“The nation-state … is being squeezed on the one side by the forces of global economics and on the other side by political demands for a more democratic distribution of power reflecting global economic and political power shifts. There are too many problems — trade, capital, the environment — that can be dealt with only at a global level. Economic globalization has outpaced political globalization. We have a chaotic uncoordinated system of global governance without global government. There is a clear need for strong international institutions to deal with the challenges posed by economic globalization.”
Thus, Nobel economist Joseph Stiglitz opened a panel discussion on “Global Imbalances, Power Shifts and the Future of Multilateralism.” The conference, sponsored by the Center for Economic and Policy Research (CEPR), was held in Washington, D.C., April 12.
‘Consensus of bankers’
Stiglitz is known as a critic of the “Washington consensus,” a concept and name which summarizes the main economic and trade policies agreed to by the International Monetary Fund, World Bank and U.S. Treasury Department since the collapse of the USSR. This “consensus of bankers” led the IMF to force harsh economic programs on developing countries in exchange for meager foreign loans. These programs were predicated on protecting the lenders’ short-term interests rather than actually promoting growth that would help the countries involved.
Suppressing inflation became the “consensus” standard of credit-worthiness. This was characterized by vast — often fraudulent — privatizations of public assets, handing them to foreign investors and corrupt officials. These policies have ruined some nations and have yielded little growth in others. Contrary to the “consensus,” in every successful country public spending has been essential to growth. Even though some inflation has resulted, people have jobs. IMF policy “fixes” recession by raising taxes and cutting spending. As economic theory predicts, the results have not been recovery but depression and collapse.
The 1998 Asian financial crisis began the crisis in the “consensus.” The cycle of rapid growth in Asia was brought to a screeching halt by minor business failures that induced a panic. Billions of invested dollars were withdrawn in days. Since few Asian nations had sufficient dollars in reserve, several went bankrupt. Some descended into chaos. The shockwave to the real economy soon moved around the world. One of the largest U.S. hedge funds collapsed. Argentina collapsed too.
In the ensuing decade, Asian countries drew a lesson, now also being learned in Latin America: “We have to become self-insured. The world financial institutions cannot protect us.” So every country that could do so started hoarding dollars via trade or oil deals.
Now trillions of dollars are held as reserve assets by Asian and some Latin American economies. The U.S. is borrowing $850 billion a year to cover the imbalance. In the developing countries, investment should flow from rich to poor countries for broad development, but the reverse is happening. In a “normal” trade relationship these dollars would be spent buying U.S. goods and services. But the threat of huge, unregulated capital flows and the absence of a global reserve make the imbalance inevitable.
What to do
Jose Antonio Ocampo, UN under-secretary-general for economic and social affairs, and Mark Weisbrot of CEPR discussed the way forward. Campo said that only democratic reforms of international economic institutions that fully reflect the real power shift toward the developing world can bring both growth and equity. Weisbrot voiced doubt that global institutions like the IMF can be reformed, and predicted emerging nations will simply bypass the IMF and establish their own regional reserves.
All panelists agreed the failure of the IMF to take the interests of developing countries into account can only be corrected by the U.S. and the European Union yielding their domination. In addition, lawlessness, fraud and violations of trade agreements, including the International Labor Organization’s labor standards, require international courts capable of making enforceable judgments. And all these efforts must be coordinated with environmental reforms.
Something’s got to give
“Things will go through a disorderly unwinding of the imbalances,” Stiglitz closed, “with vast implications for the real global economy, dire threats to peace and the greater risk of an unlivable world. What is the source of the problem? The absence of a global reserve and global, democratic institutions to manage and enforce balanced growth. If we take that road — another world is possible, but it will likely take another great panic and crisis to bring it into being.”