The Asian financial crisis of 1997–98 led to calls for the reform of the international financial architecture. A large number of policies were proposed for crisis prevention and crisis resolution, but with the faster-than-expected recovery of the Asian countries, complacency set in and reforms were abandoned. Complacency partially set the stage for the global economic crisis of 2008–09, and once again, under the auspices of the newly created G20, a large number of policies were announced. Have they been implemented, and has the world become a safer place?
This leads to three main reasons for concern. The first is complacency yet again. Five years ago, credit markets were frozen, international trade had fallen off the cliff and the global economy was headed towards a great depression similar to the one experienced in the 1930s. There was an acute sense of urgency; the major economic powers agreed to coordinate monetary and fiscal policies. These efforts were successful and instead of a global depression the world experienced ‘the great recession’.
Now financial markets no longer pose an immediate systemic threat. But the global economy is far from healthy; it is operating well below capacity, with millions unemployed. Policy coordination is still required, but is difficult to obtain. While the G20 made substantial progress in global economic reforms during its first three summits — that is, until the Pittsburgh summit — it is now headed towards obsolescence.
The second reason for lack of progress in global reforms is the reluctance of the United States to give up its veto power and control of the IMF. In 1944, the United States, as the global hegemon of the time, helped establish multilateral rules, including those for finance and the IMF. This led to financial stability and unprecedented economic prosperity, not only for members of the club but also in other countries around the world — especially in the BRICS.
Given their growing economic footprint in the world economy, the BRICS now desire a greater voice and say in running the IMF, but some members are reluctant to allow this. This is because, like many other clubs, the IMF is designed in such a way that founding members ultimately maintain control. Hence, one of the centrepieces of the proposed global reforms, namely the G20 pledge to transfer 6 per cent of quota and voting power at the IMF to large emerging markets, cannot be implemented.
The third reason for limited progress in reforms is the relatively weak cohesion within the BRICS. The establishment of the G20 in the aftermath of the global economic crisis has given the BRICS a historically unprecedented opportunity to sit around the high table with G7 member states and participate in discussions on international economic policies as key stakeholders. But the BRICS have become ‘BRICS without mortar’. For example, when the position of IMF managing director became vacant last year, even though it was well known that the IMF tradition of locking out non-Europeans would be strongly protected, the BRICS should have quickly made a claim for the position, fielded a top-rate candidate and provided a strong backing. But that did not happen. The BRICS claim came late — perhaps as an after-thought.
For the above reasons, many of the proposed global reforms have not been implemented and the world is not much safer now than it was before the global economic crisis. How might the situation evolve in the future? It depends on how global politics plays out among the various actors.
Recent economic turmoil has demonstrated beyond doubt that unfettered global markets and greed are a dangerous cocktail that can lead to ‘elite’ capture and insider trading and put global prosperity at risk. A more legitimate multilateral rules-based system is one of the best ways to ensure that the benefits of globalisation are shared in an equitable manner. Another way is to move to a more decentralised architecture with global and regional institutions working together in a complementary manner. Compromises must therefore be struck so that economies can move towards either one of these two systems. The world would then become a safer place.
If the United States decides to shun post-war multilateralism and go for preferential deals with like-minded countries instead, then the global order could fall apart. The world would then be back to the ‘beggar thy neighbour’ policies of the 1930s to the detriment of all, including the United States and the BRICS. US interest in negotiating the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership is a dark cloud on the horizon. Regional schemes, if well designed, can be stepping stones to multilateralism: let us hope that the desire of the United States in pursuing these schemes is not to lock out other countries — especially China and India.
Pradumna B. Rana is Associate Professor in International Political Economy at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.