The heavy hitters of national and global economic policy will gather in Washington, DC this weekend for their annual shindig organized by the International Monetary Fund (IMF) and the World Bank. They will have a lot to talk about at these meetings. The global financial system is in its worst crisis in the past 75 years. There are no prizes for guessing what topic will dominate the proceedings.
India now has a huge opportunity to muscle its way into the inner circle, that is currently controlled by the US and Europe. The winners of World War II have dominated the global institutions that emerged from the wreckage of that conflagration. This is especially true of IMF and the World Bank. It is scandalous: The former is always run by a European and the latter by an American, an outdated arrangement when the contours of global influence are being redrawn by the rise of India and China.
But more than raw economic power, the West has also had a subtle psychological advantage. It usually set the benchmarks for good economic and financial policy; the rest of the world struggled to emulate them, especially after the collapse of communism gave final proof of the superiority of market economics. The current financial crisis in the US and Europe allows us to question this assumption. There is still a lot to learn from the way rich countries handle their economic affairs, but now Asia and Latin America can offer a few lessons of their own.
I have been reading the speeches made by IMF heavyweights during the Fund-Bank meeting held in October 1998. The big threats to the global economy at the time came from Asia and Russia. Both were in deep trouble. The undertone in the speeches made by global financial worthies at the time was downright patronizing, full of advice on how crisis-ridden countries should learn to manage their affairs better. And this was not restricted to core issues such as deficits or banking regulation. There was also a lot of guidance of broad governance issues, such as breaking “the close links between business and governments” (according to a January 1999 fact sheet published by IMF on its response to the Asian crisis).
At around the same time, the Group of Seven (G-7) club of rich countries took the lead in setting up what is now the Financial Stability Forum. Finance ministers and central bankers from the G-7 asked German Bundesbank president Hans Tietmeyer in October 1998 to help them create a new forum to keep the ship of global finance on an even keel. Tietmeyer’s initial report spoke of a global problem that needed global coordination, but there were no doubts about who would be in charge. “The forum should be limited in size that permits an effective exchange of views and the achievement of action-oriented results within a reasonable time frame,” wrote Tietmeyer.
To be fair to him, the suggestion for a small group does make sense. The response to financial crises should be swift, if the mistakes made by Japan in the 1990s are to be avoided. Smaller groups are more likely to come to swift decisions, so the question really is who should sit at the table, rather than how many. Tietmeyer had also said: “Participation could over time be extended to include representatives from a small number of additional (i.e., non-G-7) national authorities that could contribute substantially to the process, or to invite them to attend meetings as guests.”
The latter has been done, though the bigger task of getting a few influential non-G-7 members on board remains unfinished. The ongoing financial crisis in the West is thus a strategic opportunity for countries such as India to demand a greater say in the way the global financial system is run. The Wall Street Journal reported this week that World Bank president Robert Zoellick has called for a new steering committee to guide the global economy. “In addition to the G-7 nations, the group would include Brazil, Russia, India, China, South Africa and Saudi Arabia. The group would meet frequently on the G-7 model and come up with proposals to promote multilateralism,” says the report.
The Indian government should seize these opportunities. But it should also realize that a place at the high table also imposes certain responsibilities. The type of grandstanding that commerce minister Kamal Nath revels in at the World Trade Organization talks is very damaging when it comes to helping maintain financial stability, where time is of the essence. The Doha Round can stumble along for years; a financial crisis can wreck the economy in a matter of months and thus needs a quick response.
Time magazine had famously put three Americans — Alan Greenspan, Robert Rubin and Lawrence Summers — on the cover of its 15 February 1999 issue, and evocatively called them “The Committee to Save the World.” The world may need a new committee very soon, in case the financial crisis deepens. It would not be a bad idea to have an Indian or a Chinese on it.
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