LONDON: The two crucial and fundamental issues at stake behind the posturing at the G-20 summit in Washington are the reform of the International Monetary Fund (IMF) (or the need for a new global monetary order) and the future of the US dollar - whether its days as the world's single currency of choice has had its day.
Recapitalization of banks; fiscal stimuli through tax cuts; revitalizing market and consumer confidence; stimulating growth and generating jobs are the short-term givens which are not in dispute. But the battle ahead is not even an ideological one but a political one which would signal a break with the past, in particular the post World War II international diplomatic, security and financial orders that were subsequently established.
For the smaller European countries, especially Britain, France and Italy, this will be difficult, because the status they have enjoyed in the post-war years has meant that they were allowed to punch above their political and financial weight. The World War II effectively bankrupted the European countries. While Germany had the benefit of the Marshall Plan, the UK Treasury's economic adviser, a certain John Maynard Keynes, was dispatched to Washington to beg the US Congress to agree to a loan. Britain, France and Italy were forced to retreat from their colonies because they could no longer afford to police them.
In terms of iconic events, the Washington summit, which closed last Saturday, was in the words of Simon Johnson, an economist at the Massachusetts Institute of Technology and a former chief economist of the IMF, a plain-vanilla one. Speaking to The New York Times, he stressed: "This is plain-vanilla stuff they could have agreed on without holding a meeting. What's new, except that this is the G-20 instead of the G-7?" Cynics on the other hand have called the meeting a lame-duck one because of the absence of US President-elect Barak Obama.
Compare this to the original Bretton Woods meeting in the summer of 1944 convened by US President Franklin D. Roosevelt and UK Prime Minister Winston Churchill supposedly to ensure post-war prosperity through economic cooperation, and to learn the lessons of the Great Depression in the 1930s and to pre-empt a future drift to war. The real reason was to reshape the international financial system and effectively anoint the US as the most important economy in the world and the dollar as the single global currency.
The conference, held at the serene Mount Washington Hotel in rural Bretton Woods in New Hampshire, took two years to prepare and was attended by some 700 delegates from 44 countries. President Roosevelt told the conference: "The economic health of every country is a proper matter of concern to all its neighbors, near and distant."
In Washington on Saturday, the message was less measured, but more deliberate and vague. "We, the Leaders of the Group of Twenty, held an initial meeting in Washington on Nov. 15, 2008, amid serious challenges to the world economy and financial markets. We are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world's financial systems," stated the official G-20 declaration.
The twenty leaders, which included the G-7 countries and leaders of India, Brazil, China, South Africa and Saudi Arabia, committed to implement a series of common principles for reform including strengthening transparency and accountability to ensure complete and accurate disclosure by firms of their financial conditions; enhancing sound regulation and making sure banks and financial institutions' incentives prevent excessive risk taking; promoting integrity in financial markets by taking a "fresh look" at rules that govern market manipulation and fraud; reinforcing international cooperation; reaching an agreement by the end of 2008, leading to a successful global free-trade deal; and reforming international financial institutions especially the World Bank and the IMF.
The problem is that one leader's reforms can be another leader's retreat into protectionism or even unilateralism. President George Bush's Iraq policy was effectively a unilateral policy ignoring the majority of world opinion. The Washington host of the G-20 meeting even said that there is nothing wrong with the free market system and the international financial order. And President-elect Obama during his election campaign stressed that one of his priorities was to protect American jobs even if it meant taxing US companies who export local jobs abroad. The US economy has lost 1.2 million jobs so far this year, many of them in the struggling car industry.
While many leaders especially in the G-7 countries pay lip service for the need to reform, when it actually comes to making the changes they conveniently retract and use national interest as their excuse. Come April 2009, it would be interesting to see how many of the G-7 countries are willing to propose the marginalization of their former status.
The reality is that the world in the 21st century has changed dramatically. There is a clear shift in capital ownership; manufacturing; GDP growth; private wealth; and even consumption from the West to the East. It is only a matter of time when the shift is complete to include knowledge-based industries and even military power. There are already signs of this. India is already an IT giant.
Some would say the financial crisis marks the beginning of the end of the US Empire. As such, it is up to the next generation of US administrations starting with Obama, to negotiate an orderly decline of the empire. This may sound defeatist, but unless the US can reinvent itself complete with huge capital pools, cheap labor and more thoughtful consumption, it is difficult to see how it can compete with the likes of the emerging economic giants both "near and distant".
China, India and Saudi Arabia, a group of unlikely reformers -- hold the key. They own huge swathes of capital. China and Saudi Arabia are effectively underwriting the US budget deficit and propping up the dollar. Yet they have all been quiet on the substance of the reforms and cooperation they agree is much needed.
Currently, for instance, the US and Europe control 49 percent of the voting rights of the IMF. How would the US and Europe handle losing control of the IMF? Will they go unilateral when the chips are down as Bush went over the establishment of the International Criminal Court in The Netherlands or over the US refusal to sign up to Kyoto?
Reforming the IMF will inevitably lead to calls for reforming other post World War II international structures such as the UN Security Council, which is perhaps even more outdated than the IMF. Western academics and apologists have long argued that the Security Council cannot be reformed because its basic infrastructure is set in stone. What they really mean is that Britain and France will fight to the end to keep their veto power. Never mind the fact, that greater economic powers such as India, Brazil, Germany and Japan do not have a permanent seat let alone any veto power in the Council.