This study seeks to understand the dynamics of how India and China engage in and with international financial institutions, specifically multilateral banks. It looks at India’s and China’s engagement with the Bretton Woods Institutions (the World Bank and the International Monetary Fund), as well as their participation in building the two new multilateral development banks, the Asian Infrastructure Investment Bank and the BRICS’s New Development Bank. In doing so, the study unpacks the inter-related economic, political, and strategic motivations behind India’s and China’s approach towards multilateral economic governance processes broadly, and development finance institutions in particular. Their interaction with African countries, bilaterally, and under the African Development Bank, is a particular case study in this regard.

To achieve its objective, the study also delves into India’s and China’s evolving worldviews — their roles, ambitions, and consequent approaches to their external interactions. These are contextualised against the larger economic and political
changes and disruptive trends agitating the existing international order.

In providing a clearer picture of the driving forces behind Indian and Chinese attitudes and actions in the field of global economic governance and more specifically in multilateral development finance, the study allows for a discussion on how Denmark can engage these rising powers to maintain an open, transparent, and stable economic order.

The study finds in evidence the following observations, arguments, and conclusions:

1.  The international order is in flux as the global economic weight shifts eastwards. Emerging markets will dominate the top 10 economies by 2050; the US and Europe will steadily lose ground to China and India; and global economic power will shift from the G5 to the E7 economies. The aftermath of the 2007-08 global financial crisis has fractured consensus on economic globalisation, which is being challenged in the West both internally and externally. The US retreat from the international system and the rise of China pose questions about the governance of the global economic commons.

2. India and China are beneficiaries of the BWIs. Both have used the IMF’s financial and technical assistance, and both are among the top borrowers of World Bank funds. Their rise as economic powers has been a consequence of their integration into the open, Western-led global economic system. India and China have strengthened their engagement with the BWIs in terms of a) calling for reform for the redistribution of voting shares to better reflect the changing economic order, and b) increasing contributions at the IMF and WBG as they gradually evolve from borrower to lender (particularly China).

3. The BWI system commands knowledge, extensive experience, substantial resources, and convening power. But the legitimacy of the IMF and WBG, arising from both internal process and external perception, as key managers and drivers
Executive Summary of global economic governance, and more specifically multilateral development finance, has weakened.

This is due to:

a) asymmetric representation between developed and developing countries, and slow and inadequate reforms to correct vote shares given changes in economic weights of emerging economies, calling into question the neutrality and efficiency of decision-making;
b) externally imposed conditionalities that are seen as infringement of sovereignty, manifestations of vested interests of dominant members, and with no guarantees of positive change; and
c) inefficiency in meeting expanded mandates due to a bureaucratic organisational structure, undercapitalisation, and underperformance in the case of the WBG; and doubts over the impartiality and adequacy of surveillance,
and the inefficient handling of sovereign debt crises in the case of the IMF.

4. The BWI system is increasingly witnessing a dichotomy between power and accountability, given resistance to change and efficiency gaps, as well as a dichotomy between power and influence, given the role emerging economies and middle-income countries are playing in agitating for reform and contributing resources. These contradictions will only increase if BWI reforms fail to correct under-representation — as recent IMF and WBG reforms have done.

5.  India’s interests in BWIs respond to advancing its growth and development. Its participation represents its multilateral mindset — participation in collective spaces to advance individual and collective interests that, as a small power with fledgling resources, it cannot meet unilaterally. Its economic rise and adoption of globalisation has given way to multi-alignment, a strategy that upholds a belief in multipolarity as the system of international relations in the near future. Its expansion of economic diplomacy and development cooperation agenda increases the need for India to engage in existing and new multilateral frameworks that can eventually serve as platforms for greater Indian leadership.

6.  In the meantime, India’s capacity to deliver faces challenges that include a) an unfinished development agenda that constrains India’s reach and resources in the global commons, and b) an incomplete strategic vision that binds together New Delhi’s various, increasingly active foreign policy practices. India’s appeal as a natural torchbearer of the liberal order exists especially in the face of a rising China and its pursuit of narrower interests that clash with an open, free, and stable international system.

7.  China’s weight in the economic order, and recent behaviour, rhetoric, and policies, mark its advance as a rule-maker in global economic and regional governance. It is no longer hiding and biding time, but under Xi has formally propelled itself in the international arena as a responsible stakeholder that is offering “China solutions,” particularly towards redressing global economic woes. Its rise has put in evidence attempts to displace American dominance, firstly in Asia-Pacific, which has led to concerns of revisionist designs that would substantively overturn existing norms and character of the present international system.

8. To wit, while cognisant that its continued growth requires the perpetuation of an open and transparent international system, China’s practices as a bilateral lender of development finance raise questions about its leadership in multilateral economic governance. In particular, its Belt and Road Initiative, implemented via non-market economics and unsustainable financing, has thrown up concerns of gains-oriented behaviour instead of a win-win approach that primarily serve China’s strategic interests. Several problems have been cited on the ground: lack of transparency, white elephant projects, unclear environmental and social risk assessments, weaponisation of trade, debt-trap diplomacy.

9. How India and China engage with Africa is an instructive case study of the differences in their approaches to global finance. China is a bigger stakeholder than India in the AfDB, and it is also a bigger lender than India in the continent. India’s attempts to pursue mutually beneficial development partnerships are in contrast to China’s pursuit of more traditional aid practices that have tended to target resource-rich African nations. China places more focus on hard infrastructure. African countries have witnessed the consequences of the conditions attached to Chinese loans, while Indian engagement has suffered from a lack of attention, resources, and timely delivery. Both see Africa as a source of resources and markets, and as a destination for investments. Beyond a transactional relationship, Africa is another region for Chinese firms to “go out” and replicate China’s model of development by helping advance industrialisation; given strong historical and continuing cultural ties through principally a strong Indian diaspora, India is seeking to work with Africa as a partner in the global South.

10. As the two biggest rising powers, the India-China bilateral is characterised by competition that translates into limits to cooperation but also limits for confrontation. The space between political and strategic insecurity on the one hand, and robust economic engagement on the other, is narrowing, which could constrain policy response to each other. Their engagement in multilateral forums reveals a certain degree of political understanding, such as over BWI reform. However, China’s rise will increasingly inform India’s role in the multilateral space, but the same is not the case for China, given its larger capacities.

11. India and China will be the top two economies by 2050; as such, the AIIB and the NDB will be two key institutions in which both countries will be engaging. It is therefore these institutions that will allow both countries flexibility in their approach to each other, these institutions that will introduce proximity within the relationship. Further, Trump’s challenge to the global economic order could bring India and China closer despite their differences, which will have implications for the global governance architecture in the short to medium term.

12. The AIIB is an 87-member multilateral development bank, proposed and led by China, with the stated objective of mobilising much-needed infrastructure finance across Asia-Pacific. The institution’s basis is similar to that of existing MDBs, but seeks to improve functioning by being “lean, clean, and green.” Sustainable infrastructure, cross-country connectivity, and private capital have emerged as priorities. China lays no claim to veto in the institution, and gives prominence to fellow emerging and regional powers like India and Russia. Its lending has thus far been slow and careful, and has focused on hard and social infrastructure, as well as energy projects that help in greening the energy mix (including non-renewableenergy projects). Over half of AIIB projects are co-financed.

13. The NDB, proposed by India, is currently a five-member bank engaging the BRICS member countries equally. Promoting non-conditionality, sustainability, innovation, and responsiveness as its principles of engagement, the NDB is focused on mobilising resources for infrastructure and sustainable development, and in particular renewable energy projects for which the Bank aims to dedicate 60 percent of its lending. The NDB is particularly keen to innovate ways to attract public and private finance: it has issued a first green bond, with more planned, and is encouraging of lending in local currencies. While the NDB has thus far funded projects on its own, it has made steps towards cooperating with the World Bank. It has also expressed interest in working with the AIIB and the International Solar Alliance.

14. The BRICs CRA provides a safety net for the BRICS countries in case of future shocks, but it is firmly linked to the IMF. It therefore acts as a supplementary measure, although its creation could have an effect on the IMF’s behaviour. Moreover, as the CRA evolves, it may involve the eventual inclusion of other members and the gradual elimination of the IMF-linked portion. Proposals to create a BRICS credit rating agency, as well as an early warning system, could give greater weight to the CRA.

15. The AIIB and NDB do not at present represent a change in the fundamentals of the existing system and global financing regime (although this is subject to the evolution of these institutions and any convergence in their lending practices with China’s non-market approach). But internal ‘push’ factors and external ‘pull’ factors will limit inclination to change the liberal character of global economic governance. The former includes the evolutionary link between the World Bank and the new MDBs; increased membership (i.e., multilateralism) that lends legitimacy but conditions China’s behaviour. The latter includes the pressure of credit ratings and the need to raise capital in international finance markets, as well as the benefit to encourage standard-based (i.e., policy-based) lending.

16. Vis-à-vis the BWI system, however, the AIIB and NDB already represent change — but within the global economic governance regime. They represent a break from Western monopoly by way of exercising institutional agency to correct the lack of representation in a timely and adequate manner. They also enjoy latecomer advantages — leaner structure, accumulated reserves — that increase their potential to bring real additional value in mobilising and channeling development finance. Three specific areas where the AIIB and NDB are particularly wellpositioned to supplement and improve World Bank functioning are

a) meeting the infrastructure investment gap;
b) innovating financial instruments and promoting the diffusion of local technology; and
c) advancing knowledge creation and narratives from the global South.

17. The new MDBs help meet individual needs and interests. They will help meet India’s considerable infrastructure gap, and India could see its own national initiatives gain support from these external sources. The AIIB and NDB are platforms for India’s proactive role in global economic governance, for example through the dissemination of local solutions. It could also gain greater maneuverability in its great power relations as it participates in the AIIB and NDB on the one hand, and in the AAGC and Quad on the other. Further, India will be able to fulfill its dual objectives of both cooperating with and containing China within these new institutions themselves.

18. The AIIB and NDB have led to a shift in the institutional balance of power in China’s favour, which increases its bargaining power. As part of China’s broader strategic vision and given confluence with other flagship foreign policy initiatives, such as the BRI, the potential to pursue narrower self-interest exists, but continued operation of the banks will strengthen any assessments of the potential for conflict between China’s approach and accepted norms. The AIIB and NDB advance China’s domestic economic restructuring, and their emphasis on green infrastructure and renewable energy dovetails with China’s own ambitions in the renewable energy field.

19. Against the backdrop of maintaining a rules-based multilateral system, Denmark — a small, resource-rich, and technologically advanced European country with technical expertise — can contribute to the accommodation of China and India in multilateral economic governance. Whether this “mutual accommodation” will be through conflict or cooperation remains to be seen, but the attempt should be to minimise scope for the former and maximise space for the latter.

20. Concretely, Denmark can:

a) support the AIIB and NDB functioning. Denmark, India, and China have all benefited from an open international system, and these two MDBs are instances of multilateralism in practice, particularly timely in this age of Trumpian disruption;
b) engage with India, given structural, institutional, and normative convergence, by supporting India’s growth and facilitating momentum in the EU-India relationship;
c) engage on norms with India/China, by constructively pursuing consensus on best practices and internationally relevant and accepted practices; and
d) participate with India/China in partnerships and funds in targeted geographies.

• Indian Foreign Policy
• China Foreign Policy
• International Trade and Investment
• China
• India
• International Monetary Fund
• ndp
• Sino India

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