'The U.S. has a dominant position in quota calculations'

An interview with Kalpana Kocchar, Chief Economist, World Bank, South Asia Region.

March 30, 2012 12:45 am | Updated November 26, 2021 10:28 pm IST

Kalpana Kochhar, Chief Economist at the World Bank’s South Asia division

Kalpana Kochhar, Chief Economist at the World Bank’s South Asia division

Robert Zoellick, President of the World Bank, announced last month that he would be retiring from the top job at the multilateral lender later this summer and this week U.S. President Barack Obama announced his intention to support Jim Yong Kim, President of Dartmouth College, for the top job at the multilateral lender. The news comes a little more than nine months after the resignation, under a cloud, of the International Monetary Fund Managing Director Dominique Strauss-Kahn. The change of guard at both institutions has raised questions among numerous developing nations, particularly rapidly-growing emerging economies, about whether succession questions and broader internal restructuring of the Bretton Woods institutions ought to focus on giving the interests of these countries more voice and a greater say in policymaking.

At the Fund, representatives of the so-called BRICS nations, including Arvind Virmani of India, wrote an open letter the Fund’s Board calling for the abandonment of the “obsolete unwritten convention” requiring the head of the Fund to necessarily be from Europe. While there has not yet been any such collective response from the BRICS regarding the Bank’s leadership it is highly likely that at the very least negotiations aimed at a longer-term reform process are underway.

Shedding light upon these vital questionsKalpana Kochhar, Chief Economist at the Bank’s South Asia division spoke toNarayan Lakshmanabout how decisions get made at the two institutions, how and under what circumstances their policy paradigms have changed and her view on prospects for job creation and poverty alleviation in India.

Prior to joining the Bank more than a year ago Dr. Kochhar was a Deputy Director in the Asia and Pacific Department of the Fund. Her experience before taking on that role in 2007 included three years as a Senior Advisor in the IMF's Research Department and seven years in the Asia and Pacific Department, leading missions to India, Australia, New Zealand, Singapore, and Malaysia. She has also worked on China, Korea and the Philippines. During her Fund career, she has also worked in the Policy Development and Review department and in the Fiscal Affairs department.

Dr. Kochhar’s research interests and publications have mainly focused on studies of Asian economies, including India and China, often examining issues related to India’s growth, and fiscal policies. She holds a PhD. and MA in Economics from Brown University, an MA in Economics from Delhi School of Economics and a B.A in Economics from Madras University. She is an Indian national.

Given the recent announcement that the President of the World Bank would be stepping down at the end of June, that has raised the question of rebalancing the allocation of top positions among members of the Bank but also restructuring more generally within both the Bank and the International Monetary Fund. Could you comment on where these institutions’ plans for internal reform stands right now and whether it is likely that the BRICs nations and India in particular might occupy any of the top posts going forward?

Both institutions – the Bank and the Fund – work on a quota [basis] and the quota is determined, broadly speaking, by size, which is the size of the economy, population and a couple of other variables. Not surprisingly, in spite of the fact that we have had slow growth in the last two or three years in the United States, the U.S. remains the biggest member. Any adjustment of the formula or any recalculation to take into account recent developments does not change that – it does not change the U.S.’ dominant position in the quota calculations.

Specifically that is because of the economy variable?

It is the size of the economy and there have been long arguments over the years about what weight you should give to these variables, but I think the one robust result is that regardless of how you weight these different variables, [the U.S. dominates] because it is a much bigger economy than the others in the world. That is a point that needs to be kept in mind. That will always remain the case.

What then will change, and has changed, is the relative position of the others. In particular the ones that have increased in size and importance by any of these variables are countries like South Korea, China and, to some extent, Brazil and Russia.

But you would be surprised to know that India does not [fit into this category.] The population has a big impact and [its] Gross Domestic Product as well, but the shift that has taken place is quite small. First of all the original quota was small so even a big percentage increase in a small number is not a big number. It is not like we are seeing tectonic shifts.

What is happening and this is probably what makes it uncomfortable, is that smaller European countries – I’m now talking not about Germany, France and the United Kingdom, but about Belgium, the Netherlands and Austria – they are the ones that are [losing quota share.] If it is a pie that has to be divided then somebody loses and somebody gains and it is those countries that are actually the ones where the shifts are occurring, and to a large degree to accommodate the other ones that I have said are increasing.

That is just on the calculation of the quota. That should not necessarily translate, one-for-one, [into all aspects of these institutions]. It does [translate one-for-one] into the voting structure, because that is by agreement, by which these institutions were set up. But that does not necessarily translate, and has not, into the management of these institutions – who heads them, who are the senior people, and so on. If you look back in history at both institutions it has been traditionally very dominated by the Europeans as the head [at the Fund] and by the U.S. [at the Bank] but in the top management only recently have efforts been made to diversify. I am now talking about the Managing Director level here at the Bank – that would be the second level down – and the Deputy Managing Director level at the Fund. These are equivalents in the two institutions. There you are starting to see some [diversification].

When you said “recently,” which year were you talking about?

I would say that the effort to have broader representation at that second level probably dates back to between five and ten years ago. People started worrying about it and making sure that there was always a Japanese, or now as we have it, a Chinese, Deputy Managing Director in the Fund and so on.

In terms of other levels of senior people in the institutions there has been a recognition that diversity, both in terms of nationality and agenda, has to be increased. But it has been tough. When there isn’t a pipeline it takes time. They have tried to bring in people from the outside; I think they have generally been successful.

Within the management of the Fund there is actually a reasonable representation particularly of Indians. Not so much of Chinese [nationals.] There, there is both a supply- and demand- side factor. On the supply-side, now you are starting to get a large pool of very talented people but at least in my experience until about five years ago you would bring in junior people that were really very well trained and you would see them rising all the way to the top.

But then there were very good, lucrative opportunities in the private sector in growing [economies] like China and Hong Kong, and they would get snatched away for much more competitive salaries than the Fund and the Bank were able to pay. It’s fair to say that there is a huge amount of importance being given to that now, so I do believe that things will start to change in terms of representation.

It is the same with the Japanese. You would think that there would be much greater Japanese representation in the staff and management, but [it is] not so much. There are all kinds of explanations – that they do not want to stay, that they are more culturally drawn back toward their home countries. I don’t know what the truth is but that is what you observe.

To be clear you said that the voting structure determined on a one-to-one basis on these variables?

It is basically determined by your quota size. So if the U.S. has 17 per cent, then when the U.S. votes it is given a 17 per cent weight. It is unlike the United Nations where it is ‘one country, one vote.’

Going back to those variables, I can understand what you said about the size of the U.S. economy but I was wondering about the rate of growth, because that is a measure of economic heft, especially in this post-recession global economy. That should gain some weight don’t you think?

I am sure there are all kinds variations in the way these calculations can be made and I am sure that the rate of growth matters but the more important variable is becoming the contributions that are being made [to the Fund], for example now, in the middle of the Europe crisis.

The Bank is somewhat less affected by that because the Bank also gets its funding through borrowing. The Bank borrows in the market – it goes out and issues bonds and borrows so it is able to supplement the quota resources with other borrowed resources at a very cheap rate because the Bank has a triple-A rating. The Fund does not borrow from the market. It [gets its financing] only from quota subscriptions plus every so often they go out and have an agreement to borrow.

While quota subscriptions of member countries are the Fund’s main source of financing, the Fund can supplement its quota resources through borrowing if it believes that they might fall short of members’ needs. Through the New Arrangements to Borrow (NAB), the Fund’s main backstop for quota resources, a number of member countries and institutions stand ready to lend additional resources to the Fund. That is in a way what is happening now with the European crisis. So these are not quota resources; these are borrowed resources.

Does gold and sales of gold play any role in this?

The Fund’s original quota subscriptions were paid by many countries in gold. So the Fund has a very large amount of gold. Recently, I think it was in 2008 or 2009, they did a very small amount of gold sales.

But that comes under the umbrella of quota subscriptions?

Yes it was just that in the [1940s] when the Fund was set up a lot of countries paid their subscriptions in gold, so that’s what they have. They have been allowed to sell a part of the gold reserves to come up with concessional resources, for example for the HIPC Initiative.

I think what is happening now is that some of the arguments being made is that these resources that are being raised through borrowing do not actually buy you anything, because they do not change the quota shares. That is part of the discussion that is going on in terms of how representation should really be calculated. It’s an ongoing issue that will have to be addressed.

In terms of policies, I think it is [a] difficult [issue]. There is a reason that it used to be called the ‘Washington Consensus’ and it was very much being dictated by policies that were believed to be successful by the U.S. and other Western [nations.]

But I have to make sure that people understand the context of this – they were successful policies and they were countries that were doing very well. So for us to believe that the Washington Consensus was a set of successful policies I do not think was that [unreasonable].

But what it led us to become is a little too dogmatic, that this was the way it had to be and to not see other countries’ points of view. Things started to change, first in the 1997-98 Asian crisis, where we were forced to rethink a little the prescriptions that we would have normally have made and that we did make.

Not after Latin America in the 1970s?

I could be wrong about this, but the big change came [later]. Latin America was one crisis [where some changes in policies took place.] Now, after this crisis, the ongoing one that began with [the collapse of] Lehman [Brothers], I think there is a real, much deeper questioning, of what is the right way to go about things.

The Fund has papers out that are much more sympathetic to capital controls. It is a qualified recommendation but it says that if you have to [have it] then that can be part of your toolkit to deal with capital flows. This would have been heresy several years ago. So there are serious intellectual and policy-related questions that being debated both everywhere in the field but also in these buildings.

The Bank, being a development institution, made [an] ideological shift. On core development issues it’s not like we had a lot of experience from these other [developed] countries – these were much further advanced. There was not a consensus view on anything that you had to shift away from, except for macroeconomic policies. But I do think that the Bank has gone more towards learning from the development experiences that it sees and it has become an adaptive type of institution probably sooner than the Fund did. I am not sure this is because representation has changed; it is just that circumstances have changed and everybody is asking ‘Where did things go wrong?’ and ‘How did we miss this?’

Looking at the policy question, it is clearer from the point of view of the Fund because they are involved in stabilisation and such macroeconomic issues. But what sorts of policy changes have you seen at the Bank, if any, based on what you said about this shift?

They would be too numerous to list because they are such small issues.

There is no macro shift?

The Bank would take its cues on macroeconomic policies from the Fund and in a lot of countries we work side-by-side. At the Bank I would say that the shifts have been much about learning. We’ve had successful experiments on certain types of social policies that took place in, say, Latin America. It used to be thought that social protection had to be delivered in a certain way. If the social protection is for food, should you be delivering food? And then how do you target the right people, the beneficiaries? There used to be a long debate on whether you could target them geographically, whether you could target them by actually measuring their incomes, but then there are problems and it is difficult to verify especially in big countries.

There has been a gradual move towards cash transfers, sometimes conditional, saying, [for example] that if you bring your child to a centre to be immunised [the transfer will be provided.] The transfer will be conditional on some activity by the beneficiary. Also aided by the fact that you now have much better technology you can do a transfer through electronic [means, and that] reduces the scope for abuse and fraud.

The shifts have been less on ideology and more on learning. But there have also been some ideological [shifts.] For example in our energy strategy it has been decided that the Bank will not work on coal-based energy projects because it has environmental consequences. I don’t know if that is necessarily a dogma but it is a policy that has been adopted. There are countries that are happy with it and there are others that are not – India being one of them, [as it is] heavily dependent on thermal power. I would say those shifts have really happened as the Bank has learned and gained experience in development.

The other big issue at the Bank is governance. We have very large sums of money so we have a very long [list] of safeguards. You have to satisfy social safeguards, making sure that dislocated people are compensated. You have to have procurement safeguards so that everything is done right.

The Fund also has a safeguards mechanism. But since it lends only to the central bank [of a borrowing nation] there is an audit of how the central bank’s mechanisms [work.] That is the only [safeguard.] [In the Bank and the Fund the safeguards] are uniformly applied.

Looking specifically at the Bank’s presidency, what sort of time frame do you think it will be completed in and do you see the competition for this role being of the kind that you saw for Fund Managing Director Christine Lagarde’s appointment?

First of all there is a process, which is good. But it is a good process. All members have apparently been asked to provide nominations. On our website I think you will find the competencies that they are looking for. The competencies are laid out quite clearly and my understanding is that people are supposed to nominate the candidates to a committee in our Executive Board, [which] will then gather them up and vet them and then come up with a shortlist that will be voted on.

The fact that it has to be voted on, gives a little twist to it because you have this voting structure that I just mentioned. If you assume that that is an agreed process, that that is not new, then at least there is a process and it is not just somebody automatically nominated.

The same process was followed in the Fund. There were a few nominees. There have been people who were disappointed with [it], hoping that developing countries would come together and jointly nominate somebody to balance out the voting structure. But that never happened and frankly, it is very difficult for such disparate developing countries [to come together in this way.] People talk about the BRICS and now they are starting to come together and talk. But initially it was an invention of somebody there in Goldman Sachs.

The reality is that it is difficult for these countries to bring all of their interests together in a situation like this if they haven’t done it beforehand.

One of the things you are seeing much more in the press now is [the idea of] a BRICS Development Bank. It’s been [mentioned] in the newspapers that there is talk [about this idea,] partly out of frustration.

Some of that also happened after the Asian Crisis [of 1997-98.] If you remember there was the Chiang Mai Initative, which was initially just a set of bilateral swaps between these countries, with Japan saying to Indonesia, “If you need it we will give you X-amount of dollars.” Now there is not just talk but there are moves towards multi-lateralising the Chiang Mai Initiative and having a centralised unit that would determine whoever needs it. There are some alternative structures that are coming up to address what are seen as weaknesses in the structure here.

To be clear on the voting structure here it is the exact same thing across the Bank and the Fund?

If you go on both the websites of the Bank and the Fund they will give you the current percentages. I do remember that there is some slight difference between the Fund and the Bank in numbers, but the basic story is the same. So you will get [a situation where] the U.S., the U.K., France and Germany and Japan [have relatively larger shares.]

There has been no talk of having, at least in the case of such high-profile appointments, a voting structure that is a bit different?

There may have been, but it has not been a highly public discussion. I think this may even require amending the Articles of Agreement [of the Bank and the Fund.] It’s a pretty complicated process, just like amending constitutions.

Taking a step back to look at the Bank’s report on More and Better Jobs last year, where do you think the Government of India stands now in terms of job creation? We’ve had elections recently as well – do you think the results are in any way a repudiation of large-scale programmes like the Mahatma Gandhi National Rural Employment Guarantee Act and others such as the Food Security Act?

First let me talk a little bit about their strategy for job creation. Until about three or four years ago, it is fair to say, there wasn’t really a concerted strategy for job creation. The economy was growing well and jobs were being created. Now, I would say with the second United Progressive Alliance government, there was a concerted effort to make it more inclusive and this was their whole platform.

The MGNREGA comes under that and there is no doubt that it has created jobs. It has put a lot more income into rural households’ hands, all of which is good. There come some problems with the inflation and the rising wages. First it was Rs.100 for 100 days and then the National Advisory Council said it should be indexed to inflation and now it is indexed to inflation. There have been all kinds of analyses [but] the time is too short for us to say definitively that [the policy] is what is causing the [inflation.]

What is happening is that the MGNREGA wage is setting a floor in rural areas. People are not migrating as much as they would have done. So the Bihari labour is not migrating as much as they have done in the past to Punjab and Haryana during the harvest season. They have a shortage of labour in the harvest season so that bids up the wages in those states. Urban wages are affected as well, because you do not have so much migration going on from the rural areas. They are happy to stay there because they now have this pretty strong safety net. So [there are] shortages in urban areas in construction and domestic work and so on. That is the story. I have data on rural wages which are clearly showing a very large increase. I don’t have detailed data on [the] urban [sector.]

But jobs are being created. Now I think there is a much more concerted strategy by the government. It works on two or three fronts. One [aspect of it] is that they are looking into a strategy for manufacturing, realising that this thing that India did, which was to skip over the manufacturing phase, is probably not the best way to create jobs. The service sector in India has not actually created that many jobs even though it contributes [approximately] 60 per cent of Gross Domestic Product. Now they have the National Manufacturing Policy, and a large part of that is [about] infrastructure development as you can imagine.

On the other side there is big, national skills development programme going on, where they realised that putting people through the traditional university system first takes too long and second, there is not enough capacity to train the number of people that are entering the labour force now. You hear people being quite critical of it also but at least [the government has] a focused effort on skills development and partnering with the private sector, [and] learning what skills the private sector needs.

On the election outcome, I only know what I read in the newspapers but basically, there are exit polls that came out saying that the number one worry was inflation, not corruption. All the noise that you heard about corruption and [the] Lokpal [bill] seems to be more of an urban, middle-class concern, which is a good thing. My single interpretation of the results was that it became more issues-based. Progress is being rewarded and the lack of progress is being punished. I think that’s a very good thing for the maturing of a democracy, where you cannot just [say] “I am Politician X, so vote for me,” – you judge me on my performance or the lack of performance.

I do see this as obviously as some repudiation, people were not happy with the incumbent, but what I was surprised about were the reasons that people seemed unhappy. It is not surprising that it would be inflation – inflation hurts the poor very, very badly. They have no assets to protect themselves and food inflation has been very high in India.

I don’t know why I wasn’t expecting it. I expected corruption to be further up [in priority ranking.] Of course these are exit polls that are conducted by pretty good [organisations]. So it seems people do care about how the economy is managed. I see this really as a maturing. You have incomes growing, you have people becoming more aware, you have the media and social media, and people’s aspirations have grown and now they want progress.

While the elections were in select states, do you see any shifts in the broader thrust or policy strategy that we have had under this government? Or are they going to stick to their course?

I think there is probably going to be some shift in the sense that what seems not to have worked is simply pushing money into schemes. [That] doesn’t necessarily buy you votes. Also, simply putting money into schemes is also why inflation is high. A lot of purchasing power has been put into people’s hands, which is on the one hand a good thing. On the other hand it does put demand pressures in place and where there has not been a supply response you have inflation.

My own sense is that the broader agenda of inclusive growth is not going to change, and it shouldn’t change. This is a country that still has 450 million people or so – depending on how you count them – living in poverty or extreme poverty. Clearly growth alone is not enough.

But how you deliver inclusive growth, how quickly you deliver it, what programmes you use to deliver it, [are] going to be questioned now and that is also probably a good thing.

You alluded just now to extreme poverty and there was a recent Bank report arguing that extreme poverty has reduced despite the recession. But that has been critiqued by several organisations, including Brookings, some of whom have asked if the Bank should have done more household surveys and so on. Do you have any comments on that?

This is not the first time that the Bank’s poverty numbers have been criticised. They are questioned all the time. But this is an update to 2008 and it has largely been based on household surveys. So it is not being pulled out of a hat. What is different is that the poverty line is defined as $1.25 and obviously there will be a variation in countries [in terms of] whether that is the poverty line or not.

But I think there have been enough robustness checks done around whether that is a reasonable approximation for the poverty line and the conclusion is that it is pretty robust. For international comparisons, the World Bank has anchored the poverty line to the ones used in the poorest countries and currently the line used to measure poverty is those living on less than $1.25 per day.

I personally am not surprised [by the results] because most of the world has grown. These countries [in the West] have slowed down, but this is not where the poverty is. Poverty is in other countries that have grown. So I would have been surprised if we had not seen a decline in the poverty rate. It is a whole different issue as to whether [that process] has been fast enough, whether growth is reducing poverty fast enough. And we don’t really know what fast enough is. China did very well, India also well, but perhaps less well.

But inequality is an issue. It is rising all over the world. People are starting to write about it, certainly in the U.S., but even in countries like India, which for a long time you saw poverty coming down, inequality coming down and income growth going up. For most of the period until about the early 2000s you had a decline in inequality. We have a poverty report which you can see on the Fund India website [and] it shows that [result.] But it has started to tick up now and that is a worrisome prospect. Then there regional inequalities, which we all know about. People are very mindful of this because there are all sorts of social tensions and other things associated with inequality.

Finally could you tell us a little bit about your background and connections to India?

I’m Indian, from India and I grew up in India. Most of my education, with the exception of my doctorate, was in India. I’m from the South and studied in the Delhi School of Economics before coming here.

While I have been here at the Fund and the Bank complex for 25 years a lot of my work has been on India, but quite a lot also on other Asian countries, not just South Asian countries. I worked on China and also countries like Malaysia and South Korea during the Asian Crisis, and even some of the advanced countries like Japan, Australia and New Zealand. But it has all been Asia-centric.

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