Brazil, China and India have little in common apart from opposition to Western control of global financial institutions.
8:06PM BST 29 Mar 2012
Traditionally, the job of head of the World Bank always goes to an American, while that of the International Monetary Fund is invariably filled by a European, usually a French national. For much of the post-war period, this was a reasonable trade-off, reflecting the prevailing balance of geopolitical and economic power in the Western world.
Asia and the Soviet Union didn’t count, as these were largely closed economies of limited or marginal significance for world trade. It was only right and proper that governance of the global monetary system should be directed by its two dominant economic blocs.
But then China, followed quickly by India and Russia, adopted free-market reforms and joined the global economy. The world changed. Admittedly, both the IMF and the World Bank have changed a bit with it, but they have yet fully to reflect the shift that has occurred. Both the US and Europe are reluctant to relinquish their grip on these institutions.
The ignominious fall of Dominique Strauss-Kahn provided an opportunity to break with the past, but instead the IMF opted for the easy choice of another French national. Saving the euro, it was thought, was more important than pandering to the new kids on the block. Only a Eurocrat would do. Who knows what view someone from the developing world might have taken of this monetary “folie de grandeur”?
More recently, Barack Obama has insisted he’s not about to relinquish his “right” to appoint the next president of the World Bank either. As a sop to the developing world, he has at least gone for someone with an Asian-sounding name, Dr Jim Yong Kim. But let’s not be flippant. Kim may be a first-generation Korean immigrant, yet in most other respects he’s an all-American boy. Ultimately, he’ll dance to his master’s tune.
As a result of all this, and for the first time since joining the world economy, the Brics nations – Brazil, Russia, India, China, South Africa and their hangers-on – are in open rebellion. At a summit in Delhi yesterday, they determined in frustration to set up their own development bank, with an eventual view to creating an alternative to the IMF and lessening their dependence on the dollar as a reserve currency.
They want their own institutions and their own voice. But how serious is this challenge to Western monetary hegemony?
Outside endemic corruption, uncertain or wholly absent rule of law, and relatively low per capita income and life expectancy, there wouldn’t appear to be much that unites this disparate collection of nations. But there are at least two things that do – high growth and trade.
Ever more effectively, these countries trade with each other, and not with us. I don’t want to exaggerate. Some 70 per cent of Chinese exports still went to advanced economies in 2010. But that share has fallen from 85 per cent little more than 10 years ago, and with other developing economies, the phenomenon is more marked still. Brazil has seen its advanced economy share fall from around 60 per cent to little more than 40, India from 65 to 45 per cent, and Korea from 65 to 40 per cent. China, with its immense appetite for imported natural resources, has been particularly aggressive in developing these new trade links, with a series of infrastructure-for-commodities swap deals in Africa and Latin America.
Emerging markets seem fast to be developing their own, decoupled dynamic. The financial crisis has accelerated the divergence. In the past, a recession in the West would be felt twice as badly in the developing world, with its high dependence on exports of commodities and basic manufactured goods to the richer economies. But this time around, while the West has stagnated, output in the emerging economies has grown by more than a fifth and now accounts for more than 40 per cent of world GDP.
The reversal in fortunes could scarcely be more dramatic. The two worlds seem to be changing places, with the West characterised by high levels of debt, unaffordable welfare and entitlement systems, poor training, decaying infrastructure, and a general air of despondency and decline. Its steady loss of competitiveness has been matched by a growing swagger and confidence in the East. Unsaddled by the gilded expectations of most Western populations, the outlook for many emerging economies seems bright.
Yet none of this justifies the establishment of a separate monetary system. I’ve watched these meetings of Brics nations in action and I have to say they are not at all impressive. There is very little sense of common purpose and identity.
Indeed, they make the European Union look like a paragon of calm and harmony. By day, they talk grandly of multilateral action to tip the playing field in favour of poorer nations, while by night they scheme shamelessly against each other, often in conjunction with their supposed economic oppressors in the West. There is virtually nothing that unites them other than resentment and suspicion of Western monopoly, some of it justified, some of it not.
I wish them well with their new development bank, but when it comes to where the next dam is to be built, and who’s going to build it, that’s when the sparks will fly.
The US’s “exorbitant privilege” – dollar hegemony – is surely reaching the end of its natural life, yet the future cannot lie with two separate systems, one Western and one Eastern. A global economy requires global governance and global institutions. The solution lies in reform of the existing system, not the establishment of a rival one.