Strengthening global economic governance

(pages 45-48 of printed journal)

By John Langmore and Shaun Fitzgerald

Global democratic deficit

The evolution of international economic and social institutions lags well behind the deepening of global interdependence. Interest in reducing the global democratic deficit and improving the political effectiveness of international economic, financial and social institutions has not kept pace with globalisation. Global economic forums are still too exclusive, unbalanced, slow, unaccountable or weak to enable formation of policies which facilitate improving the wellbeing of most people with maximum effectiveness. The upgrading of the G20 to be the major international meeting for national leaders of large, economically influential countries on economic and financial issues is a substantial step forward. But the G20 is self-selected, exclusive, has a static membership, and lacks an independent secretariat. It is therefore only a step towards a more equitable and effective body. Other existing forums have even more serious inadequacies, so further reform and innovation is imperative.

Just as a rule-based international system is vital for peace, so is it for economic and social development, but a necessary condition is that the rules be equitable. A brief look at existing global economic forums reveals severe imbalances - most developing, some developed and most transitional countries are under-represented in the global economic and financial institutions. The people of the developing countries account for over 85 per cent of the world's population yet decision-making on key global economic issues remains concentrated in the major industrial countries.

The UN Economic and Social Council (ECOSOC)

With the establishment of a new world order in 1945, ECOSOC was designed to be the principal international forum dealing, amongst other subjects, with global economic coordination. With every state privy to the Council's dealings, it is also the existing inter-governmental body with the greatest potential to link the isolating 'silos' into which international economic, financial, trade, social and environmental organisations have tended to settle.

Yet, no one would claim that it is close to fulfilling its functions adequately. With 54 members, it is too large to be swiftly decisive. Its principal session is held once a year during July and in the past has not adequately addressed global crises. The world's major economies are only rarely engaged with its activities at senior levels. And it has few powers and no resources with which to implement its decisions.

The effectiveness of ECOSOC has been improved in recent years through inaugurating meetings twice a year with the heads of the International Monetary Fund, World Bank, World Trade Organisation and United Nations Conference on Trade and Development; by having more short meetings on high priority issues during the year; and through improvements in procedures and preparation. These reforms could be further strengthened through the establishment of an ECOSOC executive committee with quick response capability, instituting sessions on macroeconomic cooperation, regularly reviewing the provision of finance for development, and by inviting other institutions of economic governance to contribute to sessions.

The International Monetary Fund and World Bank

Established contemporaneously with ECOSOC, the problems with the IMF and World Bank - the Bretton Woods Institutions (BWIs) - have been well documented. The governance of both institutions suffers from a lack of inclusiveness - voting power grossly favours Western nations, especially Europe and America. The top 20 nations account for 71.2 per cent of IMF votes, leaving the remaining 166 nations with 28.8 per cent of voting power¹. The lenders are the principal shareholders and the borrowers provide the income. This imbalance marginalises the voices of large and smaller developing nations. This difficulty is further exacerbated by the unfair majority rules effectively requiring the affirmative vote of the US for major decisions.

The process of electing CEOs is contrary to modern democratic thought. The Managing Director of the IMF has been appointed by a small group of European countries in consultation with the US, and the President of the World Bank has been an American. Without the participation of the broader global community in an election of these leaders, the BWIs will continue to be viewed as largely transatlantic institutions.

Many IMF and World Bank policies and procedures are not disclosed to the wider public. The current system of national representation entrenches inequity: while large developed countries have their own executive directors, other executive directors represent as many as twenty-three diverse nations. Ngaire Woods writes that 'participants from smaller countries (feel) that there is no role for their authorities in actively contributing to the formulation of their constituency position.' The dominance of developed economies has had three notable results on the implementation of BWI programs in developing nations. BWI policies have been preoccupied with controlling inflation, which has biased policy towards macro-economic contraction. Policy has sometimes been further undermined by politically motivated loan decisions, whereby donor nations' foreign policy preferences have been injected into loan decisions. Additionally, intrusive conditions attached to loans infringe unjustly on national sovereignty and subvert national democratic processes. Developing country concerns have been increased by the enhanced role given to the IMF by the G20 in response to the Global Financial Crisis.

The Organisation for Economic Cooperation and Development (OECD)

Founded in 1961, the OECD is an exclusive body with a membership of 31 largely European and North American governments, although Turkey, South Korea, Mexico and Chile have recently joined. The organisation has gained a strong reputation for high quality technical work and reports. Yet, its once influential position in international policymaking has been eroded as its membership has failed to take account of international economic changes. Many people see the OECD as little more than a nebulous group of wealthy countries. This legitimacy issue is further complicated by the OECD's slow progress on key reform issues, such as its incapacity to introduce multilateral foreign investment or tax cooperation regimes. So, despite the OECD's high quality analytical work, its exclusive membership and policy inertia stymies its ability to lead global economic governance.

From the G8 to the G20

Formed in 1975, the Group of 7 (or G8 following Russia's 1997 entry), is an informal annual meeting of powerful economies that has broadened in both scope of agenda and attendees in recent years. While the heads of government of these developed nations (Canada, France, Germany, Italy, Japan, Russia, the UK and the US) were able to meet relatively exclusively for much of their existence, the increasing economic power of large developing countries and the growth of global interdependence has resulted in a decline of G8 nations' relative prestige and their ability to steer the world economy. Lacking the formal input of developing nations (including China, India and Brazil), the G8 was obsolete. As Lord Mandelson has noted, 'however long it may persist as a grouping, as a steering committee for the global economy, the era of the G8 is over.'

The Group of 20 was formed in 1999 as a broader forum of powerful economies, with finance ministers and central bank governors from 19 countries. It also includes the CEOs of the BWIs. Its purpose is to promote international financial and economic stability and to address the challenges posed by increasing globalisation. At the September 2009 Pittsburgh Summit, the G20 was accepted as the pre-eminent international economic body, superseding the smaller, more exclusive groupings already mentioned - yet also diminishing the influence of groups with wider constituencies (i.e. the UN system agencies including the BWIs). The G20 includes in its membership emerging economies such as Argentina, Brazil, China, India, Indonesia, Mexico, South Africa, Saudi Arabia, and Turkey, as well as the powerful G8 nations, and Australia and South Korea. An excited Financial Times editorial said that it 'includes everyone who matters.' The grouping accounts for 85 per cent of global GDP, 80 per cent of international trade and two thirds of the world's people. The members encompass a wide range of incomes and approaches to economics. Certainly, when compared to its immediate predecessor (the G8), the G20 has a notable diversity and scope that has been widely applauded by politicians and commentators alike.

The elevation of the G20 to the level of heads of government in November 2008 has afforded greater prominence to issues faced by developing country. With the inclusion of nations as diverse as India, Mexico and Saudi Arabia in the international economic dialogue, the G20 is better positioned to take account of the concerns of the global South. This agenda expansion is a legitimising factor for the G20.

The G20 has also made progress on certain economic reforms that had failed to lift-off in the G8 or OECD. Work on tax havens and transparency came through the G20 after a combined German/Australian initiative because the other groups were fundamentally incapable of breaking deadlocks. Recent G20 meetings have resulted in agreements to modestly increase developing country votes in the BWIs.

The membership of the G20 remains a problem. Members were apparently selected by the US with some consultation with Canada and Germany, a secretive and undemocratic process. This method of appointment marks the G20 with a democratic deficit. Additionally, there is no open provision for change over time. Indeed, Joe Stiglitz has emphasised that the composition of the G20 'does not reflect the voice and priorities of the global community.' The interests of medium and smaller developing nations, especially low income economies, are not represented in the group's current make-up. The Heavily Indebted Poor Countries group has 'deplored' the fact that no poor country is represented at the G20 and urges this to be 'remedied'. The exclusion of 172 nations from discussion about critical issues of economic and financial governance corrodes G20 legitimacy.

The membership of the G20 may be evolving as a result of national pressure: prime ministers from Spain and the Netherlands attended recent meetings, as have leaders of regional and international organisations as observers. Developing country membership of the G20 has divided the developing countries and is perceived by some as undermining the UN's work in the area, though the effects are still being assessed. Singapore has convened a group of about 30 developing countries to discuss how to react to the G20 and how to improve cooperative activity between the G20 and the UN.

Further questions have been raised regarding G8 dominance within the G20, with the organisation effectively functioning as the G8 + 12. So far, the G20 has served principally as a vehicle for mobilising support for G8 initiatives. Leonardo Martinez-Diaz, an authoritative Brookings Institute researcher, writes that 'the G8's position was reflected in G20 communiqués twice as frequently as the Group of 24 developing nations' [position]. The victories the G8 appear to have won at the G20 are not only more numerous, they have been of much greater consequence than those of the G24.' Concern has been expressed not only by developing countries but also by certain European nations about the extent of US and UK dictation of the G20 agenda. Unlike many international groupings, the G20 does not have a dedicated secretariat. Responsibility for the agenda and direction of the meeting lies with host nations.

These structural weaknesses in the G20 contribute to the questionable nature of some of its decisions. For example, Stiglitz has criticised their decision to give the big banks - those deemed 'too big to fail' - carte blanche to continue with the kinds of activities that led to the recent financial crisis. The G20 has so far failed to address the systemic causes of the crisis. The reliance of the grouping on the IMF to carry out its financial decisions is additionally fraught with difficulty, given the Fund's own issues of representational and intellectual asymmetry.

It is clear that the emergence of the G20 as the pre-eminent international economic body is a step forward due to its enhanced membership, and the accompanying potential broader scope. Enthusiasm about this should be tempered, however, as the static, unelected nature of the grouping diminishes its authority, and the lack of legitimacy further negates the potential of the G20 to ease the democratic deficit in global economic governance.

Where to now?

A gap continues to exist in the structure of international economic institutions through the absence of a representative, accountable, politically legitimate forum for discussion of the principal issues of global political economy. The Report of the Commission of Experts for the 2009 UN Conference on the World Financial and Economic Crisis called for the creation of a Global Economic Coordination Council to 'address areas of concern in the functioning of the global economy in a comprehensive and sustainable way.'

Establishment of a permanent global council within the structure of the UN might involve changing the Charter - a difficult task. A step which is immediately possible would be for the G20 leaders, who normally attend the beginning of the General Assembly's annual session each September, to hold a summit meeting in New York before the Assembly starts. An obvious further step would be to hold elections for the G20. The size of this summit could be minimised if there were two stage elections, first of regional representatives and then of summit members. Establishment of a secretariat within the UN would further increase effectiveness. 

The principal value of such a summit could be in its articulation of goals, priorities and policies for the international system, in something of the same way as was achieved in the Millennium Declaration agreed at the UN Millennium Assembly. That Declaration and the Millennium Development Goals derived from it are contributing to greater coherence of action by international agencies and countries. Ultimately, such a meeting could emerge as a more legitimate and politically effective forum for global discussion and strategic decision-making than the static G20. As the world moves toward recovery following the Global Financial Crisis, it is imperative to strengthen institutions of global governance to facilitate the wellbeing of all people, everywhere.

¹ Just over five per cent of votes are basic votes distributed in equal numbers to all IMF member states and the rest are based on quotas which are set through a complicated formula based partly on GDP. Despite the apparent precision of the formula, disagreements continue because of differences over measurement of the factors in the formula and failure to use them comprehensively and to update quotas when factors change.

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