Event ReportsPublished on Feb 25, 2015
International financial institutions are critical in global development and in achieving sustainable developmental goals, says Dr. Paul Cadario, while Mr. Ashok Lahiri says "international finance cannot be divorced from politics"
International finance can't be divorced from politics: Ex-Economic Advisor to PM

As the world prepares to approve the Sustainable Development Goals, and hold important international meetings on how to finance them and how to address climate change, the role of the World Bank and other international financial institutions is especially relevant. This was the subject of discussion titled "International Financial Institution and New Dynamics of Funding" at Observer Research Foundation on February 13.

The chair of the event, Mr. Sanjeev Ahluwalia, Advisor, ORF, facilitated an engaging conversation that included Dr. Paul Cadario, Distinguished Senior Fellow at the Munk School of Global Affairs and Mr. Ashok Lahiri, former Chief Economic Advisor to the Government of India on the importance of financial institutions in today’s geopolitical world.

Emphasising the role these institutions play, Dr. Cadario, observed that these institutions are critical in global development and in achieving sustainable developmental goals. Alluding to the geopolitics aspect Mr.Lahiri stated that "international finance cannot be divorced from politics"

The chair posed pressing questions that have become critical in the wake of global development and its post 2015 priorities. There are new actors on the bloc such as the BRICS-led New Development Bank (NDB) and the China-led Asian Infrastructure Investment Bank (AIIB). Are these clones of the existing multilateral setup or new institutions with unique objectives and priorities?

Mr Cadario expressed concerns about the BRICS Bank given its early stage of establishment and its unique multilateral setup. According to him,the AIIB is different from the BRICS bank in that it is exclusively controlled by China that itself has significant expertise and resources for infrastructure investment. Mr. Lahiri compared the global scope of existing development finance institutions to the relatively regional scope of the new institutions that would largely restrict lending to member regions.

A separate point of discussion was the future of another regional bank, the Asian Development Bank (ADB), especially with the entry of the AIIB in the regional development finance architecture. While Mr. Paul noted ADB’s AAA credit rating that enables it to tap capital markets easily, Mr. Lahiri spoke about ADB’s deep-rooted network. However, the ADB is also increasingly facing challenges such as operationalisation, modernisation, insufficient funds and safeguard issues.

Following this, Mr. Cadario gave a presentation that delved into the World Bank’s evolution over the years and juxtaposed this on the current context of the post-2015 SDGs. Till 1944, the World Bank’s role was limited to the post war construction and recovery of European Nations which was devastated by World War II. With the setting up of the International Development Association in 1960 the Bank also got involved in the business of lending to the world’s poorest developing countries. However, it was only after the collapse of the USSR and the height of the Washington consensus that the World Bank began shaping the development narrative including an emphasis on infrastructure, poverty and the environment.

Today the World Bank is increasingly involved in result based lending projects as well as evidence based global advocacy. Additionally, it also helps in the mobilization of global public goods. However, rising inequality, shortage of funds and uncertainties are likely to create hurdles in the path of the post-2015 development agenda of the World Bank. Further, increasing competition from BRICS Bank, AIIB and Foundations are calling the legitimacy of the World Bank into question. In a world with changing power structures and priorities, Mr. Cadario highlighted the need to re-think the structural aspects of existing multilateral institutions.

Mr. Lahiri further elaborated on the structure of Bretton Wood Institutions (BWIs). At their inception, the BWIs placed the greatest voting share will lay in the hands of United States, United Kingdom, Soviet Union and China. Even today, the ownership of the BWIs continues to reflect the realities of 1943-44. Giving more voice to emerging economies will require ratification by the US Congress that has so far shown no sign of progress. The anachronistic structure of the BWIs is the fundamental reason behind the lack of credibility of the BWIs.

According to Mr. Lahiri, lack of funds is the other major challenge facing the World Bank. Major Asian economies alone will require USD 8 trillion for infrastructure development from 2010 to 2020. Ending his enriching discussion he suggested a balanced approach to overcome these challenges.

The talk was followed by a round of Q&A that further explored the dynamism of funding and the challenges facing the global development agenda.

(This report is prepared by Richa Sekhani, Research Assistant, Observer Research Foundation, Delhi)

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