Showing posts with label China. Show all posts
Showing posts with label China. Show all posts
Thursday 1 December 2022
Tuesday 1 November 2022
Is the IMF fit for purpose?
As the world faces the worst debt crisis in decades, the need for a global lender of last resort is clearer than ever. But many nations view the IMF as overbearing, or even neocolonial – and are now looking elsewhere for help writes Jamie Martin in The Guardian
Last summer, after months of unusually heavy monsoon rains, and temperatures that approached the limits of human survivability, Pakistan – home to thousands of melting Himalayan glaciers – experienced some of the worst floods in its history. The most extensive destruction was in the provinces of Sindh and Balochistan, but some estimated that up to a third of the country was submerged. The floods killed more than 1,700 people and displaced a further 32 million – more than the entire population of Australia. Some of the country’s most fertile agricultural areas became giant lakes, drowning livestock and destroying crops and infrastructure. The cost of the disaster now runs to tens of billions of dollars.
In late August, as the scale of this catastrophe was becoming clear, the Pakistani government was trying to avert a second disaster. It was finally reaching a deal with the International Monetary Fund (IMF) to avoid missing payment on its foreign debt. Without this agreement, Pakistan would likely have been declared in default – an event that can spark a recession, weaken a country’s long-term growth, and make it more difficult to borrow at affordable rates in the future. The terms of the deal were painful: the government was offered a $1.17bn IMF bailout only after it demonstrated a real commitment to undertaking unpopular austerity policies, such as slashing energy subsidies. But the recent fate of another south Asian country appeared to show what happens if you put off the IMF for too long. Only weeks before, the Sri Lankan government, shortly after its own default – and after months of refusing to implement IMF-demanded reforms – was overthrown in a popular uprising.
The correlation of Pakistan’s crises – exceptionally devastating floods and the threat of economic meltdown – was partly bad luck. But it was also emblematic of a challenge faced by many countries at the forefront of the climate crisis: how can they afford to deal with extreme weather events and prepare themselves for the coming disasters, while suffering under crippling debt loads and facing demands for austerity as the price of relief?
Pakistan and Sri Lanka are only two of the many countries currently facing conditions of severe debt distress. Covid-19 delivered a major blow to many low- and middle-income countries that had borrowed heavily during the era of low interest rates beginning with the 2008 financial crisis. As the costs of public health and welfare rocketed, economies were locked down and tourism collapsed, which meant that tax revenues plummeted. The pandemic also disrupted global supply chains, leading to shortages of many goods and higher prices. These inflationary pressures were then exacerbated by Russia’s invasion of Ukraine. Meanwhile, the decision of the US Federal Reserve to raise interest rates to reduce US inflation has pushed the value of the dollar to its highest level in 20 years. This has made the debt of countries that borrowed in dollars – many do – more expensive since their currencies are worth less, while further increasing the cost of their imports. Rising US interest rates have also encouraged investors to pull capital out of riskier emerging markets at a historic rate, since safer dollar investments now produce higher returns.
The result is that the world economy faces the possibility of one of the worst debt crises in decades, threatening deep recessions, political instability, and years of lost growth. At the same time, the increase in extreme weather events – stronger hurricanes, recurring droughts – makes life even harder for states that already dedicate a large portion of their revenues to servicing foreign debt. In the midst of this turmoil, the IMF has become more involved in bailing out countries than it has in years. Over the last few months, the value of its emergency loans reached a record level, as a growing number of states turned to it for help, including Bangladesh, Egypt, Ghana and Tunisia.
Broadly speaking, the way the IMF works is by collecting financial resources from members and then offering them short-term assistance in the case of financial hardship. Based in Washington DC, the institution is staffed by representatives of ministers of finance and central bank governors from around the world. Because voting power is weighted by each state’s financial contribution, the US, as the IMF’s largest shareholder, exercises outsized influence over its major decisions and can veto proposed reforms to its governance. But as an international body that counts nearly every sovereign state as member, the IMF plays a unique role in the world economy. It’s the only institution with the resources, mandate and global reach to help almost any country facing severe economic distress.
But in exchange for its help, the IMF typically insists governments do what they find most difficult: reduce public spending, raise taxes and implement reforms designed to lower their debt-to-GDP ratios, such as cutting subsidies for fuel or food. Unsurprisingly, politicians are often reluctant to undertake these measures. It’s not just that the reforms often leave voters worse off and make politicians less popular. National pride is also at stake. Bowing to demands from an institution dominated by foreign governments can be seen as humiliating, and an admission of domestic dysfunction and misgovernance.
On the rare occasions that the IMF criticises the policies of a wealthy European state, this too can embroil the institution in domestic political conflicts. In September, the IMF’s criticism of Liz Truss’s proposed tax cuts provided ammunition to her political opponents and contributed to a slump in the pound’s value. The decision to sack chancellor Kwasi Kwarteng was taken while he was attending the IMF’s annual meeting in Washington DC, where the institution’s leading officials did little to mask their disapproval of his policies. In future histories of the fall of Truss, the IMF is likely to play a not insignificant role.
Despite all this, the IMF is not the kingmaker it once was. After reaching the height of its powers in the 90s, when its name became synonymous with the excesses of neoliberal globalisation and US overreach, the IMF has faced increasing resistance. It’s still the only institution that can guarantee assistance to nearly any country experiencing extreme financial stress. But the decline of US power, emergence of alternative lenders, and the IMF’s reputation as a domineering taskmaster has left it an anomalous position. It is much needed and little loved, enormously powerful and often ineffectual in getting states to agree to its terms. If predictions are correct that the world is entering an extended period of economic turmoil, this will only increase the need for some kind of global lender of last resort. Whether the IMF is up to the task depends on whether it has learned from its chequered history.
One of the most remarkable aspects of the IMF was what, in theory, it was supposed to accomplish when it was established – and how quickly it departed from this initial vision. The creation of the IMF was agreed at the Bretton Woods Conference of July 1944, when representatives from more than 40 countries met to rewrite the rules of the world economy. Led by the world-famous British economist John Maynard Keynes and his US counterpart Harry Dexter White, their aim was to create an international monetary system that stabilised currencies and facilitated a return to freer trade. National currencies would be set at fixed but adjustable rates to the dollar, which was in turn convertible to gold at a fixed rate of $35 per ounce.
The role of the IMF in this system was to help member states suffering from short-term balance-of-payments problems, while its partner organisation, the World Bank, made long-term loans for reconstruction and development. Crucially, in this original vision, the IMF would help members weather financial instability without browbeating them into undertaking painful policies such as cutting budgets or raising interest rates in the middle of a recession. This marked a break with the previous gold standard system, which from the late 19th century had provided predictable and stable exchange rates for countries that kept the value of their currencies fixed to a specific quantity of gold. This stability had come at the cost of being able to implement expansive national economic policies during a crisis. By contrast, officials involved in the creation of the IMF insisted that it avoid developing what Keynes referred to as “grandmotherly powers”, meaning finger-wagging, moralising strictures that unduly curtailed the freedom of member states.
Shortly after the end of the second world war, however, European representatives in the IMF’s executive board discovered that – despite an apparent wartime consensus shared by their more powerful US counterparts – the IMF was going to readopt an unpopular practice associated with earlier periods of financial imperialism: attaching policy conditions to its loans. To their chagrin, the institution would be authorised to intervene in sensitive domestic matters concerning fiscal and monetary decisions. US representatives were wary of allowing members access to the dollar without strings attached. And because the IMF had been designed in ways that gave the US unparalleled control over its activities, their prerogatives held sway. It was not in Europe that the IMF first deployed these interventionist powers, though; it was in the so-called third world, beginning in South American states such as Chile, Paraguay and Bolivia in the 50s.
After the collapse of the Bretton Woods system in the early 70s, when Richard Nixon removed the US dollar’s peg to gold, the IMF appeared to be out of a job. But it quickly took on new prominence in making bailout loans to financially unstable states. These loans came with demands for major structural reforms (privatisation, deregulation, the removal of tariffs) in addition to fiscal and monetary restraint. What made the IMF so mighty was that other creditors – whether commercial banks such as Citibank, or foreign governments – often considered a prior arrangement with the institution as a sign of a country’s creditworthiness. When the Soviet Union collapsed in the early 90s, the IMF undertook its most ambitious task yet, overseeing the transition of nearly-formerly Soviet republics to capitalism. In the process, it became, as the political scientist Randall Stone put it, the “most powerful international institution in history”.
As the IMF reached the height of its influence in the 90s, however, it sparked a global backlash that continues to this day. And the place where that backlash began was in Asia.
The Asian financial crisis is poorly remembered in the west, having been overshadowed by the 9/11 terrorist attacks and the “war on terror”. But it was an enormously consequential event, and its impact would reshape the global economy over the next 25 years. It began in the summer of 1997, when the collapse of the Thai baht sparked a financial panic that spread quickly throughout the region. As investors dumped one shaky currency after another, the panic became self-perpetuating, wreaking havoc from Indonesia to South Korea, and to countries as far off as Russia and Brazil.
The IMF quickly stepped in to offer rescue loans to the worst-hit countries, including Thailand, Indonesia and South Korea. The conditions of these loans included the institution’s perennial demands for austerity and tighter monetary policies – even though none of these governments had run significant deficits, nor seen much inflation in their economies in the run-up to the crisis. The IMF also insisted on a long list of reforms designed to liberalise their economies and, in particular, to dismantle practices and institutions derided as corrupt and inefficient forms of “crony capitalism”. In South Korea, the IMF set its sights on the country’s huge conglomerates, or chaebol, such as Hyundai, which enjoyed close ties to the state and domestic banks. In Indonesia, the IMF called for uprooting the vast system of patronage that enriched the family of long-ruling autocrat Suharto, such as the lucrative national clove monopoly, which produced a key ingredient of the kretek cigarettes popular in Indonesia, and was controlled by one of Suharto’s sons.
By intervening in sectors that had little to do with the currency crisis, the IMF appeared to be announcing the scale of its ambition. It wanted to transform what had, until then, been widely considered well-run economies. In particular, it seemed dead set on overturning what was known as the “Asian Model” of economic management, characterised by state-led investment in specific industries and firms. This approach had yielded impressive results in several countries, not least Japan, which then boasted the world’s second-largest economy. But it was widely seen by western officials and investors as anachronistic. To them, the crisis had rung the death knell for this Asian statist alternative to the Anglo-American laissez-faire approach.
This reformist zeal made the IMF unpopular across much of Asia. People were especially infuriated by demands to lift restrictions on foreign ownership of domestic firms. As US and European corporations swooped in to buy up financial institutions in Thailand and South Korea at steep discounts, many denounced the IMF as neo-colonial. In China, which was spared from the worst of the crisis, the state-owned People’s Daily newspaper accused the US of “forcing east Asia into submission”. Even Raghuram Rajan, who became the IMF’s chief economist in 2003, later admitted that the institution’s handling of the crisis had left it vulnerable to charges of financial colonialism.
Meanwhile, austerity measures such as cutting subsidies to fuel and foodstuffs like rice and flour, in countries undergoing severe cost of living and unemployment crises, fed growing political turmoil. The crisis was especially dire in Indonesia. As the rupiah continued to plunge into 1998, the country was gripped by political discontent and violence, as mob attacks on the ethnic Chinese minority led to scores of deaths. In Jakarta, the military fired on student protesters at Trisakti University, killing four and fanning the flames of riots spreading across the country. When Suharto raised fuel prices to fulfil IMF demands to produce a budget surplus, opposition intensified. In May 1998, he was forced from office.
At the time, defenders of the IMF insisted Suharto had been the author of his own downfall, claiming he had refused to implement reforms quickly enough to halt a crisis caused by his own corruption. But other contemporaries recognised that insisting he instantly uproot the entire system of patronage on which his regime relied was an impossible demand. “It’s crazy to ask people to commit suicide,” one diplomat remarked at the time.
Looking at images of Suharto signing the terms of an agreement with the IMF in January 1998, as the institution’s managing director, the French economist Michel Camdessus, loomed over him, it wasn’t hard to see this as a humiliating surrender of sovereignty. And it did not take conspiracists to recognise that the US Treasury and many western investors wanted Suharto gone, despite the opposition of the state department and Pentagon to anything that threatened the stability of a US strategic partner in the Asia-Pacific region. While the IMF didn’t plot Suharto’s removal, there was little question that US Treasury officials had come to see regime change as the only salvation for the Indonesian economy. As Camdessus himself later admitted: “We created the conditions that obliged Suharto to leave his job.”
To some American observers, Indonesia had proven an iron law of history: that the growing material prosperity of a citizenry would inevitably cause them to reject autocratic rule. What happened to Suharto, they said, would eventually happen to the Chinese Communist party. (Some predicted the exact year – 2015 – that China would see its equivalent popular uprising.)
What went less commented on was the obvious wakeup call the crisis and its political effects delivered to other governments. The lesson was clear: make yourself able to resist a crisis of financial globalisation and, if it comes, be sure you can deal with it on your own.
For many states, the Asian crisis was a warning. In the event of a future financial crisis, they wanted to avoid calling in any institutions that might interfere in their domestic affairs. One way to do this was to build up huge stockpiles of foreign currency reserves. At a moment of crisis, these reserves can be used to defend a currency’s value, pay off foreign debts and import necessities. China led the way, but South Korea, Brazil, Mexico and others followed. From 2000 to 2009, the total value of China’s reserve assets grew by nearly $1.8tn. Today, it’s well over $3tn – a figure higher than the total GDP of the entire African continent.
For some countries, accumulating these reserves has been key to a strategy of export-led development, since doing so can help hold down the value of a national currency and thus make exports more competitive. But for most states, the aim has been insurance against financial turmoil. And in some cases, it’s worked remarkably well. The accumulation of currency reserves helped many emerging market economies escape the worst of the global financial crisis that began in 2008. While the IMF played a major role in bailing out Greece in the 2010s, it did comparatively little elsewhere. It was not invited back to countries where it had become so controversially involved in the 90s, such as South Korea and Russia.
One striking consequence of this currency stockpiling is that capital now moves in huge quantities from poorer countries to wealthier ones, rather than vice versa. This is because much of the world’s supply of reserves are held in US dollars, which countries tend to invest back into the safe haven of US treasury bills. Doing so guarantees a nearly bottomless global demand for US government debt and helps ensure the continued centrality of the US dollar to the global economy. The fact that China sits on such a huge stockpile of US treasuries has long generated anxiety about the political leverage this might give Beijing over Washington, since a sell-off would be catastrophic to the value of the dollar. But because it would also be catastrophic to the Chinese economy, the threat has never been close to realisation.
Not all states can afford to pile up currency in this way. For those that can, it is not painless, since it diverts resources away from public investment. Some economists have wondered why governments opt for it, suggesting that the opportunity cost of reducing public investment may outweigh the possible savings of averting a financial crisis. But hoarding these assets is not just a matter of economics. It’s also political and strategic policy designed to guarantee states the kind of autonomy that Indonesia, Thailand and South Korea bargained away during the 1997-98 crisis. Seen in this way, there’s little price that’s not worth paying for full sovereignty. The historian Adam Tooze has aptly referred to the strategies pursued by emerging market economies since the 90s as programmes of “self-strengthening” – a term originally used to describe the efforts of states like China and Japan in the late 19th century to reform their government administrations, militaries and economies to resist the incursion of powerful western empires.
Take Russia, a country that experienced a long and painful engagement with the IMF in the 90s. After defaulting on its sovereign debt in 1998, Russia, under its new president Vladimir Putin, began to amass a stockpile of reserves in the 2000s, facilitated by rising oil prices. By 2008, it sat on such a huge war chest that it could spark an aggressive war with Georgia without much concern for the financial repercussions. Russia appeared to have won new strategic independence.
A similar calculus was likely at play with Putin’s decision to invade Ukraine this year. But in one of the most far-reaching countermoves of Putin’s enemies, the US and its G7 partners targeted the foreign assets that were owned by the Russian central bank, but which they ultimately controlled. In late February, more than $300bn of Russian assets were immobilised in a move designed to paralyse Russia. The same tactic had been used just a few months earlier, when the dollar assets of the Afghan central bank had been frozen to hobble the Taliban in the wake of Kabul’s fall.
In Russia’s case, this strategy failed to end the war. And some worry it will backfire, encouraging states to rethink holding US dollars as a guarantee of economic stability. If the Asian financial crisis had the effect of turning countries away from the IMF and towards stockpiling reserves, the war in Ukraine may similarly push them away from the dollar as the reserve currency of choice. Were this to happen, the impact would be seismic. The dollar would be dethroned, losing its status as the world’s principal safe haven-asset. More likely, others argue, is further diversification away from dollars to other currencies. The ambitious US and European financial sanctions against Russia may prove, over time, to have similar effects to the IMF’s response to the Asian financial crisis: encouraging states to reconsider how they guarantee their autonomy in a global economy whose infrastructures they do not control.
Over the past decade, the IMF has made significant efforts to repair its reputation. In the wake of the global financial crisis, it became routine for IMF officials to publicly acknowledge that austerity could be counterproductive and that tackling inequality had become one of the institution’s central concerns. The selective use of once-taboo policies such as capital controls to restrict the flow of foreign capital into and out of a national economy was reconsidered, while demands for far-reaching domestic structural reforms were supposedly a thing of the past. When the official IMF publication Finance and Development ran an article in 2016 with the provocative headline Neoliberalism: Oversold?, many media outlets reported it as a sign of the institution undergoing a significant transformation. “What the hell is going on?” was how one longtime critic of neoliberalism, the Harvard economist Dani Rodrik, greeted news of its publication.
But in practice, the IMF’s transformation has itself been oversold. As the scholars Alexander Kentikelenis, Thomas Stubbs and Lawrence King showed in an article from the same year, the IMF, despite these rhetorical shifts, continued to insist on just as many, if not more, of the same structural reforms of borrowers as ever – sacking civil servants, cutting pensions, lowering minimum wages. A 2020 study by the Global Development Policy Center at Boston University found something similar. Today’s IMF, it noted, recognises that austerity constrains growth – while continuing to demand austerity from states in receipt of its aid.
Yet the Boston University study also reached another conclusion – one that shows how, despite itself, the institution may be undergoing real changes, not from ideological shifts alone, but from competition for its business. Researchers found that borrowers that had prior loan arrangements with China tended to get more lenient treatment from the IMF. Why? Probably because China does not make austerity or domestic reforms the price of its loans, which pushes the IMF to moderate its terms with clients that have access to this unconditional financing. Other studies have found a similar phenomenon at work at the World Bank.
China is now the world’s largest bilateral lender, a fact that has generated considerable anxiety in the west. Lending without policy strings attached is sometimes seen as Beijing’s way of buying goodwill with corrupt autocrats. China is also accused of “dept trap” diplomacy, by making loans to states to invest in unaffordable “white elephant” infrastructure projects. When these states can’t repay their debts, Chinese officials insist they give up valuable assets, like a 99-year lease over a strategic port, such as happened in Sri Lanka in 2017.
Critics of China have described Sri Lanka’s descent into financial and political turmoil as the logical end point of Beijing’s predatory lending. It’s true that the Rajapaksa brothers, who traded off ruling Sri Lanka from the mid-00s until this summer, pursued an extravagant programme of Chinese-financed infrastructure building. But when the Sri Lankan economy collapsed earlier this year, the government actually owed more money to private bondholders in Europe and the US than to China – despite the role Beijing had played in financing the country’s infrastructure boom. It’s too simple to see Sri Lanka solely as the victim of Chinese debt diplomacy.
Today, many are looking for clues on the nature of China’s role as lender in how it navigates its first global debt crisis. Over the last few years, it’s started making more emergency bailouts, setting itself up even more as a direct alternative to the IMF. But even critics of the IMF see the institution – with its broad membership, global reach and public aims – as playing a meaningfully different role in the world economy from a state actor like China, which – like all states – will make loans largely for the sake of its strategic aims and national interests. This is why many reformers calling for changes to the international financial system – such as Mia Mottley, the prime minister of Barbados – still focus on the IMF. Despite its history of missteps, and close ties to US foreign policy objectives, the institution is still seen as being uniquely able to provide something approximating a global financial safety net.
Given its continued dominance of the IMF, it is from the US that the greatest pressure to actually reshape the institution will have to come. There are signs that the current global crisis is forcing political change. In October, just before the annual meeting of the IMF and World Bank, the former Treasury secretary Lawrence Summers called on the institution to develop new, unconditional ways of providing financial assistance to states facing extreme pressures, as central banks raised interest rates. The political stigma involved in traditional IMF forms of lending, Summers suggested, was pushing states away from the institution when they needed it most.
It was extraordinary to see Summers making this case. During the Asian financial crisis, Summers had been deputy secretary of the US Treasury. He had played a leading role in coordinating Washington’s response to the crisis through the IMF. He had even met with Suharto in Jakarta to personally convince him to agree to its terms. But now, the world economy needed a kind of financial assistance, Summers implied, that moved past the legacy of the interventionist IMF, whose powers he himself had once helped to unleash. This year’s annual meetings, which failed to consider ambitious measures to rescue the world economy, he claimed, would be remembered as nothing more than a “missed opportunity”.
As the Fed’s decisions threaten a new wave of global economic instability, these meetings may also be remembered for something else entirely: as an illustration of the paradoxical nature of US power in the third decade of the 21st century – mighty enough to break the world, but not to put it back together again.
Last summer, after months of unusually heavy monsoon rains, and temperatures that approached the limits of human survivability, Pakistan – home to thousands of melting Himalayan glaciers – experienced some of the worst floods in its history. The most extensive destruction was in the provinces of Sindh and Balochistan, but some estimated that up to a third of the country was submerged. The floods killed more than 1,700 people and displaced a further 32 million – more than the entire population of Australia. Some of the country’s most fertile agricultural areas became giant lakes, drowning livestock and destroying crops and infrastructure. The cost of the disaster now runs to tens of billions of dollars.
In late August, as the scale of this catastrophe was becoming clear, the Pakistani government was trying to avert a second disaster. It was finally reaching a deal with the International Monetary Fund (IMF) to avoid missing payment on its foreign debt. Without this agreement, Pakistan would likely have been declared in default – an event that can spark a recession, weaken a country’s long-term growth, and make it more difficult to borrow at affordable rates in the future. The terms of the deal were painful: the government was offered a $1.17bn IMF bailout only after it demonstrated a real commitment to undertaking unpopular austerity policies, such as slashing energy subsidies. But the recent fate of another south Asian country appeared to show what happens if you put off the IMF for too long. Only weeks before, the Sri Lankan government, shortly after its own default – and after months of refusing to implement IMF-demanded reforms – was overthrown in a popular uprising.
The correlation of Pakistan’s crises – exceptionally devastating floods and the threat of economic meltdown – was partly bad luck. But it was also emblematic of a challenge faced by many countries at the forefront of the climate crisis: how can they afford to deal with extreme weather events and prepare themselves for the coming disasters, while suffering under crippling debt loads and facing demands for austerity as the price of relief?
Pakistan and Sri Lanka are only two of the many countries currently facing conditions of severe debt distress. Covid-19 delivered a major blow to many low- and middle-income countries that had borrowed heavily during the era of low interest rates beginning with the 2008 financial crisis. As the costs of public health and welfare rocketed, economies were locked down and tourism collapsed, which meant that tax revenues plummeted. The pandemic also disrupted global supply chains, leading to shortages of many goods and higher prices. These inflationary pressures were then exacerbated by Russia’s invasion of Ukraine. Meanwhile, the decision of the US Federal Reserve to raise interest rates to reduce US inflation has pushed the value of the dollar to its highest level in 20 years. This has made the debt of countries that borrowed in dollars – many do – more expensive since their currencies are worth less, while further increasing the cost of their imports. Rising US interest rates have also encouraged investors to pull capital out of riskier emerging markets at a historic rate, since safer dollar investments now produce higher returns.
The result is that the world economy faces the possibility of one of the worst debt crises in decades, threatening deep recessions, political instability, and years of lost growth. At the same time, the increase in extreme weather events – stronger hurricanes, recurring droughts – makes life even harder for states that already dedicate a large portion of their revenues to servicing foreign debt. In the midst of this turmoil, the IMF has become more involved in bailing out countries than it has in years. Over the last few months, the value of its emergency loans reached a record level, as a growing number of states turned to it for help, including Bangladesh, Egypt, Ghana and Tunisia.
Broadly speaking, the way the IMF works is by collecting financial resources from members and then offering them short-term assistance in the case of financial hardship. Based in Washington DC, the institution is staffed by representatives of ministers of finance and central bank governors from around the world. Because voting power is weighted by each state’s financial contribution, the US, as the IMF’s largest shareholder, exercises outsized influence over its major decisions and can veto proposed reforms to its governance. But as an international body that counts nearly every sovereign state as member, the IMF plays a unique role in the world economy. It’s the only institution with the resources, mandate and global reach to help almost any country facing severe economic distress.
But in exchange for its help, the IMF typically insists governments do what they find most difficult: reduce public spending, raise taxes and implement reforms designed to lower their debt-to-GDP ratios, such as cutting subsidies for fuel or food. Unsurprisingly, politicians are often reluctant to undertake these measures. It’s not just that the reforms often leave voters worse off and make politicians less popular. National pride is also at stake. Bowing to demands from an institution dominated by foreign governments can be seen as humiliating, and an admission of domestic dysfunction and misgovernance.
On the rare occasions that the IMF criticises the policies of a wealthy European state, this too can embroil the institution in domestic political conflicts. In September, the IMF’s criticism of Liz Truss’s proposed tax cuts provided ammunition to her political opponents and contributed to a slump in the pound’s value. The decision to sack chancellor Kwasi Kwarteng was taken while he was attending the IMF’s annual meeting in Washington DC, where the institution’s leading officials did little to mask their disapproval of his policies. In future histories of the fall of Truss, the IMF is likely to play a not insignificant role.
Despite all this, the IMF is not the kingmaker it once was. After reaching the height of its powers in the 90s, when its name became synonymous with the excesses of neoliberal globalisation and US overreach, the IMF has faced increasing resistance. It’s still the only institution that can guarantee assistance to nearly any country experiencing extreme financial stress. But the decline of US power, emergence of alternative lenders, and the IMF’s reputation as a domineering taskmaster has left it an anomalous position. It is much needed and little loved, enormously powerful and often ineffectual in getting states to agree to its terms. If predictions are correct that the world is entering an extended period of economic turmoil, this will only increase the need for some kind of global lender of last resort. Whether the IMF is up to the task depends on whether it has learned from its chequered history.
One of the most remarkable aspects of the IMF was what, in theory, it was supposed to accomplish when it was established – and how quickly it departed from this initial vision. The creation of the IMF was agreed at the Bretton Woods Conference of July 1944, when representatives from more than 40 countries met to rewrite the rules of the world economy. Led by the world-famous British economist John Maynard Keynes and his US counterpart Harry Dexter White, their aim was to create an international monetary system that stabilised currencies and facilitated a return to freer trade. National currencies would be set at fixed but adjustable rates to the dollar, which was in turn convertible to gold at a fixed rate of $35 per ounce.
The role of the IMF in this system was to help member states suffering from short-term balance-of-payments problems, while its partner organisation, the World Bank, made long-term loans for reconstruction and development. Crucially, in this original vision, the IMF would help members weather financial instability without browbeating them into undertaking painful policies such as cutting budgets or raising interest rates in the middle of a recession. This marked a break with the previous gold standard system, which from the late 19th century had provided predictable and stable exchange rates for countries that kept the value of their currencies fixed to a specific quantity of gold. This stability had come at the cost of being able to implement expansive national economic policies during a crisis. By contrast, officials involved in the creation of the IMF insisted that it avoid developing what Keynes referred to as “grandmotherly powers”, meaning finger-wagging, moralising strictures that unduly curtailed the freedom of member states.
Shortly after the end of the second world war, however, European representatives in the IMF’s executive board discovered that – despite an apparent wartime consensus shared by their more powerful US counterparts – the IMF was going to readopt an unpopular practice associated with earlier periods of financial imperialism: attaching policy conditions to its loans. To their chagrin, the institution would be authorised to intervene in sensitive domestic matters concerning fiscal and monetary decisions. US representatives were wary of allowing members access to the dollar without strings attached. And because the IMF had been designed in ways that gave the US unparalleled control over its activities, their prerogatives held sway. It was not in Europe that the IMF first deployed these interventionist powers, though; it was in the so-called third world, beginning in South American states such as Chile, Paraguay and Bolivia in the 50s.
After the collapse of the Bretton Woods system in the early 70s, when Richard Nixon removed the US dollar’s peg to gold, the IMF appeared to be out of a job. But it quickly took on new prominence in making bailout loans to financially unstable states. These loans came with demands for major structural reforms (privatisation, deregulation, the removal of tariffs) in addition to fiscal and monetary restraint. What made the IMF so mighty was that other creditors – whether commercial banks such as Citibank, or foreign governments – often considered a prior arrangement with the institution as a sign of a country’s creditworthiness. When the Soviet Union collapsed in the early 90s, the IMF undertook its most ambitious task yet, overseeing the transition of nearly-formerly Soviet republics to capitalism. In the process, it became, as the political scientist Randall Stone put it, the “most powerful international institution in history”.
As the IMF reached the height of its influence in the 90s, however, it sparked a global backlash that continues to this day. And the place where that backlash began was in Asia.
The Asian financial crisis is poorly remembered in the west, having been overshadowed by the 9/11 terrorist attacks and the “war on terror”. But it was an enormously consequential event, and its impact would reshape the global economy over the next 25 years. It began in the summer of 1997, when the collapse of the Thai baht sparked a financial panic that spread quickly throughout the region. As investors dumped one shaky currency after another, the panic became self-perpetuating, wreaking havoc from Indonesia to South Korea, and to countries as far off as Russia and Brazil.
The IMF quickly stepped in to offer rescue loans to the worst-hit countries, including Thailand, Indonesia and South Korea. The conditions of these loans included the institution’s perennial demands for austerity and tighter monetary policies – even though none of these governments had run significant deficits, nor seen much inflation in their economies in the run-up to the crisis. The IMF also insisted on a long list of reforms designed to liberalise their economies and, in particular, to dismantle practices and institutions derided as corrupt and inefficient forms of “crony capitalism”. In South Korea, the IMF set its sights on the country’s huge conglomerates, or chaebol, such as Hyundai, which enjoyed close ties to the state and domestic banks. In Indonesia, the IMF called for uprooting the vast system of patronage that enriched the family of long-ruling autocrat Suharto, such as the lucrative national clove monopoly, which produced a key ingredient of the kretek cigarettes popular in Indonesia, and was controlled by one of Suharto’s sons.
By intervening in sectors that had little to do with the currency crisis, the IMF appeared to be announcing the scale of its ambition. It wanted to transform what had, until then, been widely considered well-run economies. In particular, it seemed dead set on overturning what was known as the “Asian Model” of economic management, characterised by state-led investment in specific industries and firms. This approach had yielded impressive results in several countries, not least Japan, which then boasted the world’s second-largest economy. But it was widely seen by western officials and investors as anachronistic. To them, the crisis had rung the death knell for this Asian statist alternative to the Anglo-American laissez-faire approach.
This reformist zeal made the IMF unpopular across much of Asia. People were especially infuriated by demands to lift restrictions on foreign ownership of domestic firms. As US and European corporations swooped in to buy up financial institutions in Thailand and South Korea at steep discounts, many denounced the IMF as neo-colonial. In China, which was spared from the worst of the crisis, the state-owned People’s Daily newspaper accused the US of “forcing east Asia into submission”. Even Raghuram Rajan, who became the IMF’s chief economist in 2003, later admitted that the institution’s handling of the crisis had left it vulnerable to charges of financial colonialism.
Meanwhile, austerity measures such as cutting subsidies to fuel and foodstuffs like rice and flour, in countries undergoing severe cost of living and unemployment crises, fed growing political turmoil. The crisis was especially dire in Indonesia. As the rupiah continued to plunge into 1998, the country was gripped by political discontent and violence, as mob attacks on the ethnic Chinese minority led to scores of deaths. In Jakarta, the military fired on student protesters at Trisakti University, killing four and fanning the flames of riots spreading across the country. When Suharto raised fuel prices to fulfil IMF demands to produce a budget surplus, opposition intensified. In May 1998, he was forced from office.
At the time, defenders of the IMF insisted Suharto had been the author of his own downfall, claiming he had refused to implement reforms quickly enough to halt a crisis caused by his own corruption. But other contemporaries recognised that insisting he instantly uproot the entire system of patronage on which his regime relied was an impossible demand. “It’s crazy to ask people to commit suicide,” one diplomat remarked at the time.
Looking at images of Suharto signing the terms of an agreement with the IMF in January 1998, as the institution’s managing director, the French economist Michel Camdessus, loomed over him, it wasn’t hard to see this as a humiliating surrender of sovereignty. And it did not take conspiracists to recognise that the US Treasury and many western investors wanted Suharto gone, despite the opposition of the state department and Pentagon to anything that threatened the stability of a US strategic partner in the Asia-Pacific region. While the IMF didn’t plot Suharto’s removal, there was little question that US Treasury officials had come to see regime change as the only salvation for the Indonesian economy. As Camdessus himself later admitted: “We created the conditions that obliged Suharto to leave his job.”
To some American observers, Indonesia had proven an iron law of history: that the growing material prosperity of a citizenry would inevitably cause them to reject autocratic rule. What happened to Suharto, they said, would eventually happen to the Chinese Communist party. (Some predicted the exact year – 2015 – that China would see its equivalent popular uprising.)
What went less commented on was the obvious wakeup call the crisis and its political effects delivered to other governments. The lesson was clear: make yourself able to resist a crisis of financial globalisation and, if it comes, be sure you can deal with it on your own.
For many states, the Asian crisis was a warning. In the event of a future financial crisis, they wanted to avoid calling in any institutions that might interfere in their domestic affairs. One way to do this was to build up huge stockpiles of foreign currency reserves. At a moment of crisis, these reserves can be used to defend a currency’s value, pay off foreign debts and import necessities. China led the way, but South Korea, Brazil, Mexico and others followed. From 2000 to 2009, the total value of China’s reserve assets grew by nearly $1.8tn. Today, it’s well over $3tn – a figure higher than the total GDP of the entire African continent.
For some countries, accumulating these reserves has been key to a strategy of export-led development, since doing so can help hold down the value of a national currency and thus make exports more competitive. But for most states, the aim has been insurance against financial turmoil. And in some cases, it’s worked remarkably well. The accumulation of currency reserves helped many emerging market economies escape the worst of the global financial crisis that began in 2008. While the IMF played a major role in bailing out Greece in the 2010s, it did comparatively little elsewhere. It was not invited back to countries where it had become so controversially involved in the 90s, such as South Korea and Russia.
One striking consequence of this currency stockpiling is that capital now moves in huge quantities from poorer countries to wealthier ones, rather than vice versa. This is because much of the world’s supply of reserves are held in US dollars, which countries tend to invest back into the safe haven of US treasury bills. Doing so guarantees a nearly bottomless global demand for US government debt and helps ensure the continued centrality of the US dollar to the global economy. The fact that China sits on such a huge stockpile of US treasuries has long generated anxiety about the political leverage this might give Beijing over Washington, since a sell-off would be catastrophic to the value of the dollar. But because it would also be catastrophic to the Chinese economy, the threat has never been close to realisation.
Not all states can afford to pile up currency in this way. For those that can, it is not painless, since it diverts resources away from public investment. Some economists have wondered why governments opt for it, suggesting that the opportunity cost of reducing public investment may outweigh the possible savings of averting a financial crisis. But hoarding these assets is not just a matter of economics. It’s also political and strategic policy designed to guarantee states the kind of autonomy that Indonesia, Thailand and South Korea bargained away during the 1997-98 crisis. Seen in this way, there’s little price that’s not worth paying for full sovereignty. The historian Adam Tooze has aptly referred to the strategies pursued by emerging market economies since the 90s as programmes of “self-strengthening” – a term originally used to describe the efforts of states like China and Japan in the late 19th century to reform their government administrations, militaries and economies to resist the incursion of powerful western empires.
Take Russia, a country that experienced a long and painful engagement with the IMF in the 90s. After defaulting on its sovereign debt in 1998, Russia, under its new president Vladimir Putin, began to amass a stockpile of reserves in the 2000s, facilitated by rising oil prices. By 2008, it sat on such a huge war chest that it could spark an aggressive war with Georgia without much concern for the financial repercussions. Russia appeared to have won new strategic independence.
A similar calculus was likely at play with Putin’s decision to invade Ukraine this year. But in one of the most far-reaching countermoves of Putin’s enemies, the US and its G7 partners targeted the foreign assets that were owned by the Russian central bank, but which they ultimately controlled. In late February, more than $300bn of Russian assets were immobilised in a move designed to paralyse Russia. The same tactic had been used just a few months earlier, when the dollar assets of the Afghan central bank had been frozen to hobble the Taliban in the wake of Kabul’s fall.
In Russia’s case, this strategy failed to end the war. And some worry it will backfire, encouraging states to rethink holding US dollars as a guarantee of economic stability. If the Asian financial crisis had the effect of turning countries away from the IMF and towards stockpiling reserves, the war in Ukraine may similarly push them away from the dollar as the reserve currency of choice. Were this to happen, the impact would be seismic. The dollar would be dethroned, losing its status as the world’s principal safe haven-asset. More likely, others argue, is further diversification away from dollars to other currencies. The ambitious US and European financial sanctions against Russia may prove, over time, to have similar effects to the IMF’s response to the Asian financial crisis: encouraging states to reconsider how they guarantee their autonomy in a global economy whose infrastructures they do not control.
Over the past decade, the IMF has made significant efforts to repair its reputation. In the wake of the global financial crisis, it became routine for IMF officials to publicly acknowledge that austerity could be counterproductive and that tackling inequality had become one of the institution’s central concerns. The selective use of once-taboo policies such as capital controls to restrict the flow of foreign capital into and out of a national economy was reconsidered, while demands for far-reaching domestic structural reforms were supposedly a thing of the past. When the official IMF publication Finance and Development ran an article in 2016 with the provocative headline Neoliberalism: Oversold?, many media outlets reported it as a sign of the institution undergoing a significant transformation. “What the hell is going on?” was how one longtime critic of neoliberalism, the Harvard economist Dani Rodrik, greeted news of its publication.
But in practice, the IMF’s transformation has itself been oversold. As the scholars Alexander Kentikelenis, Thomas Stubbs and Lawrence King showed in an article from the same year, the IMF, despite these rhetorical shifts, continued to insist on just as many, if not more, of the same structural reforms of borrowers as ever – sacking civil servants, cutting pensions, lowering minimum wages. A 2020 study by the Global Development Policy Center at Boston University found something similar. Today’s IMF, it noted, recognises that austerity constrains growth – while continuing to demand austerity from states in receipt of its aid.
Yet the Boston University study also reached another conclusion – one that shows how, despite itself, the institution may be undergoing real changes, not from ideological shifts alone, but from competition for its business. Researchers found that borrowers that had prior loan arrangements with China tended to get more lenient treatment from the IMF. Why? Probably because China does not make austerity or domestic reforms the price of its loans, which pushes the IMF to moderate its terms with clients that have access to this unconditional financing. Other studies have found a similar phenomenon at work at the World Bank.
China is now the world’s largest bilateral lender, a fact that has generated considerable anxiety in the west. Lending without policy strings attached is sometimes seen as Beijing’s way of buying goodwill with corrupt autocrats. China is also accused of “dept trap” diplomacy, by making loans to states to invest in unaffordable “white elephant” infrastructure projects. When these states can’t repay their debts, Chinese officials insist they give up valuable assets, like a 99-year lease over a strategic port, such as happened in Sri Lanka in 2017.
Critics of China have described Sri Lanka’s descent into financial and political turmoil as the logical end point of Beijing’s predatory lending. It’s true that the Rajapaksa brothers, who traded off ruling Sri Lanka from the mid-00s until this summer, pursued an extravagant programme of Chinese-financed infrastructure building. But when the Sri Lankan economy collapsed earlier this year, the government actually owed more money to private bondholders in Europe and the US than to China – despite the role Beijing had played in financing the country’s infrastructure boom. It’s too simple to see Sri Lanka solely as the victim of Chinese debt diplomacy.
Today, many are looking for clues on the nature of China’s role as lender in how it navigates its first global debt crisis. Over the last few years, it’s started making more emergency bailouts, setting itself up even more as a direct alternative to the IMF. But even critics of the IMF see the institution – with its broad membership, global reach and public aims – as playing a meaningfully different role in the world economy from a state actor like China, which – like all states – will make loans largely for the sake of its strategic aims and national interests. This is why many reformers calling for changes to the international financial system – such as Mia Mottley, the prime minister of Barbados – still focus on the IMF. Despite its history of missteps, and close ties to US foreign policy objectives, the institution is still seen as being uniquely able to provide something approximating a global financial safety net.
Given its continued dominance of the IMF, it is from the US that the greatest pressure to actually reshape the institution will have to come. There are signs that the current global crisis is forcing political change. In October, just before the annual meeting of the IMF and World Bank, the former Treasury secretary Lawrence Summers called on the institution to develop new, unconditional ways of providing financial assistance to states facing extreme pressures, as central banks raised interest rates. The political stigma involved in traditional IMF forms of lending, Summers suggested, was pushing states away from the institution when they needed it most.
It was extraordinary to see Summers making this case. During the Asian financial crisis, Summers had been deputy secretary of the US Treasury. He had played a leading role in coordinating Washington’s response to the crisis through the IMF. He had even met with Suharto in Jakarta to personally convince him to agree to its terms. But now, the world economy needed a kind of financial assistance, Summers implied, that moved past the legacy of the interventionist IMF, whose powers he himself had once helped to unleash. This year’s annual meetings, which failed to consider ambitious measures to rescue the world economy, he claimed, would be remembered as nothing more than a “missed opportunity”.
As the Fed’s decisions threaten a new wave of global economic instability, these meetings may also be remembered for something else entirely: as an illustration of the paradoxical nature of US power in the third decade of the 21st century – mighty enough to break the world, but not to put it back together again.
Monday 29 August 2022
Sunday 31 July 2022
Wednesday 20 July 2022
Message from Sri Lanka
Jawed Naqvi in The Dawn
ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.
The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.
There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.
Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.
Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.
There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims.
Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.
Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.
I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.
It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”
Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.
Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.
“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”
ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.
The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.
There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.
Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.
Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.
There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims.
Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.
Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.
I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.
It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”
Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.
Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.
“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”
Sunday 10 July 2022
Thursday 16 June 2022
Sunday 5 June 2022
Thursday 28 April 2022
Tuesday 12 April 2022
Sunday 3 April 2022
Tuesday 29 March 2022
Saturday 12 March 2022
Monday 28 February 2022
China, Russia and the race to a post-dollar world
Rana Foroohar in The FT
Markets often react strongly to geopolitical events, but then later shrug them off. Not this time. Russia’s invasion of Ukraine is a key economic turning point that will have many lasting consequences. Among them will be a quickening of the shift to a bipolar global financial system — one based on the dollar, the other on the renminbi.
The process of financial decoupling between Russia and the west has, of course, been going on for some time. Western banks reduced their exposure to Russian financial institutions by 80 per cent following the country’s annexation of Crimea in 2014, and their claims on the rest of Russia’s private sector have halved since then, according to a recent Capital Economics report. The new and more aggressive sanctions announced by the US will take that decoupling much further.
It will also make Russia much more dependent on China, which will use the US and EU sanctions as an opportunity to pick up excess Russian oil and gas on the cheap. China is no fan of Vladimir Putin’s war. But it needs Russian commodities and arms, and sees the country as a key part of a new Beijing-led order, something Moscow is aware of.
“China is our strategic cushion,” Sergei Karaganov, a political scientist at the Moscow-based Council on Foreign and Defense Policy, told Nikkei Asia recently. “We know that in any difficult situation, we can lean on it for military, political and economic support.”
That does not mean China would break US or European sanctions to support Russia, but it could certainly allow Russian banks and companies more access to its own financial markets and institutions. Indeed, just a few weeks ago, the two countries announced a “friendship without limits”, one that will certainly include closer financial ties as Russia is shut out of western markets. This follows a 2019 agreement between Russia and China to settle all trade in their respective currencies rather than in dollars. The war in Ukraine will speed this up. Witness, in the past few days, China lifting an import ban on Russian wheat, as well as a new long-term Chinese gas deal with Gazprom.
All of this supports China’s long-term goal of building a post-dollarised world, in which Russia would be one of many vassal states settling all transactions in renminbi. Getting there is not an easy process. The Chinese want to de-dollarise, but they also want complete control of their own financial system. That’s a difficult circle to square. One of the reasons that the dollar is the world’s reserve currency is that, in contrast, the US markets are so open and liquid.
Still, the Chinese hope to use trade and the petropolitics of the moment to increase the renminbi’s share of global foreign exchange. One high-level western investor in China told me he expected that share would rise from 2 per cent to as high as 7 per cent in the next three to four years. That is, of course, still minuscule compared with the position of the dollar, which is 59 per cent.
But the Chinese are playing a long game. Finance is a key pillar in the new Great Power competition with America; currency, capital flows and the Belt and Road Initiative trade pathway will all play a role in that. Beijing is slowly diversifying its foreign exchange reserves, as well as buying up a lot of gold. This can be seen as a kind of hedge on a post-dollar word (the assumption being that gold will rise as the dollar falls).
New US limits on capital flows to China on national security grounds may speed up the financial decoupling process further. If US pension funds can’t flow into China, self-sufficiency in capital markets becomes ever more important. Beijing has been trying to bolster trust and transparency in its own system, not only to attract non-US foreign investment, but also to encourage an onshore investment boom in which huge amounts of Chinese savings would be funnelled into domestic capital markets.
While sanctions against Russia herald more decoupling, it is also possible that the economic fallout from the war (lowered demand, even higher inflation) would push America and other nations into succumbing to pricing pressures that would favour Chinese goods. While there is likely to be a lot of political posturing on both sides of the aisle about standing up to Russia and China, it takes a long time to decouple supply chains. Policymakers in Washington have yet to get really serious about it.
Beijing, on the other hand, is quite serious about the new world order that it is pursuing. In his 1997 book, The Grand Chessboard, Zbigniew Brzezinski, the former US national security adviser, wrote presciently that the most dangerous geopolitical scenario for the west would be a “grand coalition of China, Russia, and perhaps Iran”. This would be led by Beijing and united not by ideology but by common grievances. “Averting this contingency, however remote it may be, will require a display of US geostrategic skill on [all] perimeters of Eurasia simultaneously,” he wrote.
Financial markets are going to be a major field of battle. They will become a place to defend liberal values (for example, via sanctions against Russia) and renew old alliances. (Might the US and Europe come together to forge a strategy on both energy security and climate change?) They will also be a lot more sensitive to geopolitics than they have been in the past.
Saturday 26 February 2022
Why the Buddha would be frowning at Ukraine today
Shekhar Gupta in The Print
Strategic studies quiz: Why was the code to inform Indira Gandhi of the successful Pokhran-1 nuclear test ‘Buddha is smiling’? While you think about it, let’s switch to Ukraine.
By the time you are reading this, Kyiv would have capitulated. The question that’s been asked often in the past few days, and will continue to echo for decades to come is, would it have been so simple for Putin’s Russia to crush Zelenskyy’s Ukraine if it hadn’t given up its nuclear stockpile after the Budapest accord in 1994.
This was done in return for security guarantees by the US, Europe and Russia. One of the guarantors has now invaded Ukraine; one, Europe, is looking for a place to hide and ruing its possible loss of cheap gas; and the third, the US, is doing no more than pour tender love and care. Would Ukraine be such a pushover if it had that stockpile?
Now, let’s turn this question inwards at ourselves. Was India prescient or imprudent to not only build nuclear weapons but to declare itself a nuclear-armed state? Over the decades, this has seen a robust debate among four schools. One, the Homi Bhabha-era hawks who believed India should have built its nukes in the early sixties, even pre-empting China. Former foreign secretary Maharajakrishna Rasgotra had even stated in public interviews and seminars that President John F. Kennedy had offered to help India develop and detonate a device, but that Jawaharlal Nehru turned him down.
The second school is the opposite: Nuclear weapons are ugly, immoral, unusable, unnecessary and an affront to humanity. That school has faded lately, especially after Pokhran-2 in 1998. Some of it has morphed into a new thought process: Now that nuclearisation is a done deal, let’s work to keep it to minimum deterrence and be active and willing members of all global arrangements, including Comprehensive Test Ban Treaty (CTBT) of sorts.
The third believes that India was better served by nuclear ambiguity. That Indira Gandhi had already shown the world our capability in 1974 with Pokhran-1. The 1998 tests were unnecessary political chest-thumping that gave Pakistan the opportunity to test as well. As a result, South Asia had two self-declared nuclear weapon states.
The fourth is the team that won. That mere demonstration of capability in 1974 was not enough. It was self-inflicted double defeat. India exposed itself to sanctions, yet did not assert itself as a weapons power. To call this Peaceful Nuclear Explosion (PNE) was pure hypocrisy that impressed none. Not even India’s public opinion at a juncture when Mrs Gandhi needed desperately to shore it up. It was essential to weaponise, thump our chests, throw the gauntlet at Pakistan.
The first school did not find much purchase in the fraught 1960s, and the second was rendered irrelevant after 1998. The third and fourth need to be debated, particularly with the Ukraine staring us in the face. Similar questions were also raised when the US invaded Iraq twice, the second time on the pretext that it had nukes. Would Bush senior or junior have risked invading Iraq if it actually had any weapons of mass destruction (WMDs)?
Never mind that it wouldn’t have the wherewithal to send them to Washington. But just the threat of a nuclear reprisal for the invasion against any of the US’s Middle-Eastern allies would have done. Ukraine now has become an enduring advertisement for the WMD-sovereignty link. It is making many nations, comfortable today in the aura of guarantees, uncomfortable. Surely, no country with the nukes now, or one that’s nearly there — North Korea, Israel, Iran or any other — will ever give these up. They will remember Ukraine.
Did India gain or lose from opening its nuclear cupboard and exposing its wares to the world? The criticism is that it enabled Pakistan to find formal parity. The answer is, nobody had any doubt that Pakistan was already a nuclear weapon state. The Americans had given their last certificate of what was often called “nuclear virginity” to Pakistan in 1989, and refused to renew it.
In the 1990-91 stand-off, Pakistan had also employed the nuclear blackmail against India. It is something books have been written about (Bob Winderm and William Burrows, Critical Mass: The dangerous race for super weapons in a fragmenting world), then-CIA deputy chief Robert Gates has spoken about it, and investigative journalist Seymour Hersh has written a detailed piece too. I too have explained it in several of my writings since.
But, the Pakistani threat, which Robert Gates also brought to India from Islamabad on his conflict resolution visit, was that they will use the nukes in the beginning of the war. The reality dawned on V.P. Singh’s government that India did not have an immediately deliverable weapon in retaliation. Over the decades, proven capability had not been developed into a credible weapon and delivery systems.
That crisis passed, but this had ended any doubts across our political spectrum, with all its divisions, that India needed the weapons fast.
Eighteen March 1989 is a significant day in Indian strategic evolution. Intelligence reports were now confirming that Pakistan was indeed a screwdriver’s turn away from a deliverable bomb. On this day, the IAF was holding it customary firepower demonstration, this one involving 129 aircraft, at Tilpat, a firing range not far from Delhi. At the demonstration, Rajiv gestured to top civil servant Naresh Chandra to follow him into a tent. He was so secretive he even shook off a curious Rajesh Pilot, then a minister. There, he told Chandra of his concern and assigned him to head an elite group, mostly of scientists, to take India to full weaponisation. I wrote about it in some detail in these 2006 articles.
The group included top nuclear scientists R. Chidambaram, P.K. Iyengar, Anil Kakodkar, K. ‘Santy’ Santhanam, missile specialist A.P.J. Abdul Kalam and then-DRDO chief V.S. Arunachalam. They were to be funded mostly covertly out of a fund for “science and technology” under the Planning Commission. A lot of the operations were undercover and covert. Santhanam, for example, was given a discrete senior posting in RAW. Kakodkar later disclosed to me in this Walk the Talk on NDTV that he had to even travel overseas under assumed names and passports.
That baton passed brilliantly between seven prime ministers across a decade of political instability. And in 1998, Pokhran-2 happened, followed by Pakistan’s tit-for-tat in Chagai. Two decades after that, where did the two new nuclear powers stand? India mostly accepted as a legitimate nuclear weapons power, admitted to most multilateral arrangements, rid of all the sanctions and an American strategic ally. And Pakistan? It wasn’t such a bad idea to open the cupboard then.
Finally, here’s why they said ‘Buddha is smiling’ for Pokhran-1. It seems that some time in the epoch of Buddha, the ancient kingdom of Magadh launched a war of conquest over its neighbour Vaishali. While Magadh was the usual monarchy that built a big army and collected the weapons for the assault, Vaishali was some kind of an anarchic street democracy where people spent all their time arguing over whether to fight, how to fight, who will fight.
Sure enough, Magadh annihilated and massacred poorly armed Vaishali. When the news got to a meditating Buddha, it seems, he frowned in disapproval. Meaning that to keep the peace, a kingdom has to be fully prepared for war, or it will meet Vaishali’s fate. Since 1964, India was the Vaishali to China’s Magadh. Now you know why Buddha would now be smiling? Or why he would be frowning at Ukraine’s fate?
Strategic studies quiz: Why was the code to inform Indira Gandhi of the successful Pokhran-1 nuclear test ‘Buddha is smiling’? While you think about it, let’s switch to Ukraine.
By the time you are reading this, Kyiv would have capitulated. The question that’s been asked often in the past few days, and will continue to echo for decades to come is, would it have been so simple for Putin’s Russia to crush Zelenskyy’s Ukraine if it hadn’t given up its nuclear stockpile after the Budapest accord in 1994.
This was done in return for security guarantees by the US, Europe and Russia. One of the guarantors has now invaded Ukraine; one, Europe, is looking for a place to hide and ruing its possible loss of cheap gas; and the third, the US, is doing no more than pour tender love and care. Would Ukraine be such a pushover if it had that stockpile?
Now, let’s turn this question inwards at ourselves. Was India prescient or imprudent to not only build nuclear weapons but to declare itself a nuclear-armed state? Over the decades, this has seen a robust debate among four schools. One, the Homi Bhabha-era hawks who believed India should have built its nukes in the early sixties, even pre-empting China. Former foreign secretary Maharajakrishna Rasgotra had even stated in public interviews and seminars that President John F. Kennedy had offered to help India develop and detonate a device, but that Jawaharlal Nehru turned him down.
The second school is the opposite: Nuclear weapons are ugly, immoral, unusable, unnecessary and an affront to humanity. That school has faded lately, especially after Pokhran-2 in 1998. Some of it has morphed into a new thought process: Now that nuclearisation is a done deal, let’s work to keep it to minimum deterrence and be active and willing members of all global arrangements, including Comprehensive Test Ban Treaty (CTBT) of sorts.
The third believes that India was better served by nuclear ambiguity. That Indira Gandhi had already shown the world our capability in 1974 with Pokhran-1. The 1998 tests were unnecessary political chest-thumping that gave Pakistan the opportunity to test as well. As a result, South Asia had two self-declared nuclear weapon states.
The fourth is the team that won. That mere demonstration of capability in 1974 was not enough. It was self-inflicted double defeat. India exposed itself to sanctions, yet did not assert itself as a weapons power. To call this Peaceful Nuclear Explosion (PNE) was pure hypocrisy that impressed none. Not even India’s public opinion at a juncture when Mrs Gandhi needed desperately to shore it up. It was essential to weaponise, thump our chests, throw the gauntlet at Pakistan.
The first school did not find much purchase in the fraught 1960s, and the second was rendered irrelevant after 1998. The third and fourth need to be debated, particularly with the Ukraine staring us in the face. Similar questions were also raised when the US invaded Iraq twice, the second time on the pretext that it had nukes. Would Bush senior or junior have risked invading Iraq if it actually had any weapons of mass destruction (WMDs)?
Never mind that it wouldn’t have the wherewithal to send them to Washington. But just the threat of a nuclear reprisal for the invasion against any of the US’s Middle-Eastern allies would have done. Ukraine now has become an enduring advertisement for the WMD-sovereignty link. It is making many nations, comfortable today in the aura of guarantees, uncomfortable. Surely, no country with the nukes now, or one that’s nearly there — North Korea, Israel, Iran or any other — will ever give these up. They will remember Ukraine.
Did India gain or lose from opening its nuclear cupboard and exposing its wares to the world? The criticism is that it enabled Pakistan to find formal parity. The answer is, nobody had any doubt that Pakistan was already a nuclear weapon state. The Americans had given their last certificate of what was often called “nuclear virginity” to Pakistan in 1989, and refused to renew it.
In the 1990-91 stand-off, Pakistan had also employed the nuclear blackmail against India. It is something books have been written about (Bob Winderm and William Burrows, Critical Mass: The dangerous race for super weapons in a fragmenting world), then-CIA deputy chief Robert Gates has spoken about it, and investigative journalist Seymour Hersh has written a detailed piece too. I too have explained it in several of my writings since.
But, the Pakistani threat, which Robert Gates also brought to India from Islamabad on his conflict resolution visit, was that they will use the nukes in the beginning of the war. The reality dawned on V.P. Singh’s government that India did not have an immediately deliverable weapon in retaliation. Over the decades, proven capability had not been developed into a credible weapon and delivery systems.
That crisis passed, but this had ended any doubts across our political spectrum, with all its divisions, that India needed the weapons fast.
Eighteen March 1989 is a significant day in Indian strategic evolution. Intelligence reports were now confirming that Pakistan was indeed a screwdriver’s turn away from a deliverable bomb. On this day, the IAF was holding it customary firepower demonstration, this one involving 129 aircraft, at Tilpat, a firing range not far from Delhi. At the demonstration, Rajiv gestured to top civil servant Naresh Chandra to follow him into a tent. He was so secretive he even shook off a curious Rajesh Pilot, then a minister. There, he told Chandra of his concern and assigned him to head an elite group, mostly of scientists, to take India to full weaponisation. I wrote about it in some detail in these 2006 articles.
The group included top nuclear scientists R. Chidambaram, P.K. Iyengar, Anil Kakodkar, K. ‘Santy’ Santhanam, missile specialist A.P.J. Abdul Kalam and then-DRDO chief V.S. Arunachalam. They were to be funded mostly covertly out of a fund for “science and technology” under the Planning Commission. A lot of the operations were undercover and covert. Santhanam, for example, was given a discrete senior posting in RAW. Kakodkar later disclosed to me in this Walk the Talk on NDTV that he had to even travel overseas under assumed names and passports.
That baton passed brilliantly between seven prime ministers across a decade of political instability. And in 1998, Pokhran-2 happened, followed by Pakistan’s tit-for-tat in Chagai. Two decades after that, where did the two new nuclear powers stand? India mostly accepted as a legitimate nuclear weapons power, admitted to most multilateral arrangements, rid of all the sanctions and an American strategic ally. And Pakistan? It wasn’t such a bad idea to open the cupboard then.
Finally, here’s why they said ‘Buddha is smiling’ for Pokhran-1. It seems that some time in the epoch of Buddha, the ancient kingdom of Magadh launched a war of conquest over its neighbour Vaishali. While Magadh was the usual monarchy that built a big army and collected the weapons for the assault, Vaishali was some kind of an anarchic street democracy where people spent all their time arguing over whether to fight, how to fight, who will fight.
Sure enough, Magadh annihilated and massacred poorly armed Vaishali. When the news got to a meditating Buddha, it seems, he frowned in disapproval. Meaning that to keep the peace, a kingdom has to be fully prepared for war, or it will meet Vaishali’s fate. Since 1964, India was the Vaishali to China’s Magadh. Now you know why Buddha would now be smiling? Or why he would be frowning at Ukraine’s fate?
Friday 25 February 2022
Thursday 24 February 2022
Wednesday 9 February 2022
Sunday 30 January 2022
The failure of liberal democracy and the rise of China’s way
Eric Li in The Economist
ALARM BELLS are ringing about the state of democracy. Freedom House proclaims the “global decline in democracy has accelerated” and that even in America it has “declined significantly”. Much of the weakening is happening in countries that are aligned with America, according to research by the V-Dem Institute in Sweden. Larry Diamond, a political sociologist, argues that the “democratic recession” has reached a “crisis”, intensified by the pandemic. There are many diagnoses. Francis Fukuyama, a political scientist, believes the American government is captured by elites and the public is divided by cultural identities. And then there are those who always reach for the easy answer, blaming China and Russia.
On the other side of the spectrum, democracy’s sceptics are enjoying a moment of Schadenfreude. Russia’s foreign minister, Sergei Lavrov, recently criticised the West’s failed attempts to “enforce democracy” on other countries whose cultures were ill fitted for such political systems and called on them to stop. Kishore Mahbubani, a Singaporean diplomat and scholar, believes America has in some ways “all the attributes of a failed state.” A decade ago even I weighed in, arguing that China’s model is superior to the West—a smug way of saying democracy is doomed.
Yet these pronouncements miss the mark because they share a flawed definition of democracy. To be more precise, they mistakenly equate liberalism with democracy, thereby rendering liberal democracy the only form of democratic governance. This is wrong.
In 1992, at the end of the cold war and beginning of a golden era for liberal democracy’s universalisation, Lord Bhikhu Parekh, a political theorist, wrote in an essay, “The Cultural Particularity of Liberal Democracy”, that “liberal democracy is liberalised democracy: that is, democracy defined and structured within the limits set by liberalism.” This combination, he noted, was crystallised around the 18th century in Europe and was widely championed in practice by the West only after the second world war as a way of opposing the Soviet Union. Democracy itself, in its earliest Western incarnation in ancient Greece, long preceded liberalism.
Moreover, in combination, liberalism was the dominant partner and democracy was subjugated. In fact, liberalism was hostile to democracy. The development of liberal institutions over the past two to three centuries has in many ways consisted of attempts at limiting the power of democracy. If we are to be historically accurate and intellectually honest, we need to recognise that liberal democracy is but one kind of democracy.
During the European Enlightenment, liberal thinkers such as Locke, Montesquieu and Mill proposed revolutionary ideas about how human societies should be governed based on the tenets of liberalism, such as the individual as the fundamental unit of society, the sanctity of private property and the primacy of procedural rule of law. Most modern liberal political institutions were developed with these ideas—representative government based on elections, separation of powers, freedom of the press, an independent judiciary and so on. They are fundamental to America’s constitution and to most other liberal societies.
But at the same time, many liberal forefathers also recognised that the goal of liberal institutions is to deliver happiness to the people. If that outcome is not met, procedures must be changed. According to Mill, even access to voting could be curtailed, say, if a citizen were illiterate.
Liberal democracy had enormous successes, notably in the second half of the 20th century. During that period, liberal democratic countries delivered unprecedented prosperity to their people—so much so that many countries, including China, sought to emulate many of the West’s practices, such as market economics. However when groups like Freedom House and V-Dem rank countries on their levels of democracy, it in essence measures countries on how closely they follow liberal institutional procedures. When people say democracy is receding in many countries, they really mean liberalism is in trouble.
Why is liberalism in bad shape? The reason is that in many places it seems to be failing its junior partner—democracy. Liberal democracy is in crisis mode because so many of these countries face severe problems: persistent inequality, political corruption, collapse of social cohesion, lack of trust in government and elite institutions, and incompetent government. In short, liberalism has been failing to deliver democratic outcomes.
In the Soviet Union there was a popular joke: “We pretend to work, they pretend to pay us.” In many liberal societies, people can turn that around: “We pretend to vote, they pretend to govern.” At this rate, the word “liberal” may soon no longer deserve to be followed by “democracy”.
A broader view of governance
The world needs a better and more inclusive way of evaluating democracy. Defining and measuring democracy by liberal procedures is way too narrow—historically, conceptually and under contemporary conditions. In ancient Greece, when democracy was first practised in the West, democratic politics was rather illiberal. There was no concept of individual or minority rights. That was why Plato and Aristotle—no democrats, both—criticised its majoritarian nature. Elections were not the only way of selecting leaders. Sortition—choosing leaders by lottery—was widely practised and fit Aristotle’s definition of democracy.
In the contemporary West, populist movements from the right and socialist activism on the left seem to be, at least in part, attempts to hold liberalism accountable for not delivering on outcomes. Looking at democracy anew is no easy task and will no doubt take a lot of work and debate. But I venture to propose a common-sense idea: let’s measure democracy not by procedures but by outcomes.
Democracy’s normative goal must be to deliver satisfaction to a vast majority of people over a long period. What good are elections if they keep producing poor leaders with the public stuck in perpetual cycles of “elect and regret”? What good is an independent judiciary if it only protects the rich? What good is separation of powers if it is captured by special interests to block necessary reforms? What good is freedom of the press, or freedom of speech for that matter, if it corrodes societies with division and dysfunction? What good are individual rights if they result in millions of avoidable deaths, as has happened in many liberal democracies during the pandemic?
In its attempt to challenge a rising China, America’s president, Joe Biden, frames this competition as a starkly ideological dichotomy of democracy versus autocracy. With that in mind, the administration is hosting a gathering of democracies on December 9th and 10th, to which some 110 countries or regions invited. A review shows that these 111 places (with the US included) consist of around 56% of the world’s population but had cumulative covid-19 deaths of 4.2m, which is 82% of the world’s total. More glaringly, the three countries with the highest deaths are the host country (780,000), which boasts of being the oldest democracy, Brazil (615,000) and India (470,000), which relishes being the largest democracy.
As for the seeming target of the gathering, China, it has 1.4bn people and just 5,697 deaths from covid-19.
Some may object that this was because China restricted freedoms more than “democracies”. But what kind of democracy would sacrifice millions of lives for some individuals’ freedom not to wear masks? It is precisely in this way that liberal democracy is failing its citizens.
Perhaps it is possible to develop a set of measurements that show which countries are generating more democratic outcomes. How satisfied are most people with their countries’ leadership and directions? How cohesive is society? Are people living better than before? Are people optimistic about their future? Is society as a whole investing enough to ensure the well-being of future generations? Beyond the narrow and procedural-centric liberal definition of democracy, outcomes must be taken into consideration when we define and evaluate democracies.
I would suggest that when it comes to outcomes, China doesn’t score so badly. The country has its problems—inequality, corruption and environmental degradation to name a few. But the government has been tackling them aggressively.
This is probably why a vast majority of Chinese people tell pollsters that they are generally satisfied with how the country is being governed. Can we at least now entertain the idea that China is generating more productive and democratic outcomes for its people and, measured by these concrete results, its political system is more democratic than that of the United States, albeit different, at the moment?
Abraham Lincoln characterised democracy in the most eloquent layman’s term: government of the people, by the people, for the people. I dare say that the current Chinese government outperforms America on all three. Chinese people overwhelmingly believe their government belongs to them and they live in a democracy; and it is a fact that a vast majority of China’s political leaders come from ordinary backgrounds. Quite to the contrary, many Americans seem to believe that their government is captured by monied interests and formed by an elite oligarchy. As for the last part, “for the people”, China is way ahead on outcomes.
The world needs greater diversity in the concept of democracy that is both historically truer (because democracy was not always liberal) and practically more beneficial. Many developing countries have seen their economic growth stagnate. They need to be unshackled from the ideological rigidity of the liberal doctrine and to experiment with their own ways of realising their democratic potential. New perspectives and measurements might help liberal societies as well.
Decoupling liberal democracy
For too long, liberalism has monopolised the concept of democracy and liberals have taken their democratic credentials for granted. This may be one cause for why many liberal governments are failing to deliver democratic outcomes for their people. Being measured not on procedures but on actual performance may be just the spur for liberal countries to implement much-needed reforms. If liberal governments could again deliver more democratic outcomes, so much the better for the world.
This perspective, on the need to judge democracy by its outcomes, is rarely discussed in global debates over governance. Liberal societies champion diversity in just about everything except for diversity in models of democracy, even at a conceptual level. But the reality is that the history of democratic aspirations and practices has been immensely rich and diverse. Besides Athenian democracy being decidedly not liberal, there were centuries of democratic ideals and institutional practices in China’s Confucian tradition—also not liberal. At this point in time, the world is certainly in need of more democratic experiments.
I am not attempting to advocate any particular form of democracy, and certainly am not making a case for majoritarian or direct democracy—which China is definitely not. Rather, I am proposing to broaden and pluralise both the definition and measurements of democracy. China’s current socialist democracy is surely a model worthy of study given the country’s obvious successes.
The American foreign-policy thinker Anne-Marie Slaughter recently argued that the United States should “accept at least the possibility that other forms of government could be better.” She further suggested, as a new measure of governance, that people evaluate which countries are doing a good job at achieving the United Nations’ Sustainable Development Goals.
It is a great idea. And the broader point needs to be amplified: end liberalism’s monopoly on democracy—and let more forms of democracy flourish.
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