Is the world economy governable?
THE FIRST clear reality that predicates the question above is that it’s a far different world now from what it was even as recently as five years ago.
The world economy was once much simpler and, thus, governable when the Bretton Woods agreements were established, giving rise to, among others, postwar global institutions and procedures to regulate the international monetary system, namely the IMF and the World Bank.
A fundamental difference since Bretton Woods is the change in the balance of economic power (and along with it, political leverage) that emerged after a series of financial crises in recent years that affected the dominant economic powers, particularly the United States and the European Community. These crises also raised questions about the effectiveness of the Bretton Woods institutions. The issue of world economy being governable has become more challenging.
Alongside these crises is the emergence of China as a dominant power. Its impressive economic growth has enhanced its global influence. Thus, the world balance of power has gone from the US-Russia Cold War relationships, toward the rise of a new balance of power between America and China.
Another difference in the world economy involves the demand for governance to underpin the new structure. Bretton Woods provided the platform for the economic powers (particularly Western) to be the dominant players in the world economy. They set the rules of the game, thus proving true the golden rule: He who has the gold makes the rules.
But these rules were broken by these very same dominant rule-making economies. Thus, if the rule-makers themselves have broken the rules, who is to enforce the rules on them—or can they be relied upon to right themselves?
Whatever the reason, the near-collapse of the world financial system in 2008 and the global credit crisis that followed, the continuing Eurozone saga, and the shifting balance of economic power have given rise to widespread calls for changes in the regulatory system and the structure of decision-making in international finance.
This realization of a new economic paradigm was not lost on the Group of Seven. Thus, the G7 expanded to the G20. The G20 declared itself the “premier forum for international economic cooperation” but continues to suffer from “input” legitimacy due to its exclusive nature and lack of broader representation. Some have observed: “The G20 is a self-appointed group whose composition is determined by the major countries and powers. It may be more representative than the G7 or the G8, but it is still arbitrary.”
A World Bank/IMF paper critiqued that the G20 membership is based on no explicit membership criteria and contains no mechanism for adjusting membership to reflect changing realities of the global economy.
Some say that it also suffers from “output” legitimacy, namely its ability, or lack of it, to strengthen international cooperation and come up with effective solutions.
All these criticisms notwithstanding, it will be unrealistic to propose a supra “world government” with supreme exercise of political and economic authority as the answer.
What is realistic is this: An effectively led “world governance” is a requisite for growth and development to be sustainable. But definitely, the G20 as a mechanism for world economic governance is still at this point a work in progress.
The G20, IMF and other international institutions must continue to evolve and to continuously assess their mandates, objectives, and memberships vis à vis the changing configuration of the world economy lest they become an anachronism.
For instance, is it time now to revisit the concept of an Asian IMF as part of a new world economic governance? Is it time to review the organizational configuration of the Bretton Woods institutions? Does the present Bretton Woods protocol wherein the United States gets to appoint the World Bank president and Europe the IMF managing director still reflect the current balance of power?
The sum of the world economy, while different now, can only be equal to its parts. And the effectiveness of the sum can only be equal to the economic health and interactive harmony of its parts.
Perhaps the progressive improvement of the G20’s role in world economic governance can start with more explicit and transparent criteria of size and regional representation.
From the Asian perspective, the key is integration. The Asian Development Bank has identified challenges to make this concept of integration viable, namely: cementing recent gains, broadening the process, deepening integration and ensuring the compatibility of regional and global integration.
Finally, it is still a reality that much of global governance depends on the situation of the most powerful countries. It is particularly important for key parts, particularly regional groupings and the more dominant economies to bring themselves to a healthy economic state and a continuing harmonious relationship.
If, as they should, these leading economies, primarily the United States, the Eurozone, and China are to credibly take the lead, certainly the United States has to put in the financial regulatory framework to correct a financial system still prone to unbridled capitalism’s excesses, the Eurozone has to face the reality that monetary union without a better semblance of fiscal union is futile, and China should increasingly show its ability to be a credible influential voice on the world economic stage.
Roberto F. de Ocampo, OBE, is a former finance secretary and was Finance Minister of the Year in 1995, 1996 and 1997.