UN economist Heiner Flassbeck believes the International Monetary Fund has played its part. Now the world has to choose between regional solutions and a UN-controlled financial system.
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The financial crisis has led to debate. Politicians and economists are now talking about a complete overhaul of the financial institutions created by the US-dominated Bretton Woods agreement in 1944. UN economist Heiner Flassbeck believes the International Monetary Fund (IMF) is a global player.
- The IMF has lost credibility. Developing countries have long asked for more influence, but they are not yet treated as equals, despite the fact that many developing countries now have stronger economies than developed countries, says Flassbeck to Ny Tid.
He is the Director of the Globalization Program of the UN Conference on Trade and Development (UNCTAD), which is the UN's main body for trade and development. And he believes the world really needs global financial institutions.
Britain's Prime Minister Gordon Brown has called for an international oversight body to take control of the chaotic financial markets, preferably under the auspices of the International Monetary Fund.
Flassbeck doesn't think that's enough.
- There is no global partnership today, he says.
- Can it be created by reforming the IMF?
- I think the only way forward is through the UN framework. Developing countries will no longer let the developed world decide.
The IMF pushed through a series of unpopular privatization and liberalization measures following the financial crisis in East Asia in 1997. Since then, the organization has been low on its course in the region. Many people in East Asia are now responding to the fact that the authorities have bought into banks in Europe and the United States. "The actions of Western countries today are very different from the advice they gave Asian countries a decade ago, which shows the clear double morality," commentator Martin Khor wrote in Malaysian The Star on October 20.
- Asia will isolate itself
Heiner Flassbeck, who is in practice UNCTAD's chief economist, believes the Asian countries will develop a regional financial system unless the world is able to create a global system where developing countries gain real power.
- It means that the developed world will lose influence. Developing countries will no longer care about the IMF. They want to isolate the economy from Europe and the United States with their own money fund and their own currency reforms. They no longer have to go to Washington when they have problems, he says.
- Will this have a negative impact on economic growth in Europe and the US?
- It is hard to say. When it comes to trade, the borders will probably remain open. In relation to capital control, one of two things will happen: Either the whole world agrees, or there will be new structures regionally.
However, Flassbeck doubts that Europe and the United States are willing to give up power in the global financial institutions.
- Let's see how it goes. Many are now talking about a new financial architecture, but there were also many who did after the crisis in 1997. The United States and Europe have so far not been very constructive, he believes.
SV Deputy Audun Lysbakken agrees with Flassbeck that the IMF has played its part.
- There is greater political understanding than ever to change the IMF. We want a restructuring of both the IMF and the World Bank. Today, these are organizations that work on behalf of some rich countries. In the long run, they should be replaced by institutions that are directly subordinate to the UN, Lysbakken believes.
He thinks it is a paradox that developing countries have limited influence in the IMF and the World Bank, while the institutions' policies are largely directed at them.
- We have a clear vision of a stronger UN both in economic policy and in security policy, says Lysbakken.
In recent years, reforms have given the new economies in Asia more votes in the IMF. But voting rights are still very unevenly distributed. Today, China has 3,7 percent of the vote. There are fewer than the Benelux countries. The US has 16,8 percent, which means the country has the right to veto. An unwritten rule also states that the President of the IMF should be from Europe, while the President of the World Bank should be from the United States.
Developing countries are affected by the financial crisis
In a recent UNCTAD report, Heiner Flassbeck points out that many developing countries will be affected by the financial crisis. Especially countries that have made good money in recent years for the high commodity prices, such as Brazil, Russia and Venezuela, can suffer damages as prices now fall.
- There is a great danger that the western world will now end up in economic downturns, and that this will spread to developing countries. For some countries, this can be a big problem, Flassbeck believes.
Some countries in Asia, on the other hand, may recover through the crisis almost entirely, even though world trade will go down in the future.
- China, for example, has large domestic markets, so it is possible that we will not see negative growth, only a slowdown, says Flassbeck.
- If Asia stops growing, we really have problems. Today, Asia can be the locomotive of
the world economy.
The financial crisis was triggered by rotten US mortgages, which were bundled into advanced financial products that not even banks fully understood, and sold to banks and funds around the world willing to take a high risk of high returns. Flassbeck believes the rest of the world must now learn from the mistakes of Europe and the United States.
- They must not allow this form of speculation, and believe that all market activity is good. For many, including me, it has long been clear that this would lead to disaster. It is dangerous when banks and hedge funds participate in casino activities. We need a functioning market, not a casino, he says. ■
