Don't Expect Miracles From the G20 Summit
- By Martin Gilman
- Nov. 12 2008 00:00
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This is not to suggest that urgent and consistent policy actions are not needed as the world faces the gravest threat to economic stability in more than a half a century.
What began as a limited problem in the U.S. subprime mortgage market has spread through all classes of assets, creating a flight from risk to the perceived safety of a few types of U.S. and Japanese securities. In the process, historic banks have failed, countries as diverse as Iceland, Belarus, Hungary, Pakistan and Ukraine have turned to the IMF for support, and many Western economies are plunging into recession. The downside of globalization is that markets and investors are wired in real time. The contagion cannot be contained.
In these circumstances, it is understandable that some European leaders have suggested that this weekend's meeting be called a Bretton Woods II -- evoking the meeting in July 1944 in the town of Bretton Woods, New Hampshire, where 44 countries, initially including a Soviet delegation, agreed to a new international monetary architecture designed to prevent a reoccurrence of the vicious protectionist and mercantilist policies pursued by most countries in the aftermath of the Great Depression.
This will not be a Bretton Woods. Although the economic challenges are significant, few would contend that we face a 1930s-style depression or the dangers of a 21st-century equivalent of World War II. Moreover, the meeting in 1944 was meticulously prepared well in advance. Instead, the G20 meeting smacks of expediency and is likely to result in little more than a photo opportunity.
Nevertheless, even if just another mundane summit, Medvedev's presence is important because he has suggested some interesting and pragmatic initiatives stemming from his conviction that the multipolar world of the 21st century requires a more balanced, less dollar-centered financial system. One aspect of his concept of the future is that the ruble could become, along with others, an international reserve currency. Medvedev has also stressed the importance of developing strong capital markets, including in Russia. Had the Russian market been bigger and deeper, perhaps the country's banks and other companies would not have felt compelled to borrow offshore in dollars for medium-term finance in the run-up to the current financial crisis.
And unlike most of the other G20 members, Russia is a large creditor country. With the third-largest foreign exchange reserves in the world, the country has a natural role in any discussion of the reform of the global monetary system. Since those claims on the rest of the world could be at risk, Medvedev is right to stress the importance of legitimacy and effectiveness of the international financial institutions as the repositories of international cooperation in finding a path out of the current crisis.
Meanwhile, European Union leaders on Friday called for the summit to agree on a swift timetable for decisions to cope with the financial meltdown. The Europeans hope that there will be an agreement to consider concrete measures to strengthen the financial system at a second international meeting. Reform of the IMF emerged as a central preoccupation among European leaders, even though there was not yet a consensus about how far the remodeling of the fund should go.
But their debate about the IMF is too narrow. They argue about whether it should be the central bank of central banks, tantamount to a large stabilization fund, or an agency that would warn nations if their approach was threatening international stability. They seem to agree that the fund should become the "pivot of a renewed international system," but the critical details are contentious and do not even attempt to take into account the other members.
The Washington meeting would be an appropriate forum to start putting things in place for a monetary order more consistent with the needs of the 21st century rather than the relic that preserves the priorities of last century's creditors, which have now become the world's largest debtor countries. Medvedev should play a key role in insisting on a reordering.
And it would be appropriate to focus on reform of the IMF as a key step. But there are three deficiencies that concern Russia and others -- the lack of experienced staff, money and legitimacy.
In recent years, the appropriate analogy for the IMF was a fire station with almost no fires anymore. Its income model, dependent on the number and size of the fires, was at risk. Taking its own medicine, the IMF went through a wrenching downsizing. The departures were high among those senior and midlevel staff with experience in "program" countries -- the very people that the global fund desperately needs now.
The IMF also has a very limited pot of money -- about $250 billion -- relative to the size of the problems faced by its members. Short of a major increase in quotas or shares, the fund will need to turn to creditor countries such as China, Japan, Russia and Saudi Arabia to obtain parallel financing for countries in need. But that leads to the problem of legitimacy.
The core of the problem is the political issue of who controls the IMF. The G7 has about 45 percent of the voting rights and Western countries almost 60 percent, yet the seven largest creditor countries in the world, except Japan, are not in that group. The anomalies are striking. Russia has a quota less than Italy, China and France, and the United States retains veto power.
Even after long debate, voting rights were raised for just four countries in 2006 by small margins -- China, South Korea, Turkey and Mexico. But the steps did nothing to alter the imbalance of power in decision making at the IMF. The quotas are far from representative of the current sizes of the economies, of their ability to contribute resources to the fund or of their importance in world trade and financial markets.
It will be up to the creditors to push for a deal that brings China, Russia and the other creditors into the heart of the multilateral system. Even if united, these new creditors would face considerable opposition from the highly indebted but politically dominant Western countries. Perhaps the time is not yet ripe, but Washington would be a good place to start.
Martin Gilman, a former senior representative of the International Monetary Fund in Russia, is a professor at the Higher School of Economics in Moscow.