Roberto De Ocampo was invited to speak at the 3rd Singapore Global Dialogue on whether the world economy is governable. He argues that the world economy is far more complex now than during the Bretton Woods system. Several financial crises starting in the 1990s demonstrated the interconnectedness of economies and impacted regions and the world. The rise of China and shift of economic power away from the US and Europe has further complicated governance. While the G20 aims to facilitate cooperation, it faces legitimacy issues due to its limited membership. True global governance will require continued evolution of international institutions and cooperation between powerful state actors like the US, EU, and China.

1. Centennial Asia Advisor’s Chairman Roberto De Ocampo was one of the
invited speakers at the 3rd Singapore Global Dialogue.

2. Presentation of Dr. Roberto F. de Ocampo, OBE
Former Philippine Finance Minister
Delivered at the 3rd Singapore Global Dialogue, Sept. 21, 2012
Shangri-la Hotel, Singapore
“Is the World Economy Governable?”
It’s a Different World
When I accepted the invitation to speak in this 3rd Singapore Global
Dialogue on the panel session, “Is the World Economy Governable?” my first
reaction was why was this question being asked in the first place? I figured
that this question is being considered because there is some sense that the
world economy has become less than governable. The first clear reality that
predicates the question is that when we speak of the world, the reality is that
it’s a far different world now from what it was even as recently as five years
ago.
To put things in perspective, one could say that the world economy was
so much simpler and, thus, governable when the Bretton Woods agreements
were established giving rise, among others to post-war global institutions and
procedures to regulate the international monetary system. The Bretton Woods
system achieved its objectives to stabilize exchange rates and enhance
economic growth. It gave importance to world institutions that it established,
particularly the International Monetary Fund and the International Bank for
Reconstruction and Development better known as the World Bank.

3. The important element of the Bretton Woods was the
obligation of countries to adopt a monetary policy that maintained the
exchange rate by tying their currencies to the US dollar. It was also
characterized by the ability of IMF to provide immediate relief for countries
with problems in balance of payments. The system generally worked as it
helped establish a period of relative stability until 1971 when the USA
abandoned fixed exchange rates.
A fundamental difference since Bretton Woods is the change in
the balance of economic power (and perhaps along with it, political leverage).
A new configuration in world economy emerged after a series of financial
crises in recent years that affected the dominant economic
powers, particularly the USA and the European Community. These crises also
raised questions about the effectiveness of the Bretton Woods
institutions, especially the IMF. The issue of world economy being governable
has become more challenging.

4. These financial crises started in certain national economies, and
quickly triggered impact of regional and global proportions. Among these
were the Mexican peso crisis in 1994 that triggered the “tequila effect’ in
South America; the collapse of Thailand’s baht in 1997 that sparked the Asian
financial crisis; the sub prime mortgage crisis in the US in 2007 that set off a
global economic recession; and, the government debt crisis in Greece in 2009
which contributed to the Euro zone financial crisis that is still ongoing.
Along side these crises there has developed a defining event in the
world economy, namely the emergence of China as a dominant power. Its well
documented economic growth has enhanced its global influence. Thus since
the time of the Bretton Woods agreements world balance of power has gone
from Cold War relationships between the USA and Russia, the collapse of
Communism and the emergence of the USA as the world’s predominant world
power, and now the rise of a new balance of power primarily between the
USA and China. One can also make a case that there is a shifting of the world’s
balance of power towards Asia, particularly with the rise of Emerging
Economies most of whom are Asian and the ongoing weakness and turmoil of
the Eurozone.

5. Another difference in the world economy involves not just the economic
configuration, but the demand for governance to underpin the new structure.
Bretton Woods provided the platform for the economic powers, particularly
Western Europe and USA, to be the dominant players in world economy. They
set the rules of the game, so to speak, thus proving true the golden rule: he
who has the gold makes the rules.
But these rules, as they refer to the conduct of business in international
finance and economics, were broken by these very same dominant economies
who made the rules, thus resulting in various financial scandals that rocked
the world economy and giving rise to the issue of world governability. In
short, if the rule makers themselves have broken the rules, who is in a position
to enforce the rules on them or can they be relied upon to right themselves?
We have seen in the last decade or so notable instances when
companies employed questionable accounting tricks, financial
engineering, complicated risk metrics, and outright fraud in order to hide
losses and inflate profits. There was

6. the Enron scandal in 2001, WorldCom which inflated its cash flow by some $3
billion, and posted positive performance when it really lost money, the
Lehman Brothers collapse that triggered the still on-going financial and
economic difficulties in the USA, the most recent Barclays scandal, and of
course the nerve wracking seemingly intractable saga of the Eurozone.
Companies in the dominant economies were obsessed with hitting their
profit and share value targets. They let their people on their merry way, far
from the executive suites, manipulating fuzzy numbers and obscure financial
transactions with total absence of oversight by their superiors. The result was
financial collapse that triggered a global crisis
In reaction to these, the noted economist Paul Krugman once wrote
that he thought banking should be made boring again. But in the years that
followed the US Financial Services Modernization Act “banking became
anything but boring. Wheeling and dealing flourished, and pay scales in
finance shot up, drawing in many of the nation’s best and brightest young
people. And we were assured that our supersized financial sector was the key
to prosperity”. Instead, and as Krugman stated “finance turned into the
monster that ate the world economy”.

7. Furthermore, the process of globalization has been instrumental in
the shift of the balance of economic power. Globalization not only facilitated
interaction among the new and old dominant or important players in the
world economy through trade, capital and investment flows. More
importantly, it facilitated the exchange of information, concepts and standards
that these economies have come to acknowledge the critical value of
governance for growth and development to be sustainable.

8. There was a lot of blame to pass around. The easy-money policies of the
US Federal Reserve have been suggested to be a leading cause of the sub
prime mortgage crisis. Another school of thought maintains that the reason
people commit these financial shenanigans and a fraud is greed.
Whatever the reason, the near-collapse of the world financial system in
2008 and the global credit crisis that followed, the continuing Eurozone saga,
and the shifting balance of economic power has given rise to widespread calls
for changes in the regulatory system and the structure of decision making in
international finance.
From G7 to G20
This realization of a new economic paradigm was not lost on the
economies that were dominant or principal players of the Bretton Woods era,
namely the Group of Seven comprising of USA, UK, West Germany, Italy,
Japan, France and Canada, and thus the G7 expanded to the G20.
The G20’s Group of Twenty Finance Ministers and Central Bank
Governors has declared itself as the "premier forum for international
economic cooperation" but it continues to suffer from "input" legitimacy due
to its exclusive nature and lack of broader representation.

9. Some have observed that “The G-20 is a self-appointed group. Its
composition is determined by the major countries and powers. It may be
more representative than the G-7 or the G-8, in which only the richest
countries are represented, but it is still arbitrary.”
A study by the Danish Institute for International Studies (2011)
makes the following points:
• The claim by the G20 that its “economic weight and broad membership
gives it a high degree of legitimacy” is not convincing. It permanently
excludes 173 countries.
• This fact alone undercuts its claim to representational legitimacy.
• In addition to this fundamental problem, the composition of the
membership of the G20 is problematic from a representational
perspective because (i) the African region is grossly under-represented
(South Africa is the only African member country) and (ii) low-income
countries and small, open economies are completely absent

10. While the G20 has invited ‘representatives’ from underrepresented
regions – such as Vietnam for ASEAN and Ethiopia and Malawi or the
African Union – to participate as ad hoc ‘observers’ in G20 summits this
tantamount to ‘concessions at the margins’. Representational legitimacy
requires universal participation on equal terms, such as when all countries
participate with voting power in proportion to their GDP.

11. Even a World Bank/ IMF paper critiqued that the G20 membership
is based on no explicit criteria and includes several countries which are
obviously not “systematically important” such as Argentina and Australia.
• Lacking explicit membership criteria, the G20 contains no mechanism for
adjusting membership to reflect changing realities of the global economy.
• The G20 claim for being representative due to its high share of the world
economy is misleading because its figures include the whole of the EU via
the EU chair. Take out the non-G20 countries in the EU and the shares fall
to 77% of world GDP, 60% world trade, and 62% of world population.
• There is also the further question of why the EU is privileged as a full
member while representatives from two other regional organizations
(African Union and ASEAN) are marginal invited guests, and why other
regions (such as Latin America, Middle East) have slight or no
representation.

12. Some say that it also suffers from "output" legitimacy, namely its
ability or lack of it to strengthen international cooperation and come up
with effective solutions.
Among issues raised in this regard have been that: the results of
reform processes started in the U.S., E.U. and several individual countries
after the 2009 Pittsburgh Summit are very meager, or are too slow and
come too late.

13. Examples cited are the Basel III Agreement which is still not
finalized, 4 years after Lehman, the stress test for European banks that
failed to recognise that the entire banking sector in Spain was
insolvent, and in the US, after passing the Dodd/Frank-Act establishing
new structure of supervisory system, stress tests were made but shortly
thereafter J.P. Morgan Chase had to confess to a loss of USD2bn. The
losses are now estimated at USD5.9bn.
All thse criticisms notwithstanding, I don’t think it is our intention
to answer the question asked in this panel, “Is the World Economy
Governable?” with a proposal for a supra “world government” with
supreme exercise of political and economic authority. This is of course
unrealistic.
What is realistic is “world governance”. This is a requisite for
growth and development to be sustainable. But definitely, the G20 as a
mechanism for world economic governance is still at this point a work in
progress.

14. The G20, IMF and other international institutions must continue to
evolve with the changing configuration of the world economy. New
economic centers or powers are emerging as others fade away. New
economic parameters and balances in world economy develop. These
institutions must continuously assess their mandates, objectives, and
memberships lest they become an anachronism.
The development process is not static, and depending on how a
crisis is handled an economy can come out of it stronger. Asia, including
the Philippines, was not as adversely affected by the 2008 global financial
crisis.

15. I recall that during my time as Chairman of the APEC Finance
Ministries at the onsent of the Asian Financial crisis Japan proposed a rescue
fund that would operate like an Asian IMF, but calibrated according to the
character and context of the regional economic crisis. The proposal was not
implemented as dominant APEC member countries from the West objected to
it, claiming that it would lead to moral hazard.
If a proposal to establish a regional kind of an IMF is deemed
ineffective on the belief that it would create moral hazards, are the countries
as rule makers any more credible when they are themselves the rule breakers?
Is it time now to revisit the concept of an Asian IMF as part of a new world
economic governance?
More broadly, isn’t it time to review the organizational configuration of
the Bretton Woods institutions? For instance, under some protocol or
understanding, the US gets to appoint the World Bank President and Europe
the IMF Managing Director. Does this still reflect the current balance of power
in a similar way that the current protocol reflects the balance during the
establishment of the Bretton Woods agreements?

16. The Sum is Equal to its Parts
The world economy is indeed different now. But as always, the sum
can only be equal to its parts. And the effectiveness of the sum, as it were, of a
system of world economic governance can only be equal to the economic
health and interactive harmony of its parts.
Perhaps the progressive improvement of G-20’s role in world
economic governance could start, as some suggest, with a more explicit and
transparent criteria of size and regional representation.
Furthermore, aside from the abovementioned issue concerning the
appointment of its heads, consideration could also be given to the
reconfiguration of the boards of World Bank and IMF. It has been suggested
that instead of their current board structures where eight countries represent
themselves whereas all others are grouped into multi-country
constituencies, a more representative system be put in place dividing the
world up into fewer main regions with more balanced representation and with
voting shares more representative of the regions’ economic weight.

17. From the Asian perspective, the key is integration. As a member
of the External Advisory and Review Board of the ADB’s 2010
publication, “Institutions for Regional Integration: Toward an Asian
Economic Community”, we identified certain challenges to make this
concept of integration viable. Quoting from this publication, the
integration process creates the following challenges for policy maker:
1. Cementing recent gains: Although Asia’s economic growth has
been rapid, recent achievements are fragile. The region’s beneficial
openness to the rest of the world also has its downsides, not the least a
vulnerability to external shocks. And while regional economic cooperation
has progressed in recent years, existing obligations and commitments
have yet to be implemented uniformly across Asia and the Pacific.

18. 2.Broadening the process: Until recently, Asian economic integration
has mostly focused on East Asia with ‘Factory Asia” being mainly an East Asian
operation. While trade between South and East Asia, notably between India
and China, is growing, not all parts of those regions, and not all sectors and
activities, are equally involved.
3.Deepening integration: The next steps is regional integration involve
moving from the integrated trade and production networks to more deeply
integrated goods markets by lifting barriers to trade and competition,
removing obstacles to interregional trade in services, allowing a freer
movement of labor, and developing more resilient financial markets.
4.Ensuring the compatibility of regional and global integration: Since
Asia is highly integrated globally well as regionally, it is crucial that measures
to cement the region’s integration complement rather than jeopardize its links
with the rest of the world.

19. Aside from this, it is still a reality that much of global governance
depends on the situation of the most powerful countries. It would be
particularly important for key parts, particularly regional aggrupations and the
more dominant economies to bring themselves to a healthy economic state
and a continuing harmonious relationship.
If, as they should, these leading economies, primarily the USA, the
Eurozone, and China are to credibly take the head, certainly the USA has to
put in the financial regulatory framework to correct a financial system still
prone to unbridled capitalism’s excesses, the Eurozone has to face the reality
that monetary union without a better semblance of fiscal union will result in
continuing economic crisis firefighting, China must begin to increasingly show
its ability to be a credible influential voice on the world economic stage.
From the geopolitical perspective, considering the inevitable balance
of power and to some extent, rivalry between the US and China it would be
important that the two do not misunderstand each others signals and
intentions since, as always, when elephants battle, ants get trampled.
Thank you.