Economic meltdown: time to re-examine global governance systems?


The developing world, after undertaking hasty ‘trade liberalisations,’ facing social exclusion, economic inequality and declining skilled labour, managed sustainable growth. So the biggest question is how to have a balancing act between markets and governments?
By Dr Noor Fatima

The current global financial crisis has highlighted many challenges for international financial systems. Global economic governance, but how and for whom? The global capital system is not new and an effort of development is underway for the last five decades but did this ‘growth’ mantra provide any panacea? Does the global governance structure, steered by the global capital system bring any change in economic governance of developing countries? While at this hour of history when we witness increasing poverty, high inflation, food crises along with widened trade deficit, why is globalisation ignorant of global affairs?

The present melting down portrays a ripple effect across the globe and global banking systems. The crises which became more apparent in 2007 have exposed more pervasive weakness in global financial systems and implementation reforms. According to world economic outlook the epicentre of the financial meltdown is United States. The International Monetary Fund (IMF) also predicted that the world economy which grew by a 5 per cent last year will slow down to 3 per cent in current year.

There are several issues, as the subject of contention in this context, such as how the IFI relates to emerging market economies and other developing countries. On the one side the current economic crises has posed many governance challenges for the global financial system and on the other it has indicated that the world has now changed beyond all appreciation since the establishment of Bretten Woods. The Global meltdown has raised many questions on the flaws of the international monetary system and therefore has been a major discussion agenda of reformation of Bretton Woods in the G-20 financial summit on November 15, 2008 as Bretton Woods-2. Any debate on reformation of the BWI would have to consider the fact that the post World War 2 institutions were built for a world of just 50 states and now there are 200 states which need financial integration and regulations.

The negative outcome affected developing countries more, though they constitute more clientele of the IFIs and also they are the major source of them, but when it comes to voting power, the developing nations are on margins. The expansion or reducing the strength of this institution is not a critical issue rather the issue is how to improve their performance for reducing the risk. It need more focused and specialised policies how to prevent the crisis and to undertake the macro-economic surveillance for emerging economic and balance of payment assistance for the poor economies. Because there is a general acceptance of the proposition that the international financial system works as a lender of last resort but how effective is this role being played is the biggest question and whom does this system serve – debt ridden country, the system itself or the private multinational private industry? The policies of the IFI are designed in a way that developing countries should have ‘export oriented’, policies, reducing subsidies by turning a blind eye to similar subsidies in the rich world. Similarly, the privatisation measures also facilitate the capital of rich world to move freely in developing world particularly in the absence of sound manufacturing sector and ultimately left marginalised. This has attracted the greatest criticism because this led to an increase in poverty from IFI policies as Erik the Norwegian economist Reinert described that “No nation has ever taken the step from being poor to being wealthy by exporting raw materials in the absence of a domestic manufacturing sector.” No wonder that many assessment reports of these policies where countries like china and Malaysia have recorded more development and equitable distribution, then many other countries which have gone for such policies and registered high economic growth but with poor economic distribution.

One needs to be mindful that the ‘market economy’ tends to create an environment where the economy separates from social realities. But the point is that for the past two decades the world economy’s integration coincided with the free market economy which has spurred globalisation and presented the triumph of markets and there is actually a fuzzy relationship between the state and market. Why there is a policy imposition for developing government to lower tariffs, high taxes and open its economy to trade while another government continues to protect the domestic market from imports? Why do we need the World Trade Organisation (WTO)? Why do some governments allow multinational national companies to operate in their economies with few restrictions, while other governments attempt to regulate their activity? Each of these questions required to explain a specific economic policy, a choice made by a government sometime beyond the comprehensions of the cost they pay afterwards.

The developing world, after undertaking hasty ‘trade liberalisations,’ facing social exclusion, economic inequality and declining skilled labour, managed sustainable growth. So the biggest question is how to have a balancing act between markets and governments.

How and why have policies of these institutions come so far, in either an insensitive or ineffective way? Perhaps the answer lies in the governance structure. Bade Onimode, an African economist, by describing the original foundations of these institutions stated that “the purpose was the construction and maintenance of an international capitalist system in which multinational corporations can trade, invest and move capital without controls by national governments, and for the accumulation of private profits”. Turning from ideological foundation to reality, the question is not about the theoretical optimality of free trade given in a spectrum of competitive markets. But the question is about what policies are most appropriate in underdeveloped countries where government and market failure are both prevalent. Is there any alternative to an Anglo-Saxon brand of free market economy? In discussing the international financial system reform, we need to have a clear idea of what kind of reform of the global financial institution it should be. Particularly keeping in view the global as well regional economic crises, the governance issues related to Europe’s over representations in these institution, U.S veto power issue and effective representations of emerging economies. As quota formula is confusing which determined voting shares by virtue of that the US had the largest quota, the UK about half of that, with the USSR and following China. The IFI’s policies and reforms need to have relevance with the emerging challenges and there is a need to abandon the ‘small world’ view, as these institutions have indeed been very effective at securing economic strength for very few. Their influence over the world economy and their ties with commercial interests has also grown over time.

As the experience of the past 20 years have shown that poverty reduction and economic development impeded in poor countries; it is clear that the global economy needs to be urgently overhauled if poverty and inequality are ever to be resolved along with aiming it at global economic growth with swift policy responses. In the given global economic scenario the role of market and state require to be redefined considering the clarity that is neo-liberalism a force like gravity or an artificial construct? Or it is created as an ideological weapon only? The difference could not be made between “export orientation” and “trade liberalisation”, there has been confrontation often presented between the workings of a decentralised, competitive market economy and that of a centralised, fully planned system. The former was considered as an efficient economic system for developing countries. The reality often unveiled when marginalised poverty increased with the implementation of such policies by the developing world. Unless we talk about alternatives with humane situation we merely are playing the part of a doctor who diagnoses the sickness but prescribes no medicine.

http://jang.com.pk/thenews/dec2008-weekly/busrev-01-12-2008/p3.htm

 

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