Fault Lines: How Hidden Fractures Still Threaten the World Economy (39 page)

Even though the Fund is not always right, its prescriptions often hit the mark simply because the Fund is apolitical. However, the Fund will not gain WTO-like powers of sanction over something as amorphous as macroeconomic policy. Nor is “naming and shaming” violators in front of the community of nations likely to have much effect. Finance ministers care primarily about domestic constituencies, which typically pay little attention to the workings of the IMF. That has made finance ministers pretty shameless, at least to date.

But these observations suggest an alternative. Rather than try to impose its will over nations by fiat, which the IMF will never have the authority to do, it should strive for influence by appealing more directly to a country’s citizens. This would facilitate the government’s task in building support for reforms. Put differently, instead of trying to be like the WTO and using hard power, it should emulate Oxfam’s methods and use soft power.

Consider the impetus to do more about mitigating climate change. This is a quintessential example of an issue with short-term costs and long-term gains. Politicians would shy away from such issues were it not for the grassroots movements in their constituencies. The pressure on governments to do something has increased not just because of mounting evidence that climate change is a real threat but also because a variety of organizations, from local to international, have mobilized people to press their representatives for action. Similarly, a popular movement led by rock stars like Bono pushed rich-country governments into forgiving debt to poor countries and into pledging to give more aid at the 2005 Gleneagles Summit.

Of course, governments have not signed up yet to binding commitments on emissions, and they have backtracked on aid commitments, but the point is that these movements gained influence by convincing political leaders that there was domestic support for international agreement. As the power of the Internet increases through social and political networking sites, and as virtual democracy spreads, public influence is likely to be as much bottom-up—leaders adopting popular positions—as top-down—leaders convincing the public of the merit of their views. Those who would influence the calculations of politicians must do so not by appealing to their better instincts but by convincing their masters, the people, directly.

Multilateral organizations like the IMF and the World Bank need to do far more to expand their reach—to speak for the world to the world. In addition to trying to persuade finance ministers and heads of state, they should go directly to the public, including political parties, nongovernmental organizations, and influential personalities in each country and explain their position. They need to become much more sophisticated about using Web-enabled networks to reach the connected citizen and find ways to enter school and university classrooms, where students can be most receptive to ideas about global citizenship.

The public has a longer-term horizon than the government in power and typically more idealism and concern for the global good. It is also likely to be more receptive to persuasion, especially when it is less anxious than in the current times. Of course, reforms whose benefits for a country over time swamp the costs are much more likely to be acceptable than ones that ask the country to make sacrifices for the world’s good, but even the latter should not be ruled out: after all, aid in its purest form requires one-sided sacrifices, and the thinking active public in rich countries has pushed for it. The knowledge that citizens in other countries are being asked to pitch in at the same time—that solutions are truly intended to be global and multilateral—should be important in making persuasion easier. Moreover, to the extent that a domestic constituency develops that cares about a country’s multilateral responsibilities, politicians will no longer feel it politically costless to violate international obligations; thus naming and shaming may have more force.

This sort of campaigning is not something multilateral organizations are currently well equipped to carry out. The IMF, for example, views its primary audience as finance ministries and central bankers. After years of trying to not offend anyone in member countries, IMF staff have developed a special way of writing reports that ensures that everything important can be inferred by those who know how to read between the lines (typically IMF staff and bureaucrats from the member countries), and anyone else falls asleep reading the turgid prose. The IMF has had long practice in communicating with bureaucrats or ministers, but far less in speaking to nongovernmental organizations (NGOs) or the press. The World Bank is better, but not by much.

Moreover, it is not clear that powerful member-country governments want an international organization speaking within their borders on a message they cannot control, even if it is strictly on economics. It is not just undemocratic countries that repress free speech; democratic countries that preach in public about the need for transparency and honest appraisals are often the ones that lean most heavily on international organizations in private to alter their message.

I recall a Washington press conference held to release the semiannual IMF World Economic Outlook in the spring of 2005. Campaigning was under way for the British elections. In response to the anticipated question from a reporter from the
Financial Times,
I remarked that the United Kingdom would need to do more to raise revenues or cut costs to meet its own fiscal rules, thus implying that it might have to raise taxes. My comments were based on impeccable analysis by the IMF’s staff, but Gordon Brown, then chancellor of the exchequer, was furious because they contradicted his own public statements during the campaign. The Fund stood by its analysis despite immense pressure from the British treasury. Gordon Brown was also chairman of the IMF’s governing committee and had a press conference scheduled the next day. With the IMF’s managing director, Rodrigo de Rato, sitting embarrassed by his side, he launched into a broadside (prompted again by the inevitable question) against the Fund and how it was wrong once again about the United Kingdom. The managing director politely said nothing, but in doing so, he implicitly backed his staff’s views. The data since then suggest the Fund was right.

On the one hand, the very fact that governments are concerned about the possible public influence of an impartial commentator on government policies suggests that this avenue is grossly underexploited. On the other hand, such action will require a change in how multilateral organizations see themselves—as WTO wannabes hankering after hard power that they will never get, or those who respect the sovereignty of each country and work for the global good, country by country, through soft power and persuasion.

If multilateral organizations are to change their strategies of persuasion, fundamental reform is required. These include changes to the organizations as well as to the way they operate in countries. Their governance structure needs to be reformed so that they are seen to be independent of undue influence by any country, and some of these changes are under way. They should also make a conscious effort to broaden their intellectual frameworks by recruiting personnel trained outside the United States. Some of this will happen as universities across the developing world strengthen their research capabilities and produce high-quality graduates. Multilateral organizations should see engagement in the public debate in member countries as one of their most important tools in encouraging domestic policies that foster the global good. And finally, the rules governing membership of these organizations should force members to accept such engagement, facilitate it, and protect it when carried out in good faith. This may indeed require important revisions to the articles of agreement signed by members of the IMF, perhaps even a new historic agreement like the one at Bretton Woods that created the IMF and the World Bank.

This last point is important. No large power, especially but not exclusively countries that are undemocratic, will be happy giving multilateral organizations a platform to sound off on anything they want. Countries have to understand that there are important collective benefits from adopting sounder policies, and that if they want a platform from which to influence the policies of others, they have to allow others a platform to influence theirs. It should be understood that the multilateral organization will confine itself to economic and socioeconomic issues, with its views arrived at through a fair, deliberative process within the organization, based primarily on convincing economic research and data analysis. Its views should then be protected by international agreement, much as embassies and their activities are. Of course, a transparent and fair process will be essential to convincing citizens in each country that the multilateral organization has their interests at heart. Put differently, instead of an international agreement about economic policies à la WTO, we need an international agreement about how domestic policies can be influenced by multilateral agencies to incorporate the global good.

I have raised the issue of reform in the context of trade imbalances. But there are many other issues on which the world needs to come together on which it is currently being dragged apart. For example, whenever food prices rise, a number of countries start banning food exports. Although in the very short term such measures ensure that their citizens have access to cheap food, they deprive domestic farmers of higher prices and make them less eager to grow food. They also make other countries feel insecure and attempt to grow their own food, even if it is grossly inefficient for them to do so: the fields of grain that now appear in the middle of the Arabian desert are unlikely to be the best use of water in that location. The net outcome is that the myopic actions by governments to protect their citizenry in the short run result in global food insecurity and inefficient methods of production in the long run. We need a global agreement to ensure that international food markets will not be disrupted by government action—but no government today will risk being accused by the opposition of signing away its ability to ensure that its citizens have food. The multilateral organizations need to create the necessary awareness and momentum for agreement.

I have no illusions about how easy change will be. The instinct of global bureaucrats is to press for clear rules, but even in the European Union, which has some rule-making power and some ability to constrain the domestic policies of members, relatively homogenous countries have proved unwilling to accept strong external constraints on their policy making. Over time, rulings from Brussels have come to be seen as an imposition by citizens of EU countries, because domestic politicians blame them for everything unpleasant that has to be done and take credit for all the successes. It is no surprise, then, that when the people are asked if they want a stronger Brussels, they vociferously respond, “No!”

We must remember that even Keynes worried about global imbalances and proposed the radical idea of penalizing countries that ran persistent trade surpluses.
⁹
Such ideas are unlikely to be acceptable to independent nations today. A diverse world will not accept any forceful global coordination of policies to bridge the fault line between nations. I do not advocate a halt to the many international meetings that attempt to coordinate reforms, which have produced much talk and little action thus far. Perhaps the G-20 will pull off a miracle. But because the issues are too important to be left to the bureaucrats and politicians, I have advocated opening a second track, a track that the smaller, non-G-20 countries of the world should back, to bring the policies of the big powers into line. Multilateral organizations like the IMF should present countries with a course of action that is individually and collectively beneficial and that can avoid the political and economic risks of inaction. The multilateral organizations will have to make the persuasive case in country after country that the gain is worth the short-term pain. If there is domestic political momentum, it will make it easier for leaders to conclude an acceptable pact at the international level. Put differently, global policy discussions have to be introduced into the political debate in every country and thereby make their way back into the closed-door meetings of global leaders. Global multilateral organizations will have to work with global democracy rather than avoid it.

The most important economy in the world in the next decade, other than the United States, is likely to be China. Many policy makers outside China are concerned with the Chinese currency’s peg to the dollar. From July 2005, the People’s Bank of China (PBOC) allowed the renminbi to appreciate steadily against the dollar, but with the onset of the financial crisis in October 2008, it halted the appreciation and pegged the currency to the dollar again. Accusations of unfair trade are being heard in Washington corridors, and with U.S. unemployment touching 10 percent and Chinese growth also touching 10 percent, the disparity seems obvious. The momentum for Congress to impose some form of trade barrier is increasing, and even a renewed appreciation of the renminbi may not quell it.

Is Chinese currency intervention unfair? And if so, to whom? In one sense, the answer is obvious. Chinese exporters already enjoy subsidies such as cheap capital, land, and energy. With their goods made even cheaper by an undervalued currency, Chinese exporters can outcompete firms in industrial countries. This situation seems blatantly unfair. But this view assumes equivalence between countries in many other respects: the infrastructure in each country, the quality of its legal and contractual system, its regulatory structure, the education of its workers, and so on. Thus when one country intervenes to give itself a leg up, it seems to be violating the rules.

But there are other ways of looking at competition. Most outsiders contemplating China think of the swanky new parts of Beijing and Shanghai, not the interior and western provinces where conditions are far more backward. The infrastructure in a developed country is typically much better; its legal system is more effective at enforcing contracts; its regulatory structure is far more predictable and less corrupt; and its schools, no matter how downtrodden the area they are located in, at least have basic facilities.