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0710397

Are the principle global governance agencies ‘fit for purpose’ in the
contemporary world economy?

After every crisis in the world economy, questions are raised concerning the
principle global governance agencies; was this crisis their fault? Could they have
stopped it? Did they act effectively? These questions necessitate a re-evaluation of
these agencies, to establish whether they are still ‘fit for purpose’ in the world
economy. The Asian Financial Crisis 1997/98 prompted those questions and resulted
in the re-examination of these agencies and of “the basic structure of the international
financial architecture”1. Likewise the recent financial crisis of 2007/08 raised
questions of the global governance agencies and fuelled sceptic’s criticisms that they
are no longer ‘fit for purpose’ in the contemporary world economy. This essay will
argue that the principle economic global governance agencies, namely the
International Monetary Fund (IMF), the World Bank and the G-8 have not acted
effectively when confronted with economic crises, that some of their policies were not
only ineffective but detrimental to developing economies and that these agencies have
not adequately reflected the change in balance of power the worlds economy. Other
institutions like the Financial Stability Board (FSB) and the G20 have grown in
importance as they provided information and recommendations to countries and other
agencies. This highlights the limitations of the global governance agency’s
contribution to large developed economies, effectively relegated to providing
recommendations but which would be unable to bail out large economies.

It is first important to clarify what is meant by the contemporary world

economy and global governance. The world economy has undergone “profound
structural change over the last couple of decades”2, the opening up of capital markets
has led to a vast global capital market, this environment has lead global assets to
steeply increase from $12,000bn in 1980 to $200,000bn in 20073. In this
contemporary world economy, economies are closely integrated and the economic
balance of power is beginning to shift away from the US and Europe to emerging
economies like China, India and other Asian economies 4. Global governance is
defined by Lawrence Finkelstein as governing “relationships that transcend national
frontiers”; it is therefore “doing internationally what governments do at home” 5.
Under this definition global governance can be viewed not only as intergovernmental
relationships but also to include non-governmental organisations (NGOs) such as
Oxfam6, large institutions such as the United Nations and IMF, and smaller
institutions such as the international organisation of securities commission (IOSCO).
This essay restricts global governance to economic global governance and will focus
mainly on the principle economic global governance agencies such as the IMF, World
Bank, G8/G20 and the FSB. It will also briefly evaluate the role of smaller economic
1
Hughes, S, and Wilkinson, R. Global Governance Critical Perspectives, Routledge, 2003 p18
2
Xafa, M. Global imbalances and financial stability, IMF Working Paper No.
07/111. (2007) p791
3
Grant, W. A Crisis in Global Economic Governance? Lecture notes 16/11 (2009)
4
Hoge, J, F. Global Power Shift in the Making - Is the United States Ready, Foreign Aff. 2 (2004)
5
Finkelstein, L. What is Global Governance? Global Governance, 1 (1995) p369
6
The Commission on Global Governance, Our Global Neighbourhood, Oxford University Press (1995)
p2-3
 2

global governance agencies in the contemporary world economy, such as NGOs and
agencies like the IOSCO.

The IMF and World Bank were the two major institutions created by the
Bretton Woods Conference in 1944. The IMF’s aims are:
“…to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustained economic grown, and
reduce poverty around the world.”7
The World Bank’s mission is:
“…to fight poverty with passion and professionalism for lasting results and to help
people help people help themselves and their environment by providing resources,
sharing knowledge, building capacity and forging partnerships in the public and
private sectors.”8
Many critics argue that these two institutions that once played a key role in economic
global governance (particularly the IMF) are now outdated and are no longer fit for
their purpose in the contemporary world economy.

They have not adequately adapted to “the emergence of new categories of

stakeholders”9. This is most obviously reflected in the voting rights of each member
country in the IMF. The amount of money a nation pays to the IMF (their quota) is
meant to reflect its importance in the world economy and it also therefore determines
their voting percentage. There are large discrepancies between a country’s GDP and
their respective voting share that hugely advantage the west. India has 1.9% of the
vote and China has 3.7%, yet France and the UK have 5% each 10, whilst the EU has
32.3% of the vote but only 21.9% of world GDP11. The US has an overwhelming
influence in decisions because it has 17% of the total vote, and as some results require
a majority of 85%, this effectively gives the US the power of veto. It is industrial
countries that benefit from such inequalities; their economic strength derives from the
reluctance to reform the structure12. Were such undemocratic arrangements present in
their own societies they would not allow it, yet the principle economic global
governance agencies has yet to implement effective reforms of the voting structure.

Further to their voting power in the IMF, critics argue that the US has an
inequitable influence in the IMF and World Bank. The US played a key role in the
creation of both of these agencies at Bretton Woods and continued to play a key role
in both agencies with staff, capital and location (both agencies headquarters are based
in the US). Catherine Gwin argues that the result of such strong US influence in the
formation of the World Bank left “a strong and enduring American imprint on all
aspects of the Bank, including its structure, general policy direction, and forms of
lending”13. The US continues to exert its influence in both agencies, the US
unilaterally appoints the president of the World Bank, Robert Zoellick, previously US

7
www.imf.org
8
www.worldbank.org
9
Woods, N. The Challenge of Good Governance for the IMF and the World Bank Themselves. World
Development, vol 28, No 5, (2002) p1
10
Peet, R. Unholy Trinity, The IMF World Bank and WTO. Zed Books Ltd, 2nd ed, (2004) p71
11
Grant, W. A Crisis in Global Economic Governance? Lecture notes 16/11 (2009)
12
The Commission on Global Governance. Our Global Neighbourhood, Oxford University Press
(1995) p147
13
Gwin, C (1997), quoted in Peet, R. Unholy Trinity, The IMF World Bank and WTO. Zed Books Ltd,
2nd ed, (2004) p129
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Deputy Secretary State, is now the current President. In 2001 the US became
increasingly involved in the IMF’s policy response to Argentina’s financial crisis, the
New York Times reporting that many late night sessions “were held in Treasury
offices rather than at the I.M.F headquarters nearby.”14, Paul O’Neill the US Treasury
Secretary said “We’re working to find a way to create a sustainable Argentina, not
just one that continues to consume the money” of American citizens 15. The US
therefore believes, because it is a large stakeholder in both institutions, that it has the
right to direct policy, undermining the legitimacy and independence of both agencies.
The overwhelming influence of the US in the two principle agencies of economic
global governance highlights again that they are not ‘fit for purpose’ which needs
reforming to reflect the shift in economic power.

The combined effect of the overwhelming US interests and outdated voting

structure in the IMF and World Bank has resulted in neoliberal economic thought
prevailing throughout their policies which has been detrimental to the effectiveness of
these agencies achieving their goals of lowering poverty and creating sustained
economic growth. The IMF imposes conditionality clauses on its loans to countries,
these are conditions a country must subscribe to and implement on receipt of the loan.
Countries borrowing from the IMF are usually extremely desperate and will therefore
almost always accept the conditionality. Henceforth conditionality has become a way
in which the IMF can control a country’s economic policies 16, this is a problem for
these countries as IMF neoliberal ‘one-size-fits-all’ economic policies are often
hazardous for their economy. Policies include raising interest rates of a country to
reduce inflation, reducing tariffs on imports, and impose cut backs on government
services and the removal state subsidies that keep food prices low17, the result of these
policies is to create unemployment and increase poverty. In a survey by Mohsin Khan
(1990) on IMF supported programs, he found that in general there were positive
effects on balance of payments and current accounts but it is also “often found that
programs are associated with a rise in inflation and a fall in growth rate.”18 The World
Bank came under heavy criticism for the austerity of their structural adjustment
policies, UNICEF reported they lead to deteriorating health and education
conditions19.

The IMF and World Bank are not ‘fit for purpose’ in the contemporary world
economy because their policies fail to effectively address the needs of those who need
help the most. They are often ineffective or even damaging because the countries
affected by a particular policy do not have an active role in its formulation and
implementation20, Joseph Stiglitz concludes that whilst “almost all of the activities of
the IMF and World Bank are in the developing world, they are led by representatives
from industrialized nations”21. Unfair representation in these agencies and in the
policy formulation has led many to believe that their policies merely reflect western
interests: forcing capital and trade liberalisation irrelevant of circumstance and to the
14
Peet, R. Unholy Trinity, The IMF World Bank and WTO. Zed Books Ltd, 2nd ed, (2004). p95
15
ibid p95
16
ibid p66
17
ibid p67
18
ibid p115
19
ibid p144
20
Woods, N. The Challenge of Good Governance for the IMF and the World Bank Themselves. World
Development, vol 28, No 5, (2002) p12
21
Stiglitz, J, Globalization and its Discontents. London: Allen, 2002.
 4

detriment of the world’s poorest. Nicaragua’s current president, Daniel Ortega, said
“It is a blessing to be free of the Fund, and for the Fund it will be a relief to rid itself
of a government that defends the interests of the poor.”22

The World Bank is more successful than the IMF in reducing poverty due to
its soft loan agency the IDA. It is only available to low income countries and offers
them low interest loans, this is often crucial support for these countries, it has been
advocated by many commentators because the loans are free from conditionality and
from the political strings associated with bilateral aid23. The success of the IDA
however is limited due to small resources, the World Bank struggles to get replenish
IDA resources and get donors24, for example the US have decreased the amount of
contributions it gives to the IDA25.

The IMF had the opportunity to rise like a phoenix and act prudently to control
the recent financial crisis, but it failed to do so. The IMF was not credible due to
mistakes made in past financial crises 2007/08, and although its’ Global Financial
Stability Report in spring 2007 rightly predicted many developments that led to the
crisis; it lacked influence and ability to prevent it26. The IMF’s decision on ‘Bilateral
Surveillance’ in 2007 attempted to strengthen its ability to head off risks in
international monetary and financial stability by updating its guidelines on monitoring
member’s economies, however panellists stated that the credibility of the fund was
weakened because it was unable to resist US pressure27. Leading economist Raghuram
Rajan criticised the IMF for their ‘lack of evenhandedness’, in 2007 the IMF
encouraged Indian authorities to allow short selling and then failed to criticise the US
when it banned short sales during the financial crisis.28 The world is missing “a strong
international, independent voice which stands for the world economy and fights for
the world economy.”29 Although the IMF has trebled its resources to $750 billion, it
still does not have enough resources to be able to lend to large economies if they need
emergency support, again part of the reason it did not play more of an influential role
during the crisis. Across the world, governments attempted to drag the economy out
of the recession by creating fiscal stimulus packages, heads of states acted quickly to
try and combat the crisis whilst the IMF remained static.

International economic cooperation and coordination is needed in the

contemporary world economy to tackle global issues such as climate change. If there
is no international coordination then each country will act independently and is likely
not to act in a socially optimum manner. This becomes troublesome when considering
that one country’s action may cause negative externalities that will affect another
country. Garrett Hardin describes this situation in the tragedy of the commons; where
herdsmen have cattle on a shared commons. Every herdsman weighs up his possible

22
Ortega, D. quoted in Peet, R. Unholy Trinity, The IMF World Bank and WTO. Zed Books Ltd, 2nd ed,
(2004). p124
23
The Commission on Global Governance, Our Global Neighbourhood, Oxford University Press
(1995) p.193
24
ibid p193
25
Woods, N. The Challenge of Good Governance for the IMF and the World Bank Themselves. World
Development, vol 28, No 5, (2002) p6
26
http://www.imf.org/external/pubs/ft/survey/so/2008/NEW101608A.htm
27
ibid
28
ibid
29
Rajan, R. quoted in http://www.imf.org/external/pubs/ft/survey/so/2008/NEW101608A.htm
 5

costs or benefits gained by addition of one extra animal on the commons; if each
herdsman is rational they are compelled to add more and more cattle to the commons,
therefore ruining it30. Therefore there is eventual overexploitation of common
resources, without international cooperation it is rational for each country to continue
to emit high levels of pollution.

The need for international cooperation was one reason for the creation of G7
in 1975, which was a forum for the finance ministers of the world’s six richest
countries: US, UK, France, Canada, Germany, Italy and Japan, (Russia joined in 1997
to form the G8) to discuss economic policy. The G7/8 has failed to achieve anything
substantial to combat the contemporary world economic problems. This lack of
substantial policy is due to three main reasons; firstly there has been a shifting focus
away from economic policy towards other issues such as terrorism, secondly the US
foreign policy under the Bush administration seemed to advocate unilateralism31, and
finally because of the changing power structure in the world’s economy, emerging
economies had no representation in the forum.

In 1999 the G20 was established as a response to the financial crises of the
1990s and to recognise “that key emerging-market countries were not adequately
included in the core of global economic discussion and governance.”32 The G20 is
more representative than the G8 with approximately 60% of the world’s population
and 70% of the world’s GDP, as shown by figures 1 and 2, henceforth the G20 is
more legitimate then the G8. With no fully legitimate economic governance agency,
sovereignty still solely resides with a nation’s government. Therefore the annual
meeting of the 19 member governments and an EU representative combined with a
progressive US President has given the G20 the potential to be the most effective
economic governance agency in the contemporary world economy.

Figure 1

33

30
http://www.garretthardinsociety.org/articles/art_tragedy_of_the_commons.html
31
Khong.Y, F and Malone,D, M. Unilateralism and U.S. Foreign Policy: International Perspectives
Lynne Rienner Publishing, (2003)
32
http://www.g20.org
33
Harrison, M. International Economic Coordination, Lecture notes 17/11 (2009)
 6

Figure 2

34

Although the G20/G8 has been unable to cooperate and create effective policy
on some issues such as climate change, it has seen successful international
coordination in other areas like the recent financial crisis and subsequent recession.
The Centre for International Governance Innovation (CIGI) stated that strong
leadership by the G20 “has addressed the global financial crisis and emerged from the
early stages of the crisis with sufficient credibility to rise to the apex of international
governance”35. The G20 have been effective because it has also been working with the
IMF, World Bank and FSB, and it recognises the need for representation of emerging
and developing countries in the principle global governance agencies to be
“significantly increased to reflect changes in the world economy”36. The G20 realise
that much more needs to be done to ensure there is a global recovery and has enforced
regulatory policies and advised on best practices in an attempt to ensure banks and
governments have learnt from this crisis. It further calls on the IMF and other
international institutions to evaluate its policies to secure a sustainable recovery; this
ensures debate and evaluation from world leaders in developed and emerging
countries and from leading economic institutions. The CIGI does call for the G20 to
think about how to make the forum more representative, to include developing
countries without compromising its effectiveness37.

The Financial Stability Board (FSB) succeeded the Financial Stability Forum
(FSF) in 2009 to address vulnerabilities in the global financial market and to develop
regulatory policies to strengthen financial stability38. The FSB comprises of
representatives from central banks, regulatory authorities and ministries of finance
from emerging and developed countries, international economic organisations and
representatives from international standard setting bodies. The FSB enjoys a removal
of sharp political bias from governments, whilst acquiring a political mandate from
them39. By bringing together leading international and national economic institutions
with a renewed focus on the world economy and financial system makes the FSB so
34
Harrison, M. International Economic Coordination, Lecture notes 17/11 (2009)
35
http://www.cigionline.org/articles/2009/10/overview-pittsburg-g20-summit-g20-ascendance-g20-
effectiveness
36
http://news.bbc.co.uk/1/hi/business/8239839.stm
37
http://www.cigionline.org/articles/2009/10/overview-pittsburg-g20-summit-g20-ascendance-g20-
effectiveness
38
http://www.financialstabilityboard.org/
39
Hughes, S, and Wilkinson, R. Global Governance Critical Perspectives, Routledge, 2003 p21
 7

effective in monitoring international financial systems, evaluating policy for

governments and other agencies such as the IMF and the G20, and “fostering
implementation of standard”40. Therefore G20 and FSB are fit for their purpose of
regulation and international coordination and cooperation which will (hopefully)
ensure that the world is better prepared for the next crisis in the world economy.

Smaller global economic governance agencies with smaller, focused

objectives have often been the most fit for purpose in the contemporary world
economy. Smaller groups are able to act more decisively and use their resources more
effectively than larger groups41. The International Organisation of Securities
Commission (IOSCO) provides assistance to the principle economic governance
agencies by acting as a forum for discussion and by addressing smaller economic
issues. The IOSCO’s Code of Conduct for credit rating agencies was acknowledged
as the key instrument for addressing problems with credit rating agencies42. Likewise
NGOs are important as they focus on specific issues and have no political bias.
UNICEF is a UK based charity that focuses on improving the lives of children in the
UK and in less developed countries. Not only do they provide direct assistance to
children but also provide key research and information to governments and
international agencies that help them direct and evaluate their policies.

In conclusion the principle economic global governance agencies have not

been fully ‘fit for purpose’ in the contemporary world economy. The Bretton Woods
institutions, the IMF and World Bank, are yet to reflect the changing power in the
contemporary world economy; the large US stake hold and dominance in these
agencies have marred their effectiveness and their policies have at times blindly
followed neoliberal economic views which have often been detrimental to developing
or emerging countries. It is no longer sufficient that countries act independently; the
recent financial crisis has provided a new impetus for regulation and joint policies
which therefore requires legitimate global governance agencies. The G20 and the FSB
have become increasingly important in the current world economy where there are
large capital flows and a growing interdependence of countries, developed, emerging
and developing. The IMF has also become more relevant since the recent financial
crisis, although it still cannot be a lender of last resort large countries, it plays a key
role in financing emerging countries, if it can reform its structure to reflect the
changes in economic balance it will be a more legitimate and effective agency, fit for
its new purpose. Although some global governance agencies have become
increasingly irrelevant in the contemporary economy, the present need for co-
regulation between these agencies, governments, NGOs and smaller economic
governance agencies ensure that they will continue to exist.

Word Count: 2997

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http://www.financialstabilityboard.org/about/history.htm
41
Olson, M. The Logic of Collective Action, Public Goods and the Theory of Groups. Harvard
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42
T Porter, ‘Why International Institutions Matter in the Global Credit Crisis’. Global Governance, 15
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 8

Finkelstein, L. What is Global Governance? Global Governance, 1 (1995)

Grant, W. A Crisis in Global Economic Governance? Lecture notes 16/11, (2009)

Harrison, M. International Economic Coordination, Lecture notes 17/11 (2009)

Hoge, J, F. Global Power Shift in the Making - Is the United States Ready, Foreign
Aff. 2 (2004)

Hughes, S, and Wilkinson, R. Global Governance Critical Perspectives, Routledge,

2003

Khong.Y, F and Malone, D, M. Unilateralism and U.S. Foreign Policy: International

Perspectives, Lynne Rienner Publishing, (2003)

Olson, M. The Logic of Collective Action, Public Goods and the Theory of Groups.
Harvard University Press, (1971)

Peet, R. Unholy Trinity, The IMF World Bank and WTO. Zed Books Ltd, 2nd ed,
(2004)

Porter, T ‘Why International Institutions Matter in the Global Credit Crisis’. Global
Governance, 15 (2009)

Stiglitz, J., Globalization and its Discontents. London: Allen, (2002)

The Commission on Global Governance. Our Global Neighbourhood, Oxford

University Press (1995)

Xafa, M. Global imbalances and financial stability, IMF Working Paper No.
07/111. (2007)

Woods, N. The Challenge of Good Governance for the IMF and the World Bank
Themselves. World Development, vol 28, No 5, (2002)

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