Is the governance of global economy conducive to growth, development and stability?
Would the coming G20 and WTO ministerial meetings remedy the systemic deficiencies? I doubt so.
A series of crises have hit the world economy during the last few years. There is a deadlock in the negotiations in the Doha Round. In fact, there is a lack of confidence in the governance of the global economy in general, reflected in the jump in the price of gold by over 100% between November 2008 and July 2011. Although the current economic recession is not as severe as that of the 1930s, it is the worse since then. Had the international community agreed on the proposals made by Keynes on the governance of the world economy and the establishment of International Trade Organization (ITO), the situation would have been different.
During recent years, the food crisis, fuel crisis, and financial crisis have been followed by a recession unprecedented since the early 1930s. Unemployment reached about 10% in the USA and exceeded 20% in some European countries; from peak to the tough, the index price of (non-oil) primary commodities and crude oil declined by 38% and 68%, respectively, and the Dow Jones Industrial Average fell by 52%. A number of European countries have faced debt crises affecting confidence in the Euro as a common currency of the EU. There is also a risk of double dip recession along with upheavals in a number of developing countries.
What does the global economy suffer from? The short answer: deficiencies in governance of the global economy, particularly the international trade system. The great depression of the early 1930s, followed by the Second World War, led the British parliament to initiate the so-called Beveridge Report and, in parallel, requested Keynes to come up with proposals for achieving economic growth, stability in economic activities and enhanced employment worldwide.
Regarding the stability in economic activities Keynes proposed two main schemes: stabilization of prices of primary commodities, putting the main burden of balance of payments adjustments on surplus countries. A surplus country would be charged interest by the International Clearing Union (a sort of international bank) and would be required to revalue its currency. Deficit countries (regarded as expansionist) were encouraged to devalue their currencies by 5 % a year, but it was not obligatory.
In addition to the commodity-price stabilization scheme, the draft of the Havana Charter for the ITO included a number of developmental issues such as employment creation, regulation of restrictive business practices and foreign investment, labour standards, and commercial policies.
The U.S. Congress did not ratify the Havana Charter nor the GATT, which were supposed to be a part of ITO and become operational together with IMF and World Bank. In the language of Professor Singer, the Bretton Woods system became “incomplete” and “distorted”. It was incomplete because it lacked the stabilization schemes and many of developmental issues included in the Havana Charter. It was distorted because the GATT regulations were full of contradictions and biased against developing countries – a situation which persists after changes made in various trade rounds, including the Uruguay Round. Moreover, in the early 1970s the fixed exchange rate system was replaced by a flexible one, adding to instability in commodity prices and economic activities. And the speculative activities in the financial and commodity markets have increased due to the introduction of derivatives and other financial instruments.
Furthermore, following the recession of early 1980s, the IMF and the World Bank introduced Structural Adjustment and Stabilization Programs, putting the burden of adjustment further on deficit countries.
Thus, not only has instability in global economic activities increased, but the current GATT/WTO rules are biased against developing countries. For example, despite the fact that in the preamble to GATT, trade liberalization is regarded as the objective of the GATT/WTO system, the power of government in international trade is to be limited, but not that of transnational corporations (TNCs). (In fact, government control over TNCs has been relaxed through TRIMs and GATS.) Manufactured goods are to be liberalized, but agricultural products are exempted. Imports of labour-intensive manufactured goods from developing countries are restricted. Moreover, development of new technology is to be protected through TRIPs, but development of infant industries is restricted. Above all, developed countries have not implemented Uruguay Round rules to which they have agreed or have not often complied with verdicts of the Dispute Settlements Body of WTO.
In a nutshell, the current GATT/WTO rules and the Bretton Woods system are not conducive to development and stability in global economic activities. There is an urgent need for modifications in the system, which will be discussed in my next blog.