  being the cause of collapse of German economy and Hitler’s rise to power>
• The concentration of power in a small number of states (US and Western Europe)

Members of Bretton Woods Family aka Bretton Woods Twins

#1. International Monetary Fund(IMF) – To maintain global financial stability through technical assistance, training, and loans to member states to tide over short term balance of payment crisis

#2. World Bank (WB) Group – Consisting of 5 agencies which provides vital financial and technical assistance to developing countries around the world to reduce global poverty

Remember that WTO has nothing to so with Bretton Woods. It officially commenced only in 1995 under the Marrakesh agreement and replace General Agreement on Tariff and trade (GATT)

Propounder of the idea of IMF and WB group:

Trio of  – US Treasury Secretary Henry Morgenthau, his chief economic advisor Harry Dexter White, and British economist John Maynard Keynes.

What are some of the concerns and criticism about Bretton Woods twins?

• Critics of the World Bank and the IMF 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 liberalisation of trade, investment and privatisation of nationalised industries <so if India asked for funds from IMF, it might ask India to allow FDI in multi brand retail, to end system of minimum support prices in agriculture, privatize coal India etc.>
• Many infrastructure projects financed by the WB Group have social and environmental implications for the populations in the affected areas
• For example, World Bank-funded construction of hydroelectric dams in various countries has resulted in the displacement of indigenous peoples of the area
• Criticisms against the governance structures which are dominated by industrialized countries <unwritten rule that president of World Bank will be from USA and Managing Director of IMF from Europe.> Otherwise who is more qualified than Rajan Bhai to become MD of IMF
• Decisions are made and policies implemented by leading industrialized countries, the G7, because they represent the largest donors without much consultation with poor and developing countries < Countries which would utilize that assistance not even consulted, you see the irony>

Let’s have a look at Bretton Woods organisations in brief

#1. International Monetary Fund (IMF)

Fundamental mission is to ensure the stability of the international monetary system.

It does so in 3 ways:

• Keeping track of the global economy and the economies of member countries (surveillance role)
• Lending to countries with balance of payments difficulties (Lending role)
• Giving practical help to members (technical assistance role)

When? 1944

Membership: 188 countries

Headquarters: Washington, D.C.

Publication- World Economic outlook, Global Financial Stability Report

Objectives:

• Promote international monetary cooperation
• Facilitate the expansion and balanced growth of international trade;
• Promote exchange stability
• Assist in the establishment of a multilateral system of payments
  Make resources available (with adequate safeguards) to members
• experiencing balance of payments difficulties

Functioning of IMF comes under 3 Mains types –

Surveillance –

This involves the monitoring of economic and financial developments and the provision of policy advice , aimed especially at crisis-prevention.

<Surveillance is the process of appraisal of the exchange rate policies of member countries. In the absence of surveillance, the financial volatility in the world today can become worse>

We all know, how good it’s surveillance is. It failed to predict worse it failed to even recognize the stress in the system which led to financial crisis of 2008. It again failed with the prediction of euro-zone crisis.

Lending –

The IMF also to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems, loans to low-income countries are also aimed esp. at poverty reduction <most criticized part, riddled with commonalities we discussed above>

Technical Assistance –

The IMF provides countries with technical assistance and training in its areas of expertise, which it calls capacity development

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Obviously IMF would need money to perform all these functions. Money is contributed by member states and each country’s contribution is fixed in terms of it’s quota.

Let’s learn about Member’s Quota in IMF –

• Quota represents the subscription by a member country to the capital fund of the IMF i.e it’s contribution to the IMF
• the quota also forms the basis for determining its drawing rights from the IMF <simple, more you contribute, more you can withdraw at the time of crisis, fair point>
• But the quota also determines voting power i.e. if 10% quota, your vote will carry 10% weight <this seems very undemocratic, gives all the power to rich countries or is it just fair, private companies mein bhi to same hi hota hai, jitni equity, utna vote>

But how is quota of each country calculated?

• Quota is calculated using a quota formula
• The current Quota formula is a weighted average of GDP (50%), openness (30 %), economic variability (15%), and international reserves (5%)
• In the GDP category, weight of GDP at market exchange rate is 60% and at purchasing power parity rate (PPP) is 40% <developing countries GDP is more in PPP terms and they want the IMF to change the formula to give greater weightage to GDP at PPP plus frequent revision of quotas as they grow faster>
• The largest share of 17.5 per cent belongs to the USA, while the smallest share belongs to Palau (0.001 per cent) <now think what can tiny Palau do at IMF>
• Any change in quotas must be approved by 85% voting power i.e USA with more than 15% quota holds virtual veto over all such decisions <now compare power of US with tiny Palau at IMF>
• 25% of a country’s quota is to be contributed in the form of SDRs or foreign exchange and 75 per cent in the country’s own currency.

What is this Special Drawing Rights or SDR?

Bretton Woods established an international monetary system of fixed exchange rates pegged to dollar which was roughly pegged to gold known as gold exchange standard i.e. for every unit of currency fixed amount of dollars could be bought and with those dollars fixed amount of gold.

But with high trade growth in world resources did not keep pace with the growth in international trade because there simply wasn’t enough gold. World needed some other asset to supplement shortfall in dollar and gold and IMF brougth in SDR. But in 1971 gold standard and dollar peg collapsed and world moved to flexible exchange rate system. Role of SDR as international reserve asset diminished.

The value of the SDR is based on a basket of key international currencies (weighted avg value). With the addition of Renminbi, 5 currencies, dollar, yen, euro and pound-sterling form the SDR basket. (Renminbi value will be taken into account from Oct 1, 2016 only)

Please remember that SDR is not a currency i.e it is not a claim on the IMF. On the other hand, SDR is a claim on the countries whose currency is included in the SDR basket.(claim as is written on your 500 rs note with Rajan’s signature: I promise to pay the bearer the sum of 500 rupees)

Now, it has primarily become a unit of account i.e. IMF record keeping is done in SDR, Quotas are allocated in SDR.

• SDRs are entitlements granted to member-countries enabling them to draw from the IMF apart from their quota. It is similar to a bank granting a credit limit to the customer
• When SDRs are allocated the country’s Special Drawing Account with the IMF is credited with the amount of the allotment
• Originally, SDRs were to be utilised only for meeting BOP difficulties. But as a consequence of endeavours to make it an international unit of account, the use of SDRs has been liberalised

Current Position of SDR:

• Now SDRs can be used directly among the members without the approval of the IMF
• A country may swap SDRs with another country to acquire a currency it desires. SDRs may be utilised to pay charges to IMF
• SDR has gained importance both as a reserve asset and as a unit of settlement of international transactions. Some countries have pegged their currencies to SDR.

Reforming the IMF

Role of IMF was criticized for following reasons –

• One size fits all policy under which it gives the same recipe for all ills
• Conditionalities that go with the loans that it disburses demand that spending on poor be curtailed <privatize your industries, stop subsidies, open up your markets etc.>
• The private international flows are huge and in comparison, the IMF resource base is small and so is rendered ineffective
• IMF MD is invariably from a European country, so India and other emerging markets are demanding that it should not be geographically confined and be merit – based
• India wants that its economic power as it is emerging should be recognised and so is given greater voting rights
• IMF failed to predict the global recession in 2008-09, let alone prevent it with its surveillance mode

IMF recently passed long standing reform of changing quota share of member countries after US Senate withdrew its virtual veto. A few points

1. With this structural shift, more than 6 % of the quota, including both the Fund’s capital and voting rights, have been transferred from developed to emerging economies
2. India’s voting rights increase to 2.6 per cent from the current 2.3 per cent, and China’s, to 6 per cent from 3.8, as per the new division.
3. All the directors on IMF board will now be elected and developed countries will not be able to nominate (earlier Europeans and US used to nominate up to 4 members to the board)
4. Total resource base of IMF has doubled

To follow the newscards related to IMF as they are pushed, follow this story, IMF and India

India and the IMF equation –

• India and IMF have had an amicable relationship, which has beneficial for both. IMF has provided India with loans over the years and this has helped the country in times of Balance Of Payments (BOP) crisis pressure
• India joined the IMF in 1945, as one of the original founding members
• IMF credit has been instrumental in helping India respond to emerging BOP problems on 2 occasions
• In 1981-82, India borrowed SDR 3.9 billion
• In 1991-93, India borrowed a total 2.2 billion under 2 stand by arrangements, and in 1991 it borrowed SDR 1.4 billion under Compensatory Financing Facility

As a member of the Fund, India has derived following benefits:

Foreign Exchange for Meeting BOP Deficits:

Such drawings of foreign exchange have enabled the country to tide over the acute foreign exchange crisis and to maintain the imports of essentials goods

Oil Facility from the IMF:

India resorted to drawals from the IMF under the Oil Facility created in June, 1974 to meet larger outlays for the import of petroleum crude.

Assistance under SDRs:

The SDRs provide unconditional liquidity since the participants have access to foreign exchange resources at will.

• The country has made use of the Fund’s facilities a number of time Aid from the World Bank: The country’s membership of the IMF has entitled it to become a member of the World Bank; as a member of the Bank, India has received large technical and financial assistance for the various development projects
• Assistance under the Extended Credit Facility: Loan under this facility is contracted at softer terms but there is a serious conditionality clause attached to it
• Preparation of Valuable Reports: The country has availed the services of the specialists in the Fund for the purpose of assessing the state of the Indian economy and for preparing valuable reports on various aspects of the economy.

<We will take World Bank group, a part of bretton woods institutions in next article of this series>

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UPSC ke sawaal

#1. Which one of the following groups of items is included in India’s foreign-exchange reserves? (IAS pre 2013)

1. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
2. Foreign-currency assets, gold holdings of the RBI and SDRs
3. Foreign-currency assets, loans from the World Bank and SDRs
4. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

#2, Regarding the international monetary fund, which one of the following statements is correct ?

• (a) It can grant to any country.
• (b) It can grant loans to only developed countries.
• (c) It grants loans to only member countries.
• (d) It can grant  loans to the central bank of a country.

#3.Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (IAS pre 2014)

(a) The International Monetary Fund
(b) The United Nations Development Programme
(c) The World Economic Forum
(d) The World Bank

#4. The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate. (Mains 2013)

Further Readings –

• The Great fall of China (Brief compilation of news cards)
• Chinese Move – Currency Devaluation
• Nursery rhymes on SDR

This post continues from the series on International Relations for IAS Prep. Read the essential posts here –

• An IAS Aspirant’s guide to cracking International Relations
• Analysis | Previous year’s IAS Mains questions from IR

When was IORA conceived?

1997 in Ebene Cyber City, Mauritius

Origins:

• First established as Indian Ocean Rim Initiative in Mauritius on March 1995 and formally launched in 1997 by the conclusion of a multilateral treaty known as the Charter of the Indian Ocean Rim Association for Regional Cooperation.
• It is based on the principles of Open Regionalism for strengthening Economic Cooperation particularly on Trade Facilitation and Investment, Promotion as well as Social Development of the region.

Members:

20 member states (including India) and 7 dialogue partners, the Indian Ocean Tourism Organisation and the Indian Ocean Research Group has observer status. 20th member was Comoros (latest added in 2012)

 

 

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Objectives:

• To promote sustainable growth and balanced development of the region and member states
• To focus on those areas of economic cooperation which provide maximum opportunities for development, shared interest and mutual benefits
• To promote liberalisation, remove impediments and lower barriers towards a freer and enhanced flow of goods, services, investment, and technology within the Indian Ocean rim
• In recent years, new and emerging issues for the better management and governance of Indian Ocean resources have begun taking shape.
• Such issues include blue economy development and sectoral integration

Six priority areas:

1. Maritime safety and security
2. Trade and investment facilitation
3. Fisheries management
4. Disaster risk management
5. Academic science and technology cooperation
6. Tourism and cultural exchanges

First IORA Ministerial Blue Economy Conference –

• In 2015, First IORA Ministerial Blue Economy Conference, titled as, Enhancing Blue Economy Cooperation for Sustainable Development in the IORA Region, was held in Mauritius
• Blue Economy is a new comprehensive concept, incorporating the Ocean Economy, environment and sustainability to provide basic human needs such as potable water, food, jobs and habitable shelter
• Conference aims to act as an ideal platform to bring together Member States and Dialogue Partners of the IORA to promote Blue Economy in the Indian Ocean region

Conference focused on 4 priority areas namely :

1. Fisheries & Aquaculture
2. Renewable Ocean Energy
3. Seaports & Shipping
4. Seabed Exploration & Minerals

China’s thrust for IORA membership: Is it push for Go Global policy?

• China is the second-largest economy after the USA, among the current dialogue partners of the IORA (China, Egypt, Japan, the USA, the UK and France)
• Recently, China is even reported to have expressed its interest in becoming a full member of the IORA
• China’s dialogue with the IORA has been propelled by trends of globalisation and the process of regional integration, where she can play a leading role
• China vigorously implements the ‘go global’ strategy by encouraging well-established Chinese enterprises to invest in and cooperate with countries in the Indian Ocean Rim region
• While pushing ahead a going global strategy, China urges companies with proper capabilities to go to Indian Ocean Rim countries to invest
• China would pursue active participation with the IOR-ARC in light of economic globalisation and regional economic integration

What is the real significance (geostrategic and geoeconomic) of IORA for China?

• As a connector between Africa, Asia and Oceania, it is the most important transport zone, almost 80% of the global oil and liquid natural gas shipments pass through it
• Three strategic chokepoints – the Strait of Hormuz, Bal-el-Mandeb and the Strait of Malacca, connect the IOR with the Persian Gulf, the Red Sea and the South China Sea resp.
• They have 7 adjacent IORA member countries, namely Oman, the UAE, Iran (Strait of Hormuz), Yemen (Bal-el-Mandeb), Indonesia, Malaysia and Singapore (Strait of Malacca)
• Almost 85% of China’s oil and gas supplies and most of its maritime cargo, trade and transport pass through these choke-points

Do It Yourself (DIY)– Learn more about other major choke points of the world.

Future Ahead for India

India along with IORA could transform the region, and focusing on Security and Growth for All in the Region (SAGAR), as envisioned by Prime Minister Modi during his recent visit to Mauritius.

UPSC ke Sawaal

#1. With reference to ‘Indian Ocean Rim Association for Regional Cooperation (10R-ARC)’, consider the following statements : (IAS pre 2015)
I. It was established very recently in response to incidents of piracy and accidents of oil spills.
2. It is an alliance meant for maritime security only.
Which of the statements given above is/are correct?
(a) I only
(b) 2 only
(c) Both I and 2
(d) Neither I nor 2

#2.   Between India and east Asia, the navi-gation-time  and distance can be greatly reduced by which of the following ? (IAS pre 2010) #importance of map marking

1. Deepening the Malacca straits between Malaysia and Indonesia.
2. Opening a new canal across the kra isthmus between the gulf of Siam and Andaman sea.

Which of the statements given above is/are correct ?

(a) 1 only. (b)  2 only. (c) Both 1 and 2. (d) Neither 1 nor 2

#3. Which one of the following can one come across if one travels through the Strait of Malacca? (IAS pre 2011) #importance of map marking

A. Bali
B. Brunei
C. Java
D. Singapore

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Brazil, Russia, India, China and South Africa (BRICS) are leading emerging economies and political powers at the regional and international level.

When? 2008. They had their first official meeting in 2009

Origin:

• The acronym, BRIC, was coined by Jim O’Neill of Goldman Sachs way back in 2001
• He predicted that by year 2050, Brazil, Russia, India and China would become bigger than the 6 most industrialized nations in dollar terms and would completely change the power dynamics of the last 300 years
• It was pointed out that high growth rates, economic potential and demographic development were going to put BRICS further in a lead position

Why is BRICS suddenly so important?

The idea of development bank (NDB) and Contingency Reserve Arrangement (CRA) has strengthen BRICS as a grouping

Both of these concepts were formalised over in 2015 (@BRICS summit at Fortaleza and Brasilia) and this was seen as a strong signal to the challenge of western dominated discourses in some forums (IMF, WB)

We will get to these details in a short while but since these developments happened in 2015, the IAS aspirants from 2016 onwards are required to sweat blood in order to be on top of this theme (kidding!)

What prompted the need for emergence of BRICS? 

Most multilateral institutions were designed in the era when the West dominated the world. The US and Europe are over-represented in the IMF and the World Bank. Together with Japan, they control most regional development banks as well! That’s a big bad bully in making, right?

The main reason for co-operation to start among the BRICs nation was the financial crises of 2008

The crises raised scepticism on the dollar dominated monetary system and the need for participation by non-G7 countries became evident. If you don’t know about G7, click this wiki page to know the countries involved

What reform did BRICS want out of the multilateral institutions?

Since their inception in 1944, the Bretton Woods institutions (IMF and World Bank) had not reformed their governance structure, to give more voting and voice to emerging economies. Both dominated by USA and developed countries. Both were out of sync with the new dynamics of world economy

The BRICs called for the “the reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play

BRICS managed to push for institutional reform which led to International Monetary Fund (IMF) quota reform in 2010 (although, it met with limited success as United States Congress did not ratify)!

Three new terms? Bretton Woods, Quota reforms, 2008 financial crisis. We will get to them later.

So, essentially, BRICS opened up a possibility for countries of the global South to challenge the global North. When the quota reforms were quashed in 2010, BRICS moved towards enlarging their spheres of cooperation. We will talk about the BRICS bank at a later stage.

Advantage India?

Now that NAM (Non-alignment) is almost defunct and very little wealth is left in the Commonwealth, BRICS provide a great alternate for India to build its global profile.

But don’t we have a G 20 group to further India’s interest in the global arena? Yes, that’s another big one (besides UN).

G 20 is a bloc of developing nations established on 20 August 2003. The G-20 accounts for – 60% of the world’s population, 70% of its farmers and 26% of world’s agricultural exports.

India has tried to use BRICS as a forum to engage China as the latter has become the largest market for the fast-industrializing countries of East Asia. India wants to resolve the age-old mis trust and complicated relationship between the two countries since the 1962 war between them.

What are the factors that will bolster co-operation among BRICS members?

Firstly, the common need among developing countries to construct economic order that reflects current situation will drive the BRICS’ efforts. In this matter, the idea of NDB and CRA are defining and will have a huge geo-economic and geopolitical impact

Secondly, the BRICS alternative idea in the landscape of global governance will attract support from other countries. There have been suggestions by political analysts that BRICS may expand its member quota

Thirdly, the expansion of BRICS interaction to other sector will make it more strong partnership

Lastly, Chinese support to BRICS will make sure that group remains a force to reckon with in the future

Chinese support – interesting point. Some would say that a lot depends on how China carries its might behind BRICS for the time to come.

Some concerns regarding the future of BRICS

1. Competition within themselves – The BRICS countries aspire to be regional powers and hence at some point will compete with each other
2. Different forms of governance – They have different political systems with Brazil, India and South Africa being democracies while Russia and China having authoritarian characteristics. It would be interesting to see how policy consensus is brought about!
3. Trade conflicts, maybe? Brazil and Russia are commodity exporting countries and thus benefit from high commodity prices while India and China are commodity importers that benefit from low commodity prices
4. Territorial Issues – China and India have outstanding territorial issues to resolve and India looks askance to any institution that has Chinese domination. Russia looks suspiciously at China’s interest in its sparsely populated far eastern of Siberia
5. The big daddy China – China spearheads three other major initiatives in this region – One Belt One Road (OBOR), Asian Infrastructure Investment Bank (AIIB) and SCO. You should know that the 7th BRICS summit was held as a joint summit with SCO. BRICS has to find a reckoning space among them to keep china’s interests alive!

Parting words on BRICS (more mirch masala)

All that UPSC want from an IAS aspirant is: Analysis, analysis, analysis. These are some of the fodder points that you can use in any answer involving BRICS and world arena.

Engaging China has been one of the important components of India’s foreign policy in recent years, considering that co-operation and negotiations with China is imperative to clearing the mistrust between the two countries.

Geostrategically, BRICS are now represented on all continents of the global south. In bilateral and regional agreements, the BRICS emphasize south-south solidarity and horizontal cooperation in contrast to western dominance.

Yet, in global fora such as G20, UN Security Council or World Climate Conferences, BRICS claim to speak on behalf of the developing world (whether they actually do represent these countries is disputable) and gradually challenge western supremacy in international politics.

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Phew. This was a long one! Did we cover everything? Nope. We will cover later

1. Latest BRICS summit
2. All about the BRICS Bank (NDB) & Contingency Reserve Arrangement (CRA)
3. Comparison of BRICS Bank with AIIB (another master stroke by China)

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Want to read more?

• BRICS : Major Emerging Economies (extensive compilation of news cards)
• Ufa could be the yuan moment

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UPSC ke sawaal

#1. With reference to a grouping of countries known as BRICS, consider the following statements: (IAS Prelims 2014)

1. The First Summit of BRICS was held in Rio de Janeiro in 2009.
2. South Africa was the last to join the BRICS grouping.

Which of the statements given above is / are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
#2. The ‘Fortaleza Declaration’, recently in the news, is related to the affairs of ((IAS Prelims 2015)
(a) ASEAN
(b) BRICS
(c) OECD
(d) WTO

#3. With reference to BRIC countries, consider the following statements (IAS Prelims 2010)
1. At present, China’s GDP is more than the combined GDP of all the three other countries.
2. China’s population is more than the combined population of any two other countries.
Which of the statements given above is/are correct?

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2