Comment on Dani Rodrik’s piece

Posted by Nancy Birdsall on 27 January 2009

Dani Rodrik predicts that the developing nations will emerge as a group from the current crisis with a much bigger say in the multilateral institutions that govern economic globalization – for two reasons: their increasing weight in the overall global economy, and the psychological impact (my word not his) on the traditional trans-Atlantic Western leadership’s readiness and ability to defend the post-World War II “policy and intellectual orthodoxy” (to use his nice turn of phrase). He then proposes a serious list of priorities in international economic policy and rules that the rising powers should push for.

He is assuming a happy and smooth transition in which the increasing economic weight of developing countries translates into their increasing “say” in the multilateral institutions. Whether that happens does matter for developing countries.

The institutions are a key vehicle for implementing, monitoring and sometimes enforcing the sorts of new rules and regimes that Dani proposes (a Tobin tax for example; a change in WTO rules to make it easier for poor countries to reconcile food security with international trade rules; larger emergency credit lines at the IMF).

In the past it was the G-7 that implicitly instructed the multilaterals on new policies and directions, and had the political wherewithal to follow up through its control of the institutions’ leadership and finances. The transition to the G-20 playing the G-7 role depends at least in part on a parallel transition at the multilateral institutions, especially the IMF and the World Bank. Yet so far it looks as though these 20th century institutions will not easily transit to a new century. The US and Europe are still in fact the driver’s seats, and seem unable to give them up, apparently preferring to drive increasingly irrelevant and inefficient old cars to sharing the wheel.

For good reason, pushing for reform of those institutions, including of their governance, has not been a high priority for the major developing countries.

The increasing economic weight of China, India and Brazil has meant – prior to the crisis at least – that financing from the multilateral institutions was less important than it had ever been.

·     For the Chinese with trillions in dollar reserves why worry about financing or leadership and votes at the IMF (at least until recently) – when discussion might up the ante on its exchange rate situation? 

·     For India why rock the boat on delicate negotiations about nuclear technology with the White House with whining about leadership at the World Bank or the IMF? (Recall that India backed off pushing for its then-Finance Minister to chair the IMFC -- ministerial level committee that guides IMF policy).

·     For the Brazil, why use diplomatic chips in complicated negotiations about running institutions that have become small (relative to capital flows) and increasingly irrelevant (at least prior to the crisis)? 

The developing countries hardly raised a peep when the Bush White House presumed to cut short discussion of a successor to their failed assignment of Mr. Wolfowitz at the World Bank. And the developing countries, while refusing to yield in the Doha trade round, and are holding back on a climate change agreement until the US and Europe put something serious on the table – were apparently not sufficiently interested in serious governance reform at the IMF to resist the minimal reform package now on the table.

Will the current crisis make a difference? It could increase interest in institutional reform – but more urgent and immediate financial regulatory issues are likely to steal the show this year at least.

Meanwhile in an ironic twist, the crisis has added to the global premium on the dollar, reminding the global community that the US is still in charge and that China has shown little interest in sharing with the US the burden of being chief steward of the global economy.

The developing countries should take a different view. They should help the developed world “see” that it’s in everyone’s interest to increase their representation at the financial institutions and bring them into the fold where they will naturally accept more responsibility along with more influence. A good first step would be for them to back inclusion in the April G-20 of clarity about the US and Europe both ending their embarrassing patronage lock-hold on appointing the heads of the World Bank and the IMF.

Replacing the G-7 with the G-20 may be a step in the right direction. But it’s a modest step and the G-20 at the head of state level is a fragile entity still. Dani’s agenda – a global trade regime allowing for “policy space”, a climate change agreement that is just as well as enforceable, credible deployment of the proceeds of a Tobin tax, an IMF with the resources to respond to crises – none of these has any legs if the developing countries have minimal influence at the international financial institutions.

And one thing is clear to me: Those institutions will not only enjoy fundamental governance reforms until and unless the developing countries collectively assert themselves to get it done.

Nancy Birdsall

President, Center for Global Development