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India has to make a case for soft loans

India has to make a case for soft loans
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First Published: Tue, Mar 09 2010. 11 36 PM IST

 Photo: Pradeep Gaur / Mint
Photo: Pradeep Gaur / Mint
Updated: Tue, Mar 09 2010. 11 36 PM IST
New Delhi: Prior to becoming the World Bank’s vice-president for the South Asia Region on 1 July 2008, Isabel Guerrero served as the country director for India. A vastly experienced senior staffer of the bank, Guerrero was in India recently for a staff review.
Photo: Pradeep Gaur / Mint
In between, she took time off to speak on a range of issues including the ongoing debate on India’s continued access to soft loans given out by the World Bank’s soft lending arm, International Development Association (IDA). She candidly admitted that India had till the end of the year to convince IDA donors that it did indeed have a case for accessing the soft loan window. Edited excerpts:
What brings you to India now?
This visit is because I wanted to meet the (World Bank) staff. There has been a lot going on in the bank. I am coming back from a week in Nepal, from a couple of days in Bangladesh, then in Bangkok... I have no meetings in government.
In the last two years, when the world was experiencing a global economic crisis, the bank presumably loaned a lot of money. What is the quantum and the nature of this lending?
It’s been a very interesting year. First of all, we started the crisis in a very strong financial position; you know we have this AAA writing, which allows us to go to the market and raise money at a very low interest rate and then use part of that money to reduce the cost of our own lending; and it has been a very conservative management, extremely conservative.
So, when this financial crisis started we were in a very strong shape in terms of capital. So while for all the other development banks were asking for more capital, we really didn’t need it at that time. And we went all out with a huge demand from clients that had not been demanding for a long time; East Asia, Mexico, which had repaid $4.5 billion (Rs20,475 crore today). All these countries were very strongly hit by the financial crisis so our lending went up in one year by 54%. So, now we are lending around $59 billion.
What about resources?
For any bank it is a huge increase. We have a huge increase for India, for Mexico, for Brazil, for Eastern Europe for East Asia. So, what that means now is that now we need to get more capital; and that’s where the capital increase comes in. And we are asking from $3-5 billion of additional capital. And each dollar that we receive additional in capital we can lend like $5.
Are you seeking this from donor countries or members?
Well that’s the interesting thing, we are seeking from our board and also from member countries. And then the issue of voice comes in; so countries like China, like India, like Brazil are saying we would be willing to invest but we also want to have strong voice on the board of the bank. That’s now what’s been discussed: the issue of capital increase, on one hand its been discussed in many meetings; there’s been a lot of work around the world. And, on the other hand the issue of voice.
How much will it go up, the voice of the developing countries in the board of the bank; right now the agreement is for 44%. But there is demand for 47% I think....And I think what has happened is this will be a first capital increase in 20 years-in this period there hasn’t been really a discussion about how the world has changed.
Once the Soviet Union collapsed a lot of new members that came in and that was many years ago. That was a last sort of shift in the composition of the voting rights in the board. Now this is a new relation—China and India have a very different place in the world and so does Brazil.
But if you enhance theirs, won’t it reduce for someone else?
Yes, and the small European countries would be impacted.
So they wont be very happy about it?
That’s the discussion happening right now. It is a very interesting discussion and it is being lead by our president (Robert Zoellick) in the board.
In terms of crisis there are a lot of middle-income countries such as India...
India for us is not a middle-income country...it is still eligible for IDA funding.
There is an ongoing debate on whether India should be eligible for IDA funding. It is an interesting contradiction: While it is a trillion dollar economy it also has about 500 million poor. How does the bank view this problem?
IDA gets replenished every four years and hence we are in IDA-15 now and we are going to IDA-16; IDA-16 discussions is happening this year. ...so what is happening right now that IDA is replenished by a set of donors; of them, the largest donor is the UK and the second one is the US...the discussion is very different from the capital increase discussion (in the World Bank)...and within this there are a lot of questions about India.
India on the one hand has hundreds and millions of people who are still in poverty and on the other hand, it is in many ways an emerging economy and a powerful economy in the world.
So, the donors are asking (questions)... for example DFID (Department for International Development: the development lending arm of the UK) no longer considers India in this category. So, how will that and the position of other donors affect IDA allocation is something important, that is going to be discussed.
I think it is for the Indian government to actually make the case that India still should have IDA in the next round. My own personal view is that IDA deputies are very focused on performance, much more than (it is with respect to programmes financed from) other sources of funds.
So if India can show its using its IDA resources very well and its actually achieving the results on the ground in terms of those poor and the needs are still there it will have a much stronger case in IDA-16. But the case is yet to be made.
How long is this window of opportunity open?
This year (2010).
So the Indian government needs to lobby?
More than lobby they have to actually show that the use of IDA has been giving results for the taxpayers who are funding IDA.
India has launched a recent experiment of direct cash transfers. How do you view this?
Our experience with direct cash transfer all over the world is very good. Before India, I was working on it in Mexico where they have some thing called Oportunidades, which was the direct cash transfer for the mothers; they then have to, one, show they have taken kids to school and two, show that they are going to health office to have the kids weighed (to test) for malnutrition and take also training on nutrition.
It had a huge impact not only on the income because they get more income, but in school attendance, in nutrition indicators of the children. In a way, the cash transferring is the most empowering thing you can do to a human being. You say I am not choosing for you, I don’t know better than what you need, but here is the cash. This cash transfer in Mexico was tied to the building of human capital, which is the child—he is going to get the education and he is going to get the health.
What is your biggest takeaway from the economic crisis, not as an institution, but as an economist involved with developing countries?
Dogma is a really bad thing. When you are dogmatic, you stop thinking. And I think economics is not chemistry; even chemistry has big changes. So, I think we have to constantly be checking whether what we think is right is actually right. There were many people saying that the financial crisis was coming; there were many signs, but people were not looking at it. I saw Alan Greenspan testify in the US Congress and they asked him whether dogma had what had kept from seeing what had happened and he said “yes”. So that for me is the big lesson...always keep an open mind.
And any guesses on what the new normal is going to be?
I don’t know. It’s going to be a long recession. Things are not looking that great in terms of long term and in the next two-three years; (especially) in Europe and in the US. So, this is going to take time.
That would mean the bank will have an enhanced role. Because the developed countries continue to struggle, there will be a domino effect term on emerging markets and developing countries such as Africa. On the other hand, India and China really have an important role in the world. So, it is also the time, the crisis has shown the real emerging powers. For India it is really important to see this leadership role they have in the world; things have shifted.
So many of you define this leadership role which is emerging for India, China and Brazil. But one is yet to see any of these countries show any initiative in this direction?
It takes time. I think some of the people in the private sector have a world leadership role. For example in India in the world; (similarly) I think some people in Mexico have a leadership role in the world right now in the private sector. And I think in the G-20 (Group of Twenty) India and China have actually started to play some of these leadership roles. I think it will happen.
Sometimes the domestic concerns are so pressing day-to-day that those take most of their attention. I think India is starting to (recognize it has a global role).
Megha Chhabra contributed to this story.
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First Published: Tue, Mar 09 2010. 11 36 PM IST