The big international financial and economic institutions are in crisis.
You know what I mean:
The Greek-tragedy-like Wolfowitz drama at the World Bank, Chávez’ pull-out of the World Bank and the IMF, Rafael Correa’s kick-out of the World Bank representative from Ecuador, the last rush to bilateral trade agreements by the US and the EU in a context of a faltering Doha round, are symptoms of a fundamental trend: the rise of emerging markets in the global economy and the subsequent erosion of power of the West and the institutions the latter has shaped in the Post-war period (see, on related topics, this post, this post, or this one, err, in fact, this entire blog…).
Fundamentally, all this is excellent news. The IMF is having financial problems in a moment when the global economy is doing well, and especially the countries that have needed its help (and contested its harsh methods) in the 1990s and during the various Asian, Russian, Turkish, Latin American crises have witnessed an unprecedented economic turnaround. Today, global growth is robust, and emerging market catch-up, although mainly concentrated in Asia, is impressive.
But look at the dismal state of the IMF today. There is a perfectly scandalous whiff about the fact that the IMF’s finances tend to depend on the profitability of its lending activities during crisis. The solution of selling gold proposed a few months ago has something Dickensian about it. It reminds of stories one reads as a teenager of ladies going to the pawnshop with the family jewellery in a last-ditch attempt to survive. Obviously, the IMF’s structures are too slow at reforming themselves. A much-publicised increase of the quotas and therefore voting weight of countries such as Mexico and Turkey during the IMF meetings in Singapore last year have not solved the problem of the IMF’s reform, which needs to go beyond restoring its finances. The IMF’s raison d’être is at stake. Set up to sustain the Bretton-Woods system of gold-parity, it evolved into helping out developing countries since the debt crisis of the 1980s. Being the world’s fireman avoided the question of purpose. But now it is obvious. What should the IMF become: a think-tank or economic consultancy? It would become a direct competitor to the OECD, which is no longer a closed rich-country club but includes emerging markets like Mexico, or the EU’s new members. An aid provider for poor countries? This displeases the World Bank. A plain business? Maybe being a plain global investment bank involved in the current global money binge would at least provide for financial reserves for the future if financial needs arise during a financial crash certainly to come at some time in the future. But this would require less politics in the IMF’s working structure. Business profits for a bank whose head would still be appointed by Europe (while the World Bank remains in the hands of politically-appointed US-Americans) is food for Chavistas. A broker in the issue of tackling global imbalances? The question of legitimacy remains, and the isssue seems less urgent than a few months ago….
Indeed, in the current context, Chávez’ recent move to pull out of the IMF and World Bank is farcical. With all his oil money our friend Hugo needs neither advice nor money from these institutions. So it is indeed easy to pull out when oil prices are at their highest. The anti-imperialistic anti-American rhetoric inherited from a long-forgone period of colonial domination and big-stick politics in Latin America is so anachronistic. In recent years, the US has obviously neglected its traditional Latin American backyard due to its concentration on the war against terror and obsession with the rise of China. The US has even obviously failed to push through its hemispheric trade-integration agenda based on a now-dead Free Trade Area of the Americas (FTAA) project. DR-CAFTA is in this context an easy present of ageing Uncle Sam for plying Banana Republic clients. Chavez is doing easy politics. I am not even commenting on el pequeño Rafael, protected by Chavez, el grande.
Beyond finance and aid, the World Trade Organization is also in deep crisis. The Doha round is farcical as well (here a potentially useful post on that matter). Big heavy emerging markets like India like to use outdated third-world rhetoric, but they don’t want to assume the liberalising tasks necessary for them to go a step further in their recent surge bloc trade talks with eroding Europes (and USs) that cling to their as outdated agricultural protection practices instead of spending money on modernising their economies to meet the challenges of a rising Asia. Aware of these difficulties, the EU Commission has embarked upon a “Global Europe” strategy, where it states: “We need to promote our economic interests by activism abroad not protectionism at home.”
Fine. But embarking upon new-generation bilateral agreements with difficult countries like India with enough clout to stop the multilateral Doha Round is not necessarily an easy task and will force the EU to face what it is uneasily facing in the Doha Round (agricultural protection above all, but also issues like the temporary movement of workers in the GATS). So we do agree with Patrick Messerlin when he calls the EU to focus on the multilateral system and get that Doha deal done. Having lost power, a multilateral system that limits individual member state power is in the EU’s best interests. The EU, and the US which have embarked earlier on a more aggressive bilateral strategy the EU is imitating now, still have enough weight in the global economy (still 2/5 of world trade, main destination of exports of the world’s emerging markets and developing countries) to be system-shapers within the WTO. But embarking each on their side onto bilateralism (a debate on bilateralism is here) is only going to accelerate their (in relative terms) economic decline in the midst of growing internal political discontent over globalisation.
The problem with declining countries is that they tend to be in a state of denial until everything falls apart. This is the case of France in its relationship with globalisation and its outdated right-wing nationalism embodied by Sarkozy. Yet denial of the obvious is also what is happening in the US and in the EU. Clinging to past practices – like protecting a politically appointed Wolfowitz who should leave – is damaging and only accelerates the long-term decline. The West should prepare for the future, play fair game now in the international institutions in order to shape it in such a way now to force recalcitrant emerging countries to take on what they often deny in easy and outdated anti-Western rhetorics – a greater responsibility in the global political system that comes with their economic emergence. That is what Chávez is denying his people: a stake in the system and the possibility to shape it, and they are going to pay a high price as soon as the current oil-party is over.