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Economic meet can’t hide world’s growing divisions

by Kevin Rafferty

WASHINGTON — What a difference a year makes. Spring was in the air in Washington — both physically and in the economic metaphors — at the meetings of the International Monetary Fund and World Bank late last month. The fog of crisis that pervaded a year ago has largely been blown away. IMF predictions that global growth will be 4.2 percent next year put cheerful makeup on the economic picture.

Nevertheless, the bags round the eyes of Dominique Strauss-Kahn, or DSK as everyone calls him, the IMF managing director, have gotten deeper. Discussions on and off the record with participants at the meetings and key backroom players suggest that deep fissures and flaws still exist. Politics — and the pettiness and greed that go with it — is the problem at virtually every level, from the big institutions themselves down through the member countries.

One of the main achievements was that the World Bank had won its first capital increase since 1988, a significant boost of $86.2 billion, of which $5.1 billion will be paid in, subject to legislative approval by the member countries. The overall capital increase includes a general and a selective tranche that will allow a significant reshuffling of the shareholdings in the bank to give China a clear third place with 4.42 percent of the voting shares (up from 2.78 percent) ahead of Germany and behind only Japan (6.84 percent) and the United States (with a veto-wielding 15.85 percent).

DSK and the IMF should beware: Beijing’s next step is to get close to 5 percent in the IMF in ongoing negotiations.

Robert Zoellick, the bank’s president also boasted that the reshuffle meant that developing countries will hold 47 percent of the revamped bank. But there is sleight of hand in his sums with the 47 percent achieved only through counting countries like Saudi Arabia and Kuwait among developing countries. Perhaps Zoellick’s happy grin might have faded when he got the news that China is not satisfied. The South China Morning Post reported from Beijing that the increased votes were in “recognition of Beijing’s growing economic clout but insufficient to help it win in the current trade and exchange rate disputes.”

Leaving aside the small fact that the World Bank, as a lender of money to developing countries, is not an appropriate forum for arguing about international trade or exchange rates, the news is a worrying indicator that Beijing wants to run the world and the World Bank its own way.

Hitherto, the bank, the IMF and World Trade Organization have won good reputations for their professionalism and integrity. They have made mistakes and sometimes been smug or overbearing, but when staff have made economic reports or negotiated over loans or tried to settle trade arguments, they have done so fairly after reporting the facts, the arguments, the advantages and disadvantages of policy.

Indeed, one of the joys of reporting from Washington a few years ago was to see Gordon Brown, the chairman of the key IMF committee, squirming as he had to answer questions about IMF criticism of his policies as the British finance minister. He was free of course to reject the criticisms, but it was important that the IMF was free to make its own judgments.

In the same way, former Japanese finance official Naoyuki Shinohara, who is now IMF deputy managing director, warned Japan that it was high time to tackle its rising fiscal deficits. Tokyo may shut its ears, but independent warnings from the IMF are worth heeding.

There are good reasons why DSK looks weary in spite of the rosier global picture. The IMF has been negotiating to bail out Greece, and attracting rude comments from Greeks who feared the conditions.

Greece is a tiny pimple when it comes to the recalcitrant problems of the former economic rulers of the world. The U.S., Britain and Japan lead the way with the same weaknesses of unsustainably high budget deficits, growth built on government stimulus spending and continuing high unemployment rates.

The political problem in almost all the developed countries is when to turn off the spending tap and raise taxes to pay for long overdue bills. All the signs are that it will not be as easy as politicians gearing up for elections are wont to promise.

In the U.S. in particular, the grip of some rich lobbying groups will make it harder for the government to maintain a straight policy line. A study by Northwestern University shows that unemployment in the U.S. resembles the patterns of the Great Depression: Households earning $150,000 or more have an unemployment rate of only 3.2 percent, while among the lowest earning households the rate is more than 31 percent.

One of the excuses of the Europeans for clinging to their power in the international financial institutions is their proclaimed fear that China and other countries that replace them will take a narrow nationalistic view of how the IMF and World Bank will be run. Sadly that may be true. More recent news suggests that the rulers in Beijing have no vision of the world far beyond the Great Wall.

The claim by the old economic powers that they can be trusted because they have a world vision and no vested interests would ring truer if they kept their own promises. The OECD, the club of rich industrialized countries, has found its members have failed to deliver on their promises to increase development assistance to poorer countries by $50 billion in real terms by 2010. They are $20 billion short. Africa was supposed to get $25 billion in extra aid, but only $11 billion has been delivered.

Talking of failures, the U.S. leaps to the top of the class. Then candidate Barack Obama promised to “double our foreign assistance to $50 billion by 2012.” U.S. aid is $28 billion or a measly 0.2 percent of GDP. Japan is almost as lamentably bad.

Zoellick also proclaimed that the expressions “third world” and “North-South” had been consigned to the history books in a “new geopolitics for a multipolar economy, where all are fairly represented in associations for the many, not clubs for the few. North and South, East and West, are now points on a compass, not economic destinations.”

For all that, the world is increasingly sharply divided between haves and have-nots. The World Bank’s own research claims that as a result of the 2008 economic crisis, 53 million more people will remain in extreme poverty by 2015 and there are still a billion people in the world living in what is prosaically called “extreme poverty.”

Many of those are impoverished because of political manipulation in their domestic economies, such as the rule of dictators or favored families whose grip on the economy does not permit newcomers to enter, or rulers who spend so much on the military that there are not enough funds to allow children a rudimentary education.

The rise of Chinese exports and the low value of the yuan on foreign exchange markets are also working to crowd out other aspiring exporting economies.

Kevin Rafferty is a former managing editor at the World Bank.