WHAT THE WORLD NEEDS FROM THE LONDON SUMMIT Moving beyond half-measures By Andrew Pickering, Center for International Relations, 03/30/2009 On April 2, the leaders of the Group of Twenty will meet in London to discuss plans for a cohesive and unified response to the global financial crisis. The London Summit’s formal aims are to forge ‘coordinated actions to revive the global economy’, to reach agreement on ‘reforming and improving financial sectors and systems’ and to outline ‘principles for reform of international financial institutions’. Yet to interpret these aims too narrowly would be to miss a historical opportunity of great significance. It is not enough to simply stabilise the financial system. It is clear that the current mechanisms of global economic governance are highly unsatisfactory. One of the greatest challenges of our time is to ensure that political globalisation – the creation of appropriate forms of global governance – catches up with the economic globalisation that continues to bring both opportunity and instability to all our lives. The London Summit needs to work towards eliminating the imbalance between the degree of global interdependence and the degree of political power available to govern that interdependence. In order to do so it must address a multitude of more specific challenges. To merely tinker with the causes of the immediate crisis would be to squander political capital and a unique opportunity. Given the bold statements made recently by various ministers, there is reason to believe that governments agree on this much at least. Indeed, there is cause to be optimistic that relatively radical change is at last possible. The fact that the London Summit has been opened to the G20 rather than the G8 suggests it has been understood that a broader consensus is necessary. As Robert Zoellick and Justin Yifu Lin have recently argued in an op-ed for The Washington Post, the success of the G20 is dependent on cooperation between the US and China. Yet the Summit must also take account of the concerns of other Asian economies, as well as the oil-producing states of the Middle East and a Russian government increasingly aware of its power to affect European gas supplies. In short, the Summit must not be allowed to be dominated by the US and EU, but should work with a truly global vision. In addressing the apparent causes of the current crisis, it is necessary to consider first of all the regulation of financial markets. The need for improved global regulatory regimes is obvious and as such, this should have high priority on the summit’s agenda. Certainly, it is essential that moves begin towards reworking the Basel accords to take account of the realities of this new crisis. However, this may also be the time for a more ambitious consideration of the so-called Tobin tax – a proposal that a 0.25% levy be imposed on foreign exchange transactions. A minimal tax like this would ‘throw sand in the wheels’ of currency speculation and reduce the harmful effects of capital flight, without significantly damaging the liquidity that such trading ensures. Additionally, the Tobin tax could raise somewhere in the region of $200-300 billion, which could be used to fund expanded global economic governance and development programmes. In this vein, the global financial crisis may also constitute an opportunity for a reorientation of attitudes towards capital controls. Indeed, the original Bretton Woods settlement of 1944 was motivated in part by the fear of volatile short-term capital flows, which were felt to have had a role in the spread of the Great Depression. Whilst the present crisis was not exacerbated by contagion in the conventional sense, it has nonetheless brought home to policy-makers and the public alike that we live in an interdependent world. More careful management of volatile trans-border capital flows is no longer as politically unviable as it once was. However, this regulation will require strong institutional backing. As such, reform of the International Monetary Fund (IMF) and World Bank is high on the agenda. Calls for change to these institutions have been growing gradually louder and more urgent and it is essential that the G20 take a firm lead on any reform package. British Secretary of State for International Development, Douglas Alexander has stated that the World Bank needs to enhance its presently weak claims to legitimacy, in part through voting reapportionment whereby developing countries would have a greater say in the Bank’s decisions. The IMF, on the other hand, above all, urgently needs more money. German Chancellor Angela Merkel proposed doubling the Fund’s budget, only to be outdone by the Obama administration, which suggested tripling it instead. Of course, locating such funding will be highly problematic, but G20 attendees need to realise that bolstering the power of the IMF is a pragmatic necessity and one of long-term self-interest. Like the World Bank, the IMF’s tendency toward highly restrictive conditionality has also eroded its legitimacy in the eyes of much of the developing world. As such, in order for the Fund to play any plausible role in the post-crisis environment, its exact mission needs to be reconsidered and its methods and voting structure overhauled. Given the size and difficulty of these reform agendas, it may be suggested that the Bretton Woods twins are simply obsolete and that it would be advantageous to consider the wholesale abolition of both the Bank and the Fund. New organisations more appropriate to twenty-first century globalisation could be created to take their places. The creation of new political institutions and their constitutions is a very delicate matter, perhaps an art. Nonetheless, these audacious proposals have significant merit. However, whether G20 leaders have the political capital, the will and the vision to countenance such revolutionary and far-reaching changes remains to be seen. As suggested above, if the financial crisis is read optimistically, as an opportunity for the global economy, the G20 is also in a position to reinvigorate the trade regime alongside the programme of institutional reform outlined above. The London Summit will focus particularly on growing fears of a wave of protectionism as countries respond in nationally-minded fashion to the impact of the financial crisis. There have been many pledges to uphold the status quo and avoid protectionism. Yet in France, for example, plans to provide support to an ailing auto industry have led to controversy across the EU. Economic stimulus packages must avoid the kind of knee-jerk reaction exemplified by the ‘Buy American’ clause seen recently in US legislation. However, it is necessary to go further than this. A successful set of trade liberalisation negotiations at the World Trade Organization (WTO) would bring a significant boost to the world economy, especially as trade volumes have been hit hard by the present recession. Moreover, a multilateral trade deal would help to stem the tide of regional and bilateral trade agreements that threaten an already fragmented trade regime. The foundering Doha Round was billed back in 2001 as a ‘development round’. Part of the failure seen in recent WTO meetings is due to the failure of the US and EU to keep to that intention. Though a breakthrough at the WTO would help to bolster the world economy, it is essential that any such deal be a fair one. Many of these proposals have been made with the interests of developing countries in mind. Whilst the doctrine of ‘trade not aid’ and more equal relations within global governance have long been demands of developing countries, the G20 must also pay attention to the financing of more traditional development programmes. The British government’s plan for economic recovery expresses the desire that world leaders ‘reaffirm their commitment to the Millennium Development Goals and commit to making the necessary investments, including honouring their previous commitments to increase development assistance.’ The idea of sending more money abroad during a time of recession may seem politically implausible. But it is during truly global economic hardship that development aid is most necessary. Furthermore, it is now commonplace to assert that global inequalities are not only a moral problem, but a security issue as well. G20 leaders would do well to remember this when considering comprehensive plans for economic recovery. Throughout the developed world, such plans have been slated by those who oppose government intervention into the economy, particularly in light of widespread public bailouts of private banks. Whilst allegations of socialism have been overstated, there can be no doubt that the other extreme - market fundamentalism - has been found wanting. A thread running through all the ideas above must therefore be the intention to move firmly away from these kinds of mindsets, as well as the policies that result. Some commentators have gone too far in calling the events of the past few months a ‘crisis of capitalism’. Crisis in capitalism, perhaps. Conversely, Dani Rodrik’s idea that the world is about to experience a reinvented ‘capitalism 3.0’ is similarly exaggerated. When French president Nicolas Sarkozy called for an end to irresponsible short-termism and spoke out in favour of a ‘capitalism for entrepreneurs rather than speculators’, he came somewhat closer to articulating what can and should be learnt from recent events. British Prime Minister Gordon Brown has called for a ‘grand bargain’ for the global economy. This is the kind of wide-ranging ambition that the world needs from the London Summit. This is a time for extraordinary leadership and vision. It will be necessary for the world leaders assembled to upset a lot of vested interests, both at home and abroad. But perhaps the willingness to do so is the measure of the difference between a politician and a statesman. Andrew Pickering works for the Center for International Relations and a postgraduate student of International Political Economy at the University of Sheffield, UK. His website is http://andrewpickering.weebly.com.

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