Global economic imbalances and the G-7
In order to achieve an orderly resolution of these problems, the first step the Western-dominated IMF, the World Bank and the G-7 must take is to engage with these so-called emerging nations on a basis which would allow them to feel that they have a role to play in the decision-making process. The economic and political realities have changed since 1945, when the IMF and the World Bank were first set up. In this respect, I agree with Mr. de Rato's recommendation to give greater voting rights to the emerging countries in the affairs of the IMF. A proposal to this effect will be discussed at the September meeting of the IMF.
This is good news. But let us be frank about it. While the World Bank functions as an important anti-poverty institution and the IMF monitors how the economic policy of one country affects others -- the US is putting pressure on the IMF to include the surveillance of exchange rates of countries like China as one of its more important activities --, the real power centre of global capitalism is an informal club called the G-7, which discusses all matters of international concern and work out common strategies, which affect not only the member countries but also most other nations of the world. The international institutions like the World Bank, the IMF and the WTO then pick up these guidelines and prepare their agendas accordingly.
For all latest news, follow The Daily Star's Google News channel. One of the consequences of the Middle East crisis in 1973 was an unprecedented rise in oil prices which created havoc with the balance of payments of most nations. It was at that time that Valery Giscard d Estaing and Helmut Schmidt were finance ministers of France and West Germany respectively. They used to get together informally to discuss oil prices, the exchange rate fluctuations and the world economic outlook.
After becoming presidents, they invited the leaders of the United States, the United Kingdom and Japan to join them at an informal meeting in a country house in Rambouillet, a village close to Paris. Thus, the G-5 was born in 1975. The gold standard was abandoned in 1976 making the surveillance of exchange rate fluctuations even more important. Later Canada and Italy were invited to join the group, which came to be known as the G-7 or the group of the seven most industrialised nations of the world, who controlled most of its financial resources. In 1994, Russia was invited to attend the G-7 meetings as a special guest. Now the group is often referred to as the G-7 plus one. In fact, the next summit of the G-7 will be hosted by Russia in St. Petersburg in July, this year. Now the question is: Does the composition of the G-7 plus one reflect the current economic realities of the world?
The short answer is no because it includes neither the oil exporters nor the emerging countries of enormous importance like India and China.
In this respect, China probably occupies the most anomalous position. Politically, Chinese influence in Asia, Africa, Latin America and even in Australia is growing. China is currently the fourth largest economy in the world with huge trade surpluses. It is likely to overtake Germany and Japan in the near future. America's trade deficit with China reached $203 billion in 2005. It is also the holder of huge foreign reserves. If China suddenly decided to switch from dollar-denominated government bonds to euro-denominated securities, its effect on US interest rates and the value of dollar would be disastrous. Yet, despite all this, China is not represented at the G-7 meetings.
Now the question is: If countries of economic importance like China, India, South Africa and Brazil are not represented adequately at the G-7 meetings, why should they feel bound by the decisions taken there?