World power trends

Bill Emmott

This is the era of books about the rise of new eras. Notable books recently published make an attempt to answer what will come next? What are the trends in shifting evolving world power?

Fareed Zakaria, the editor of Newsweek International, says that the world has seen “three tectonic power shifts” in the past 500 years, by which he means great changes in the distribution of international power. First there was the rise of the western world, which began in the 15th century. By the western world he presumably means Europe, since his second shift was the rise of the US, which he dates from the final years of the 19th century. And fionally a post-American era, which he also calls “the rise of the rest”.


This era is otherwise known as globalisation, a period during which the US’s long post-1945 effort to convince others of the merits of free trade and liberalised capital markets has finally paid off. But having talked of a 400-year western era, then a 100-year American one, the evidence that this new era is a third tectonic shift, relies on statistics and anecdotes from a handful of years. This jump from broad sweeps of history to contemporary analysis is where the problem of era books arises.

Parag Khanna, a scholar at the New America Foundation in Washington DC, in his The Second World, promotes the idea that the world is now going to be dominated by three big countries or blocs: a declining and (he thinks) incompetent US; a peaceable European Union; and a rising, bumptious and potentially aggressive China.

The trouble with this thesis is not what it includes; it is what it leaves out. What about the other countries that are growing and are getting more powerful? Brazil, Russia, India, South Africa, Mexico, Iran and many more will not buckle down easily to three global “empires”, to use Khanna’s chosen term.

Robert Kagan’s The Return of History and the End of Dreams, says that we are in a multi-polar world in which many countries are becoming powerful, nationalistic and ambitious, and in which the rules of the game will be disorder and unpredictable behaviour.


In truth, this messy, multi-polar world has been evident since the end of the Cold War. In that time, the US’s stance has fluctuated, from the “reluctant sheriff” in the title of a 1997 book by Richard Haass, now head of the Council on Foreign Relations in New York, to the “indispensable nation” cited by Madeleine Albright when she was Bill Clinton’s secretary of state, to the unilateralist approach of President Bush. But the essential trend of the world has not changed in that time. Whether or not that makes the period a new era, or just a further phase of American leadership, is a question best left to historians in decades or even centuries to come.

IDFC and infrastructure financing

When IDFC was set up in 1997 based on the recommendation made by the Expert Group on Commercialisation of Infrastructure Projects under Rakesh Mohan (1994-96)— there were several sceptics who said in private that it was a classic case of dissipating capital.

IDFC has, over the years, expanded its business footprint and it now has a private equity arm, brokerage and investment banking, a mutual fund, and only the last piece that every finance institution wants to have is a bank within its fold is missing. See private equity in infrastructure:

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million.

IDFC acquired Standard Chartered Bank’s mutual fund (MF) business for $205 million in March this year. This MF will not only help IDFC connect with a retail audience, but it will also have another arm in its fold to raise money and invest. The MF business has very low regulatory barriers, it has low capital requirements and the returns are high. Market penetration by MFs is largely in the top ten cities.

In the case of wholesale funding, IDFC’s borrowings costs are exposed to sharp hikes in interest rates and tightness in market liquidity. Second, its business model has relatively higher portfolio concentrations compared to banks; and third, as a finance company platform, there are limits in leveraging relative to banks.

IDFC is also handicapped by the fact that there is no corporate bond market in India. The tenure of the longest IDFC bond is 10 years, even though there is a 30-year bond issued by the central bank, RBI. IDFC, therefore, willy-nilly lands up borrowing from banks to the extent that they are the biggest subscribers to IDFC’s bonds.

In August 2006, the RBI started regulating IDFC as a non-banking finance company (NBFC) instead of a public financial institution. It further placed a cap of 15% of total funds, on the amount IDFC could lend to a single borrower, which severely limits IDFC's investments in big infrastructure projects.


IDFC also bought 8.2 per cent in National Stock Exchange (NSE) for about $20 million, and within six months of this deal, NYSE, General Atlantic, Softbank and Goldman bought a total of 20 per cent in NSE, valuing the exchange at $2.5 billion.

In February 2007, IDFC also set up a $5-billion fund to finance infrastructure along with Citigroup, India Infrastructure Finance Company (IIFCL) and Blackstone Group. Of this, $2 billion will be in equity capital ($1 billion each in quasi-equity and equity) while $3 billion would be in long-term debt with financing maturities exceeding 10 years.

India continues to set up newer entities for financing infrastructure, but the Middle Kingdom’s State Development Bank of China has been responsible for at least part-funding mega projects: the multi billion dollar Three Gorges Hydel Project, the Beijing-Kowloon Railway and the $3.5-billion Daya Bay Nuclear Power Project in southern China.