What a way to run the world

Now its on front page. The foreign policy that India had in the past decade has only been how to get a seat in the security council. Representing more than 1/6 of humanity, largest democracy and oldest civilization, it was odd to see India being left out of the big bodies that "manage" the world order. But now along with the old titles it also has the most important title of economic superpower (albeit growing). Good press like this lead article on economist supporting the inclusion of emerging giants like India and Brazil in world organisations and will bring in more credibility (also buy in) to these organisations' claim that they maintain world peace. India has grown beyond the bickering of Pakistan, but it has got a new obstacle in form of China that will be uncomfortable having a superpower in its neighbourhood. The elections in India and US will stall any progress in this area for another year but then China does not have such hinderances.

----Vj
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Global institutions are an outdated muddle; the rise of Asia makes their reform a priority for the West

CLUBS are all too often full of people prattling on about things they no longer know about. On July 7th the leaders of the group that allegedly runs the world—the G7 democracies plus Russia—gather in Japan to review the world economy. But what is the point of their discussing the oil price without Saudi Arabia, the world’s biggest producer? Or waffling about the dollar without China, which holds so many American Treasury bills? Or slapping sanctions on Robert Mugabe, with no African present? Or talking about global warming, AIDS or inflation without anybody from the emerging world? Cigar smoke and ignorance are in the air.

The G8 is not the only global club that looks old and impotent (see article). The UN Security Council has told Iran to stop enriching uranium, without much effect. The nuclear non-proliferation regime is in tatters. The International Monetary Fund (IMF), the fireman in previous financial crises, has been a bystander during the credit crunch. The World Trade Organisation’s Doha round is stuck. Of course, some bodies, such as the venerable Bank for International Settlements (see article), still do a fine job. But as global problems proliferate and information whips round the world ever faster, the organisational response looks ever shabbier, slower and feebler. The world’s governing bodies need to change.

Time for a cull?

There has always been an excuse for putting off reform. For a long time it was the cold war; more recently, “the unipolar moment” convinced neoconservatives that America could run things alone. But now calls for change are coming thick and fast. Britain’s prime minister, Gordon Brown, and America’s treasury secretary, Hank Paulson, want to redesign global financial regulation. Others are looking at starting afresh: John McCain is promoting a League of Democracies, while Asian countries are setting up clubs of their own—there is even talk of an Asian Union to match the European one. And many critics, especially in America, want a cull. Surely economic progress in the emerging world argues for getting rid of the World Bank? Is a divided Security Council really any use?

The critics are right to argue that global organisations should be more focused than they are, but wrong to assume they can be dispensed with altogether. Get rid of the Security Council or the World Bank and the clamour to invent something similar would begin: you need somebody to boss around 100,000 peacekeepers and to lend to countries that find it hard to access capital markets. International talking-shops and standard-setters are here to stay; instead of trying to bin them, focus on making them work well.

That means recognising how economics has changed the world order. Emerging economies now account for more than half of global growth. The most powerful among them need to be given a bigger say in international institutions—unless of course you think India will always be happy outside the Security Council and China content to have a smaller voting share than the Benelux countries do at the IMF.

Any solution must accept three constraints. First, better institutions will not solve intractable problems. A larger G8 will not automatically lick inflation, a better World Food Programme would not stop hunger. Second, no matter how you reform the clubs’ membership rules, somebody somewhere will feel left out. Third, you cannot start again. In 1945 the UN’s founders had a clean slate to write upon, because everything had been destroyed. The modern age does not have that dubious luxury, so must build on what already exists.

Take for instance the G8. Some dream of reducing it to just the economic superpowers: the United States, the EU, China and Japan. An appealing idea, but Silvio Berlusconi and Vladimir Putin are unlikely to give up their seats at the top table. Better to enlarge the current body to include the world’s biggest dozen economies. A G12 would bring India, Brazil, China and Spain into the club, while allowing Canada (just) to stay in.

The politics of the Security Council are even more outdated. Nobody now would give France or Britain a permanent veto, but neither wants to give up that right. Meanwhile, the four obvious candidates are held back by regional jealousies: India by Pakistan; Brazil by Argentina; Germany by Italy; and Japan by China. The most sensible plan gives these four permanent but non-veto-wielding seats, with two other seats provided for Islamic countries and one for an African nation.

America has yet to get behind these proposals, but a sharpened Security Council could mitigate the emerging world’s objections to UN reform. With a more representative high command, more jobs could be allocated on merit, the globocracy slimmed and bolder steps considered: for instance, the case for a small standing army, or earmarked forces, to nip Darfur-style catastrophes in the bud, would be easier to make.

The Bretton Woods duo are easier to change: all that is needed is Western will. Their problem is finding a useful purpose. The World Bank is still needed as a donor to the really poor and as a supporter of global public goods, such as climate-change projects. There is less obvious need for the IMF, which was originally set up to monitor exchange rates. It could become a committee of oversight, but the main financial regulation will stay at the national level.

League of Good Hope

Supporters of Mr McCain’s League of Democracies suggest it could be like NATO—a useful democratic subcommittee in the global club. But Mr McCain needs to define his democracies. (Will Malaysia count? How about Russia or Iran?) And, crucially, any league must not be seen as an alternative to reforming the UN. The whole point of global talking-shops is that they include everybody, not just your friends.

Faced with the need to reform international institutions, the rich world—and America in particular—has a choice. Cling to power, and China and India will form their own clubs, focused on their own interests and problems. Cede power and bind them in, and interests and problems are shared. Now that would be a decent way to run a world.

America's vulnerable economy

Recession in America looks increasingly likely. Can booming emerging markets save the world economy?

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market. Experts said that house prices could never fall nationwide. But fall they have, by 5% in the past 12 months. Residential investment has collapsed, but a glut of unsold homes means that prices have much further to drop. Americans' spending is likely to be dented much more by a fall in house prices than it was in 2001 by the stockmarket's collapse. With house prices lower and credit conditions tighter as a result of the subprime crisis, households can no longer borrow against capital gains to support their spending.

Dearer oil is set to squeeze households further (this week's drop in crude prices notwithstanding). Consumer confidence has already fallen sharply. It cannot be long before consumer spending stumbles, which in turn would hurt companies' profits and investment. The weak dollar will boost exports, but at only 12% of GDP, exports are too small to make up for a weakening of consumer spending, which accounts for 70%.

I want to break free

Will an American recession drag the rest of the world down with it? The economies of Europe and Japan rebounded strongly in the third quarter, but look likely to slow down. Although both should be able to keep chugging along, neither is likely to set any great pace. Strengthening currencies will hurt exporters in both places. Europe's own housing hotspots are cooling, and some of its banks have been sideswiped by America's subprime ills.

The best hope that global growth can stay strong lies instead with emerging economies. A decade ago, the thought that so much depended on these crisis-prone places would have been terrifying. Yet thanks largely to economic reforms, their annual growth rate has surged to around 7%. This year they will contribute half of the globe's GDP growth, measured at market exchange rates, over three times as much as America. In the past, emerging economies have often needed bailing out by the rich world. This time they could be the rescuers.

Of course, a recession in America would reduce emerging economies' exports, but they are less vulnerable than they used to be. America's importance as an engine of global growth has been exaggerated. Since 2000 its share of world imports has dropped from 19% to 14%. Its vast current-account deficit has started to shrink, meaning that America is no longer pulling along the rest of the world. Yet growth in emerging economies has quickened, partly thanks to demand at home. In the first half of this year the increase in consumer spending (in actual dollar terms) in China and India added more to global GDP growth than that in America.

Most emerging economies are in healthier shape than ever (see article). They are no longer financially dependent on the rest of the world, but have large foreign-exchange reserves—no less than three-quarters of the global total. Though there are some notable exceptions, most of them have small budget deficits (another change from the past), so they can boost spending to offset weaker exports if need be.

This does not mean emerging economies will grow fast enough to make up for the whole of a fall in America's output. Most of them will slow a bit next year: for instance, China's growth rate may dip to “only” 10%. So global growth will ease—which, after five years at an average of almost 5%, close to its fastest pace ever, it needs to do. But thanks to the vigour of the new titans, it will stay above its 30-year average of 3.5%.

A tale of two prices

The rising importance of the world's new giants will not only boost growth. It will also shift relative prices, notably those of oil and the dollar. And the consequences of this will be less comfortable for developed countries, especially America.

The oil price has risen mainly because of strong demand in emerging economies, which have accounted for as much as four-fifths of the total increase in oil consumption in the past five years. In past American recessions the oil price usually fell. This time it is likely to hold up. That will not only hurt the finances of Western consumers, but may also make the jobs of their central bankers harder, by combining inflationary pressure with economic slowdown.

The enfeebled dollar—lately in sight of $1.50 to the euro—would be weaker still without enormous purchases by central banks in emerging economies. This support is now waning. China and others are putting a smaller share of increases in reserves into the American currency. And Asian and Middle Eastern countries with currencies linked to the dollar are facing rising inflation, but falling American interest rates make it harder to tighten their own monetary policy. They may have to let their currencies rise against the sickly greenback, meaning they will need to buy fewer dollars. More important, as international investors wake up to the relative weakening of America's economic power, they will surely question why they hold the bulk of their wealth in dollars. The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done.

The vigour of emerging economies is good news for the world economy: for its growth, it has much less need of a strong America. The bad news for America is that this, in turn, may mean that the world also has less need of the dollar.