Bretton Woods’ institutions lagging behind world economy
by Jorge Nascimento Rodrigues
Bretton Woods’ institutions lagging behind world economy
Economists from emerging countries, Europe and the United States speak their minds on the gap between reality and the equilibrium of forces in the IMF and the World Bank and discuss the “change from within.” Europe is into question.
The world economy suffered a colossal change in the last 20 years. The weight of major advanced economies in gross domestic product (GDP) decreased significantly from 63% to 45%.
This collapse of the economic relevance of the so-called “triad” – the U.S., Europe and Japan – was offset by the rise of four emerging powers, the BRICs (Brazil, Russia, India and China), jumping from 15% to 27% of global GDP, and the growth in much of the former Third World. The very term “Third World” launched almost 60 years ago by Alfred Sauvy in the French newspaper L’Observateur (edition of 14 August 1952) became obsolete.
In the geopolitical level, the transformation was also radical. Assessing the geopolitical weight, based on eight indicators (beyond the weight on world GDP), the turning point occurred in the late 1990s.
A study from two Portuguese researchers, Fernando Fonseca and Fernando Gonçalves, on the period between 1994 and 2003, reveals that the G7 (the seven most advanced economies in the world) lost geopolitical weight (-31 points) while the BRICs gained (36 points). In that period, China risen to second place in the geopolitical map taking the place of the former Soviet Union that imploded. The European Union was the group losing more geopolitical relevance.
Another dramatic change is the exporter of capital role of the emerging giants, especially China, which is currently the second largest capital exporter in the world and the largest creditor of U.S. debt. According to the IMF Global Financial Stability Report, the 13 largest exporters of capital in 2011 (latest available data published in April, 2012) are two BRICs (China, with 12.5% of total world exports of capital, and Russia, with 6.3%), two are ”tigers” of the Pacific (Singapore and Taiwan) and four are oil exporters (Saudi Arabia, Kuwait, Iran and Qatar). Taken together, they hold 44.8% of world exports of capital. In 2011, Germany was the world’s largest exporter of capital (12.8%), surpassing China (12.5%), Saudi Arabia (8.8%) and Japan is the fourth (7.5%). Comparing with 2010, there was a significant reduction in the relative weight of capital exports from China (down from 20.1% to 12.5%) and Japan (down from 12.9% to 7.5%).
China also has the largest foreign reserves in the world with 3.3 trillions of U.S. dollars, well ahead of Japan is number two, with 1.2 trillions. Overall, the BRICS have 4.5 trillions of U.S. dollars in foreign reserves, almost five times more than the entire Euro zone.
However, this figures are not reflected in the two world financial organizations that came from the Bretton Woods agreements in 1944, the International Monetary Fund (IMF) and World Bank (WB).
“far too western centric” institutions
The BRICS hold less than 12% of the voting rights in the IMF and the U.S. and Europe continue to have the “exorbitant privilege” of sharing the heads of both institutions. With the proposals on the table for the 14th revision of quotas, that began in 2010, the weight of Europe and the U.S. in the IMF will decrease (from 31.92% to 30.3%, in the case of Europe, and from 17,69% to 17.40%, in the case of the U.S.) and the weight of the BRICS will increas (from 11.52% to 15.24%). But the imbalance remains.
“The geopolitical landscape is changing. The IMF and WB are still late in recognizing the new reality and adjusting their own rules and leadership,” points Mark Thoma, professor of economics at the University of Oregon and author of the blog “Economist’s View”. And the pace of change within these two institutions is frustrating: “The IMF and WB clearly have a legacy that isn’t in tune with the new geopolitical reality. However, they are changing and will change more. It’s just that the pace of change doesn’t meet the expectations of the rapidly growing countries,” synthesized Hugo Dixon, editor of Reuters’ Breakingviews.
“The IMF and WB clearly have a legacy that isn’t in tune with the new geopolitical reality. However, they are changing and will change more. It’s just that the pace of change doesn’t meet the expectations of the rapidly growing countries.”
“The IMF and World Bank are far too western centric. There is a balance of economic power in the world, and the new powers like China and India need to be given the rightful share in decision-making and voting commensurate with their economies and population. Part of the problem with the economic system is that the global framework for decision-making is being controlled in a neo-colonialist way by the US and a lingering Europe”
“The IMF and the World Bank currently face three major deficits: of relevance, credibility and trust.”
“Europe needs to cede space to emerging powers to strengthen the IMF and the World Bank. The longer Europe refuses to do so, the more it will loose goodwill among emerging powers.”
“The IMF and World Bank are far too western centric. There is a balance of economic power in the world, and the new powers like China and India need to be given the rightful share in decision-making and voting commensurate with their economies and population. Part of the problem with the economic system is that the global framework for decisionmaking is being controlled in a neo-colonialist way by the US and a lingering Europe” outlines Shaun Rein, managing director of China Market Research Group, in Shangai, and author “The End of Cheap China”.
Jayati Ghosh, professor of economics at Jawaharlal Nehru University, New Delhi, and a member of the National Knowledge Commission advising the prime minister of India, and founder of the Economic Research Foundation [macroscan.org], draws a more radical scennario: “The IMF and the World Bank currently face three major deficits: of relevance, credibility and trust. For many poor developing countries, their lending is too little and their approach too outdated to be relevant in a world where private flows have grown and some countries like China have emerged as major donors. Their credibility has been dented by the continuing reliance on Washington Consensus arguments that should have been ditched long ago because of their poor results. Most people in the developing world simply do not trust them to protect their interests – in fact they are seen as working against such interests. All of these have to change. (…) Obviously the current quotas and voting rights make no sense. But even more than that, the ideology of both institutions is the real problem.”
The name of the problem is Europe
“The excessive power of europe is clearly the problem. the eurozone should have one combined seat on the board and there should be a realignment of votes to more accurately reflect the balance of power in the global economy,” points Daniel Bradlow, professor of international development law and african economic relations, at the University of Pretoria. And the current situation adds to that: “Europe is a problem not just because it has excessive voting power but because it is now the overwhelming user of IMF money. In the past, when Europe was a donor, it found it easier to hang onto its uneven voting power. In future, that won’t be tenable,” notes Hugo Dixon. In fact, 65.6 billion euros, of the 123.8 million that the institution is currently applying in the world, are commitments made by the IMF under the funding programs with the three Euro area countries under rescue plans.
The IMF recently secured a new 430 billion dollars (325 billion euros) buffer. The Euro area (with 200 billion dollars) and Japan (with 60 billion dolars) were the major contributors. The BRIC’s were only cited in a footnote in the statement on the fund raising, along with “others”.
Critics point the finger at the IMF by ignoring the “Arab Spring” and in particular Egypt, whose probability of default has risen to the world top ten. Outside Europe, the fact that the program for Greece is 23 times the size of Athens’ contribution to the Fund is somehow shocking.
Shaun Rein is even more scathing: “Europe continues to play an outsized role in decision-making in international bodies. That needs to change. Europe’s inability at handling its own internal affairs proves that it cannot tell the rest of the world how to manage its economy and that outside views are needed to help it fix itself — that can only come from new powers.” And Oliver Stuenkel, professor of international relations at the Getulio Vargas Foundation, São Paulo, Brazil, draws attention to the fact that “Europe needs to cede space to emerging powers to strengthen the IMF and the World Bank. The longer Europe refuses to do so, the more it will loose goodwill among emerging powers.”
“The eurozone should have one combined seat on the board and there should be a realignment of votes to more accurately reflect the balance of power in the global economy.”
Changing from the inside
“China wants to work within the current international framework rather than build a new one and lead it. Having China and India gain more power within the current system, rather than build a new one, is good for global security. However, unless Europe and the US cedes more control sooner rather than later, China might no longer be willing to work within the system,” points Shaun Rein.
Oliver Stuenkel, who has participated in the preparatory meetings of the BRICS’ summits, adds: “For these organizations to effectively tackle global challenges, they need emerging powers’ participation and their intellectual input. Things have changed considerably since the 1990s, when the BRICS still played a minor role in the Bretton Woods organizations. Therefore I think this drive to reform the organizations “from within” is increasingly effective.”
Mark Thoma, in turn, sums up the approach: “I think that the change from within is possible and necessary, but it must be driven by pressure from the outside. The latter is the fundamental driving force.”
Dominique Plihon, economist, professor at the University Parix XIII, one of the leaders of ATTAC – an international organization opposed to neo-liberal globalization, and of the “Manifeste d’économistes atterrés”, goes along the same lines: “two strategies should be complementary – reform from within, on the one hand, and the creation of new regional institutions, on the other, as is underway in Latin America and Asia.”
The outside pressure is not just in speeches and resolutions of the BRICS’ summits. “The talk about a brics bank, and alternative monetary arrangements (even if not completely separated from IMF) suggest that they may consider alternative structures at some point. My view is that the reality for the foreseeable future is that they have no real choice to continue pushing for change from the inside until opportunities for bigger changes becomes possible.” outlines Daniel Bradlow.
On other side, Dirk Elsner, economic blogger, author of Blik Log, doesn’t believe in the change from within: “This strategy cements the power structure.”
One of lines of “change from within”, is the the currency basket of the special drawing rights (SDRs). Currently with the dollar, euro, yen and pound. Stuenkel believes that the inclusion of the yuan, the Chinese currency, would be “a major step.” But Dirk Elsner thinks the SDRs mechanism is “too opaque” to become a reliable system.
Jayati Ghosh believes that “clearly, it is necessary to change the SDR basket. But that will not necessarily bring about major change. Both the “bancor” and the idea of using the SDR as a real global currency fail because they are not backed by states, and just as money is about power, international money is still about international power. A “technocratic” solution will therefore not work.”
“The BRICS Bank will not affect the World Bank directly. None of the BRICS will retreat from the World Bank. Rather, I see the idea of the BRICS Bank as a complementary instrument that will serve needs the World Bank cannot meet.”
The Achilles heel of the BRICS
For those interviewed, the European Christine Lagarde and the North-American Jim Yong Kim will be the last elected by the traditional method of sharing the highest rank between Europe and the U.S.. And for the first time, there was what some call a “competitive election” in the IMF.
The US-supported candidate was elected, but against an opponent, Ngozi Okonjo-Iweala, Finance Minister of Nigeria, supported by Africa and explicitly by Brazil.”All future elections will follow this pattern [in four years for the IMF and five for the World Bank] will have to follow this pattern,” thinks Bradlow. For now, notably the BRICS, were divided, with some still to bet on the American option, as Russia did.
Moreover, stresses Dominique Plihon, the understanding among the BRICS is still very limited. This seems to be their Achilles’ heel. One of the fracture lines, stressed by Robert D. Kaplan, long time correspondent for The Atlantic, and the author of “Monsoon: The Indian Ocean and the Future of American Power”, is the new geopolitical rivalry between China and India that feeds on the possibilities brought by technology.
And Michael Pettis, finance professor at Peking University’s Guanghua School of Management, in Beijing, where he specializes in Chinese financial markets and author of the blog “China Financial Markets” [mpettis.com] refers that: “It is a mistake to assume that the four BRICs want the same kind of global governance. There are different interests: Brazil and Russia want high commodity prices, China and India want them cheap. Brazil is on war against what they call ‘currency wars’, China doesn’t want to hear about it.”
The end of the “Washington Consensus”?
Are we witnessing change in the policy of these institutions?
Mark Thoma thinks that the IMF and WB have learned from their mistakes. The mistakes made by the IMF in the face of successive crises of the 1990s in Eastern Europe, Latin America and Asia have almost dictated a death sentence. The annual volume of IMF loans fell roughly from about 97 billion dollars in 2003 to 9.5 billion in 2007.
Most of the victims of these global crises eventually raised their heads, not because of IMF programs, but due to higher commodity prices that allowed exporting countries to accumulate foreign reserves, which in 2008 reached the triple of the “triad” (U.S., Europe and Japan) combined. Several Southern countries, such as Brazil, Argentina, Uruguay, Indonesia and the Philippines, have repaid their loans in advance, emptying IMF’s role. The Fund was, ironically, saved by the sovereign debt crisis in the euro area, returning to an annual level above 120 billion dollars of funds applied. The G20 summit in London in April 2009 opened the way.
But this resurrection is having a price: the “Washington Consensus”, also referred to as “neoliberal doctrine,” is being quietly shelved. A study by Susanne Lutz and Matthias Kranke of the University of Berlin, shows that the Fund’s activities in Latvia, Hungary and Romania have imposed “lighter” conditions. The contradictions between the IMF team and experts from the European Commission and European Central Bank have enriched the anecdotes on the recent bailout programs in Greece, Ireland and Portugal. The guardians of the “Consensus” have been in Brussels and Frankfurt, more than in Washington DC, which surprised the unions and the left, in the countries under bailout programs, that used to shout “Get outta here IMF”.
In IMF spring meeting, Christine Lagarde tried to create a new label for the IMF strategy: “the Washington moment”. But Jayati Ghosh, doesn’t believe just in words: “Even when they accept mistakes in their research and theoretical papers, they rarely reflect these in their policy advice, which continues to push often counter-productive austerity and socially damaging obeisance to markets and large capital.”
As for the World Bank, Shaun Rein thinks that it “hasn’t learned from its mistakes at all. It is still part too political an institution, dictated by the US political process, for it to truly evolve in the way it needs by incorporating thoughts from others.” We’ll see if the new president Jim Yong Kim changes the situation. Xu Hongcai, professor at the Peking University, and deputy director of information department of China Center for International Economic Exchanges , is inclined to think that we could be witnessing “a new historical beginning.”
“Even when they accept mistakes in their research and theoretical papers, they rarely reflect these in their policy advice, which continues to push often counter-productive austerity and socially damaging obeisance to markets and large capital.”
“It’s a mistake to assume that the BRICs want the same kind of global governance. There are different interests: Brazil and Russia want high commodity prices, China and India want them cheap. Brazil is on war against what they call ‘currency wars’, China doesn’t want to hear about it.”
Source: articles from Jorge Nascimento Rodrigues and João Silvestre [journalist, Expresso]
published in the printed edition of Expresso, April 28, 2012.
English Edition by: JPO | LISwires