Why Manmohan carries White Man’s burden

On November 3, the government announced the appointment of former chief economist of the International Monetary Fund (IMF) Raghuram G. Rajan as honorary economic adviser to Prime Minister Manmohan Singh. A professor of finance at the University of Chicago, Dr Rajan’s post is equivalent to that of a secretary to the Government of India. There had been speculation that he might be appointed deputy governor of the Reserve Bank of India (RBI) after he headed a panel set up by the Planning Commission on financial sector reforms. Rajan is the co-author of a book entitled, Saving Capitalism from the Capitalists.

A few months earlier, in late-May, Jahangir Aziz had been appointed principal economic adviser in the Ministry of Finance after having spent 14 years working for the IMF. But this Kolkata-educated economist lasted barely five months in his post in North Block before he joined J.P. Morgan Chase’s Indian operations as chief economist.

Rewind seven years to July 2001. Montek Singh Ahluwalia is not exactly comfortable as Member, Planning Commission, under the Bharatiya Janata Party-led National Democratic Alliance government. He leaves Yojana Bhavan for a spacious office located on 19th Street in Washington DC as the first director of the independent evaluation office of the IMF.

Two months later, in September 2001, speaking at a function organised by the Swadeshi Jagaran Manch, affiliated to the Rashtriya Swayamsevak Sangh, George Fernandes (who was then yet to be re-inducted as Defence Minister in Atal Behari Vajpayee’s government after he had resigned from the post in the wake of Operation West End conducted by Tehelka) flayed a report on employment that had been prepared by a panel headed by Dr Ahluwalia.

Mr Fernandes said the report of the Ahluwalia committee should have been prepared in six months instead of two-and-a-half years. He added there was little substance in the report and went on to describe Dr Ahluwalia as an “acolyte of the World Bank.”

Fast-forward three years. In June 2004, Dr Ahluwalia returns to New Delhi as Deputy Chairman, Planning Commis-sion. He is regarded as the Prime Minister’s right-hand man as far as economic policies are concerned.  Is Dr Singh particularly enamoured of advisers who have worked with the IMF?

The Prime Minister surely remembers the tumultuous events of July 1991. As Finance Minister in the P.V. Narasimha Rao government, he devalued the Indian currency by close to 30 per cent that month from roughly Rs 17 for one US dollar to Rs 22 per dollar. That month, the government negotiated what was called a ‘standby arrangement’ loan of one-third of a billion American dollars from the IMF.

An amount of $ 330 million appears small change today. But in 1991, India desperately needed that money as it was on the verge of defaulting on its external financial obligations. The total foreign currency reserves with the RBI had plummeted to an all-time low of less than $ one billion, barely enough to meet import requirements for a fortnight. A few months earlier, the country’s official stocks of gold had been mortgaged to the Bank of England to stave off a balance of payments crisis.

The IMF is no longer the institution it was those days when politicians and bureaucrats from developing countries would be scared stiff of the fallout from accepting harsh ‘conditionalities’ that came with loans from the Fund. Financial assistance from the IMF used to be linked to unpopular policy changes – the most controversial of which were the structural adjustment programmes that were insisted on to rescue countries in acute financial distress.

These conditions entailed a lowering of import barriers and the initiation of ‘neo-liberal’, market-friendly measures that often wreaked havoc with the economies of not just poor nations but countries like Russia as well. Especially after the Asian financial crisis of 1997, developing countries became extremely cautious about following the Fund’s policy prescriptions – often described as the ‘Washington consensus.’

Even before the current international crisis, it had become quite clear that most developing countries did not need the IMF any more. Many emerging economies, notably China and India, accumulated huge reserves of foreign exchange to ensure they would never have to go to the Fund, begging bowl in hand. A stark manifestation of the changed global reality is that the IMF is no longer a net lender of funds; it is, in fact, a net recipient. After more than four years, in recent months, a few countries (including Pakistan, Iceland and Belarus) have gone to the IMF for loans.

In 2003, the IMF had loaned more than US$ 100 billion dollars to various countries. This figure shrunk thereafter to less than $ 20 billion a year. The IMF became a net receiver of funds with an inflow in excess of $ 20 billion in the form of repayments of past loans, much of it from developing countries.

Operational after the Second World War and the July 1944 Bretton Woods conference, the IMF was meant to foster global economic stability and assist countries facing financial crises. Though the Fund is at present a pale shadow of its once-imposing self, after the November 15 summit attended by heads of the Group of Twenty countries, there are moves to enlarge its role as well as that of the World Bank and also add to their financial resources.

The clear apprehension in this regard is that these two multilateral bodies that are being called on to find solutions to the present crisis are, in fact, part of the problem. Even George W. Bush has acknowledged that the Fund and the Bank need to “modernise their governance structures (and)… ought to consider extending greater voting power and representation to developing nations…”

India’s Prime Minister pointed out in Washington that the “representation in the governance levels of the Fund … (should) reflect the current and prospective economic realities”, adding that the quota reform in the IMF had so far been “contentious and incremental.”

Out of the 185 countries represented in the IMF, seven — the US, Japan, Germany, the UK, France, Canada and Italy – have historically dominated its functioning. All major decisions by the Fund need 85 per cent voting support; this means that the US has veto power since its voting power alone is 17 per cent.

The total vote share of the 80 poorest members of the IMF is barely 10 per cent. Representatives of five rich countries — the US, the UK, Germany, France and Japan – control around 39 per cent of the total vote and have permanent seats on the governing board of the IMF. By convention, the managing director of the Fund is invariably from Europe (while the president of the World Bank is an American).

Faced with an unprecedented economic crisis, the West has no choice but to look eastwards. The IMF itself has pointed out that that the economy of the planet as a whole would not grow during 2009 if it were not for China and India. While emphasizing the point that developing countries should not suffer for the sins of the developed world led by the US, Dr Singh seems to have abiding faith in the ability of the bosses of the IMF and the World Bank to reform themselves. Many would consider such faith misplaced. But not our PM. Why?

Here’s a pointer: Former Finance Minister of West Bengal Ashok Mitra, in his book entitled, A Prattler’s Tale: Bengal, Marxism and Governance, has claimed that just before Dr Singh was appointed Finance Minister in Narasimha Rao’s government in May-June 1991, the US Administration, in coordination with the Fund and the Bank, sent a “categorical message” to New Delhi through “secret talks” that the “the prerogative of naming the new finance minister was also transferred to Washington.”

Dr Mitra went on to claim that the “first person whose name was proposed by Washington DC, thought things over and declined the invitation to be the finance minister”. Though this individual has not been named in the book, it is widely believed that he was eminent economist the late Dr I.G. Patel. As for the second choice, he was none other than our present PM. While the author has described this episode as an instance of “ignominious surrender” to American diktat, the point that is noteworthy is none of the claims made by Dr Mitra in his memoirs published in early 2007 has been officially denied or contradicted.

Do we now know why Dr Singh spoke on behalf of the 1.1 billion people of India and expressed “deep love” for George Bush after the nuclear agreement with the US was finalised?

Critics of the Fund and the Bank argue that these agencies prescribe simplistic “one-size-fits-all” policies that are not always beneficial for developing countries. Such policies include blanket privatisation of all public sector undertakings, currency devaluation, elimination of subsidies aimed at the poor by extracting user charges for use of public utilities, reduction of customs tariffs in the name of globalisation, speedy removal of controls on capital account transactions and so on.

The Fund-Bank prescription had in the past ruined the economies of Latin American countries as well as that of Russia. The 1997-98 Asian financial crisis may have been averted had countries not blindly followed the policies propounded by the advocates of the “Washington consensus.” The same IMF that preaches the virtues of transparency to the rest of the world is itself quite secretive when it comes to formulation of policies and programmes.

As eminent economist Dr Jeffrey Sachs had once observed: “It defies logic to believe that a small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people.” Dr Sachs was repentant about the havoc that his policies of “shock therapy” had wreaked on the people of Russia and became sceptical of many of the policies prescribed by the Fund and the Bank.

Singh in the Woods

In August-September 2004, within months of the United Progressive Alliance (UPA) coming to power, the Manmohan Singh government got into a major tussle with the Left on the issue of including representatives of the World Bank, the IMF, the Asian Development Bank (ADB) and multinational consultancy firms such as McKinsey in various consultative groups constituted by the Planning Commission for the mid-term appraisal of the Tenth Five Year Plan (April 2002 to March 2007).

This move by Dr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, who was working with the IMF before he moved into Yojana Bhavan and who used to work with the World Bank in Washington DC during the late-1960s and early-1970s, was akin to waving a proverbial red rag before a raging bull. Dr Ahluwalia’s actions united the Left with its arch political opponents in the Bharatiya Janata Party (BJP) and its ideological parent, the Rashtriya Swayamsevak Sangh (RSS). Socialist George Fernandes, convenor of the National Democratic Alliance, decided to support the Communist parties on this issue.

At that time, Congress leaders cribbed that the Marxists were guilty of hypocrisy since the Left Front government in West Bengal is utilising credit obtained from at least one of the organisations they were criticising, namely, the ADB. The Communist Party of India (Marxist) led state government in West Bengal had also engaged the services of McKinsey to prepare an overview of the state’s industrial potential together with sector-specific reports on information technology and agriculture.

In a letter dated September 11 to various leaders of the Left parties, Dr Ahluwalia claimed that the consultative groups would not be “committees of outsiders”. He contended that there was “enormous expertise” outside the government and it was necessary for the Planning Commission to make itself aware of the views of these experts.

He added that the Commi-ssion would not be able to “do justice” to the mid-term appraisal if it relied solely on one set of civil servants in the Commission commenting on the work of another set of civil servants in different ministries and departments of the Union government.

To take some of the sting out of the criticism of the Left, Dr Ahluwalia stated that the members of the consultative groups would represent a “large spectrum” of experts – not just from multilateral agencies and consultancy firms – but from trade unions as well, including unions supportive of the Left parties. He wrote: “Representatives of the World Bank and the ADB have been included in four of these groups that deal with areas in which these agencies are actively involved in supporting Central government or state government projects … By including individuals from outside the government in the consultative groups, we are not in any way handing over to them critical decision making involved in the mid-term appraisal on policies and policy corrections that need to be introduced to achieve the objectives laid out in the national common minimum programme.”

He went on to state that “we recognize fully that the individuals whom we hear have their own agendas, but I would like to assure you that we will subject the views expressed in our consultative process to careful professional scrutiny.” Moreover, he said the multilateral institutions “in any case interact regularly” with Central and state government agencies and “this has in the past also included the Planning Commission.”

It was argued that this controversy indicated that Indians remained xenophobic and had not been able to overcome their colonial legacy. It was pointed out that over the last 60 years and longer, eminent Indian ministers and planners (including Dr P. C. Mahalanobis, said to be the “father” of Indian planning and former Union Ministers T.T.K. Krishnamachari and C. Subramanian) had actively solicited the advice of many international experts – including diplomats and economists such as John Kenneth Galbraith, Nicholas Kaldor, William Cochrane, R. Cummings and others – to assist in the country’s planning process. A firm like McKinsey is said to have provided “sound advice” – for instance, on restructuring the country’s largest bank, the State Bank of India.

The UPA government’s critics were quick to retaliate that the same McKinsey had also advised the disgraced US power giant Enron and the failed telecommunications firm Global Crossing. They contended that when, in the past, the Indian government sought the advice of eminent foreigners, these individuals were called in their personal capacities and not as representatives of funding agencies like the World Bank or the IMF.

CPI(M) leader Prakash Karat argued that since 1991, agencies like the IMF and the World Bank have had “undue influence” on the Indian government’s policy making and this has had “harmful effects” on the economy. The CPI(M) politbureau issued a statement on September 18 which read: “The needless controversy created by the inclusion of representatives of the World Bank and other international agencies in the consultative bodies of the Planning Commission shows a lack of awareness of the popular feelings in the country.”

A. B. Bardhan, general secretary of the Communist Party of India, questioned that while “one can certainly informally consult and interact with as many experts as one wishes” – including representatives of multilateral financing agencies — “why institutionalise the process by including representatives of such foreign institutions in regularly constituted panels?” He said it was all right to borrow money from an international funding agency but quite something else to seek the advice of so-called experts from such organisations and shape government policies accordingly.

It may be recalled that in 1991, Dr Manmohan Singh (who was then Finance Minister in the P.V. Narasimha Rao government) himself had a tough time explaining to the Communist parties (who were then his political opponents as they are now) – that by obtaining a “structural adjustment” loan from the IMF, the then government of India had not compromised the country’s national economic sovereignty. At that time, he had argued that the 3D prescription of the Fund – deflate, devalue and deregulate – would be good for the country.

Nevertheless, Dr Singh could not convince many that what had accompanied the IMF loan, namely, a sharp cut in capital outlays on education and health-care, was such a great thing. It should also be recalled that after 1991 and 1992, there were no major “liberalisation” initiatives by the Narasimha Rao government and some of the expenditure cuts that had been made were later restored.

Old Boys Network

The list of important serving and retired officials of the government of India, who have at some point in time or the other worked either for the World Bank or the IMF, is rather long and impressive. Many of these key decision-makers in economic ministries, in particular, the Ministry of Finance, are officials who went to either the Bank or the Fund after working with the Indian government. But there are others who were inducted into government service after they were associated with one of these two Washington DC-based multilateral financial institutions. Here’s an illustrative (not an exhaustive) list of fifteen
such individuals:

1.      Dr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission — he has in the past worked with both the Bank and the Fund
2.      Dr Raghuram G. Rajan, Honorary Economic Adviser to the Prime Minister of India — a professor of finance at the University of Chicago, he was earlier chief economist of the IMF
3.      Jahangir Aziz, former Principal Economic Adviser to the government of India in the Ministry of Finance — he had worked 14 years for the IMF and is now with J.P. Morgan Chase
4.      Dr Vijay Kelkar, Chairman, Thirteenth Finance Commission and former Finance Secretary — he was India’s executive director to the IMF
5.      D. Subba Rao, Governor, Reserve Bank of India and former Finance Secretary — this US-educated IAS officer has worked with the World Bank
6.      Dr Bimal Jalan, Member, Rajya Sabha, former Governor, RBI and former Finance Secretary — he was worked with the World Bank
7.      Pradeep Bhide, Revenue Secretary, Ministry of Finance — this IAS officer had worked for five years as a technical adviser to the World Bank
8.      Dr Arvind Virmani, Chief Economic Adviser, Ministry of Finance — this Harvard-educated economist has worked with the World Bank
9.      Dr Rakesh Mohan, Deputy Governor, RBI — he has worked with the World Bank
10.    Dr Shankar N. Acharya, former Chief Economic Adviser, Ministry of Finance — he has worked with the World Bank
11.    Dr Ashok Lahiri, former Chief Economic Adviser — he has worked with the World Bank
12.    Gopi N. Arora, former Finance Secretary — this officer who was close to Rajiv Gandhi became India’s executive director to the IMF after retirement
13.    Dr Jaimini Bhagwati, India’s Ambassador to Belgium — this IFS officer who had served as Joint secretary, Capital Markets in the Finance Ministry during the time Yashwant Sinha was Finance Minister has worked with the World Bank
14.    K.P. Krishna, Joint Secretary, Capital Markets, Finance Ministry — he had worked with the World Bank
15.    Rajul Awasthi, Officer on Special Duty to Finance Minister P. Chidambaram — now with the World Bank