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U-20: Will the Global Economy Resurface?

The
Group of 20 (G20) is making a big show of getting together to come to
grips with the global economic crisis. But here's the problem with the
upcoming 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 G20 conveys the impression
that they're more commanded by than in command of developments (In
addition to the seven wealthy industrial nations that belong to the G7,
the G20 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 G20 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 G20'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 G20 is recycling failed institutions: the
G20 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 Group of 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 G20 are
following Marx's maxim that history first repeats itself as tragedy,
then as farce.

Resurrecting the Fund

The most
problematic component of the G20 solution is its proposals for the
International Monetary Fund (IMF). The United States and the European
Union are seeking an increase in the capital of the IMF from $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 U.S.
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 global South, the rich countries are still
overrepresented on the Fund's decision-making executive board and
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 United States, 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
compensate 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 that the IMF now sees the merit of massive deficit spending
and that, like Richard Nixon, it can now say, "we are all Keynesians
now." Many critics do not agree. Eurodad, a non-governmental
organization that monitors IMF loans, says that 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 United States, 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 or not the Fund knows what it's doing. One
of the key factors discrediting the IMF has been its almost total
inability to anticipate the brewing financial crisis. In concluding the
2007 Article IV consultation with the United States, the IMF board stated
that "[t]he 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, but
despite its supposedly top-flight stable of economists, it has
drastically fallen short in its surveillance responsibilities.

However large
the resources the G20 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' famous saying: "The difficulty
lies not so much in developing new ideas as in escaping from old ones."
So, in Keynes' spirit, let's try to identify ways of abandoning old
ways of thinking.

First of all,
since legitimacy is a very scarce commodity at this point, the UN
secretary general and the UN General Assembly - rather than the G20 -
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 would be an
inclusive process like the Bretton Woods Conference, 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, like 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.


© 2021 Foreign Policy In Focus
Walden Bello

Walden Bello

Walden Bello is the co-founder and current senior analyst of the Bangkok-based Focus on the Global South and the International Adjunct Professor of Sociology at the State University of New York at Binghamton.  He received the Right Livelihood Award, also known as the Alternative Nobel Prize, in 2003, and was named Outstanding Public Scholar of the International Studies Association in 2008. His books include: "Counterrevolution: The Global Rise of the Far Right" (2019) and "Capitalism's Last Stand?: Deglobalization in the Age of Austerity" (2013).

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