[p2p-research] Fwd: worth reading

[Michel Bauwens]

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From: James Quilligan <jbquilligan at comcast.net>
Date: Wed, Dec 2, 2009 at 5:15 AM
Subject: worth reading

Retread required

By Alan Beattie

Published: November 30 2009 20:12 | Last updated: November 30 2009 20:12

[image: tyre factory workers]

Protesters dressed as sea turtles; teargas billowing through the streets;
the ignominious collapse of efforts to launch a new round of global trade
talks. It is 10 years since the World Trade Organisation meeting in Seattle
broke up in chaos.

The biennial conference of trade ministers that started on Monday in Geneva
is a much quieter affair. There have been some demonstrators – and a few
even smashed windows and torched cars over the weekend – but not the tens of
thousands in Seattle. The so-called Doha round of trade negotiations is so
deadlocked that it is not even on the formal agenda – the rough equivalent
of holding the 1919 Versailles conference without talking about the war.

Since Seattle, two global asset bubbles have popped, the world economy has
plunged twice into recession and trade has suffered its sharpest drop since
the Great Depression. Yet the multilateral organisations supposedly
governing the world economy, particularly the WTO and the International
Monetary Fund <http://www.ft.com/indepth/imf>, have barely changed and often
struggle to have an impact. Why has a global financial
crisis<http://www.ft.com/indepth/global-financial-crisis>not brought
forth a global response?

It was, after all, the crisis of the Depression and the second world war
that created the forerunner of the WTO along with the Bretton Woods
institutions: the IMF and the World Bank. Gordon Brown, the UK prime
minister who rarely sees a global governance initiative he does not like,
has called for a “new Bretton
Woods<http://www.ft.com/cms/s/0/2f9a96d2-9ae9-11dd-a653-000077b07658.html>”,
and the global rhetoric has certainly been in favour of more co-operation.
The previously low-key Group of 20 <http://www.ft.com/indepth/g20> leading
industrialised and developing economies has been elevated to great
prominence amid much talk of big emerging markets such as China and India
taking their rightful place at the table.

[image: Voting power versus economic reality]

But on actual policy, there has been little concrete change. The Doha round,
launched in 2001, has remained deadlocked for years, in spite of persistent
predictions by Mr Brown and others that it is on the point of breakthrough.
The IMF, though it has been given more money by its shareholder countries
and in theory asked to help correct global economic imbalances, is still
largely constrained to its core function of crisis lending to emerging
markets. It has had little impact on the debate over how to resolve the
imbalances, particularly those between the US and the big surplus countries
in Asia – a discussion that also remains at an impasse.

As Raghuram Rajan, former IMF chief economist, says: “The Fund essentially
has no leverage over any country not borrowing from it.” When important
decisions need to be taken, such as the co-ordinated interest rate cut in
October last year, they are taken through ad hoc conversations among central
banks or finance ministries.

What might close the gap between the rhetoric and reality? One widely touted
change is giving emerging economic powers their due say in the institutions.
But experts warn that that would not automatically mean more co-operation.
Ngaire Woods, director of Oxford University’s global economic governance
programme, says: “We may not be witnessing the dawn of a new era of
multilateralism [but] the last gasp of an old-fashioned concert of the great
powers.”

Exchange rate co-operation

Since the Bretton Woods system of fixed exchange rates collapsed in 1971,
some of the most high-profile attempts at global co-ordination have involved
trying to stabilise major currencies. But the mixed record of these ad hoc
efforts gives reluctant countries such as China
an excuse not to repeat them – suggesting that, for now, the Group of 20
leading nations will struggle to even try to match the role played by its
predecessors, the G5 and G7.

After the collapse of Bretton Woods, some European countries attempted to
manage their exchange rates against each other in the evocatively named
“currency snake”, which hardened into a more formal system of fixed values
and, eventually, the euro.

Otherwise, however, currencies swung against each other, sometimes wildly,
as the economic and monetary turmoil of the 1970s combined with high and
volatile oil prices to push exchange rates around.

The growing economic power of Japan, one of the first Asian export
powerhouses, raised concerns in the US about unfair currency valuations.

In the Plaza and Louvre accords of 1985 and 1987, the G5 (later G7) grouping
of governments agreed first to weaken the dollar then to stabilise it,
hoping to reduce the US current account imbalance, particularly against
Japan. But though the dollar did weaken, America’s trade deficit remained a
problem. Moreover, the exercise was blamed in Japan for helping create the
financial and property bubbles of the late 1980s, as monetary policy had to
be loosened to offset the effects of a rising yen.

Two decades later, some are pushing for the 1980s movie to be remade with
China taking the part of Japan and the G20 supplanting the G7. “Some
international co-operation would be helpful in ensuring that exchange rates
could play their role in rebalancing the world economy,” says Gerard Lyons,
chief economist at Standard Chartered bank.

But China seems recalcitrant. Wen Jiabao, premier, made it clear on Monday
that European attempts to press Beijing into letting the renminbi rise would
be no more effective than US efforts. “There is a perception in China that
the currency revaluations of the 1980s ended the Japanese economic miracle,”
says Mark Manger, an expert on political economy at the London School of
Economics, “so they are very reluctant to follow suit.”


Within the WTO, for example, which in theory is a one-country-one-vote
system, India and Brazil have already been accorded increasing de facto
influence in the Doha talks over the years, being included in a small inner
core of negotiators. But that has not facilitated rapid progress. The
pivotal moment was the Cancún ministerial conference in 2003, when
developing countries showed their willingness for the meeting to collapse
when they felt ignored. Subsequently, Kamal Nath, then Indian trade
minister, played a leading role in insisting that the US should change its
demands, which led to the stand-off.

Pradeep Mehta of the Consumer Unity & Trust Society, a Jaipur-based research
and campaigning organisation, says: “Things changed a lot after Cancún. I
don’t think India would have taken this stand 10 years ago.” He adds that
engagement has become more constructive: “Indian thinking has changed to the
belief that we are a responsible power and should not take the traditional
Indian oppositionist stance.” But others, particularly the US, blame Indian
intransigence – with occasional support from China – for preventing a deal
in Doha and hence driving trade negotiations down bilateral and regional
routes.

The IMF is going through its own agonies about legitimacy. For years it has
been locked in a fiercely complex debate about giving emerging market
countries more voting power on the Fund’s executive board, a move resisted
by European countries whose overweighting reflects their affluence when the
IMF was created in 1944.

IMF shareholders have finally ag­reed a shift in that direction, though not
a dramatic one – and it still allows the US a veto on important decisions.
Yet, as with the WTO, more representation will not necessarily lead to a
more active role for the Fund. Mr Rajan says: “The [voting] quota issue has
become an excuse for not addressing more fundamental problems.”

T  he IMF’s difficulties in fulfilling its wider mandate of reducing global
imbalances illustrate one of the main problems with many global
institutions. One of their functions is to bind members into a co-operative
outcome, avoiding the “prisoner’s dilemma” where each country shrinks from
taking a co-operative action lest it be let down by others. In the case of
reducing global imbalances, an obvious deal would be for China to allow its
exchange rate to appreciate, thus reducing its trade surplus and consuming
more, while the US increases exports and raises its savings rate through
fiscal and consumer retrenchment, lowering its deficit.

But Mr Rajan notes that Beijing simply does not agree that its exchange rate
policy is a prime cause of imbalances, still less a contributor to the
global financial crisis. Beijing points instead at the flood of cheap money
created by the US, which it says inflated consumer demand and asset bubbles.
“Their attitude is: ‘Don’t blame us for this’,” he says.

The IMF does not therefore face a co-ordination problem so much as a
difference of opinion between two of its most powerful shareholders. Aside
from issuing reports on exchange rates and macroeconomic imbalances, which
in itself has created tensions between China and the US within the fund,
there is not much it can do.

Another main function of international organisations is to affect the
domestic debate in their signatory countries. “We can’t raise tariffs
because we are WTO members” is an easier argument to make than “we can’t
raise tariffs because it is a bad idea”. Indeed, IMF staff are well used to
being deployed as a defensive shield by beleaguered finance ministers in
borrower countries who want to implement politically unpopular tax increases
or spending cuts and find it easier to appeal to force majeure in the form
of the conditions the Fund attaches to lending.

But for this to work, countries have to feel they are getting enough back
from the organisation to adhere to its rules. Without a mechanism for
enforcing standards, attempting to conjure up such credibility is not easy.
Among the few concrete decisions at the first big G20 meeting in Washington
in November 2008, for ex­ample, was a promise not to undertake protectionist
actions. It lasted all of 36 hours before Russia – unused to rules on trade
and investment, not being a WTO
member<http://www.ft.com/cms/s/db1d68e2-738c-11dd-8a66-0000779fd18c.html>–
broke it by raising car tariffs, promptly followed by most of the rest
of
the G20.

True, existing rules are holding up fairly well: most of those protectionist
actions, including President Barack Obama’s controversial decision to
increase tariffs on Chinese
tyres<http://www.ft.com/cms/s/b5068b0e-a151-11de-a88d-00144feabdc0.html>,
appear to be within current WTO laws, created 15 or more years ago. But
there appears precious little appetite for writing new ones.

So what could rescue multilateralism? Some experts suggest a reshuffling of
responsibilities. Arvind Subramanian from the Peterson Institute in
Washington and Aaditya Mattoo from the World Bank caused a stir last year
with a proposal<http://www.petersoninstitute.org/publications/interstitial.cfm?ResearchID=871>for
the WTO to address currency undervaluation and aspects of climate
change
as well as trade – a suggestion that caused some sharply raised eyebrows in
Geneva.

But an exercise in loading more tasks on to burdened and deadlocked
institutions has gained few supporters. Several other experts point to a
less dramatic, more piecemeal solution: for leading countries to work out
what they agree on and spend some time and political capital convincing
their domestic audience before pushing it through any global grouping.

Razeen Sally of the European Centre for International Political Economy, a
Brussels think-tank, says: “Multilateralism in its pure form of large group
co-operation is, and has always been, a fiction.” The Bretton Woods
institutions, for example, were largely created by the UK and US. The WTO’s
predecessor, the General Agreement on Tariffs and Trade, was in effect run
by a clique of dominant economies. It will require a small group of
governments – probably smaller than the G20, though including the likes of
India and China – to get global economic co-operation to work. “We need
minilateralism, not multilateralism,” Prof Sally says.

But the first priority is for such governments to take the domestic actions
required to contribute to a more harmonious global economy. Prof Sally says
Beijing, for example, will float its exchange rate only once it has achieved
the domestic economic structural reform that will enable its financial and
corporate sectors to absorb the shock. Many WTO members say a necessary
precondition for a deal in Doha is that the White House convinces US farmers
and manufacturers to moderate their demands for more access to markets
abroad.

Pascal Lamy, director-general of the WTO, said in a recent speech that the
three elements necessary for the functioning of global governance –
institutional machinery, political will and a clearly defined common project
– would not be enough without sustained long-term commitment from individual
governments. “Global legitimacy requires long-term care and attention,” he
noted. “Coherence starts at home.”

Copyright <http://www.ft.com/servicestools/help/copyright> The Financial
Times Limited 2009. You may share using our article tools. Please don't cut
articles from FT.com and redistribute by email or post to the web.



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