9.4 Challenges in Global Economic Governance

Emerging economies like BRICS are reshaping global economic governance. Their growing influence challenges the dominance of advanced economies in institutions like the IMF and World Bank, leading to calls for reform and the creation of alternative frameworks.

Global economic governance faces challenges in addressing crises and ensuring fair representation. Informal groupings like the G7 and G20 play a crucial role in shaping priorities, while proposals for reform aim to increase transparency, accountability, and inclusivity in decision-making processes.

Emerging Economies and Global Economic Governance

Impact of emerging economies

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• Rise of emerging economies (BRICS - Brazil, Russia, India, China, South Africa) has shifted the balance of power in global economic governance
  • Increased economic clout gives them more influence in international decision-making
  • Demand greater representation and decision-making power in institutions like the IMF and World Bank
• Challenges the dominance of advanced economies (US, EU, Japan) in setting the global economic agenda
  • Emerging economies push for reforms to reflect their growing economic weight
  • Resist traditional Western-led economic policies and prescriptions they view as not serving their interests
• Formation of alternative institutions and frameworks led by emerging economies
  • New Development Bank (NDB) established by BRICS as an alternative source of development financing to the World Bank
  • Asian Infrastructure Investment Bank (AIIB) led by China to finance infrastructure projects in Asia, seen as a rival to the Asian Development Bank

Challenges and Reforms in Global Economic Governance

Adequacy of financial institutions

• Limitations of the International Monetary Fund (IMF) and World Bank in addressing global economic crises
  • Insufficient financial resources to provide adequate assistance to all countries in need during widespread crises
  • Conditionality attached to loans and assistance programs criticized as overly strict and politically motivated
• Concerns about the legitimacy and representativeness of decision-making processes in these institutions
  • Voting power skewed towards advanced economies, particularly the US which holds veto power
  • Calls for reforms to give greater voice and representation to emerging and developing economies to reflect the multipolar world order
• Challenges in coordinating effective and timely responses to global economic crises
  • Divergent interests and priorities among member countries makes consensus difficult
  • Disagreements on appropriate policy measures and how to allocate limited resources

Role of informal groupings

• G7 (Group of Seven) as a forum for coordination among advanced economies
  • Comprises Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States
  • Discusses and sets the agenda on major global economic issues like trade, finance, and development aid
• G20 (Group of Twenty) as a broader forum for international economic cooperation
  • Includes G7 countries plus major emerging economies (China, India, Brazil) and other key players (Australia, Mexico, South Korea)
  • Represents around 80% of global GDP and two-thirds of the world's population, giving it significant influence
  • Focuses on issues such as global economic stability, financial regulation, and sustainable development goals
• Influence of these informal groupings on the priorities and decisions of formal international financial institutions
  • G7 and G20 summits often set the tone and direction for discussions at the IMF, World Bank, and other multilateral bodies
  • Coordination and consensus-building among major economies in these forums can shape the global economic governance agenda

Proposals for governance reform

• Increasing the representation and voting power of emerging and developing economies in the IMF and World Bank
  • Adjusting quota shares to reflect the changing global economic landscape and the rising share of developing economies
  • Ensuring greater diversity in leadership positions and decision-making processes to break the traditional US-European hold
• Enhancing the transparency and accountability of international financial institutions
  • Improving the transparency of decision-making processes and criteria for lending and assistance programs
  • Strengthening mechanisms for stakeholder participation and input, including from civil society organizations and local communities affected by projects
• Exploring alternative or complementary frameworks for global economic governance
  • Regional or plurilateral arrangements, such as the Chiang Mai Initiative Multilateralization (CMIM) currency swap agreement among ASEAN+3 countries
  • Strengthening the role of the United Nations and its agencies in global economic governance to give it more legitimacy than the Bretton Woods institutions
• Addressing the need for better coordination and coherence among various institutions and forums
  • Improving communication and collaboration between the IMF, World Bank, WTO, and other relevant bodies to avoid duplication and inconsistencies
  • Ensuring that the agendas and actions of informal groupings (G7, G20) align with and support the work of formal institutions to present a united front