28th September 1993: The United Nations headquarters in New York. (Photo by Ron Sachs/Consolidated ... [+]
The promise of globalization as a path to greater world-wide prosperity is seemingly fading, failing, or coming to an end, depending on whom you ask. Some critics say globalization drives rising inequality, within and between countries.
The IMF warns that the world is on the precipice of a global recession, a mere two years after the last one. And as the world’s wealthy countries tout post-pandemic economic recovery and take bold steps to manage inflation, poorer countries experience the relentless pressure of exogenous shocks – a lingering pandemic, climate change, soaring energy prices, and a dangerous food security crisis.
Unable to marshal anything approximating the $11 trillion in stimulus funding that Europe and the United States mustered during the pandemic, and squeezed out of the vaccine market, the world’s low- and lower-middle income countries — where much of the global population lives — endured all of the downsides of the pandemic without the tools to manage the fallout. These countries face a bleak future.
About 60% of low-income countries are already in or at high risk of a debt crisis. Interest rate hikes by national central banks to tame inflation – the U.S. Federal Reserve especially – and a strong dollar are pushing up the cost of servicing these debts.
At times like this, the world looks to institutions and leaders to steady the ship, but confidence in international institutions is low and those very institutions designed to help counter these trends and shape the future of globalization are failing to deliver.
Despite the ambition set forth by this year’s host, Indonesia, the recent G20 Finance Ministers and Central Bank Governors’ meeting was so hamstrung by disagreement on Ukraine that it was unable to achieve consensus on a response to the global food security crisis.
The last G7 Leaders’ Summit yielded a united front on Ukraine and ample resources to address that crisis, but little more than promises and solidarity on either the food crisis or the post-pandemic economic catastrophe plaguing low- and low-middle income countries.
The World Bank, with its mission to end extreme poverty and promote shared prosperity, has been unable to muster the innovation, agility, and necessary capital to stop the financial bleeding, the way it did during the 2007-08 global financial crisis, or to finance public goods, like vaccines, with efficiency and speed.[MJ1]
One path to increasing confidence in global institutions is to reform and modernize them, re-shaping institutional mandates and operations so that these bodies are capable of steering globalization in a more equitable and responsive direction.
Take the G20. Established in 1999, the G20 has sufficient political and financial weight to lead the global economy through periods of crisis. Its members represent 80% of global GDP, 75% of international trade and 60% of the world’s population. This leaves 40% of the world’s population — 3.3 billion people — out of the deliberations. And it fosters a dynamic that defines the global economy for those who are represented and leaves those who are the least resilient to rely on compensatory initiatives.
This dynamic has been laid bare by the feebleness of the creditor-driven Common Framework for Debt Treatments, which the G20 created to facilitate orderly restructuring in the wake of the COVID-19 pandemic. Almost two years later, only three countries – Chad, Ethiopia, and Zambia – out of 73 eligible nations have applied and none have completed the process, though recent developments in Zambia may offer hope.
The biggest play for global institutional change today lies in the growing calls for the reform of the international financial institutions – the IMF, World Bank, and other multilateral development banks (MDBs), and the World Trade Organization.
Many of these institutions were established or grew out of organizations that were created almost 80 years ago, and while they have delivered major gains, they are also showing their age. As U.S. Treasury Secretary Janet Yellen noted in April, the IMF needs “the tools to fulfill its role of financial firefighter in the face of modern, potentially more frequent global crises,” and the World Bank must “better mobilize private capital and fund global public goods.”
Modernizing these institutions, and in particular the multilateral development banks, could yield an additional $500 billion to $1 trillion in development finance – capital urgently needed to ameliorate the economic impact of volatility and, more importantly, to build the resilience needed for countries to withstand external shocks.
Wealthy countries were able to weather the Covid-19 crisis and its aftershocks by ripping up the rulebook and defying previously held economic orthodoxy. Even the so-called Frugal Four fiscal hawks – Austria, Denmark, the Netherlands, and Sweden – and like-minded Germany backed Europe’s largest stimulus packages. Meanwhile, low-income countries lacking domestic fiscal and monetary firepower are still battling a cash crunch, with many effectively locked out of international capital markets.
Reforming the MDBs is no small undertaking. It entails adjusting institutional risk tolerance on maintaining AAA ratings and using capital efficiently, greater financial innovation, and reimagining the country-based model to enable capital to flow not just to national projects, but also to finance regional and global public goods that are not constrained by borders.
Modernizing international financial institutions is up for discussion at the G20 Leaders’ Summit in November. While that gathering in Bali will most certainly focus on the immediacy of a possible global recession, leaders will hopefully overcome their political differences long enough to agree to reshape the institutions much of the world relies on during times like these. The billions of people who will not be represented are counting on it.
