Financial crisis exposes weakness of global institutions

October 13, 2008

the markets response to the G7 and G20 meetings.... (photo by JB, cc-by)

the markets' likely response to the G7 and G20 meetings.... (photo by JB, cc-by)

The inability of the G7 and the G20 to offer anything beyond a meek, palliative response to the Global Financial Crisis this weekend reflects the sorry state of political globalism.

The Washington Post hit the nail on the head with its frontpage headline yesterday: “World Leaders Offer Unity But No Steps to Ease Crisis.” The story details how efforts to utilize the G7 and G20 framework to develop a coordinated policy solution to the crisis have, not surprisingly, failed:

The challenge of developing a coordinated approach is made all the more difficult because diplomats lack a viable forum in which to hold talks, analysts say. Calls are rising to disband, or expand, the G-7, created at a time when the United States, Europe and Japan monopolized economic power and when countries such as China were not as relevant economically as they are today. The broader group meeting this weekend, known as the Group of 20, also includes Brazil, Mexico and other emerging economies. But its authority and the scope of its mission are limited.

Yesterday, Guido Mantega, Brazil’s finance minister and chairman of the G-20, said it was time for the organization to be rethought, calling it ill-suited to respond to a crisis. The group meets infrequently, mainly to talk about broad, long-term matters.

“The G-20 was not created to deal with this sort of situation,” Mantega said. “Its makeup does not really allow it to act in a decisive fashion. There is no real structure to deal with an emerging economic problem. We have to turn the G-20 into a tool of some kind that can provide action better.”

In theory, the IMF was designed with precisely this kind of crisis in mind; however the Fund has been shunted aside during the past 5 years, a victim of its own radical free marketeering in the 1990’s and the power politics that made it a woefully undemocratic institution in the first place. The WP piece continues:

The International Monetary Fund, an institution long charged with global economic stability, has meanwhile been relegated to the sidelines. Although it played the leading role in emerging market crises in 1990s, which spread through Latin America and Asia, the current worldwide crisis dwarfs the fund’s ability to manage it.

The IMF has instead been largely left to offer gentle advice to U.S. and European officials, while entering talks on possible assistance to deeply troubled Iceland and preparing to contain the crisis at the margins as it spreads to the developing world.

Lacking the political authority to lead the G7 and moral authorirty to exert influence over the rest of the G20, the IMF can do little to affect policy outcomes where they are needed most.

By the end of today, it will become clear whether investors find solace in the world’s political leaders’ weekend promises. In the meantime, I am inclined to join the Financial Times’ Philip Stephens in wondering about the geo-political implications of the crisis. Looking back to the Asian financial crisis in order to understand the roots of the current situation, Stephens argues that Europe and the United States must face facts:

A decade ago, after the crisis of 1997-98 wrought devastation on some of its most vibrant economies, Asia said never again. There would be no more going cap in hand when the going got rough. To avoid the IMF’s ruinous rules, governments would build their own defences against adversity by accumulating reserves of foreign currency.

Those reserves – more than $4,000bn-worth at the present count – financed credit in the US and Europe. There were other sources of liquidity, of course, notably the Fed and the reserves accumulated by energy producers. It also took financial chicanery to turn reckless mortgage lending in to triple A rated securities. But as a Chinese official told my FT colleague David Pilling the other day: “America drowned itself in Asian liquidity.”

Owning up to the geopolitical implications will be as painful for the rich nations as paying the domestic price for the profligacy. The erosion of the west’s moral authority that began with the Iraq war has been greatly accelerated. The west’s debtors cannot any longer expect their creditors to listen to their lectures. Here lies the broader lesson. The shift eastwards in global economic power has become a commonplace of political discourse. Almost everyone in the west now speaks with awe of the pace of China’s rise, of India’s emergence as a geopolitical player, of the growing roles in international relations of Brazil and South Africa.

Yet the rich nations have yet to face up properly to the implications. They can imagine sharing power, but they assume the bargain will be struck on their terms: that the emerging nations will be absorbed – at a pace, mind you, of the west’s choosing – into familiar international forums and institutions.

From the look of things this weekend, these familiar international forums and institutions are simply not up to the job. It is unclear as to whether or not enhanced regulation from a global institution would help resolve this situation or not, but the point is that this was an exceptional opportunity to advance the project of global integration – an effective means of enhancing global equality and acountability. That opportunity is rapidly slipping away.


One Response to “Financial crisis exposes weakness of global institutions”

  1. gwaterg Says:

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