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Global Governance

New centres of gravity

by Jaleel Ahmad
Western Europe and North America are accustomed to dominating multilateral institutions. Their influence in these bodies, however, does not reflect their real weight in the global economic and political system any more. The current crisis makes reform ever more urgent. [ By Jaleel Ahmad ]

The international governance system currently in force is a remnant of the Bretton Woods system, put in place after the end of the World War II, roughly 60 years ago. The system has had an undulating history, undergoing a number of significant changes, the most prominent being the abandonment of fixed exchange rates in the early 1970s.

In spite of such overall flux, the underlying governance structure remained virtually unchanged. The system actually served the world economy rather well, providing much-needed stability and resilience in the face of constant change.

Nonetheless, it has become abundantly clear that this governance system has outlived its relevance. It does not reflect current political and economic realities. The growing importance of new centres of gravity, particularly in Asia and Latin America, must be taken into account. The underlying governance structure is therefore in need of more than mere cosmetic changes.

That is most evident in the case of the G8. This is an informal group, and it was originally set up to coordinate macroeconomic policy, involving the USA, Canada, Germany, Britain, France, Italy and Japan. Later, Russia was made a member, reflecting the fact that the G8 had assumed a role in other fields of policymaking as well.

As far as macroeconomic issues are concerned, however, the G8 has not only become obsolete, but already been replaced by the G20, which includes major emerging economies on top of the G8. Because of the current crisis, the G20 leaders met in Washington in November, and will do so again in April in London. By contrast, the regular G8 schedule of annual summits in summer has not been altered. It is thus evident that the G8 is no longer the place to make macroeconomic policy for the world.

IMF and World Bank

The members of the informal G8 are used to dominating important formal international institutions, most of all the International Monetary Fund (IMF) and the World Bank. It is absurd that tiny Switzerland has almost the same share of IMF voting rights (1,6 %) as giant India (1.9 %).

It is high time for the IMF to recognise that emerging markets have grown fast and have become new heavyweights of the global system.

On the other hand, despite Asia’s rising global stature and influence, the continent still suffers from major problems – including widespread poverty, disease and malnutrition. These problems require for their correction not only sustained economic growth but also an equitable distribution of this growth. It is, therefore, essential to arrive at a new international governing system that will be able to provide opportunities for broad-based and egalitarian economic and social development.

Indeed, these issues, on their own, would justify a reallocation of voting rights, to confer greater influence to those governments that are closest to the challenges. Not only at the IMF and the World Bank, but also at the regional development banks, these matters must be addressed.

For too long, problems of fund allocation and conditionality have plagued decision-making. This must not go on at a time when the international financial institutions are gaining in significance once more because of the private capital markets’ credit crunch. Least developing countries and even emerging-market nations need access to liquidity in a time in which the advanced economies are increasingly focussing on their own crisis symptoms.

The main function of the IMF envisaged at Bretton Woods was to provide balance of payment support and liquidity to member countries, while the development issues were allocated to the World Bank. In the recent past there have emerged instances of overlap. It would therefore make sense for both agencies to focus on their core competencies once again.

The IMF, despite claims to the contrary, does not have a comprehensive mandate to include in its assessment all pertinent aspects of many international issues that it deals with. The oversight of the member countries’ macroeconomic problems and the design of inter-governmental policies should be entrusted to a new agency, tentatively titled the World Macroeconomic Authority or the Global College of Macroeconomics (or any other suitable moniker). This new agency should be charged with the task of non-bureaucratic study, analysis and advice on broad questions of macroeconomic management in a way that does not impinge on national or territorial sovereignty.

The agency should not be a data collection body. It should utilise the data which is already collected by a large number of other United Nations agencies and the European Commission. It should not be a forecasting agency either. It should act as a high-power consultative body to provide at regular intervals a broad picture of the macroeconomic conditions in the world economy, with more detailed analysis of particular regions, countries or problems, when necessary. And of course, it should not be biased towards North America and Western Europe, as multilateral bodies have tended to be so far.

The very large number of reports, as well as the constant stream of research papers issued by the IMF should be discontinued. A very large part of this research is only remotely related to the key activities of the Fund. The bulk of this research (and the funds needed for it) should be channelled to institutions of higher education, which are more likely to come up with transparent and balanced results.

This new macroeconomic agency should be construed as a global “public good” unconditionally available for advice and support to member counties. It is envisaged that its structure and functioning would be markedly different from that of the IMF. Had such an agency been operational at the time, it could have prevented the policy errors of the IMF in assessing the causes and prescribing remedies during the East Asian financial crisis ten years ago.

The United Nations

In view of the credit crunch and the dramatic economic downturn in many countries, most attention is now being paid to economic affairs. It must not be forgotten, however, that the United Nations system too has become dysfunctional and unwieldy. The reasons include the higher number of members, increasing demands by an ever more assertive civil-society organisations and, most importantly, outdated concentration of power thanks to the veto rights the permanent members enjoy in the UN Security Council.

The latter problem should be corrected by enlarging the membership of the Security Council. Countries such as India and Brazil with large populations, significant economies and considerable military power should be made permanent members. It is paramount, however, that permanent membership of the Security Council, whether new or continued, be based on generally agreed criteria.

Adjusting the membership and the method for selecting Security-Council members would do a great deal to make this world body more representative. Moreover, doing so would help to solve the UN’s financial problems, as the new members can be expected to provide additional funds in exchange for greater influence.

Conclusion

Practically all existing multilateral institutions appear to be in need of reform. The world economy has become multi-polar and infinitely more complex. It is worth emphasising that the new initiatives for reform of the system should be arrived at in a democratic and transparent fashion, as the outcome of a consultative process.