Thursday, April 24, 2014
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Our Unbalanced World

The search for a new Managing Director of the IMF provides a keen reminder of how unjust today's international institutions are. Created in the postwar world of 1945, they reflect realities that have long ceased to exist.

The organization and allocation of power in the UN, the IMF, the World Bank, and the G7 meetings reflects a global equilibrium that disappeared long ago. After WWII Germany and Japan were the defeated aggressors, the Soviet Union posed a major threat, and China was engulfed in a civil war that would bring Mao's Communists to power. Much of the so-called Third World was either recently independent, or remained colonies; all of it was very poor.

There were 74 independent countries in the world in 1945; today there are 193. Outside of China, Cuba, and North Korea communism is popular only in West European cafés and a few American college campuses. Germany is reunited and much of the Third World is growing faster than the First World, with computer software built in Bangalore and American graduate programs, including business schools, receiving thousands of application from smart Chinese students.

The whole world has turned upside down, and yet France and Britain, for example, retain permanent seats on the UN Security Council. This made sense in 1945; it does not today. Why France and Britain and not Germany or Japan, two much larger economies? Or India and Brazil, two huge countries?

Does it really make sense that two European Union member countries hold a veto power on the Security Council while the Third World (outside of China) is completely unrepresented? The EU does not have a common foreign policy and it will not have one in the foreseeable future, but this is no reason to continue to provide a preference to France and Britain. If Europe is really serious about a common foreign policy, does the current arrangement make any sense? True, France and Britain do have the best foreign services in Europe, but this is reversing cause and effect. France and Britain maintain this capability because they continue to have foreign-policy relevance.

Europe's over-representation extends beyond the Security Council. While a European foreign policy does not exist, Europe has some sort of common economic policy: 12 of the 15 current members have adopted the euro as their currency and share a central bank. Nevertheless Germany, France, Italy, and Britain hold four of the seven seats at the G7 meetings.

Indeed, the situation is even more absurd when G7 finance ministers meet: the central bank governors of France, Germany, and Italy still attend these meetings, even though their banks have been reduced to local branches of the European Central Bank, while the president of the ECB - these countries' real monetary authority - is a mere "invited guest." Shouldn't there be only one seat for Europe?

Of course, European leaders strongly oppose any such reform: they fear losing not only important opportunities to have their photographs taken, but real power as well. But how much power they really wield in the G7 is debatable: America's President, Secretaries of State and Treasury, and the Chairman of the US Federal Reserve almost certainly get their way more easily in a large, unwieldy group than they would in a smaller meeting where Europe spoke with a single voice.

The current search for a new IMF head continues this pattern. The IMF Managing Director is a post reserved for a West European; the Americans have the World Bank. This division of jobs leaves out the developing countries, many of which are "developing" at a speed that will make them richer than Europe in per capita terms quite soon.

What about the one billion Indians or the 1.2 billion Chinese? Shouldn't one of them at least be considered for such a post? What about the hard working and fast-growing South Koreans? Why should they not be represented at the same level as Italy or France? What about Latin American success stories like Chile and perhaps Mexico or Brazil?

The Europeans don't even seem to care very much about the job. After all, Horst Köhler, the IMF managing director, resigned from a job that commands the world's attention to accept the nomination to become President of Germany, a ceremonial post with no power whatsoever, not even inside Germany.

The OECD is located in Paris, the UN's Food and Agriculture Organization in Rome, and the list goes on. Simply put, Western Europe is overrepresented in international organizations, given its size in terms of GDP and even more so in terms of population. It is thus not surprising that some Europeans - particularly the French - are so reluctant to reform the international organizations, even in terms of cutting waste and inefficiency at the UN. After all, might not someone then suggest that the first step in such a reform is to reduce Europe to a single seat on the Security Council?

Europe is being myopic. A single seat - at the UN, the IMF, or the World Bank - would elevate Europe to the same level as the US and would augment, rather than diminish, its global influence.

The over-representation of Western Europe and the under-representation of growing developing countries cannot last. Indeed, it is already creating tensions. Obsolete dreams of grandeur should not be allowed to interfere with a realistic and fair distribution of power in the international arena.

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