Sunday, January 20, 2008

EAST Vs WEST: REVERSING FINANCIAL EQUATIONS

INTRODUCTION
With very few developing countries approaching the International Monetary Fund (IMF) for loans and preferring easier alternatives, the IMF’s survival is at stake. It has, consequently become difficult for it to control the Third World through its financial muscle. It is a sign of changing times and equations that the IMF that had facilitated the rich West to dominate the world for the past half a century or more, is laying off employees to ensure its relevance in the financial world space.

ASIAN FINANCIAL RESURGENCE
The developing countries, on the other hand, have amassed trillions of foreign exchange and are using the new found wealth to bail out the Western financial institutions hit by the sub prime market meltdown in the US. Recently, Citibank, the world’s biggest commercial bank, received $ 14.5 billion from investment funds in China and Kuwait. This over and above the $ 7.5 billion it got from Abu Dhabi Investment Authority. Merrill Lynch received $ 5.6 billion from Temasek of Singapore last year, and is now negotiating another $ 6.6 billion. The top Swiss bank, UBS, suffered mortgage losses of $ 10 billion and was rescued by investors from Singapore and the Middle East. In the process, these institutions are losing ownership to Asian government funds.

The sharp rise in oil prices gave oil exporters unprecedented cash surpluses, estimated at $ 300 billion per year resulting in a shift of financial balance from the West to the East. Countries with long term financial surpluses have placed part of their forex reserves with what are called Sovereign Wealth Funds (SWF), to make long term investments for future generations. These funds today control a mighty $ 2,876 billion. India would do well to enter the fray with a modest contribution from its own handsome forex reserves.

IMF & SWF
The IMF provides loans to distressed governments, while SWFs invest in equities, including those of distressed MNCs. The IMF imposes onerous conditions on borrowers. SWFs don’t impose conditions, but become part-owners of the distressed corporations. IMF takes a long time to draw up detailed loan agreements with conditions, whereas SWFs make money available almost instantly.

In the long term, however, frequent borrowings from the SWFs may enable them to take over the MNCs. This is the new fear stalking Western governments. Already France and Germany have initiated steps to prevent backdoor takeovers in this manner. Though none have so far been attempted, the possibility exists. In 2005, the US refused to allow the Chinese to take over Unocal, a big oil corporation. When Dubai Ports acquired P&O, the British based ports MNC, it acquired several port operations in the US. This led to an outcry about security in the US, and Dubai Ports had to sell all its US operations.

Conclusion
As of now, the SWFs may be passive investors, but as their stakes rise so would their influence and the ability to dominate world affairs. The balance of world financial power has changed, probably forever. India too needs to be a proactive participant in this change.

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