The leaders of major countries are in agreement on the need to respond quickly and cohesively to the current global economic crisis. But while developed nations are experiencing tremendous slowdowns, emerging market countries are still expected to achieve gross domestic product (GDP) growth rates of 2.5 percent to 3 percent, on average.
In this global downturn, can emerging market economies can be the locomotives of the world’s marketplace?
Perhaps. But only if the global community substantially changes the current organizational structure of the global economic order to allow these new and dynamic economies to assume greater responsibilities commensurate with their greater roles.
Today, there are only three major multilateral Bretton Woods institutions still in existence: the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO). This is not enough.
In 1944, these organizations were created as multilateral bodies, bringing together the biggest economies of the time. But, with the birth of emerging markets, the economy is now global. New rules and practices are needed. The global marketplace needs new global ratings agencies, global crisis monitors, and monetary and financial instruments for global regulators.
Political and business leaders have attempted to determine which individuals and authorities should be held accountable for not ringing the alarms at the first hint of the current financial crisis. Some point to the IMF—but it is only a fund, not a ratings group, and certainly not a crisis monitoring agency.
Indeed, the fragmentation of existing institutions underscores the need for a new architecture in the global economic order. The functions of future agencies must be based on an understanding of how crucial cooperation is to the stability of the global marketplace—enhanced cooperation between companies, national governments and multilateral institutions is increasingly essential in our interconnected world.
The era of romantic capitalism is over. The role of government is increasing to fill the void in regulation, monitoring, and crisis prevention. This need was apparent during the Asian crisis of 1997. Because governments weren’t involved in regulation, monitoring, or prevention, regional fiscal crises blossomed into the very first global economic disaster. The crisis spread through Eastern Europe and Russia, finally ending in 2001 in Brazil and Argentina. Governments, then in the grip of an idealized view of free-market self-regulation, were afraid to intervene.
In our current mess, governments tried to prevent the spread of the market crisis by intervening to provide liquidity and enforce restrictive measures. Nonetheless, despite the urgent need for new global agencies, the last G-20 meeting was notable for a lack of concrete proposals from global leaders.
Two new multilateral agencies are essential.
First, the global marketplace needs a rating agency that can handle rating and classifying both national markets and the most influential private companies. For example, the IMF and the United Nations use the terms “developing,” “emerging,” and “under-developed” almost as synonyms—but each term actually reflects a different market, with widely varied levels of economic maturity. And countries within each of these categories are surely not homogeneous; they require greater specificity in classification.
Second, the world needs a multilateral watchdog agency to perform one critical function: to recognize the earliest signals of an upcoming crisis and warn businesses and governments. When everyone is responsible for this task, it falls to no one in particular.
Existing multilateral institutions, first and foremost the IMF, are desperately outdated given the scope and complexity of the new global economy. Indeed, the IMF rarely works with the private sector, and its record of giving loans to governments that perform poorly has been a disaster. Bureaucrats have often stolen substantial portions of the loans, leaving generations of citizens in those countries to repay their graft. Worse, as deficits accrue, the IMF refuses to accept responsibility for the poor oversight and questionable loans that were initially granted.
The World Bank, for its part, does work with the private sector but—like all of the existing multilateral institutions—not particularly well. It has not learned from past global crises or taken steps to correct the current disaster.
In the triangle of private business, national governments, and multilaterals, there must be a clear division of responsibility. In the paradoxically fragmented and interconnected global marketplace, this doesn’t currently exist.
It is essential that a new architecture for major institutions of the global marketplace is considered at the upcoming G-20 meeting in London. Indeed, the G-8 nations cannot handle this alone, or take regulatory steps within a bubble: the increasing role and responsibility of the emerging market countries are required.
The last G-20 meeting included leaders from both developed and the emerging markets such as China, India, Brazil, Russia, Indonesia, Turkey, Argentina, Mexico, Korea, and South Africa. But perhaps they should have invited the leaders of Egypt, Pakistan, Nigeria, Kazakhstan, and Ukraine.
It’s time for a G-25—only by revamping the Bretton Woods global order can we fix this global economic crisis and head off future challenges before they start.
****
****
Economist and strategist Vladimir Kvint, a member of the Bretton Woods committee, is the author of The Global Emerging Market: Strategic Management and Economics, published by Routledge in 2009.