The Role Of The World Bank(2)

The global slumpometer Nov 6th 2008 From The Economist print edition

Rich countries face their deepest recession since the 1930s. For poorer nations it could still be relatively mild MANY economists are now predicting the worst global recession since the 1930s. Such grim warnings discourage spending by households and businesses, depressing output even more. It is unfortunate, therefore, that there is so much confusion about what pundits mean when they talk about a “global recession”. America, Britain, the euro area and Japan are almost certainly already in recession according to the popular rule of thumb of two successive quarters of falling GDP. But is the R-word really justified for the world as a whole? In an updated World Economic Outlook, published on November 6th, the IMF predicted that world GDP growth would fall to 2.2% in 2009, based on purchasing-power parity (PPP) weights, from 5% in 2007 and 3.7% in 2008. In the past, the IMF has said that global growth of less than 3% implied a world recession, so its latest forecasts would push the world over the edge. Some forecasts by private-sector firms are even gloomier, with several now predicting global GDP growth of no more than 1.5% in 2009. But why does the IMF think that a world economy growing by less than 3% a year is in recession? To many people, growth of 2.9%, say, sounds pretty robust. Surely a drop in output is required? The trouble is that there is no agreed definition of a global recession. The popular benchmark used in developed economies—two successive quarters of decline—is not helpful when looking at the world as a whole, because many emerging economies do not report seasonally adjusted quarterly GDP figures. Also, downturns are rarely perfectly synchronised across countries, so even if most countries contract at some stage during a two-year period, global GDP growth may not turn negative. Indeed, global GDP has never fallen in any year since the 1930s Depression. Its worst years since then were 1982 and 1991, with growth of 0.9% and 1.5% respectively (see left-hand chart).

World growth also needs to be adjusted for rising world population. The IMF suggests that a sufficient (although not necessary) condition for a global recession is any year in which world GDP per head declines. In each of the downturns in 1975, 1982 and 1991, growth in world GDP per head turned negative. By contrast, in 2001, despite much talk of “the mother of all recessions”, global GDP per head expanded by around 1%. The annual growth rate in world

population has now slowed to 1.2%, so recent GDP forecasts would still allow average world income per head to rise. If market exchange rates are used to measure world output instead of PPPs, then some recent forecasts would imply a fall in world GDP per head. However, the IMF believes that PPP weights are more appropriate, because a dollar buys a lot more in poor countries than in America, thanks to lower prices. Converting China’s GDP into dollars at market exchange rates therefore understates the true size of its faster-growing economy and, in turn, understates world growth. The IMF’s definition of global recession also takes account of the fact that the trend growth rate in emerging economies is higher than in developed ones, so even a steep downturn will leave GDP still expanding. A growth rate of 4% would count as a boom in America, but a recession in China. Nevertheless, some economists reckon that the IMF’s 3% benchmark for global recession may be too high. UBS, for instance, suggests a demarcation point of 2.5%. Even the IMF now seems less sure. At the original launch of the World Economic Outlook in October, Olivier Blanchard, the fund’s chief economist, said “it is not useful to use the word ‘recession’ when the world is growing at 3%”. When tracking such diverse economies, it does make much more sense to define a global recession not as an absolute fall in GDP, but as when growth falls significantly below its potential rate. This can cause anomalies, however. Using the IMF’s definition (ie, growth below 3%), the world economy has been in recession for no fewer than 11 out of the past 28 years. This sits oddly with the fact that America, the world’s biggest economy, has been in recession for only 38 months during that time, according to the National Bureau of Economic Research (the country’s official arbiter of recessions), which defines a recession as a decline in economic activity. It is confusing to have different definitions of recession in rich and poor economies.

Growing apart Before proclaiming global recession, it is also important to consider the extent to which a downturn has spread around the world. As stockmarkets and currencies have slumped in emerging economies and some governments have had to knock on the IMF’s door, it might appear as if these economies are being hit harder than rich countries. Even in China, growth seems to be slowing sharply, prompting the government to lift its quotas on bank lending at the start of this month. Yet most emerging economies are still widely expected to hold up much better than in previous global downturns. It is only really the developed world that faces severe recession (see right-hand chart). The IMF’s revised November figures now forecast that the advanced economies will shrink by 0.3% in 2009, which would be the first annual contraction since the war. The IMF has become markedly more bearish on emerging economies since October, revising its forecasts downward by an average of a percentage point. But emerging economies are still tipped to grow by around 5%. This is a sharp slowdown from recent growth of 7-8%, but still above their average growth rate over the past three decades and considerably higher than their typical growth in previous global downturns. These numbers could of course, be revised down still further. But if broadly correct, this could be a relatively mild downturn for emerging economies. Real income per head is still expected to increase next year in countries that account for well over half of the world’s population. Indeed, if the developed world as a whole suffers an absolute decline in 2009, next year is set to be the first year on record when emerging economies account for more than 100% of world growth.

Unfunded mandate Oct 30th 2008 | RIGA From The Economist print edition

The IMF adopts a more flexible approach TIME was when a bail-out by the International Monetary Fund was a uniformly horrid experience. Cold-eyed, sharp-suited men pored over your country’s books, demanding painful structural reforms and bone-chilling fiscal stringency. Faced with the current turmoil in emerging markets, the fund now seems more like a generous uncle. Well-run countries now have fewer hoops to jump through to gain IMF money. On October 29th the fund announced the creation of a new short-term liquidity facility for the soundest emerging markets. The facility will disburse three-month loans to countries with good policies and manageable debts without attaching any of its usual conditions. The Federal Reserve added its considerable firepower to the rescue effort, announcing the establishment of $30 billion swap lines with each of the central banks of Brazil, Mexico, South Korea and Singapore. The fund’s traditional lending also comes with fewer strings attached. The IMF-led $25.1 billion bail-out of Hungary on October 28th was “fast, light and big”, in the words of one person involved. The rescue came just days after the fund agreed on a $16.5 billion package to shore up Ukraine’s collapsing economy, a prospect which seems to be unblocking the country’s wretchedly deadlocked politics. It is also standing by to help Pakistan. The huge international support package for Hungary is a shocking turn of fortune for eastern Europe, a region that has enjoyed growth and stability for a decade. But a toxic combination of external debt and collapsing confidence left the economy floundering. Even spending cuts, tax increases, a €5 billion ($6.7 billion) loan from the European Central Bank and a sharp rise in interest rates, from 8.5% to 11.5%, had failed to calm the markets. The fund had tried to get the governments of Germany, Italy and Austria on board for the rescue. Their banks are most exposed to Hungarian borrowers (thanks to eager lending in euros and Swiss francs). Austria was willing to take part; Germany was not. So the IMF has put up $15.7 billion (to be agreed on at an IMF board meeting shortly), the European Union has added $8.1 billion, and the World Bank a further $1.3 billion. In return, all Hungary has to do is pass a law on fiscal responsibility that is already before parliament. The fund may be calculating that it is better to be lavish before a crisis than stringent after one. Iceland, which is negotiating a $2 billion bail-out from the IMF, is being forced to take some bitter medicine after the failure of its banks. The central bank raised interest rates by a full six percentage points to 18% on October 28th, as trading resumed in the Icelandic krona after a suspension of nearly a week. The big uncertainty now is how many more fires the fund and other lenders must fight—and whether they can afford to do so. The IMF may well need more than the $250 billion it now has. Gordon Brown, Britain’s prime minister, wants countries with big surpluses, such as China and the oil-rich Gulf states, to contribute more. The fund’s backers, it seems, need to be as flexible as its new lending criteria.

The IMF

Supersizing the fund Feb 5th 2009 From The Economist print edition

The IMF needs more than just money if it is to tackle global imbalances

Illustration by S. Kambayashi

DOUBLING the lending capacity of the IMF to $500 billion might seem like a bold idea. But when John Lipsky, the fund’s deputy head, announced its intention to do just that on January 31st, India’s chief economic planner, Montek Singh Ahluwalia, deemed the proposal too modest. Instead, he suggested tripling its members’ IMF quotas, or the capital they provide. To hear developing countries call for a bigger role for the IMF would have sounded, just a short while ago, as if they were asking for a bigger rod for their backs. The fund, after all, is hardly popular. But given the tumultuous state of global capital flows, it is not entirely surprising. As the crisis has spread, the massive influx of capital to developing countries, which had made the IMF seem so irrelevant during the boom, has slumped. The Institute for International Finance, a group of senior bankers, reckons that net inflows into emerging markets, which were $929 billion in 2007, will fall to $165 billion in 2009. Trevor Manuel, South Africa’s finance minister, spoke of fears of “decoupling, derailment, and abandonment”—the prospect of being shut out of international capital markets as Western banks, in particular, withdraw from foreign markets.

All of which has given emerging economies a renewed appreciation for multilateral financing, and a sense that the IMF’s resources may need beefing up. Arvind Subramanian, a former IMF economist now at the Peterson Institute for International Economics in Washington, DC, reckons it may need up to $1 trillion. But even supersizing the fund may not be enough. There are those who think the fund’s mission should go beyond doling out money to helping prevent the build-up of global financial imbalances that led to this crisis. Part of that lopsidedness was the huge pile of international reserves emerging countries built up during the boom on the back of strong exports. The flip side was the rising deficits of consumer countries in the developed world.

But some people, such as Mr Ahluwalia, argue that the build-up of those reserves stemmed partly from the IMF’s shortcomings. They were amassed because the developing countries did not believe that the IMF was adequately equipped to provide financing when it was needed. Indeed, the fund recognises that countries are loth to turn to it even when it has enough money to lend, which suggests that more money, by itself, may not be enough to make it more effective. Raghuram Rajan, a former IMF chief economist, says a big part of the solution might be to give emerging nations more say in the IMF, which is dominated by Europe and America. Discussing reforms to the IMF’s governance is on the agenda when the leaders of the Group of 20 meet in London on April 2nd, and the fund has set up a committee headed by Mr Manuel to look into the matter. The big powers will be reluctant to give ground, not least because they are the fund’s main backers. But if they do not, the risk is that the developing world will be tempted to build even larger piles of reserves to insure itself against future crises.

The IMF

Doubling up Feb 17th 2009 From Economist.com

The IMF is sharply increasing its lending capacity. It expects that more countries may need its help

Shutterstock

THE International Monetary Fund usually draws attention when it doles out cash. As notable, however, was the news last week of a deal with the Japanese government, allowing the fund to add an extra $100 billion to its kitty. The loan will augment the fund’s existing lending capacity by about half, but it is not stopping there: it plans to raise still more money (perhaps another $200 billion) from other governments. If it succeeds, it would have roughly doubled its lending capacity compared with the start of September 2008, when the global financial crisis broke in earnest. It is not immediately obvious why the IMF, already flush with cash, needs to raise so much more money now. In September last year it had roughly $250 billion available for loans in uncommitted funds. Since then it has committed roughly $48 billion to a variety of battered emerging economies, including Belarus, Latvia, Pakistan, Iceland, Ukraine, Hungary and Serbia. A burst of activity at the end of last year has, however, been followed by a period of calm. No more loans have been agreed upon this year, except a precautionary arrangement with El Salvador, under which the country is entitled to draw $800m in case of balance-of-payments difficulties. That should leave the fund with some $200 billion lying about, even before the injection of Japanese funds.

Evidently the fund is worried that emerging economies face a large shortfall in external financing, and in turn is concerned that it might suddenly lack the means to plug the gap, if asked. Such concerns are not misplaced. Private capital, which flooded into emerging countries in the boom years, is now rushing out just as fast. According to the Institute for International Finance (IIF), net inflows of such capital to these economies peaked at nearly $929 billion in 2007, but then almost halved to $466 billion last year. Worse is to come. The IIF expects that flows will dwindle to a paltry $165 billion this year. Bank lending to emerging economies, in particular, has dried up. Western banks have hunkered down in their home markets; the IIF predicts a net outflow of $61 billion this year, a dramatic reversal of the net inflow of $410 billion in 2007. As private capital dries up, therefore, emerging markets may have to turn elsewhere: the fund is an obvious, if usually unpalatable, choice.

The worry is that if several large emerging economies needed to turn to the IMF at once, the latter’s resources could prove inadequate. Also, the fund has been adding facilities to its arsenal. In October it launched a new short-term liquidity facility to help countries with otherwise sound macroeconomic policies facing sudden capital flight. Although no loans have been made under this facility so far, these would only be credible if they were backed up by enough resources. Signs suggest that more countries may soon have to turn to the IMF for money, over and above loans that have already been approved. Pakistan’s government is considering a request for a $4.5 billion loan to top up the $7.6 billion the IMF agreed to lend in November. Romania’s prime minister says that his government will decide in the next two weeks whether it will seek money from the IMF. More generally eastern Europe has been hit hard by the reversal of private capital flows. Turkey is negotiating the terms of a possible loan with the fund. Some economists, including former IMF economist Arvind Subramanian, even estimate that $500 billion may not be enough to allay worries about the fund’s capacity to commit, credibly, to rescuing countries in trouble. Mr Subramanian reckons the fund may need to have as much as $1 trillion on hand. But where such additional funds would come from is far from clear. The fund is not yet considering turning to private markets. Tapping additional resources from reserve-rich emerging countries such as China is a possibility. But this may require the fund to reform its governance structure radically to give these countries significantly more voice in its running than they have at present. In a hopeful sign, reforming the IMF figures prominently on the agenda of the meeting of G20 leaders in April. Movement on this vexed issue would hugely help the effectiveness of the IMF.

Cool aid? Oct 28th 2008 From the Economist Intelligence Unit ViewsWire

Iceland requests a loan from the IMF The Icelandic government has formally requested a US$2bn loan from the International Monetary Fund (IMF), three weeks after the state was forced to take control of the country's three largest commercial banks. The meltdown in Iceland's financial system has seen the near collapse of its stock and foreign exchange markets, and has also triggered the country's worst diplomatic crisis since the Cod Wars ended in 1976. Alongside additional loans from Iceland's Nordic neighbours, the IMF bail-out package and accompanying economic stabilisation programme is set to be agreed in early November. This will represent the first step in Iceland's attempts to regain credibility in international markets. More decisive moves towards joining the EU may not be too long in coming.

Paying the price for financial excess The international credit crisis hit Iceland hard in mid-September, as credit markets seized up almost completely following the bankruptcy of Lehman Brothers, the US investment bank (a move now widely viewed as having precipitated the current acute financial crisis). The IMF sent a fact-finding mission to Iceland in early October, just as the country's third largest bank, Glitnir, was taken into government hands. It soon became evident that the problems facing the Icelandic financial system were larger than the state could conceivably handle on its own. However, the government was far from keen for Iceland to become the first western country to receive IMF assistance since the UK in 1976 and accept its position as the first sovereign victim of the international credit crunch.

By the middle of October, however, external assistance was widely seen as the only possible option after the government had been forced to take over the country's three largest banks with liabilities totalling more than 10 times Iceland's annual GDP. The near-collapse of the financial system caused a 90% drop in the domestic stockmarket, extensive problems for money market funds, the evaporation of more than one-third of the value of the national pension system and a nearly uncontrollable depreciation of the Icelandic krona (before the Central Bank imposed currency controls after two days of unsuccessful attempts to defend the currency). Outside of Iceland the krona became almost worthless, trading 80% below its value in domestic markets. The problems didn't end there. Exporters have been unable to transfer funds into Iceland after the country's payment system collapsed, leading to severe losses in terms of market access and the development of a currency black market. This problem was further complicated by the British government's decision to invoke UK anti-terrorism legislation to freeze (and potentially seize) Icelandic assets in an attempt to safeguard up to 300,000 British depositors in Icesave, the online bank of Landsbanki, one of the country's failed institutions now in state hands. With the Bank of England (the UK central bank) holding most of the Central Bank of Iceland's foreign reserves, it was unclear whether the latter actually had access to its own reserves. The Central Bank therefore drew on €400m swap lines with Norway and Denmark to secure imports of food, medicine and other necessities. Before an agreement was finally reached with the IMF on October 24th, Iceland's Central Bank had used up almost half of these accessible reserves.

In search of help

The Icelandic economy was always a likely candidate for failure as the global credit crunch escalated. The country's banking system had grown rapidly through easy access to cheap foreign funding, while the currency became sharply overvalued as high domestic interest rates made the Icelandic krona popular in the so-called carry-trade (borrowing in low-interest currencies to invest in high-yielding markets). Economic imbalances were clear to see, as inflation surged into double digits and the current-account deficit widened to more than 25% of GDP in 2006 and 15% in 2007. With a small foreign currency reserve compared with the huge foreign liabilities of the banking system, the ability of the authorities to provide the commercial banks with a lender of last resort facility in foreign currency and so prevent a serious run on the overleveraged economy was simply out of the question. The severe vulnerability of the financial system became evident following a speculative attack in March 2008 and the collapse of Lehman Brothers in the US, which triggered a sharp flight to safety among global investors. The Central Bank began at that time to seek currency swap agreements with the European Central Bank, the Bank of England and the US Federal Reserve in addition to the Nordic Central Banks. These overtures resulted only in a €1.5bn swap facility agreement with three Nordic central banks, as the world's major central banks all declined to provide assistance. This prompted the Icelandic prime minister, Geir Haarde, to state that the country was now forced to look for "new friends". On October 7th the Central Bank of Iceland announced that it was in negotiations to receive a €4bn loan from Russia to strengthen its foreign currency reserves. Even though an agreement ultimately wasn't reached, the Russian advance caused a stir in the Nordic countries and pushed the Icelandic problem higher on the international political agenda. Using the threat of increased Russian influence in Iceland has been a tried-and-tested method used repeatedly by Iceland (mainly during the Cold War) to influence US and NATO policies.

Bail-out boost

The US$2bn loan provided by the IMF is set to be accompanied over the next four years by additional loans totalling around US$4bn from its Nordic neighbours, and possibly also Japan, which announced earlier this month that it would use some of its US$1trn foreign reserves to support IMF programmes to strengthen the international financial system. Primarily this additional lending will be used to bolster Iceland's foreign exchange reserves. The Nordic governments had previously insisted on an approved IMF deal and economic stabilisation plan as conditions before providing their support. The total package of around US$6bn equates to around 50% of Iceland's annual GDP (in purchasing power parity terms) or over 11 times the country's IMF quota. This is a much larger assistance programme, in relative terms, than both Turkey and Brazil received earlier this decade. Once the deal is approved, most likely in about 10 days, the IMF will initially provide US$830m, with Iceland able to draw down additional instalments following quarterly reviews. In addition, large amounts of government guaranteed bonds will have to be issued to refinance the banking system and recapitalise the Central Bank of Iceland. The economic stabilisation programme also involves a stringent fiscal consolidation package aimed at limiting discretionary spending and returning the structural budget position towards balance over the medium term (the fiscal deficit is set to rise sharply in the near term, with the IMF expecting the economy to contract by around 10% next year). Regulation of the banking sector is also set to be reformed "in accordance with international best practice", although it remains to be seen exactly what form this will take in light of the global financial turmoil. The Icelandic economy is now at a major turning point, having previously been one of the most dynamic in Europe, enjoying average annual growth of over 5% in the last five years which allowed the central government to eliminate the country's net public debt. Over the coming years Iceland's economic policy will be planned in collaboration between the government and the IMF.

Allaying some earlier concerns, the IMF programme will allow the government to postpone most of the inevitable tightening of fiscal policy until the economy comes out of its expected deep trough. The IMF has also stepped back from demanding the privatisation of the state-owned Housing Financing Fund, despite urging such action in its previous recommendations. However, tighter monetary policy will be required to support the currency and prevent capital flight once the krona is refloated. Considerable currency volatility is expected in the short term.

Changing landscape

The rapid turnaround in the Icelandic economy from one of Europe's most successful to an economic and financial basket case may also have a profound impact on the country's political landscape. The governing centre-right Independence Party (IP) has long dominated Icelandic politics, not least on the back of its policies of economic and financial liberalisation. With the banks now back in public ownership only five years after being fully privatised, the party's market-based policy agenda is coming under increasing scrutiny. As are some of the main architects of this approach, including the IP prime minister, Geir Haarde, and the Central Bank governor, David Oddsson, who served as prime minister between 1991 and 2004. Moreover, support for EU membership has growth rapidly as the Icelandic krona, the world's smallest free floating currency, has come to be viewed increasingly as the source of much of the economy's current troubles. The main beneficiary of the increased support for EU entry has been the Social Democratic Alliance—the junior party in government alongside the IP—which is the only major political force aiming for EU membership. According to a recent poll, around 69% of Icelanders now want to join the EU and 73% support swapping the krona for the euro. The IMF programme is just the first step for the Icelandic economy towards regaining credibility in international markets, rebuilding the payments system and restoring capital flows and an effective currency market. Iceland will have to work hard to rebuild confidence in important overseas markets. At present, relations are especially strained with two of its largest trading partners following the UK's controversial use of anti-terror legislation and the extensive losses experienced by German banks from the failure of the Icelandic financial system. Moreover, EU membership is now increasingly viewed in Iceland as an important step towards strengthening the country's international standing, regaining confidence in foreign markets and rebuilding a stronger and more robust economic and financial system. Changing times lie ahead. he IMF

No strings attached Oct 23rd 2008 From The Economist print edition

The fund is back. It needs to keep alert

EPA

Strauss-Kahn—but shouldn’t have

Correction to this article UNTIL last week, the IMF had been embarrassingly absent from the financial turmoil. Instead, it was just embarrassed. Rather than discussing rescue packages for troubled countries, most of the talk had been over the severance package offered to a former lover of its managing director, Dominique Strauss-Kahn. Now, as one country after another descends into crisis, the world’s economic firefighter has at last been called into action—despatching teams to parts as different as Iceland and Pakistan. As The Economist went to press the IMF was close to announcing details of a $1 billion package for Iceland, part of a $6 billion lifeline with contributions from the other Nordic countries and Japan. Pakistan may get $10 billion over two years. A $14 billion package for Ukraine is likely. The reasons for their vulnerability vary. Eastern European countries talking to the fund are disproportionately dependent on external financing and foreign banks. Pakistan’s foreignexchange reserves have dwindled as remittances and foreign investment have dried up. Iceland’s troubles began with the collapse of an over-leveraged banking system. The IMF remains the institution most suited to dealing with such crises. It has $255 billion in uncommitted usable resources and the ability to elicit funds from countries that may be reluctant to act on their own—as with the Japanese and Nordic contributions to the Iceland package. The IMF-led route is better for troubled countries than making ad hoc approaches to others. Even so, Pakistan first sought an emergency infusion of between $2 billion and $4 billion from the Chinese government, and Iceland tried to work out a deal with Russia. It was only after these attempts fell through that the two countries approached the IMF. In part, their reluctance is a sign of the stigma of an IMF bail-out. The delay can cost valuable time while countries scramble to find other sources of help. Governments also worry about the damaging domestic political fallout of being forced to accept tough conditions as part of a rescue package. Critics have argued that the IMF is overly hung up on conditionality—although, in countries like Pakistan and Ukraine, which have enormous deficits, the need for conditions is clear. More generally, however, the fund needs to be flexible and it has indeed rethought its approach in recent years. It now aims to impose policy prescriptions only when absolutely critical to a programme’s success. Details emerging from the talks with Iceland suggest these guidelines are being followed: there appear to be no punitive strings attached. That will help the IMF dispel concerns that it is too rigid in its ideology.

There are also doubts about whether the IMF’s instruments are quick and flexible enough for the full range of crises. The mainstay of IMF crisis lending to emerging economies is the Stand-by Arrangement, which is designed for dealing with short-term balance-of-payments problems, but not necessarily with shortages of liquidity. The fund is thinking about a special short-term liquidity instrument, somewhat like the swap lines recently extended among central banks. But it has been slow in coming. The fund needs to move fast, to use the right tools, and to propose policies that are tailored to each country’s economic situation. There could be no worse time to be investigating whether Mr Strauss-Kahn broke the rules in his affair with a former staffer from Hungary. Just now Mr Strauss-Kahn needs his wits about him. Clearly, he can be easily distracted.

The world economy

Bad, or worse Oct 9th 2008 | WASHINGTON, DC From The Economist print edition

At best, the world economy is on the brink of recession DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. As the financial crisis has broadened and intensified, the global economy has begun to suffocate. That is why the world’s central banks have been administering emergency measures, including a round of co-ordinated interest-rate cuts on October 8th. With luck they will prevent catastrophe. They are unlikely to avert a global recession. According to the IMF’s most recent World Economic Outlook, published on October 8th, the world economy is “entering a major downturn” in the face of “the most dangerous shock” to richcountry financial markets since the 1930s. The fund expects global growth, measured on the basis of purchasing-power parity (PPP), to come down to 3% in 2009, the slowest pace since 2002 and on the verge of what it considers to be a global recession. (The fund’s definition of global recession takes many factors into account, including the rate of population growth.) Given the scale of the financial freeze, the fund’s forecast looks optimistic. Other forecasters are convinced that a global recession is inevitable. Economists at UBS, for instance, expect global growth of only 2.2% in 2009. The rich world’s economies were either shrinking, or close to it, long before September. Recent weeks have made a rich-world recession all but inevitable. America’s economy lost steam throughout the summer. Temporarily buoyed by fiscal stimulus and strong exports, output grew at a solid 2.8% annualised rate between April and June. But as the stimulus wore off, the job market worsened, credit tightened and consumer spending slid. That slide became a rout in September. The economy lost 159,000 jobs, the most in a month since 2003. Car sales fell to a 16-year low as would-be buyers were unable to get credit. The economy may already have shrunk in the third quarter. The rest of the year is likely to be worse. Some economists expect consumer spending to fall at its fastest pace since the 1980 recession. Add in other gloomy evidence, such as a survey of purchasing managers that suggests manufacturing is extremely weak, and it is clear that output is now falling. America’s recession may not yet be official, but it is well under way. In Europe the outlook is equally grim. The British economy, which stalled in the second quarter, is now unmistakably falling into recession. The IMF’s forecasts suggest that Britain will see the worst performance of any big economy in the year to the fourth quarter of 2008. The economies of the euro area, too, are struggling badly. Figures released on October 8th showed that output in the euro area fell at an annualised rate of 0.8% in the second quarter. GDP shrank in the currency zone’s three largest countries—Germany, France and Italy. The fourth largest, Spain, barely grew. As elsewhere, the most recent figures have grown grimmer still. Business confidence has turned down and a closely watched survey of purchasing managers points to a further contraction in activity over the summer months. Even the European economies that are less directly affected by housing busts, such as Germany, have been hard hit. The big hope for the euro area was that German shoppers, relatively free of debt and with scope to save a little less, would make up for weakness in debt-laden economies such as Spain. But household spending in Germany has been falling since the end of last year.

Japan, too, is looking weak. Its economy shrank at an annualised rate of 3% in the second quarter as exports fell, investment slowed and high food and fuel prices dented consumer confidence. Japanese banks are less embroiled in the financial crisis than those in Europe and America, but with other economies falling into recession and the yen soaring, the prospects for Japan’s exports and economy are dark. This gloomy backdrop explains why the co-ordinated rate cuts were so essential. Even without the financial seizure, the case for cheaper money was becoming abundantly clear. With commodity prices falling sharply (the price of a barrel of crude was down to $88 on October 8th) and economies suffering, inflation risks are evaporating in the rich world. If oil prices remain at around today’s levels, headline inflation will be below 1% in America by next summer. Deflation is an increasing risk. That suggests more rate cuts will be needed, particularly in Europe. All told, the IMF expects the rich-world economies to grow by only 0.5% in 2009. Its forecast of 3% global growth depends on reasonably robust expansion in emerging economies. The fund expects developing countries, as a group, to grow by 6.1% in 2009, more slowly than their blistering 8% pace of recent years, but far from recession. That would imply an unprecedented growth gap between the rich and emerging world (see chart).

Some emerging economies, notably China, have shown remarkable resilience to the financial storm (see article). Many other markets, however, are being hit hard by the widening crisis as investors flee risk. Analysts at Morgan Stanley estimate that capital flows to emerging economies could fall to $550 billion in 2009 from around $750 billion in 2007 and 2008. Such a sharp drop would hit economies that rely heavily on foreign finance: more than 80 developing countries are likely to run current-account deficits of more than 5% of GDP this year. The links in the real economy could also be stronger than many imagine. Exports will be hit as recession grips the rich world. Falling commodity prices bode ill for the countries that produce them, notably in Latin America. The Brazilian real has fallen by more than a quarter against the dollar in the past month. Thanks to more disciplined macroeconomic policies and large cushions of reserves, many emerging economies have strong defences against a rich-world downturn. But they will not escape unscathed. A mild global recession is the best that can be hoped for.

The World Bank

Dirty linen Mar 19th 2008 From The Economist print edition

Can a big lender fight sleaze? DENOUNCING sleaze and kickbacks has long been fashionable among the bosses of the World Bank. Back in 1996, James Wolfensohn piously vowed to root out the “cancer of corruption” and even made some modest internal efforts at reform. His successor, Paul Wolfowitz, also made the issue a priority, linking it to his goal of making aid effective. Both men genuinely tried to tackle the scourge. And yet this week saw yet another bank boss, Robert Zoellick, forced into the spotlight by yet another scandal. For several years there have been whispers about wrongdoing in the agency's lending to Indian health-care projects. The allegations led to a “detailed implementation review” by the bank's internal auditor. That report, made public in January, concluded that over $500m-worth of contracts may have been tainted by “significant indicators of fraud and corruption” such as “collusive behaviours, bid rigging, bribery and manipulated bid prices”. Though the bank was initially slow to respond to the allegations, it said this week that it had started nine investigations into the matter. The Indian government has also started several related probes. Not everyone is convinced. In 2006 Amir Attaran of the University of Ottawa co-authored a paper in theLancet, a British medical journal, pointing to apparently falsified results and other deficiencies in health projects paid for by the bank. He is convinced that its managers are too cosy with their clients in India to conduct a proper investigation: “This is a corrupt party investigating itself.” World Bank spokesmen hotly deny this, insisting that anti-corruption efforts are gathering pace. They point to multiple examples of firms punished by such measures as temporary bans on doing business with the bank. Yet even if the World Bank emerges untainted from this affair, that may not be enough to solve a deeper problem that may produce more scandals in future. As an institution which is under strong pressure to lend as much as possible, says Francis Fukuyama of America's Johns Hopkins University, the World Bank is “poorly structured to lead a fight against corruption”. Another problem: the bank's mandate forbids it from dabbling in local politics—and that can mean failing to make sober enough assessments about what is really going in the countries where it is pushing out money.

The IMF

Selling the family gold Apr 10th 2008 | WASHINGTON, DC From The Economist print edition

The IMF launches a financial rescue plan—for itself IT HAS whipped many developing countries into shape. Now it is time for the IMFto apply the birch to its own back. With crisis lending down, the fund has not been generating enough income to cover its $1 billion budget. By 2010 its deficit will be some $400m a year. It has enough reserves to tide it over. But ultimately it needs its own financial rescue plan. Which is why, on April 7th, the fund's board agreed to cut costs and boost income. A quarter of the gap will be plugged by cutting costs, including 380 jobs (or 15% of the total). The rest will come from new income sources. It wants to sell about 12.5% of its vast gold stocks, which amounts to 403.3 tonnes, and create an endowment with the proceeds. Using a (conservative) price estimate of $850 an ounce, the fund reckons such a sale would raise about $11 billion. In order to avoid upsetting the gold market, it would be done over several years.

The fund also wants to broaden its investment strategy. At present it may invest its reserves only in government bonds. In future, it hopes to boost returns by half a percentage point a year by broadening its portfolio to include corporate bonds and perhaps shares. Is the doughty IMF to become an international version of a sovereign-wealth fund—ready to help recapitalise American banks or invest in a private-equity firm? Hardly. Conflicts of interest would be legion, so the investments will be made slowly and conservatively. Buying assets beyond government bonds requires a change in the fund's Articles of Agreement, which demands parliamentary ratification in many of the IMF's 185 member countries. The gold sales, too, face hurdles. America's Congress must approve—and hitherto senators from gold-producing states such as Nevada have been loth to agree. But with gold still near $1,000 an ounce, they may just be amenable.

Chad

Breaking the bank Sep 25th 2008 From The Economist print edition

A vaunted model development project goes awry

WHEN the World Bank agreed to help finance a controversial pipeline from oilfields in Chad to a port in Cameroon, it claimed to be raising the bar for transparency and good government in the extractive industries. It insisted that the government of Chad spend almost all its revenue from the project on development; to make sure it did so, the oil firms involved were to pay royalties into an escrow account monitored by an independent agency. Eight years later, the bar has fallen with a thud. Rather than comply with the bank’s strictures, the government of Chad has repaid its loans in full. It will now do as it pleases with its oil money. The project did not get off to an auspicious start: the government spent a chunk of its $25m signing bonus on arms. As local rebel movements grew stronger, and the conflict in neighbouring Darfur began to spill over into Chad, the government’s urge to funnel cash to the army only grew. It bickered frequently with the bank and the oil firms about the terms of the deal. The lockbox for revenue proved insecure, since the government simply took the money disbursed for education and health care and diverted it to less worthy causes. “Ultimately,” says a World Banker, “these projects depend on the political will of the governments involved.” Pressure groups say the bank should have known better. Robin Hodess of Transparency International, a Berlin-based anti-corruption lobby, says that setting up parallel administrative structures to ensure sound management of revenues never works; the incompetence and venality they are designed to bypass inevitably undermine them. Instead, she says, the bank should have concentrated on reforming Chad’s bureaucracy until the government seemed fit to handle the bonanza. Korinna Horta of Environmental Defence, an American NGO, believes that Chad, already one of the world’s poorest countries before the oil began to flow, is now even worse off. She argues that the government’s spending on arms has fuelled a civil war, as well as the conflict in Darfur. She also points to pollution and public-health problems around the oilfields as proof that Chad’s natural resources, like those of so many other poor countries, have proved to be more of a curse than a blessing. The World Bank, meanwhile, says it still stands ready to assist Chad’s government with future development schemes.

Poverty

The bottom 1.4 billion Aug 28th 2008 | DELHI From The Economist print edition

The world is poorer than we thought, the World Bank discovers Correction to this article IN APRIL 2007 the World Bank announced that 986m people worldwide suffered from extreme poverty—the first time its count had dropped below 1 billion. On August 26th it had grim news to report. According to two of its leading researchers, Shaohua Chen and Martin Ravallion, the “developing world is poorer than we thought”. The number of poor was almost 1.4 billion in 2005. This does not mean the plight of the poor had worsened—only that the plight is now better understood. The bank has improved its estimates of the cost of living around the world, thanks to a vast effort to compare the price of hundreds of products, from packaged rice to folding umbrellas, in 146 countries. In many poor countries the cost of living was steeper than previously thought, which meant more people fell short of the poverty line. Ms Chen and Mr Ravallion have counted the world’s poor anew, using these freshly collected prices. They have also drawn a new poverty line. The bank used to count people who lived on less than “a dollar a day” (or $1.08 in 1993 prices, to be precise). This popular definition of poverty was first unveiled in the bank’s 1990World Development Report and was later adopted by the United Nations (UN) when it resolved to cut poverty in half by 2015.

The researchers now prefer a yardstick more typical of the 15 poorest countries that have credible poverty lines. By this definition, people are poor if they cannot match the standard of living of someone living on $1.25 a day in America in 2005. Such people would be recognised as poor even in Nepal, Tajikistan and hard-pressed African countries such as Uganda. But for those who still think a “dollar a day” has a better ring to it, the authors also calculate the number of people living on less than that at 2005 prices (see table). The discovery of another 400m poor people will not satisfy some of the bank’s critics, who think it still undercounts poverty. Its cost-of-living estimates are based on the prices faced by a “representative household”, whose consumption mirrors national spending. But the poor are not

representative. In particular, they buy in smaller quantities—a cupful of rice, not a 10-kilogram bag; a single cigarette, not a packet. As a result, the “poor pay more”. Such concerns prompted the Asian Development Bank (ADB) to carry out its own study of the prices faced by the poor in 16 of its member countries (not including China). Its results, released on August 27th, found that in nine of those countries the poor in fact pay less. Even though they buy in smaller quantities, they save money by buying cut-price goods from cheaper outlets: kerbside haircuts not salons; open-air stalls not supermarkets; toddy not wine. This penny-pinching adds up. In Indonesia, for example, the poor’s cost of living is 21% below the World Bank’s estimate. The survey also shaved more than 10% off the cost of living in other populous countries, such as Bangladesh and India. The difference was narrower in smaller countries, such as Cambodia. This may be because in big countries, such as India, the rich are large in number, though a tiny part of the population. Perhaps their spending has an undue influence on the prices faced by the representative household. The ADB’s findings face an obvious philosophical objection. In theory a poverty count is supposed to calculate how many people fail to meet a certain standard of living. A person eating coarse rice, not fine-grained basmati, dressed in polyester not cotton, has a lower standard of living, even if he eats the same amount of grain and owns the same number of shirts. And when a household buys fruit in a supermarket, its members are buying more than just an apple. They are also enjoying the comfort of air-conditioning, the convenience of a parking space, and the hygiene of airtight packaging. But until such comforts are within the poor’s reach, the ADB is right to track the prices the poor actually pay. It hopes the next global price survey, due in 2011 and led by the World Bank, will do the same. Then, perhaps, the number of poor will be back to nine digits.

Who runs the world?

Wrestling for influence Jul 3rd 2008 From The Economist print edition

The post-war global institutions have largely worked well. But rising countries and growing threats are challenging their pre-eminence

THE powerful, like the victorious, do not just write history. They grab the seats at the top tables, from the United Nations Security Council to the boards of the big international economic and financial institutions. They collude behind closed doors. They decide who can join their cosy clubs and expect the rest of the world to obey the instructions they hand down. That is how many outsiders, not just in the poor world, will see the summit that takes place from July 7th to 9th of the G8, the closest the world has to an informal (ie, self-appointed) steering group. Leaders of seven of the world’s richest democracies, plus oil-and gas-fired Russia, gather this year in Toyako, on Hokkaido in northern Japan, to ruminate on climate change, rising food and energy prices, and the best way to combat global scourges from disease to nuclear proliferation.

But in an age when people, money and goods move around as never before, this little group no longer commands the heights of the global economy and the world’s financial system as the core G7 used to do when their small, purposeful gatherings of the democratic world’s consenting capitalists first got going in the 1970s. Nowadays summits produce mostly lengthy communiqués and photo-opportunities. And Russia’s slide from democracy into state-directed capitalism has lowered the club’s political tone. In an effort to show that the G8 is still up with the times, Japan, like Germany last year, has invited along for a brief chat leaders from five “outreach” countries: Brazil, China, India, Mexico and South Africa. Yet this handshake between those who did best out of the 20th century and some potential shapers of the 21st leaves hanging the question of how the old world order should be adapting to the new. Might the world be better managed by such a G13? Or a G15 or G16, to include a couple of weighty Islamic states too? Or, to preserve the group’s original globe-steering purpose, by a G12 of the world’s biggest economies? Meanwhile, the global institutions set up after the second world war are also having to look hard at their own futures. Unlike the G7/8, which takes on a bit

of everything, these institutions basically divide into two sorts: economic and financial, and political. At the pinnacle of world political management, but looking increasingly anachronistic, is the UN Security Council. Of its 15 members, ten rotate at the whim of the various UN regional groupings. The other five, which wield vetoes and are permanent, are America, Russia, China, Britain and France, roughly speaking the victors of the last long-ago world war. Alongside them is a secretary-general (currently Ban Ki-Moon from South Korea; this job, too, tends to go by regional turn), a vast bureaucracy at UN headquarters in New York, and hundreds of specialised agencies and offshoots (see table).

The world had to be saved not just from another war, but from a repeat of the Great Depression of the 1930s. That job went to a clutch of institutions: the World Bank and the International Monetary Fund (IMF), jointly known as the Bretton Woods institutions after the place of their creation; the Organisation for Economic Co-operation and Development, a rich-country thinktank set up in 1961; the much older central bankers’ Bank for International Settlements; and the World Trade Organisation (WTO, formerly the GATT).

They have been buttressed too by conventions, conferences, courts, declarations, disputemechanisms, special mandates and treaties governing everything from human rights to antidumping complaints. The whole elaborate architecture has had extra underpinning from strong regional organisations, such as the European Union, and less elaborate ones like the African Union and the various talking-shops of Latin America, the Arab world and Asia, as well as from steadying alliances, such as NATO. As a result, there has been no return to the disastrous global conflicts of the first half of the 20th century. Yet that very success has become one of three powerful pressures to adjust the way the world is run, as new economic winners (and some new losers) demand a say. Pressure also stems from intensifying resentment and frustration. After ringing declarations on human rights and even the adoption by a UN world summit in 2005 of a “responsibility to protect” against genocide and crimes against humanity, the UN Security Council still finds itself unable to agree to do much to protect the people of Darfur, Zimbabwe, Myanmar and others from the murderous contempt of their rulers—just as in the 1990s the UN failed the genocide victims in Rwanda. If the Security Council, with a charter of high principles at its back, shows such feebleness towards tyrants (or to those who cavalierly flout nuclear treaties), doesn’t it deserve to be bypassed? John McCain, the Republican candidate for president of the United States, supports the creation of a new League of Democracies which, its boosters argue, would have not only the moral legitimacy but also the will to right the world’s wrongs effectively. The third impetus to rejig the way the world organises itself is a dawning realisation on the part of governments, rich and poor, that the biggest challenges shaping their future—climate change, the flaws and the forces of globalisation, the scramble for resources, state failure, mass terrorism, the spread of weapons of mass destruction—often need global, not just national or regional, solutions. The shift in 21st-century economic power alone is justification for rebalancing influence in the top clubs. Much harder to figure out is which bits of the global architecture need mere tweaking, which need retooling or replacing—and who should have the right to decide. After decades of dividing the world into the rich and powerful West and the developing (or emerging) “rest”, China’s rapid growth and the economic dynamism of East Asia had led to talk of a new “Pacific” century well before the old “Atlantic” one had ended. On present trends, somewhere between 2025 and 2030 three of the world’s four largest economies will be from Asia. China will just pip America to top the global league, with India and Japan, both determined but so far unsuccessful campaigners for permanent seats on the UN Security Council, following on (though Chinese and Indians will still be, on average, much poorer than Americans or Japanese).

Not unipolar but what?

Yet talk of an Asian century sounds quaint. Despite America’s brief “unipolar moment” as its rival pole, the Soviet Union, collapsed, Russia has recovered to join a rising China, America, Europe and Japan in a new constellation of big powers that is based on far more than the old boot-androcket counts of the cold war. Bring India into the snapshot, and you capture 54% of the world’s population and 70% of GDP. Whether the leaders of this multipolar world will rub along or bash elbows remains to be seen. Globalisation’s increasingly unfettered flow of information, technology, capital, goods, services and people has helped spread opportunity and influence far and wide. To re-emergent China and Russia, add not just India but Brazil (these four bracketed by Goldman Sachs in 2001 as the upcoming BRICs), Mexico, South Africa, Saudi Arabia, South Korea and Australia, to name just some of the new winners as money changes pockets and the world turns faster. A modern map of power and influence should also include transformational tools such as the internet; manipulators from lobbying NGOs to terrorist groups; profit-takers such as global

corporations and sovereign wealth funds; and unpredictable forces such as global financial flows. The principal characteristic of this world, argues Richard Haass of the Council on Foreign Relations in a recent Foreign Affairsarticle, is not multipolarity but “nonpolarity”. Dozens of actors, exercising different kinds of power, vastly complicate the effort to find a better balance of influence and responsibility. But the excuse of complexity is no answer to the demand for equity. Some clubs have proved more responsive than others. China got a new economic start simply by ditching Marx, Lenin and Mao. But its reformers were able to tap the liberal rules-based system codified in the rules of the IMF and the World Bank (and later the WTO) for ideas as well as cash. China rejoined the bank in 1980 (the Nationalist government on Taiwan had been a founder member) just as its reforms got under way. Ironically, Communist-run China has since been one of the system’s biggest beneficiaries. But it is by no means the only one. Despite the latest stockmarket dips and credit squeezes, world income per head has increased by more over the past five years than during any other similar period on record.

The IMF and the World Bank, pragmatic institutions from the outset, have adapted already, in fits and starts. In April the IMF reformed the peculiar formula by which it allocates votes and financial contributions according to economic size, reserves and other measures (see chart). China’s share of votes will increase to 3.81%, still far short of its weight in the world economy. Meanwhile, old power patterns still determine who holds the two top jobs: the bank is run by an American, the fund by a European. But a bigger problem for both organisations is relevance. Until the late 1990s the IMF, monitor of exchange rates and lender of last resort to struggling governments, had plenty of work. But emerging economies, once its chief clients and source of earnings in repaid interest and loans, are these days often awash with their own cash. Earlier this year the IMF board voted to cut staff and sell off about an eighth of its gold reserves (some 400 tonnes) to meet expected future funding shortfalls. With no obvious role in coping with the aftermath of the recent banking and stockmarket turbulence, its future role may be more as an expert economic adviser. Some worry that the world may still need a lender of last resort. Critics think the fund’s days should be numbered and its reserves put to better use for development. Still others muse that what is needed is a World Investment Organisation, to set basic rules and better track the huge

and complex flows of cash that now wash around in hedge funds, sovereign wealth funds, banks and financial markets. The World Bank has a more certain future, but still needs to retool. Competition has stiffened from private capital markets. Many governments that once needed the bank’s help for dams, roads and other big projects are earning plenty from the sale of raw materials. Even in Africa, the readiness of China and India to spend liberally without strings in pursuit of oil and minerals means that the Sudans and the Congos can take the bank’s cash and ignore the conditions attached. Yet the bank still has a role lending to unfashionable causes, or countries which donors neglect. It could also provide global public goods: funding energy-infrastructure and climate-change projects are two examples, agriculture another.

A bit too equal While the bank and the fund are steered by their biggest shareholders, the WTO, though relying on a representative caucus of states to hammer out deals, belongs to all its members: India and Brazil, for example, are at the heart of the Doha round of trade talks. But egalitarianism can be a weakness as well as a strength. Much admired, at least by government lawyers, are the 60,000 pages of jurisprudence that govern the workings of the WTO dispute mechanism, which has helped resolve many a trade spat. The WTO ensures that members do not discriminate among each other—the best deal they offer to anyone must be extended to everyone. This has helped level the playing field and expand world trade. Russia’s is the only large economy still outside the WTO, and that is its choice. Yet those wanting to join must strike deals with each of the existing members—now a daunting 152. Operating by consensus means that the Doha “development” round has bogged down in disputes between developed and developing countries over complex, reciprocal cuts in farm subsidies and tariff barriers. The prospects for moving on to services look dim. Slow progress has helped push many to forge bilateral or regional deals instead. And if the Doha round fails completely, the recriminations could run far and wide—threatening any attempt, for example, to get agreement between the developed and developing world on new mechanisms to deal with climate change. Economic and financial power is to some extent up for bids by governments with a stake in the game, and trade rules are (arduously) negotiable. Yet the distribution of political power has proved stubbornly—debilitatingly—resistant to change. Most bitterly contested is membership of the UN Security Council, which has the right (whether exclusively or not is hotly debated) to decide what constitutes a threat to world peace and security, and what to do about it. In the UN’s other big decision-making institution, the General Assembly, all the world can have its say, and does. But here outsiders take their revenge: a caucus of mostly developing countries called the G77 (but these days comprising 130 members including China) tends to dominate and filibuster. Might it assuage resentment and improve the council’s authority and the UN’s effectiveness if America, Britain, France Russia and China invited other permanent members to join them—and considered giving up their veto? When the P5, as they are called, first grabbed the most powerful slots, the UN had 51 members; decades of decolonisation and splintering self-determination later, it has 192. The obstacles to reform grow no smaller either. Most recently a concerted effort by Brazil, Germany, India and Japan (a self-styled G4) to join the council’s permanent movers and shakers was thwarted by a combination of foot-dragging,

jealousy and stiff-arming. African countries failed to agree on which of their several aspirants should join the bid. Regional rivals—Argentina and Mexico, Italy, Indonesia, Pakistan and others —lobbied to block the front-runners. China made it clear it would veto Japan; America, in supporting only Japan, helped destroy its friend’s chances. New permanent members would broaden the regional balance. That could add authority and legitimacy to council decisions. Bringing in not only nuclear-armed India, but soft-powered Japan and the rest, would undercut the notion, perpetuated by the P5, that to be a winner you need first to crash the nuclear club. But might the price of a larger, permanently more diverse council be more potential spannertossers and thus greater deadlock? The hope would be that once difficult outsiders got their feet permanently under the table, sharing the responsibility for managing the world would stop them protecting bad elements, as South Africa (currently a rotating member) has been doing with Zimbabwe, in part to defy the permanent five. Prising the P5 from their vetoes might, however, have adverse effects. It was dependable veto power, ensuring their vital interests were never overridden, that kept America and Russia talking at the UN—and Nikita Khrushchev shoe-banging—through the darkest episodes of the cold war. Russia will not forget the mistake of the brief Soviet boycott of the council that led to force being authorised to repel North Korea at the start of the Korean war in 1950. China shows no sign of veto self-effacement, either. But staying at the table does not guarantee agreement. The UN is deliberately an organisation of states, and states differ for reasons good and bad. George Bush went to war in Iraq without explicit backing from the Security Council (just as NATO went to war to end ethnic cleansing in Kosovo, despite Russia’s certain veto had the issue come to a council vote). But the council’s divisions on the most contentious issues have not prevented responsible stewardship elsewhere. A Security Council summit in 1992 agreed that the proliferation of weapons of mass destruction was a “threat to peace and security” to be dealt with forcibly if need be. After the attacks of September 11th 2001, new resolutions were passed to curb terrorists’ finance and keep nuclear, chemical and biological weapons out of their hands. There has been a huge increase over the past 15 years in the numbers of blue helmets, with 100,000 soldiers and police currently deployed. This is credited with helping to reduce the number of conflicts between states, as well as calming civil wars from Bosnia to Haiti, from Cambodia to Sudan, from Congo to Lebanon. Acceptance, at least politically, of a “responsibility to protect” takes the council towards territory which, earlier this decade, it would not have approached: an International Criminal Court, for example, separate from the UN but able to take its referrals, and ready to prosecute the worst crimes. Yet divisions among the P5 have often slowed deployment of peacekeepers where they are most needed, such as in Sudan’s war-torn province of Darfur. Pessimists doubt that China and Russia, both arch-defenders of the Westphalian principle that state sovereignty trumps all, will ever seriously contemplate authorising forceful intervention even to end a genocide. A new UN Human Rights Council has yet to prove it is any better than its discredited predecessor at bringing brutal governments to book. Meanwhile it took years, and North Korea’s 2006 bomb test, for China to condemn Kim Jong Il’s nuclear cheating and let the Security Council pass judgment on it. The P5 plus Germany have worked together over the past three years, slapping a series of UN resolutions and sanctions on the regime in Iran for defiance over its suspect nuclear work, yet Russia and China have doggedly watered down each text, line by line.

Doing it for themselves

There is much the UN Security Council will never be able to do, no matter who occupies its plushest seats. And there are lots of other ways to get useful things done these days. The internet helps campaigners on human rights, as on other issues, to get their message round the world rather effectively. Stung by constant exposure and criticism of its policy in Sudan and Darfur, China appointed a special envoy (who soon found he had a lot of explaining to do) and shifted ground on the need for a UN force, even though deployment is agonisingly slow.

In some cases, regional organisations are better equipped to take the strain. Enlargement of the EU and NATO has helped stabilise Europe’s borderlands, with mostly European troops and police these days in the Balkans. Russia may protest, but its western frontier has never been more peaceful. On a similar principle of African solutions to African problems, the African Union has provided troops in Sudan and elsewhere. But devolving security jobs to the neighbours can be a disaster: the AU delegated the problem of what to do about Zimbabwe’s Robert Mugabe to a southern African grouping, SADC, which left it to South Africa’s Thabo Mbeki, who did nothing. The hardpressed people of Zimbabwe are still waiting for relief. East Asia, the other big potential battlefront in the cold war, used to look very different from Europe, which has long had more than its share of shock-absorbing regional clubs and institutions. Now, alongside the Association of South-East Asian Nations (ASEAN), a still limited talking-shop, other regional conversations are starting up. The ASEAN Regional Forum draws in not only China, Japan and Korea, but Americans, Russians and Europeans; ASEAN-plus-three summits are clubbier, involving only regional rivals China, Japan and Korea. A new East Asian Summit excludes America but brings in India and Australia, among others; Americans naturally prefer to boost the Asia-Pacific Economic Co-operation forum (APEC). Meanwhile Russia, China and their Central Asian neighbours have founded the Shanghai Co-operation Organisation, in part to counter Western influence in the region as NATO battles on in Afghanistan, but in part so that Russia and China can keep an eye on each other. Annual joint military exercises are a new feature. Problem-solving groups come in all shapes and sizes, from quartets (for promoting Middle East peace or trying to settle the future of Kosovo) to entire posses. Some 80 countries in the Proliferation Security Initiative (an “activity not an organisation”) exchange information and train together to sharpen skills for blocking illicit shipments of nuclear or other weapons materials. Like the P5 plus 1 talks on Iran (sometimes called the E3 plus 3 by Europeans), there are six-

party talks hosted by China on North Korea (and including America, South Korea, Japan and Russia), which could yet evolve into a formal north-east Asian security dialogue. More countries are taking the initiative. China, Japan and South Korea, East Asia’s rival powers, will meet this year for a first 3-minus-ASEAN summit. China, India and Russia meet from time to time to re-swear allegiance to multipolarity. They may have little more in common than an ambition to put Europe and America in the shade, but earlier this year the foreign ministers of the four BRIC countries got together for the first time; their economic and finance ministers will soon meet too. And with a wary eye to China’s growing economic and military weight, America, Australia and Japan have formed something of a security threesome, though Japan’s plan to include India too was deemed a bit provocative.

Quirky but familiar globe-spanning organisations include the Commonwealth, which knits together Britain’s former colonies plus other volunteers and does good works in all sorts of outof-the-way places, and the Non-Aligned Movement, a cold-war hold-over with 116 members and communiqués that leave no prejudice unrecorded. But what of Mr McCain’s endorsement of a League of Democracies? The notion isn’t new. An American sponsored Community of Democracies got going with fanfare in 2000. There is nothing wrong with mobilising freedom-loving governments to speak up for democracy. But there are difficulties. Last time, America found it hard to say no to friends, and not all its friends are democrats. The new League (or Concert) of Democracies would have clearer rules for ins and outs. Supporters see it as potentially an alternative source of legitimacy, should the Security Council be hopelessly divided: a two-thirds majority of the roughly 60 countries that might qualify could even authorise the use of force to deal with threats to peace or to uphold the principle of a “responsibility to protect”.

But would a group of countries that spans all continents from Botswana to Chile, and Israel to the Philippines, ever manage to agree on much? A supposed democracy caucus at the UN has achieved little. Dividing the world ideologically again seems a step backwards to some. Nor could such a club solve pressing global problems. Coping with climate change needs China as well as India; energy security needs Saudi Arabia and Russia, as well as oil-dependent Japan or the Europeans. The good news, given the rise of lots of new powers and players, is that this is not the 19th century. Then governments had few means other than gunboats to settle their differences. There are plenty of guns about these days, but also many other ways to settle the world’s disputes. International government

What a way to run the world Jul 3rd 2008 From The Economist print edition

Global institutions are an outdated muddle; the rise of Asia makes their reform a priority for the West

CLUBS are all too often full of people prattling on about things they no longer know about. On July 7th the leaders of the group that allegedly runs the world—the G7 democracies plus Russia —gather in Japan to review the world economy. But what is the point of their discussing the oil price without Saudi Arabia, the world’s biggest producer? Or waffling about the dollar without China, which holds so many American Treasury bills? Or slapping sanctions on Robert Mugabe, with no African present? Or talking about global warming, AIDS or inflation without anybody from the emerging world? Cigar smoke and ignorance are in the air. The G8 is not the only global club that looks old and impotent (see article). The UN Security Council has told Iran to stop enriching uranium, without much effect. The nuclear nonproliferation regime is in tatters. The International Monetary Fund (IMF), the fireman in previous financial crises, has been a bystander during the credit crunch. The World Trade Organisation’s Doha round is stuck. Of course, some bodies, such as the venerable Bank for International Settlements (seearticle), still do a fine job. But as global problems proliferate and information

whips round the world ever faster, the organisational response looks ever shabbier, slower and feebler. The world’s governing bodies need to change.

Time for a cull?

There has always been an excuse for putting off reform. For a long time it was the cold war; more recently, “the unipolar moment” convinced neoconservatives that America could run things alone. But now calls for change are coming thick and fast. Britain’s prime minister, Gordon Brown, and America’s treasury secretary, Hank Paulson, want to redesign global financial regulation. Others are looking at starting afresh: John McCain is promoting a League of Democracies, while Asian countries are setting up clubs of their own—there is even talk of an Asian Union to match the European one. And many critics, especially in America, want a cull. Surely economic progress in the emerging world argues for getting rid of the World Bank? Is a divided Security Council really any use? The critics are right to argue that global organisations should be more focused than they are, but wrong to assume they can be dispensed with altogether. Get rid of the Security Council or the World Bank and the clamour to invent something similar would begin: you need somebody to boss around 100,000 peacekeepers and to lend to countries that find it hard to access capital markets. International talking-shops and standard-setters are here to stay; instead of trying to bin them, focus on making them work well. That means recognising how economics has changed the world order. Emerging economies now account for more than half of global growth. The most powerful among them need to be given a bigger say in international institutions—unless of course you think India will always be happy outside the Security Council and China content to have a smaller voting share than the Benelux countries do at the IMF. Any solution must accept three constraints. First, better institutions will not solve intractable problems. A larger G8 will not automatically lick inflation, a better World Food Programme would not stop hunger. Second, no matter how you reform the clubs’ membership rules, somebody somewhere will feel left out. Third, you cannot start again. In 1945 the UN’s founders had a clean slate to write upon, because everything had been destroyed. The modern age does not have that dubious luxury, so must build on what already exists. Take for instance the G8. Some dream of reducing it to just the economic superpowers: the United States, the EU, China and Japan. An appealing idea, but Silvio Berlusconi and Vladimir Putin are unlikely to give up their seats at the top table. Better to enlarge the current body to include the world’s biggest dozen economies. A G12 would bring India, Brazil, China and Spain into the club, while allowing Canada (just) to stay in. The politics of the Security Council are even more outdated. Nobody now would give France or Britain a permanent veto, but neither wants to give up that right. Meanwhile, the four obvious candidates are held back by regional jealousies: India by Pakistan; Brazil by Argentina; Germany by Italy; and Japan by China. The most sensible plan gives these four permanent but non-vetowielding seats, with two other seats provided for Islamic countries and one for an African nation. America has yet to get behind these proposals, but a sharpened Security Council could mitigate the emerging world’s objections to UN reform. With a more representative high command, more jobs could be allocated on merit, the globocracy slimmed and bolder steps considered: for instance, the case for a small standing army, or earmarked forces, to nip Darfur-style catastrophes in the bud, would be easier to make. The Bretton Woods duo are easier to change: all that is needed is Western will. Their problem is finding a useful purpose. The World Bank is still needed as a donor to the really poor and as a supporter of global public goods, such as climate-change projects. There is less obvious need for

the IMF, which was originally set up to monitor exchange rates. It could become a committee of oversight, but the main financial regulation will stay at the national level.

League of Good Hope

Supporters of Mr McCain’s League of Democracies suggest it could be like NATO—a useful democratic subcommittee in the global club. But Mr McCain needs to define his democracies. (Will Malaysia count? How about Russia or Iran?) And, crucially, any league must not be seen as an alternative to reforming the UN. The whole point of global talking-shops is that they include everybody, not just your friends. Faced with the need to reform international institutions, the rich world—and America in particular —has a choice. Cling to power, and China and India will form their own clubs, focused on their own interests and problems. Cede power and bind them in, and interests and problems are shared. Now that would be a decent way to run a world.