Friday, August 22, 2014

Don’t forget to reform the UN

Zahir Tanin
guardian.co.uk

–After the focus on the G20 and the financial crisis, we must remember the security council is also in dire need of change

After a week during which the eyes of the world were on the G20 summit and the state of the world economy, we should not forget that our international peace and security institutions are in equal need of reform – first and foremost the UN security council. After all, the next emergency calling for a global response could be in foreign rather than financial affairs.

Away from the cameras and under the public radar so far, diplomats at the UN in New York are quietly working towards strengthening multilateralism’s muscle, the security council. This February finally saw the successful launch of real reform negotiations, which I have the privilege of chairing on behalf of the president of the UN general assembly. While differences on, for instance, the size and composition of a revamped security council remain, all delegations have agreed to work them out at the negotiating table and all aspire to forge a council that reflects the global realities of the 21st century, not the mid-20th century.

The international economic institutions now under intense scrutiny were set up during the Bretton Woods conference back in 1944. Only slightly younger and just as stuck in a timewarp is the security council, the most powerful multilateral political body. When they signed the UN charter at the 1945 San Francisco conference, world leaders entrusted the maintenance of international peace and security to the council, with the ultimate goal of, in the words of the charter, saving succeeding generations from the scourge of war.

Special rights and responsibilities were assumed by the big three second world war allies, Russia (then still the Soviet Union), the UK and the US, plus China and France. These five took up permanent seats around the horseshoe-shaped table and secured the right to veto any resolution tabled in the council.

From those post-war days to our post-cold war era, the council did not change much, even if the world did. With many African and Asian nations throwing off the shackles of colonialism, the UN’s membership nearly quadrupled from 51 to 192. We saw not just new countries but also new powers emerge outside the west, as “the rise of the rest” created our contemporary multipolar world.

Yet while the times were changing at breakneck speed, the security council remained more or less the same, with the sole exception of the addition of four non-permanent seats in the 1960s. The current composition of five permanent (the P5 in UN-speak) and 10 non-permanent members, drawn from different regions and elected for two-year terms by all countries in the UN, is the enduring result of that 1963 tweak.

In the same year, a young and charismatic American president made the case for ongoing change at the UN when he addressed the entire UN membership: “The United Nations cannot survive as a static organisation … Its charter must be changed as well as its customs. The authors of that charter did not intend that it be frozen in perpetuity.” But ever since the year John F Kennedy spoke those words at the height of the cold war, the security council, the UN’s most powerful body, has actually remained frozen in time.

Fortunately, it seems that we are now finally heeding his words. All the UN’s 192 member states have signed up to the current negotiation effort to create a more legitimate and effective security council. Arguably, today’s general public is more often dissatisfied with the UN because it has done too little, such as in Rwanda in the 1990s or Darfur, rather than too much. The security council can become more effective and save more lives if it is widely perceived as a more representative and thus more legitimate body. Harvard professor Joseph Nye, who coined the now oft-used term “soft power”, has stated that legitimacy, an important part of soft power, is in fact the main tool the UN has to carve out a place for itself in the international order.

Most high-level actors in that international order are now understandably preoccupied with putting out the economic fire raging in the global village. But they neglect the need to also modernise international peace and security institutions, especially the security council, at their own peril. The world needs to be vigilant in both financial and foreign affairs and ready to deal with not just incomes falling down but also peace falling apart in the blink of an eye. Only a few blocks from the ground zero of this recession, Wall Street, we find a strong and stark reminder of that imperative: the gaping hole of the World Trade Centre site, the real Ground Zero.

A wider order comes into view

It may take months to discover whether the actions taken by last week’s Group of 20 summit in London are enough to rescue the world economy from a prolonged recession, if not depression. The substance of its conclusions will have to convince capital markets, global financial institutions, investors and humble consumers that they can start to spend, borrow or lend again.

But the symbolism of the event may be more important than the substance. For even if the G20 countries are a strange ad hoc selection, initially brought together by the Asian financial crisis in 1997, they represent a whole new element in the world order. They are not the Group of Seven – the club of western powers and Japan – or the G8 (the G7 plus Russia). The use of the G20 at this moment of global crisis is a clear indication that the old order has outlived its time.

Another pointer came four months ago when the US National Intelligence Council, part of Washington’s security apparatus, published a startling forecast. The international system as constructed after the second world war would, it predicted, be “unrecognisable” by 2025, thanks to globalisation, the rise of emerging powers and “an historic transfer of relative wealth and economic power from west to east”.

“The next 20 years of transition to a new system are fraught with risks,” the document declared. “Strategic rivalries are most likely to revolve around trade, investments and technological innovation and acquisition, but we cannot rule out a 19th-century scenario of arms races, territorial expansion, and military rivalries.”

That report was largely written before the full force of the financial and economic crisis had become apparent. Nevertheless, its authors were convinced that the “unipolar moment” of unchallenged US hegemony after the Berlin Wall came down was already drawing to an end. The future world order would be “multipolar”.

The extraordinary thing about the present moment is that several fundamental adjustments are taking place at the same time. That is what makes the outcome so unpredictable.

The end of the cold war, with the fall of the Wall in 1989, cleared the way for new powers to rise – China and India in particular – and removed ideological obstacles to globalisation. Cross-border migration has surged. The technological revolution of the internet has transformed international communications, the flow of information, financial trading and political awareness.

The breakdown in the global financial system, caused not just by the bubble that burst in the US subprime mortgage market but also the explosion of financial speculation across world markets, has rapidly turned into a recession in the real economy. No one has been spared. Credit has frozen up in markets from Africa to eastern Europe.

A massive rebalancing is starting to take place in world trade flows between the unsustainable US trade deficit and the equally unsustainable surpluses of China and other big exporters. US consumers are no longer going to be the engine for Chinese export-led growth, but nor can Chinese savers continue to finance American borrowing.

Finally there is the underlying adjustment – one that would normally still take decades to be realised – that the NIC report identifies, of the switch in power from west to east, especially the rise of China and India to reassume the prominence they held when Europe was in the Dark Ages.

There is an assumption in many parts of the world that the “crisis of capitalism” represented by the freezing up of the financial system will accelerate the long-term geopolitical shift, heralding the decline of US power and European influence. Last year’s choice of the G20 as the forum to tackle the crisis was a belated recognition that China, India and Brazil, at the very least, must be at the table. But will the G20 provide lasting leadership? It smacks of an emergency solution, not a considered construction.

For a start, it has no permanent secretariat. Gordon Brown, UK prime minister, as current chairman struggled for months with a tiny team of British civil servants to forge a consensus. There were divisions between the US and Europe. More important, there were different priorities for the industrialised countries and emerging economies. It was remarkable they managed to agree on a communiqué.

“It is an arrangement that works for finance ministers and central bank governors to meet once a year,” says Trevor Manuel, the South African finance minister. “When you take it up to heads of state and government, the imbalances are accentuated.”

But at least there were few signs of schadenfreude in London. Expectations in 2007 and 2008 of a “decoupling” between the crisis-hit economies of the west and the less exposed emerging markets have vanished. The pain is global and the solution had to be, too.

The real economic effect of the financial crisis has hit emerging markets harder than the developed economies, with a collapse in trade flows and a dramatic fall in commodity prices. It is clear that those worst hit will be the poorest – especially in Africa – who have the least to fall back on.

Second hardest hit are those commodity producers that have always faced big social and demographic challenges, such as energy-rich Russia, Iran, Nigeria and Venezuela. Even Gulf oil producers have been affected. All had become used to swollen export and tax revenues and face readjustment.

Finally, emerging economies still in transition from poverty to prosperity – or from communism to democracy – have been caught by the economic crunch before they could build stable systems of governance and root out endemic corruption. They include many in central and eastern Europe that emerged from the Soviet empire.

Some observers are sceptical about the geopolitical fallout from any financial crisis. “Geopolitical events like the disappearance of Mao in China, or the fall of the Berlin Wall, have far greater consequences than financial shocks,” says Robert Cooper, director-general of external affairs at the Council of the European Union . “Look at the technology bubble in the 1990s. There were no obvious consequences. Or the 1970s crisis with oil prices. Any geopolitical consequences rapidly disappeared.”

Yet he admits that two financial crises of the 20th century – the Depression of the 1930s and economic collapse in Europe after the second world war – did have important results. The former led to the rise of Nazi Germany, the isolationism of America and the outbreak of war. The latter, far more positive, resulted in the Marshall Plan that financed the German Wirtschafts­wunder and economic revival across the rest of the continent, which led to the eventual establishment of the EU.

The lessons of the 1930s also led to the setting up of the Bretton Woods institutions – the World Bank and International Monetary Fund – to bring monetary order to the main industrialised states and a system of crisis management that has survived for more than 60 years. But today their legitimacy and representativeness are being called into question.

The central nation in the ongoing geopolitical transformation is China. It is also the most difficult to read. “They want everything and nothing,” says a senior IMF official. “What they really want is just to be among the big players. The coming 20 to 30 years will be the era of the US and China. They are preparing for this game.”

Beijing wants a bigger share of votes at the IMF, to reflect its rapidly growing economy. But before the G20, it did not want to contribute from its massive foreign reserves to increasing the Fund’s resources because China is still, per capita, a poor country. In the end, Mr Brown announced that Beijing would contribute $40bn, alongside $100bn each from the EU and Japan, as part of a $500bn total. “The crisis emphasises that China is a pivotal world player,” says Bobo Lo of the Centre for European Reform in London. “It might not be a global superpower yet, but it has accelerated that trend.”

If China is a cautious winner, Russia is the most obvious loser from the upheaval. The choice of the G20 as the crisis forum rather than the G8 has abolished Russia’s privileged position as the only outsider at the same table as the wealthiest countries. At the G20 it is one of many middle-sized economies, such as South Korea and Turkey.

But Russia’s weakness is more fundamental. The oil price may rise and fall but the crisis has exposed its failure to diversify beyond the energy sector. Its financial institutions are inefficient, its judicial system corrupt. In the longer term, it faces a chronic demographic crisis likely to result in severe labour shortages in the next two decades.

What of the rest of Europe in the new world order? Like Russia, the continent has an ageing, shrinking population. Slow growth is inevitable, although most west European economies have the reserves and the social safety net to cope with the recession. That is not true of eastern Europe.economy1

For the EU, the risk is that solidarity within the Union will crack, as sneaking protectionism undermines the single market and the old member states show reluctance to bail out the new ones that face acute social crises, with a freeze on bank credit and investment.

The outcome of the G20 – reinforcement of the international financial institutions and a big emphasis on regulation – is what Europe wanted. But it may be a mixed blessing. On the one hand, Europeans have a strong voice in the institutions, especially the IMF. But they will have to give up some of that influence in exchange for China’s contribution and the representation of other developing countries.

As for the G20 itself, the chemistry of the group is unstable. But what seems clear is that without a firm line from Barack Obama’s new US administration, the outcome would have been more feeble. It was Washington that wanted to triple IMF resources. The EU was happy just to double them. Mr Obama played the role of mediator.

France’s Nicolas Sarkozy was the only one who insisted last week that the crisis spelt the demise of “Anglo-Saxon capitalism”. Yet experience suggests that of all the countries affected, the US has the greatest resilience and capacity to recover quickly. The EU and Japan seem stuck in sluggish growth and declining demographics.

As for China, the requirement to adapt from export-led growth to a radical expansion of domestic demand could be a huge political challenge. The Communist party will have to countenance a much faster growth of the middle classes than it has prepared for.

A new world order may be replacing the old – but it will be a bumpy ride.

By Quentin Peel
FT.com

World Leaders Agree on Global Response

Leaders of the Group of 20 nations on Thursday announced a host of measures they said should help lift the global economy — but deferred many of the trickiest decisions or forwarded them to international institutions unaccustomed to the responsibility.

Facing the worst economic crisis in decades – and one they say hasn’t hit bottom — the leaders concluded a summit by turning especially to the International Monetary Fund to warn of impending problems and assess whether G-20 countries are keeping their promises on regulation and fiscal stimulus to ease the impact of the recession.

Those are tasks beyond the IMF’s traditional role, and may require the fund to show more spine in dealing with its largest members than it has managed in the past. The leaders agreed to quadruple the financial capacity of the IMF with a $1 trillion commitment.

The G-20 also worked to clamp down on tax havens and to tighten financial regulations, bringing large hedge funds and financial institutions into the global regulatory net. The G-20 wants to register hedge funds with domestic regulators, disclose how much they have borrowed and to make sure there is effective oversight, even if the fund operates across borders.

The measures may ease some pain from the economic crisis. But many declarations were of principles that have to be followed up — some at another G-20 meeting set for later this year.

“Our problems are not going to be solved in one meeting; they are not going to be solved in two meetings,” said President Barack Obama, at his first high-level international meeting.

A Communiqué issued by the group at the end of the meeting didn’t specifically tackle the problems that many say are at the root of today’s crisis, such as the broken banking systems. U.K. Prime Minister Gordon Brown said the G-20 had figured out a way to deal with toxic bank assets. Yet in the communiqué, the leaders said they would “address decisively” the problem of impaired assets, but didn’t spell out how.

The chance for more sweeping progress here was sidelined by weeks of differences among key players. Calls by the U.S. and the U.K. for more financial stimulus to restart economies collided with European calls — primarily from France and Germany — for stricter regulation of the global financial system.

The group made no commitment to a specific stimulus target that the U.S. supported. Instead, the leaders made a vague commitment to “deliver the scale of sustained fiscal effort necessary to restore growth” and said the world was in the middle of a giant monetary and fiscal stimulus valued at $5 trillion.

Nonetheless, by Thursday night, the erstwhile factions — Messrs. Obama and Brown as well as French President Nicolas Sarkozy and German Chancellor Angela Merkel — painted a picture of progress and bridged their differences.

“This is the day that the world came together, to fight back against the global recession. Not with words but a plan for global recovery and for reform and with a clear timetable,” Mr. Brown said.

Other international institutions were assigned enforcement duties. The Financial Services Board — an expanded version of the Swiss-based Financial Stability Forum, a group of international regulators — is expected to gain more clout as it tries to coordinate crisis-response SWAT teams of regulators from many countries. The World Trade Organization is being asked to review whether G-20 members break pledges to refrain from protectionism.

In the Communiqué on Thursday, the leaders said the new Financial Services Board would work with the IMF to signal “early warnings” of economic and financial risks.

“There has been a strengthening of the mandate” of the group, said Mario Draghi, the FSF head and a former Goldman Sachs Group Inc. banker who is governor of the Bank of Italy.

It’s far from clear that the international organizations have the muscle — or will — to carry out the tougher mandates. For instance, the IMF in the spring of 2008 urged the U.S. to take care of its toxic-asset program and handed the U.S. Treasury a detailed plan for doing so, said U.S. and Treasury officials. The U.S. ignored the plan.

Disagreements among the G-20 leaders continued until the last minute. According to White House officials, in an account supported by officials from other countries, Mr. Obama was crucial in sealing the deal on the last remaining stumbling block: publishing tax-haven names.

Mr. Sarkozy insisted that the G-20 strongly endorse a list of tax havens that aren’t in compliance with the organization’s rules on transparency, and that the list be drawn up by the Organization for Economic Cooperation and Development. Chinese President Hu Jintao objected, especially to the role of the OECD. China isn’t an OECD member.

The back-and-forth on the matter began Thursday morning and stretched into the afternoon, a senior Obama administration official said. The opposing sides returned to it three times.

Finally, Mr. Obama took Mr. Sarkozy aside and suggested compromise language. The G-20 wouldn’t order up a blacklist. Instead, its Communiqué would cite a list the OECD had published, on its own, under its own initiative. Mr. Sarkozy agreed.

Mr. Obama then sent an aide, Michael Froman, to the Chinese delegation. Mr. Froman suggested a direct conversation between Messrs. Obama and Hu, which the Chinese accepted. Mr. Obama huddled with Mr. Hu, then called Mr. Sarkozy into the conference with their translators and aides. The three leaders shook hands, agreed to the Obama language, and the issue was resolved in 15 to 20 minutes, the White House official said.

Summit host British Prime Minister Gordon Brown, front row center, stands with the other G20 leaders during the group photo Thursday.

Summit host British Prime Minister Gordon Brown, front row center, stands with the other G20 leaders during the group photo Thursday.

By STEPHEN FIDLER, BOB DAVIS and CARRICK MOLLENKAMP