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Wednesday, May 27, 2020
Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
KUALA LUMPUR, May 23 2017 (IPS) - Why is it so difficult to achieve meaningful coordination when everybody agrees that it is desirable, if not necessary? President Richard Nixon’s withdrawal of the US from and hence termination of the Bretton Woods system in 1971 confirmed the end of the post-war Golden Age. This led to slower growth, greater volatility, more instability, and reduced progress in raising economic welfare, among other consequences.
Multilateral governance compromised
The Bretton Woods institutions (BWIs) — World Bank and International Monetary Fund (IMF) — were initially conceived as part of a post-war system of multilateral governance to ensure the conditions for peace, growth, development, employment and prosperity. Today, however, their governance arrangements are very different from those of rest of the UN system, despite all its variety, and this is part of the problem. In New York, the UN is governed by ‘one country, one vote’, at least at the General Assembly.
The role of the BWIs and their relationship with the rest of the UN system have also changed significantly over time. Europe is over-weighted in the BWIs while developing countries are under-weighted by the formula for determining voting weights. These governance arrangements have created a sense of exclusion as developing countries feel they have not been fairly represented, especially after decades of dilution of the weight of the ‘basic vote’.
For example, in the mid-1940s, there were 44 members, with the weight of their collective ‘basic votes’ totaling 11.4 per cent. Today, there are 189 members, so if the weight of the basic vote remained the same, the total weight of the members would be just under half (189/44 x 11.4%). A few years ago, total basic votes only accounted for 2.2 per cent, or less than 5% of what they should have been!
While the IMF is undoubtedly influential in various matters under its jurisdiction, there is no overall governance mechanism for finance comparable to the World Trade Organization (WTO) for trade. Through the General Agreement on Trade in Services (GATS), it has been the WTO which has been facilitating, without supervising, financial services liberalization.
Besides the WTO, the Bank of International Settlements, the Basel Committee on Banking Supervision, the Financial Stability Board and other international organizations have limited jurisdiction in other cross-border financial matters. Meanwhile, important UN initiatives, e.g., the Financing for Development (FfD) conferences, have been largely stymied and ignored in various discussions on international financial reform as the governments of OECD economies prefer the grossly undemocratic decision making arrangements in the Bretton Woods institutions to those of the rest of the UN system.
North Atlantic divide
Such governance issues inevitably undermine legitimacy, and thus constrain more effective global coordination, but of course, there are other problems as well. For many years, there have been some important differences across the Atlantic, arguably since the 1960s.
During the recent crisis, the European approach initially relied on long-standing ‘automatic stabilizers’, arguing that Europe did not need the big fiscal stimuli which the US and the UK – untypically — advocated in 2009. Later, the European Central Bank warned incessantly of the threat of inflation, while the IMF inconsistently shared the view of the rest of the UN system, that the bigger threat was that of deflation and stagnation.
Instead of providing a desperately needed, coordinated, counter-cyclical fiscal stimulus to the world economy, under the leadership of the then UK Prime Minister Gordon Brown, the G-20 committed to a huge capital infusion for the IMF. It would have been better if the G-20 had provided this capital boost on condition that the IMF reforms itself to pro-actively revive and sustain global economic growth and to better serve developing countries. Without sufficiently reforming itself, the IMF has continued to suffer from legitimacy and credibility problems, undermining its ability to provide more effective leadership.
From G-7 to G-20
Although current international coordination leaves a lot to be desired, there have been some modest and generally unsuccessful efforts to improve the situation. For instance, there were some efforts to improve coordination by the G-7 as well as in Europe at the annual IMF-World Bank meetings in October 2008 and soon afterwards as well, but these efforts did not achieve much.
Meanwhile, then President Sarkozy of France initiated an unprecedented G-20 summit to be held at the UN with Secretary-General Ban. US President George W Bush later insisted on hosting the summit in mid-November 2008 in Washington DC. (The G-20 group of Finance Ministers had been meeting for a decade after it was created by then US Treasury Secretary Larry Summers and Canadian Finance Minister Paul Martin after the 1997-1998 Asian crisis.) In the following month, the G-20 heads of government met for the very first time, and have continued to meet since with limited consequence after 2009.
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