The Group of 20 (G-20) is making a big show of getting together to come to
grips with the global economic crisis. But here's the problem with the summit
in London on April 2: It's all show. What the show masks is a very deep worry
and fear among the global elite that it really doesn't know the direction in
which the world economy is heading and the measures needed to stabilize it.
The latest statistics are exceeding even the gloomiest projections made
earlier. Establishment analysts are beginning to mention the dreaded "D" word
and there is a spreading sense that a tidal wave just now gathering momentum
will simply overwhelm the trillions of dollars allocated for stimulus spending.
In this environment, the G-20 conveys the impression that it is more
commanded by than in command of developments (In addition to the seven wealthy
industrial nations (the US, Japan, Germany, the UK, France, Italy and Canada)
that belong to the Group of Seven, the G-20 includes China, India, Indonesia,
Mexico, Brazil, Argentina, Russia, Saudi Arabia, Australia, South Korea,
Turkey, Italy, and South Africa.).
Indeed, perhaps no image is more evocative of the current state of the global
economy than that of a World War II German U-boat depth-charged in the North
Atlantic by British destroyers. It's going down fast, and the crew doesn't know
when it will hit rock bottom. And when it does hit the ocean floor, the big
question is: Will the crew be able to make the submarine rise again by pumping
compressed air into the severely damaged ballast tanks, like the sailors in
Wolfgang Petersen's classic film Das Boot? Or will the U-boat simply
stay at the bottom, its crew doomed to contemplate a fate worse than sudden
death?
The current capitalist crew manning the global economy doesn't know whether
Keynesian methods can re-inflate the global economy. Meanwhile, an increasing
number of people are asking whether using a clutch of Social Democratic-like
reforms is enough to repair the global economy, or whether the crisis will lead
to a new international economic order.
A new Bretton Woods?
The G-20 meeting has been trumpeted as a new Bretton Woods. In July 1944, in
Bretton Woods, New Hampshire, representatives of the state-managed capitalist
economies designed the postwar multilateral order with themselves at the
center. In fact, the two meetings couldn't be further apart.
The London meeting will last one day; the Bretton Woods conference was a tough
21-day working session. The London meeting is exclusive, with 20 governments
arrogating to themselves the power to decide for 172 other countries. The
Bretton Woods meeting tried hard to be inclusive to avoid precisely the
illegitimacy that dogs the G-20's London tryst. Even in the midst of global
war, it brought together 44 countries, including the still-dependent
Commonwealth of the Philippines and the tiny, now-vanished Siberian state of
Tannu Tuva.
The Bretton Woods Conference created new multilateral institutions and rules to
manage the postwar world. The G-20 is recycling failed institutions: the G-20
itself, the Financial Stability Forum (FSF), the Bank of International
Settlements and "Basel II", and the now 65-year-old International Monetary Fund
(IMF). Some of these institutions were established by the elite G-7 after the
1997 Asian financial crisis to come up with a new financial architecture that
would prevent a repetition of the debacle brought about by IMF policies of
capital account liberalization. But instead of coming up with safeguards, all
these institutions bought the global financial elite's strategy of
"self-regulation".
Among the mantras they thus legitimized were that capital controls were bad for
developing economies; short-selling, or speculating on the movement of borrowed
stocks, was a legitimate market operation; and derivatives - or securities that
allow betting on the movements of an underlying asset - "perfected" the market.
The implicit recommendation of their inaction was that the best way to regulate
the market was to leave it to market players, who had developed sophisticated
but allegedly reliable models of "risk assessment".
In short, institutions that were part of the problem are now being asked to
become the central part of the solution. Unwittingly, the G-20 are following
Marx's maxim that history first repeats itself as tragedy, then as farce.
Resurrecting the IMF
The most problematic component of the G-20 solution is its proposals for the
IMF. The US and the European Union are seeking a doubling of the capital of the
IMF from US$250 billion to $500 billion. The plan is for the IMF to lend these
funds to developing countries to use to stimulate their economies, with US
Treasury Secretary Tim Geithner proposing that the fund supervise this global
exercise. If ever there was a non-starter, this is it.
First of all, the representation question continues to exercise much of the
global south. So far, only marginal changes have been made in the allocation of
voting rights at the IMF. Despite the clamor for greater voting power for
members from the south, the rich countries are still overrepresented on the
fund's decision-making executive board. Developing countries, especially those
in Asia and Africa, are vastly underrepresented. Europe holds a third of the
chairs in the executive board and claims the feudal right to have a European
always occupy the role of managing director. The US, for its part, has nearly
17% of voting power, giving it veto power.
Second, the IMF's performance during the Asian financial crisis of 1997, more
than anything, torpedoed its credibility. The IMF helped bring about the crisis
by pushing the Asian countries to eliminate capital controls and liberalize
their financial sectors, promoting both the massive entry of speculative
capital as well as its destabilizing exit at the slightest sign of crisis.
The fund then pushed governments to cut expenditures, on the theory that
inflation was the problem, when it should have been pushing for greater
government spending to counteract the collapse of the private sector. This
pro-cyclical measure ended up accelerating the regional collapse into
recession. Finally, the billions of dollars of IMF rescue funds went not to
rescuing the collapsing economies but to compensating foreign financial
institutions for their losses - a development that has become a textbook
example of "moral hazard" or the encouragement of irresponsible lending
behavior.
Thailand paid off the IMF in 2003 and declared its "financial independence".
Brazil, Venezuela, and Argentina followed suit, and Indonesia also declared its
intention to repay its debts as quickly as possible. Other countries likewise
decided to stay away, preferring to build up their foreign exchange reserves to
defend themselves against external developments rather than contract new IMF
loans. This led to the IMF's budget crisis, for most of its income was from
debt payments made by the bigger developing countries.
Partisans of the fund say the IMF now sees the merit of massive deficit
spending and that, like Richard Nixon, it can say, "we are all Keynesians now".
Many critics do not agree. Eurodad, a non-governmental organization that
monitors IMF loans, says the fund still attaches onerous conditions to loans to
developing countries. Very recent IMF loans also still encourage financial and
banking liberalization. And despite the current focus on fiscal stimulus - with
some countries, like the US, pushing for governments to raise their stimulus
spending to at least 2% of GDP - the IMF still requires low-income borrowers to
keep their deficit spending to no more than 1% of GDP.
Finally, there is the question of whether the fund knows what it's doing. One
of the key factors discrediting the IMF has been its almost total inability to
anticipate the present financial crisis. In concluding the 2007 Article IV
consultation with the US, the IMF board stated that "the financial system has
shown impressive resilience, including to recent difficulties in the subprime
mortgage market." In short, the fund hasn't only failed miserably in its policy
prescriptions, and despite its supposedly top-flight stable of economists, it
has drastically fallen short in its surveillance responsibilities.
However large the resources the G-20 provide the IMF, there will be little
international buy-in to a global stimulus program managed by the Fund.
The way forward
The north's response to the current crisis, which is to revive fossilized
institutions, is reminiscent of Keynes's famous saying: "The difficulty lies
not so much in developing new ideas as in escaping from old ones." So, in
Keynes's spirit, let's try to identify ways of abandoning old ways of thinking.
First, since legitimacy is a very scarce commodity at this point, the UN
secretary general and the UN General Assembly - rather than the G-20 - should
convoke a special session to design the new global multilateral order. A
Commission of Experts on Reforms to the International Monetary and Financial
System, set up by the president of the General Assembly and headed by Nobel
Prize laureate Joseph Stiglitz, has already done the preparatory policy work
for such a meeting. The meeting, like the Bretton Woods Conference, would be an
inclusive process, and like Bretton Woods it should be a working session
lasting several weeks. One of the key outcomes might be the setting up of a
representative forum such as the "Global Coordination Council" suggested by the
Stiglitz Commission that would broadly coordinate global economic and financial
reform.
Second, to immediately assist countries to deal with the crisis, the debts of
developing countries to northern institutions should be cancelled. Most of
these debts, as the Jubilee movement reminds us, were contracted under onerous
conditions and have already been paid many times over. Debt cancellation or a
debt moratorium will allow developing countries access to greater resources and
will have a greater stimulus effect than money channeled through the IMF.
Third, regional structures to deal with financial issues, including development
finance, should be the centerpiece of the new architecture of new global
governance, not another financial system where the countries of the north
dominate centralized institutions like the IMF and monopolize resources and
power. In East Asia, the "ASEAN Plus Three" grouping, or "Chiang Mai
Initiative", is a promising development that needs to be expanded, although it
also needs to be made more accountable to the peoples of the region.
In Latin America, several promising regional initiatives are already in
progress, such as the Bolivarian Alternative for the Americas and the Bank of
the South. Any new global order must have socially accountable regional
institutions as its pillars.
These are, of course, immediate steps to be made in the context of a
longer-term, more fundamental and strategic reconfiguration of a global
capitalist system now on the verge of collapsing.
The current crisis is a grand opportunity to craft a new system that ends not
just the failed system of neoliberal global governance but the Euro-American
domination of the capitalist global economy, and put in its place a more
decentralized, deglobalized, democratic post-capitalist order. Unless this more
fundamental restructuring takes place, the global economy might not be worth
bringing back to the surface.
Walden Bello is president of the Freedom from Debt Coalition, senior
analyst at the Bangkok-based Focus on the Global South, and professor of
sociology at the University of the Philippines.
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