The United States’ priority in maintaining influence is most evident in the debate over who should head the Bretton Woods institutions. One of the reforms that the G-20 called for was that the head of the World Bank and that of the IMF be appointed on the basis of merit only—hardly a remarkable recommendation in this day and age. However, it was a recommendation that flew in the face of the narrow U.S. interest that the Bank president be someone that the American president could unduly influence. Historically—since the beginning of the IMF and the World Bank—the United States has always appointed the head of the World Bank and Europe that of the IMF. Disappointingly, the United States decided to pay no attention to the new G-20 reform—even under Obama. Obama first planned to appoint the former U.S. secretary of the Treasury and head of the National Economic Council who played such a big role in some of the stories of GAID and whose great achievement as secretary of the Treasury was the bill ensuring that derivatives (those risky products that contributed so much to the global financial crisis) would not be regulated. Reportedly, many of the other countries around the world made it clear that they would have none of that—they were willing to show some, but limited, deference toward the United States. Hurriedly, the Obama administration found an alternative, Dr. Jim Yong Kim, whose background was in health, not economics or finance. The power of the United States was again shown: Dr. Kim got the nod over two extraordinarily well-qualified candidates from the developing world.
CHANGES IN OLD INSTITUTIONS
GAID criticized the central global institutions managing globalization in the hope of eliciting change. There have been marked changes—more in some areas that I could have conceived of, less in others than I had anticipated. There is a common thread: when the international institutions seem willing to strike out on their own, becoming less dependent on the United States, there is some success; where an institution cannot or will not, there is disappointment.
The IMF
A theme of GAID is that the IMF paid too little attention to the effects of its programs on inequality in general and the poor in particular—not withstanding its rhetoric. But beginning with the stewardship of Dominique Strauss-Kahn, and continuing under his successor Christine Lagarde, things have changed. When Strauss-Kahn’s research staff presented findings showing that inequality can be bad for economic performance, he not only endorsed them, but put this focus at the center of the IMF’s programs. He defended this action, saying that IMF’s mandate was promoting growth and stability—and inequality was inimical to both.
Since then, the IMF has been a tireless crusader—attacking not just inequality in general, but particular manifestations of it, such as gender inequalities. It has helped convince people all over the world of the central message of my book The Price of Inequality: our society pays a high economic, social, and political price for the high level of inequality—in all of its dimensions—that we are experiencing today.
The IMF has undergone other changes as well. Following the crisis, the IMF actively asked where its thinking had gone wrong. Two conferences at the IMF highlighted the change in thinking.42 While in GAID I discussed the excessive focus on inflation, in the years after GAID was published, matters became worse as central bankers around the world increasingly adopted an “inflation target.” However, inflation hadn’t been the central problem of most countries for years, in some places for a decade and a half or more. The IMF has begun to recognize that too much attention was focused on inflation, too little on financial stability.
The Financial Stability Board
In the aftermath of the East Asia crisis, it was recognized that there was a need for better regulation. Indeed, as I note in GAID, some of the global regulations almost surely contributed to that crisis. Banks were, in effect, encouraged to lend short-term—making it easier for money to flow in and out of countries. The global rules (called Basel I) were designed to protect the safety and soundness of individual banks in the developed world—with little or no attention to their systemic consequences, especially in developing countries.
The response was to create what was called the Financial Stability Forum (FSF)—and that was what it was; a forum, a place for the central bankers to talk. Since the bankers didn’t have a “systemic mindset,” however, what emerged was, in some ways, even worse than Basel I. The new framework asked banks to self-regulate—and that meant not only having them focus on their own risk (and not on systemic risk), but also allowing them to use their own models to make judgments. Almost by definition, self-regulation is an oxymoron. Our regulators—from the “Maestro” himself, Alan Greenspan, on down—didn’t seem to realize the contradiction. Each individual bank, in assessing its actions, does not fully take into account its effects on the economic system. Greenspan and other regulators of that era didn’t even seem to understand why we have regulations—to prevent banks from imposing costs on others, which occurs when taxpayers have to bail out the bank or when a systemic bank failure such as that of 2008 leads to an economic meltdown, with millions losing their jobs and homes.43 As I have noted, these effects are called externalities, and whenever there are important externalities, markets do not result in efficient outcomes.44 I had expected the system of self-regulation to fail, and it did—though I did not fully anticipate the magnitude of the failure.45
It goes without saying that the Financial Stability Forum did not save the world from the global financial crisis. One of the responses was to change the name of the Financial Stability Forum to the Financial Stability Board. I was understandably skeptical that this change would make any real difference. As it turned out, however, the name change was accompanied by a broadening of its mandate, and together with the wake-up call of the 2008 crisis, the Financial Stability Board has advanced a rethinking of the factors that contribute to systemic fragility and instability.46
The 2008 crisis made clear that in a globally connected system, weaknesses in any part could have global consequences. The global community has been working to establish standards, such as minimal capital requirements, to make crises less likely, and make it less likely that taxpayers are left footing the bill for banks’ mistakes. Still, the banks, especially in the United States, are pushing back. They have been arguing for the repeal of the Dodd-Frank Act, the financial reform bill passed in 2010, even though that act didn’t go far enough to ensure that another large crisis would not occur. The banks have done everything they can to undermine Dodd-Frank, to impede its implementation, and to get key provisions repealed. With Trump as president, they have found an ally.47
The World Bank
The IMF has changed dramatically, but so have other international institutions. The World Bank entered hard times after James Wolfensohn, who was the president from 1995 to 2005, during the period I served as chief economist, left the bank. His successor was Paul Wolfowitz, who was previously the American deputy defense secretary and is often credited as being the “intellectual godfather” of the Iraq War and the mistaken neoconservative theories that contributed to it.
The way that President Bush reportedly “solved” the problem of how to get Wolfowitz out of the administration was to foist him on the rest of the world. Wolfowitz tried to make the World Bank serve America’s foreign policy interests—and did so perhaps more transparently than had been done before. Three years after his appointment, in the midst of massive dissatisfaction from both staff and member countries, he was forced to resign over a corruption scandal. The Bank never (in my judgment) fully recovered the influence and acceptance it had under Wolfensohn, and the discrediting of the Washington Consensus discredited much of its policy advice.
WTO and the Development Round
The global institution which has perhaps seen the greatest rise and fall is the World Trade Organization. The original ideas for the construction of a post–World War II economic order had three institutions at the apex—the World Bank, the IMF, and a third to regulate trade (referred to at the time as the International Trade Organization
). Conservatives in the United States, worried about the loss of national sovereignty, blocked the formation of the trade institution for decades—until it was reborn in a round of negotiations that began in Montevideo, Uruguay, in 1986. These negotiations culminated in the creation of the World Trade Organization in 1995, with a clear judicial system to adjudicate disputes over noncompliance by any one of the signatories. A major deficiency, however, was the limited punishment for noncompliance, which was restricted simply to the right to impose retaliatory tariffs. That discipline has proven effective when one large country sues another, but when a small state—say an island microstate in the Caribbean—sues the United States and wins, there is no effective redress. For example, retaliating by imposing a tariff, say, on the importation of food from the United States only leads to an increase in the cost of living. The injured country is hurt more than the United States.
The provisions of the Uruguay Round were unbalanced. The developed countries got most of what they wanted. And while one of the great achievements of the Round was bringing the developing countries and emerging markets into the fold, these countries were told to be patient: what they wanted—for instance, a reduction of the West’s distortionary agricultural policies, which lowered the prices of the goods they produced—could only be delivered gradually over time.
And so, the developing countries imposed as a condition for starting a new round of trade negotiations that any such round be a development round, centering on instituting rules that would most promote development.48 Many of the rules, tariffs, and regulations, inherited from the colonial era, were designed to ensure that the former colonies remain focused on producing raw materials which would then be processed in the developed countries. It should be no surprise that those in the developing world viewed these provisions as unconscionable.
The moment of global unity after September 11, 2001 allowed for the initiation of the new “Development Round,” but that moment of unity didn’t last long. The developed countries lost sight of the bigger picture, of the inequities that were built into the Uruguay Round, and the promises made to get the Development Round started were quickly broken. Rapid turnover of governments made this especially easy. Meetings in Cancún (2003) and Hong Kong (2005) led to little progress. Finally, in December 2015, the WTO gave up on the Development Round. By then, it was clear that the United States would not make the concessions necessary to create a fairer globalization. The United States would not give up on its cotton subsidies—even though they were declared noncompliant with the WTO under previous trade agreements. Indeed, when Brazil brought a case against the United States and won (and won again, and again, as America tried to circumvent the WTO rulings), the United States simply paid off Brazil. It compensated Brazil for the damage it did to the country, but kept the cotton subsidies in place, harming millions and millions of poor farmers in India and Sub-Saharan Africa.
The United States and Europe have abandoned the global multilateral process, hoping that in bilateral or regional agreements they can throw their weight around more effectively and get agreements more in their favor. China, India, and Brazil have proven to be effective negotiators, and the hope was that with them out of the room, the United States and Europe would set “standards” which served their interests—forcing in the end the large emerging countries to adhere. Trump, while not fully realizing what he is doing, is pushing this approach even further, focusing on bilateral trade agreements and bargaining. The likelihood is that this approach will lead to a global trading regime that is even more biased than the current one—biased in favor of corporate interests in the developed countries. If that happens, the discontent with globalization, both in the developed and developing world, will only grow.
Still, while the WTO won’t be at the center of new trade agreements—indeed, the prospect of significant global agreements in the immediate future is low—it is playing a truly critical role. It is partly, perhaps even largely, because of the WTO that Trump has been tamed: It is too costly for America to act unilaterally. As this book goes to press, he hasn’t imposed the across-the-board tariffs, for instance on China and Mexico, that he promised. The “concessions” made in trade negotiations so far have been truly minor—China has, for instance, opened its market to American beef. No one expects these changes to have any significant effect on the U.S. trade deficit with China.49
CREATING NEW INSTITUTIONS
With the world changing so rapidly, it was natural that new institutions be created to respond to the evolution. The importance of global warming has only been recognized for the last quarter century. This was a global problem, and had to be dealt with globally; but it was a problem that was not on the agenda when the international institutions like the IMF and the World Bank were created. The United Nations took on the responsibility for negotiating a shared response. The agreement made in Paris in December 2015 was a major step forward—smaller than one would have liked and too small, on its own, to prevent a dangerous increase in temperature—but still, a real commitment to reduce the emissions of greenhouse gases. As I noted in the introduction, the strength of that agreement was demonstrated by the resolve of the rest of the world—and many within the United States—to continue with their commitments in reducing greenhouse gas emissions, even as Trump announced the United States would be leaving the accord in 2020. The World Bank and a special financial fund within the Bank, the Global Environment Fund (GEF), are helping developing countries reduce their emissions. With the government of Donald Trump still denying the reality of climate change and withdrawing from the Paris Agreement (joining only two countries around the world, Nicaragua and Syria, who are not part of the agreement), there will have to be an effective enforcement system. No country can be allowed to put the entire planet in jeopardy. The countries of the world will have to impose a high carbon tax on cross-border trade from countries, like America, that do not reduce their emissions. Such a tax simultaneously “corrects” for an important global externality (by making the United States pay for the costs that it imposes on the entire world) and provides an incentive for the United States to do something about climate change, for instance, to impose a tax on its carbon emissions.50
The need for additional funds to help developing countries respond to the challenge of global warming was one of the motivations for the creation of two new global financial institutions described later, but there were others. The existing institutions (in particular the World Bank and some of the regional development banks) simply hadn’t responded as quickly as they should have to the changing world. The huge increases in infrastructure needs in the developing world and emerging markets were beyond what these institutions could have provided; they needed an increase in their capital—but the sentiment among some Republicans in the United States made that impossible.51 I described earlier the deficiencies in governance of these institutions—there was a need to make it more reflective of the economic realities of the twenty-first century; and though the G-20 recognized this, again, the U.S. Republicans made it clear that changes in governance would be difficult. And with these impediments, adapting the institutions to the fast-changing nature of global financial markets and responding to the deficiencies in these markets was difficult.
There was a potential large supply of long-term funds for investment—pension funds and sovereign wealth funds (oil-rich countries had accumulated trillions of dollars in savings; Norway, with a population of 5 million, had almost a trillion dollars alone). There were at the same time huge needs for long-term investment. But standing between the two were short-term financial markets, which paid little attention even to the most pressing global problems, like global warming.
Thus, early into the second decade of this century, the need for new development banks was apparent. And it made sense for the global South—the developing countries—to do this on their own. They had already shown that they could: One of their longstanding development banks, Corporación Andina de Fomento (CAF), or Banco de D
esarrollo de América Latina; the Andean Development Corporation—Development Bank of Latin America), has long been flourishing. It has been so successful that it has expanded from its original mission of serving the Andean region (Colombia, Venezuela, Ecuador, Peru, and Chile) to serving the entire Latin American region.
The New Development Bank
With the limitations in the established development banks in mind, and with the gap in “climate finance” especially deep, Meles Zenawi, prime minister of Ethiopia, approached me and my successor as chief economist of the World Bank, Nicholas Stern, in January 2011, to see if we could help in the creation of a new development bank. Though the developed countries had promised help in financing spending to reduce emissions and adapt to climate change, the effects of which were expected to be particularly devastating in Africa, there was a big disparity between promise and delivery, just as there had been in their earlier promise to devote 0.7 percent of their gross national income to helping poor countries.
Five key emerging market countries—Brazil, Russia, India, China, and South Africa—started meeting annually in 2009. The group, called BRICS, even then had a GDP as large as that of the advanced countries at the time of the founding of the Bretton Woods institutions (the IMF and the World Bank). They embrace more than 40 percent of the world’s population and almost a quarter of global GDP. It made sense for them to found their own development bank. The idea that a new development bank could be a common project, solidifying their cooperation, quickly caught on, and at the sixth BRICS summit, in Fortaleza, Brazil, in July 2014, the agreement to create the bank was signed. The BRICS Bank, more formally called the New Development Bank, has broader mandates (focusing especially on climate change), better governance, and new instruments, more suited to twenty-first-century financial markets than the old multilateral development institutions.52
Globalization and Its Discontents Revisited Page 49