The new money order

MK Bhadrakumar

Former Ambassador

The phrase Washington Consensus, coined in 1989 to encapsulate an excessive belief in market fundamentalism and international economic institutions, became a damaged brand name within a decade or two, but in India it acquired the status of ‘motherhood and apple pie’ when the Narasimha Rao government adopted it as its road map and handed it down to successive Congress governments. That is, until the current process of ‘nativisation’ of the political economy began in 2014 culminating in ‘Aatmanirbhar Bharat’.

An emerging power like India must be cognisant of an inflection point where the global financial order is being seriously challenged for the first time in history.

Now, the concept of ‘Washington Consensus’ also had profound foreign policy implications for India. In our country, coverage of international affairs is almost entirely Washington-driven and the issues concerning foreign affairs are Washington’s questions, framed in terms of the US domestic politics and established policy positions. Thus it is that a significant section of the Indian elites ends up getting uninformed answers regarding the developments in Ukraine. As a result, the metric for analysing the current events has once again come to be that India is ‘out of step with the passions felt in the West’.

This is not the first time such a bizarre rendering of national interests is happening. In 2003, a senior editor warned the Vajpayee government that if India did not comply with the American demand to depute an Army contingent to join the US-led ‘coalition of the willing’ to invade Iraq, there would be hell to pay, as an irate President Bush would wreak vengeance by taking away Kashmir from India! It almost seems that some Indians belong to another planet. Incredible naïveté combines with shameful ignorance of India’s freedom struggle. External Affairs Minister S Jaishankar’s riposte last week is timely: ‘It is better to engage the world on the basis of who we are rather than try and please the world as a pale imitation of what they are. This idea that others define us, somehow we need to get approval of other quarters, that is an era we need to put behind us.’

To be sure, the geopolitical signposts of the epochal events in Europe need to be understood correctly. For a start, there is growing evidence that Ukraine may not survive in the present form under the combined weight of the US-Russia military confrontation, the inter-church standoff within Ukraine and fragmentation fuelled by radical nationalists, ethnic cleavages and the backlogs of history. Again, at a time when India is engaged in active dialogue with the European Commission, let us not overlook that Europe’s prospects in the near and medium term do not give comfort — large-scale migration from Ukraine (expected to be around 10 million refugees), food security, rising level of inflation, the fall in living standard, etc.

European Commissioner for Economy Paolo Gentiloni acknowledged last week that Ukraine situation ‘presents an uncertainty and unpredictability factor for Europe, economic growth will obviously slow down with a stagnation risk’. Unsurprisingly, few European countries advocate decoupling from China. Europe needs China to stabilise the economy. Quite obviously, the real ‘loser’ in this conflict may turn out to be Europe itself.

These are sobering realities for India to assess that the current context is not accidental or an abrupt eruption. It is global and has been brewing through recent decades since the inconclusive ending of the Cold War in dramatic circumstances. A Russian-American detente is not to be expected. President Biden is foraying into forbidden territories that strikes very deep chords in the Russian collective consciousness of Nazi invasion and the ‘Immortal Regiment’.

Meanwhile, a new world financial order is coming, and the West will have no say in this new order. Russia has started ‘a subversive revolution that turned the table upside down, linking basic commodities such as Russian natural gas to the rouble and gold, turning the currency war launched by the West into a war between money and currency’ as the well-known Chinese scholar and political thinker Zhang Weiwei puts it. CNN reported last week that some of Russia’s biggest natural gas customers in Europe are preparing to accept the Kremlin’s new payment terms that final payments for its gas must be made in roubles. Ironically, the European Commission is looking for a workaround so that buyers can comply with the new Russian rules to bypass the western sanctions!

The point is, the US’ February 28 decision to freeze around half of Russia’s foreign exchange reserves is a blatant breach of trust, and that trust only had provided underpinning to the international financial system all this while. Simply put, the US, which issues the main global reserve currency, has shown brazen willingness to freeze all foreign assets in a split second. That is to say, Washington decided to stop playing by monetary rules.

If, as Washington Consensus espoused, the purpose of trade was to participate in the international division of labour in a way that improves resource allocation across borders, ‘America First’ already rendered it an obsolete concept. Furthermore, it is also risky now to hold large quantities of dollar-denominated foreign-exchange reserves since the greenback’s value may fall significantly, because the US has been running huge net foreign and national debts for decades, and this shows no signs of changing, while the US Federal Reserve’s expansionary monetary policy, in the form of quantitative easing, may continue to create inflationary pressure in the future.

This is a systemic crisis and the analogy of rouble-rupee trade is not applicable. An emerging power like India must be cognisant of an inflection point where the international financial order that appeared like mushroom after a thunderstorm when the Second World War ended, is being seriously challenged for the first time in history.

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