“What do you think the test will be on?” the students would ask each other sarcastically, after another lengthy rumination, “The turning point where Europe failed to turn?”
But I never forgot the phrase or the events it denoted, and I think that current economic crisis could well go down in history as the turning point where the entire Western world failed to turn. The recent creation of the New Development Bank by the BRICS nations (Brazil, Russia, India, China and South Africa), which will compete with the IMF and World Bank, is yet another example of how international control is skittering away from those nations that are failing to adapt to a changing world.
In a certain sense, falling behind like this is actually quite an achievement, given that Western countries not only invented the IMF and World Bank – up until now, the preeminent international lenders of last resort – but also gave themselves a controlling stake within both institutions. They set the rules of the game. Therefore, all they had to do to stay on top of that game was throw the other players a crumb once in a while.
It’s not exactly rocket science.
When people or countries feel they have a chance to succeed, they are motivated to participate in international institutions. Generating this mindset doesn’t even demand that the rules of the game be completely fair or that the rewards for success be particularly large. Most people are willing to settle for a reasonable chance of success and modest rewards when it occurs. Provide these things and you can spin out any advantage you may have for a startlingly long time.
One of the modest rewards implicitly offered by the IMF and World Bank was the chance to someday participate within these institutions as an important partner, i.e. to have a real say in the projects these institutions undertake.
For nations are not accorded equal voting power at the IMF and World Bank. Instead, voting power is allocated based on the economic strength of a country. Decisions are not made based on what most people want, but on what the richest people want. This means that the top five shareholders (the US, Japan, Germany, the UK and France) hold nearly 40 percent of total voting power at these institutions, but only about 10 percent of the world’s population, while countries like China and India, each with approximately 20 percent of the world’s population, enjoy only about 2-3 percent of total voting power.
For a long time, this voting system was justified with the argument that those nations that were habitually lenders and not borrowers should have the final say in IMF and World Bank decisions. Implicit in this was the idea that any nation that managed to transform itself into a major world economic power with an economy stable enough to make it a habitual lender instead of a habitual borrower could expect to have its shares reallocated and thereby acquire a meaningful stake in global economic decision-making.
That was hard, some would even say it was grossly unfair, but it was within the realm of the possible. All those populous nations that were allotted miniscule fractions of voting power at the IMF and World Bank would have to do was to put their noses to the grindstone and work their way to success.
As they say in German “hope dies last.”
The Germans don’t offer any further advice about what happens when it does die, but I think we’re about to find out.
People in BRICS countries did put their noses to the grindstone and work themselves silly. And in the end, they made it. BRICS countries now make substantial contributions to the international system, from international lending programs to United Nations peacekeeping missions, and they do so at a time when many Western nations have scaled back their own contributions.
But the promised reward failed to materialize.
As of 2010, despite having the world’s second-largest economy, China is still locked out of the IMF’s top five shareholders, with only 3.81 percent of total voting power, while Brazil, with an economy comparable to France and the UK, is only permitted to wield 1.72 percent of votes at the institution (France and the UK hold 4.29 percent each).
The top five IMF shareholding nations (as well as other Western countries which are also overrepresented at the institution) have literally refused to make room at the table for these other powerful states, which could, with a little compromise, quite easily have become their natural allies. BRICS countries had played, and succeeded at, the global economic game in order to have a chance of attaining a meaningful and respected position within the international community. They had not done all that work just so that traditional powerbrokers like the IMF and World Bank could continue to ignore them. It’s not too surprising that under those circumstances anyone would look for alternatives.
Here, the inadvertent generosity of Western nations truly becomes apparent, because not only did they provide the BRICS with a reason to look for alternatives ways of acting on the world stage, they also considerately gave most of the rest of the world a reason to join them.
For a very long time, the US and other Western States, which together control most aspects of IMF and World Bank lending, abused their position at those institutions in the service of their own national interests.
For example, the IMF and World Bank repeatedly loaned to Mobutu Sese Seko, dictator of the Democratic Republic of Congo (then Zaire) in order to keep him – and the enormous natural resources within his country – out of the communist camp during the Cold War. Mobutu blew the cash on whatever struck his fancy and the people of the Congo spent decades trying to pay back the money – in fact, by the late 1980s they had paid billions of dollars just in fees related to the nation’s debt, never mind the debt itself. Such irresponsible and short-sighted lending trapped the citizens of the DRC, and many others like them, in a perpetual debt cycle.
When powerful Western states working in tandem with corporate banks, began to set down increasingly harsh loan conditions through the IMF and World Bank, there was little these nations could do about it. The practice of setting conditions on loans is often dressed up with various justifications in official rhetoric, but at bottom, the IMF, the World Bank and the countries and companies behind them, operate in a way that many petty drug dealers would recognize. They hook a victim with cheap goods and a lot of talk and later they up their demands. It’s not an endearing modus operandum.
And some of these IMF and World Bank conditions were not a great deal more pleasant than having one’s fingers cut off. One core demand over the past 20 years has been privatization. This meant that nations who received loans from the IMF and World Bank were forced to privatize public services, even when doing so made no economic sense. For example, it was not uncommon for the World Bank to demand that a developing country entice private companies to bid for infrastructure contracts. These incentives usually included allowing the company to work in a completely tax-free environment and promising a certain level of profitability for the enterprise. In the case of a power plant, a country might literally oblige itself to pay for a minimum amount of power produced regardless of how much energy was actually used by its population.
That meant that private companies, usually based in Western countries, landed fat contracts to build and run something that there was literally no demand for, but for which the people of a nation ultimately had to foot the bill.
People in these nations could, of course, always hope that schemes like the privatization one were somehow magically inspired and that the combination of non-tax-paying, overproducing private ownership would, for inscrutable reasons, prove the unerring fertilizer of economic growth. They could hope this, in much the same way that you could hope to throw a few beans out the window and end up with a magic beanstalk.
But eventually hope dies, even if it does die last, and these heavily indebted peoples quite naturally begin to ask themselves what could possibly be worse than another World Bank or IMF loan. When people start thinking like that they will only continue with what they are doing if there is really, truly no other choice. In other words, if you are going to ignore the winners of the global economic game (i.e. the BRICS) and subject the losers (developing nations like the Democratic Republic of Congo) to an impossible web of harsh conditions and crony capitalism, it shouldn’t be too surprising that these two camps might someday get together.
Looked at this way, the New Development Bank isn’t even a bold step – it’s a no-brainer. Like 19th-century monarchs, Western nations have managed to give nearly everyone a reason to want rid of them, and like an absolute monarch, the IMF and World Bank’s twisted voting structures are looking increasingly anachronistic. The world is turning, but Western leaders are only trying to hit the brakes, remaining in a comfort zone that does not require them to face a new reality that requires higher levels of compromise and cooperation.
The New Development Bank doesn’t need to be fair, it doesn’t need to be perfect, it doesn’t even need to have that much cash to succeed. All it needs to do is be better than the IMF and World Bank, and that isn’t going to be a particularly challenging task.