Ukraine crisis shows global governance is in a mess

The crisis surrounding Ukraine shows that global governance is in a mess, but events there are merely a symptom of something larger.

By: Date: April 23, 2014 Topic: Macroeconomic policy

This opinion was first published by the Telegraph on 18th April.

The crisis surrounding Ukraine shows that global governance is in a mess, but events there are merely a symptom of something larger.

My visit to Washington for the spring meetings of the International Monetary Fund and World Bank set me wondering whether western democracies are much guiltier than we are prepared to admit.

These meetings took place against the surreal background of the US Congress having failed to pass a bill allowing the IMF to reform in the way that was agreed back in 2010 – a strange decision, as the planned changes to the fund were led by the then-US Treasury Secretary, Tim Geithner.

Those proposals were to increase the IMF’s lending capability as well as to boost the voting share and seats of the major so-called “emerging economic powers” at the expense of others, including Europe.

Without the additional firepower, it makes it more difficult for the fund to intervene in economic crises, including the one engulfing Ukraine.

It is more than ironic that many of the Congressional figures who are calling for aggressive actions towards Russia over the Ukraine crisis are the same ones blocking the reforms of the IMF.

Without foreign financial assistance and economic support, Ukraine’s downward spiral could accelerate, yet there seems to be little recognition of this link.

The stalled 2010 agreement is based around the status quo of the world that existed at the end of 2008 . In those five intervening years, the world economic balance has continued to shift.

China has seen its nominal GDP double since 2008, so any agreements based on the relative size and balance of trade prevailing then are already very much out of date.

It is bigger than the combined GDP of France, Germany and Italy, three European countries which also have an intransigent stance about more substantial global reform.

Even though Brazil and Russia have especially disappointed in the past couple of years, both are within the top 10 economies by size. Collectively, the Bric countries are now nearly as large as the US and already quite a bit larger than the eurozone.

While the other Bric countries probably don’t have much sympathy with Russia on the specifics of the Ukraine issue, they might have broader sympathy with the notion that emerging economies are not allowed a relevant voice in global affairs.

Such thoughts might serve to undermine the legitimacy of global organisations such as the IMF and World Bank, the G20 itself as it morphs into clubs within a club, and encourage the growth of their own club.

My impression, for example, is that there is renewed energy surrounding previous plans to form a Brics Development Bank, and later this year the funding and location for such a body seems set to be announced.

It is not impossible that providing capital for such a new bank might take precedence over additional funding for the IMF if the US Congress continues to stall on the reforms.

Europe is more than a mere bystander in these issues. Obviously as it relates to Ukraine, this crisis is on Europe’s immediate borders and some of the EU’s most eastern members – notably Poland and the other Baltic states – have particularly acute concerns about the crisis.

It continues to be quite tricky for European countries to pursue aggressive sanctions against Russia when many of their leading companies want to do more business there.

I recently attended a well-known economic and financial conference in Italy where delegates were asked about their plans to invest in a variety of economies. Russia came a close second to China in a list of about six emerging economies.

Just before that event, I read of a visit by the chief executive of German industrial giant Siemens to President Vladimir Putin, soon after the annexation of Crimea.

It is things like this that mean I cannot imagine either Germany or Italy leading a push to be really tough with Russia.

European companies need to export beyond their borders to grow their revenues and recover from the economic malaise of recent years.

Being tough and making sacrifices when your own economic challenges suggest the exact opposite requires a grander vision.

Does the EU really have a true vision for the Ukraine?

Does it really have a true vision for the shape of the world in which the EU is going to be positioned? It seems eager to export to China and Russia, but doesn’t really want to engage with them on an equal footing.

In March, I published a paper co-authored with Alessio Terzi for the Brussels-based Bruegel think-tank that discussed the rapidly changing nature of world trade, and the contrasting absence of global economic governance.

In it, we argued that it would be in Europe’s long-term interests to give up its national seats of representation within global organisations and to volunteer either EU or EMU combined seats.

By doing so, it would allow the space for the emerging powers, as well as making it more difficult for the US to not be more adaptable to change.

Indeed, it might even lead to questions as to why the IMF and World Bank would need to be located in the US unless they supported more reform themselves.

The integration of the largest emerging economies into the world economy has been one of the most important positive developments of the past 20 years.

It has allowed hundreds of millions of people in developing nations to escape poverty, as well as permitting western multinationals to develop markets that were unimaginable beforehand.

This continued integration is a very positive thing for the world economy, despite some ongoing adjustment costs for some that struggle to adapt and change.

However, it will not be able to continue unless we can also advance our organisations that are supposed to provide optimal global economic governance.

As I was leaving after my trip to Washington, I was led to believe that Congress might end up passing the IMF bill after November, seven long months away. I was told this to be encouraged, but I would hope for more.

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