Bulletin n. 2/2007
October 2007
CONTENTS
  • Section A) The theory and practise of the federal states and multi-level systems of government
  • Section B) Global governance and international organizations
  • Section C) Regional integration processes
  • Section D) Federalism as a political idea
    • Mosconi Antonio
    An International Conference to Govern Globalization. Stiglitz and the WFM
    in Federalist Debate (The) , Year XX, n. 2, July ,  2007 ,  40-43
    The 24th Congress of the World Federalist Movement, held in London in 2002, passed the resolution A New Bretton Woods for a new International Economic Order, proposed by Guido Montani. For the first time since the creation of the Bretton Woods institutions, a new currency, the euro, was challenging the dollar in its role of international currency. Monetary unification had become a concrete goal to be pursued by regional organizations in Asia, Latin America and Africa. The Bretton Woods institutions, the market and the national states were proving unable to cope with the global financial problems and to assure a sustainable and equitable world development. In such a context, the WFM committed itself to support the creation of regional forums with the task of working out proposals for the creation of a world economic and monetary union, provided with limited, but real, taxation powers, which could stabilize international economy and further a sustainable development and a just international economic order. Alfonso Iozzo and myself put forward, with the aim of putting that resolution in practice, a proposal published in this review on June of last year1. I summarize its main points: the current, fundamental malfunctions of the financial system are not sustainable; the redistribution of weights in the world economy makes it unthinkable to replace one national currency with another (as happened in the passage from the pound to the dollar) in the role of international currency; globalization of the economy requires a multilateral and cooperative system of economic governance, founded on a world unit of account (an embryo of a single currency) linked to a basket of currencies where each currency is to be weighed according to the significant economic and human-development-related parameters of the area using it; the dollar reserves should be convertible into world units of account, upon payment of an exchange fee to be assigned to the UN; the International Monetary Fund, once so reformed as to give democratic representation to all regional areas of the world and to ensure that decisions are taken by a qualified majority, should carry out the functions of a UN (it too to be made more democratic) Council of Economic Ministers; the Bank of International Settlements should carry out the peculiar functions of a world monetary system; the World Bank should become the UN Agency for human development and environmental sustainability; new institutions should see to the evaluation of global risks and to overseeing the financial institutions and markets at the global level. On the eve of the 25th Congress of the WFM, it may be useful to briefly consider some recent facts and new ideas that make it even more necessary and topical today to convene an international conference for the reform of the world financial system. Among the facts, a special importance have the continuous worsening of the dollar's position abroad; the signs, on the part of important countries and areas, of unilateral strategies aiming to abandon it, and the creation of a special advisory group at the IMF. Among the ideas, Stiglitz'2 proposal envisaging a reform of the global economic system and the emission of "global greenbacks"stands out. The IMF (at the Singapore meeting of September 2006) has instituted a special advisory group on the fundamental malfunctions, with the aim of adopting concerted measures for relieving them. Members of the group are the United States and its main creditors: Saudi Arabia, China, Japan and the euro area. This decision is significant in many aspects. It officially acknowledges a dangerous situation, kept for some time under severe scrutiny by the circles most interested in the economic policy choices made urgent by the enduring and worsening of those malfunctions3. The deficit of the US current-account balance has reached in 2006 the amount of 850 billion dollars, or 6.5% of its GDP; the net foreign indebtedness has thus grown to about one third of GDP, and continues to rise unchecked despite the dollar's devaluation. Decades of neo-liberist policies, instead of fostering an increase of savings, as forecast by the all-too-celebrated Laffer's curve, have produced an excess consumption financed by the luring of savings from the rest of the world. The tax cuts to higher incomes and the increase of military expenditure have caused a negative saving for the government, while family savings too have decreased to zero. The continuous expansion of the dollar as international currency, after the declaration of the dollar's non-convertibility into gold in 1971, was founded, so to speak, on the oil convertibility guaranteed by the US military supremacy in the cold-war context, which was freezing the emergence of other groups of countries and the rise of a multipolar-system configuration. Today, things have changed. The crisis of the US hegemony has created the space for the emergence of new economic powers and the formation of ever more autonomous regional areas.As resources are absorbed by the military industrial establishment, the provision of world public goods, vital for the globalization process to be physically supported and socially accepted, is impeded. The US deficit is no longer spontaneously financed by the markets, but by governments, in particular the Chinese and those of the other countries and areas called upon to be members of the IMF special advisory group. This highlights another significant aspect of the IMF decision, the political one. The IMF control is shifting, for the first time, from the excessive indebtedness of poor countries to the financial situation of the superpower, and does so by creating an official consultation site among debtors and creditors in the IMF context. Moreover, for the first time the euro area is invited as a unitary participant in the advisory group, despite the continuing division of its national representatives in the Fund's decision-making bodies. Such novelties can be interpreted on the one hand as the beginning of the end of unilateralism, at least in the economic field, and a signal of a tendency to look for cooperative solutions at regional (in the wake of the euro) and world level. On the other, the significance of such novelties is greatly diminished by the advisory nature of the group and by its composition: the fact that only China, among the BRIC countries (Brazil, Russia, India and China), is part of the group brings to mind the procedures of a preliminary agreement, rather than the spirit of a conference aiming to create a new international economic order. The creditor countries of the group, although they have initiated regional financial-unification processes that in due time could produce effects comparable to those already accomplished in Europe, are at the same time putting in place unilateral and bilateral strategies of the kind "every man for himself". For example, China, after having unpegged the yuan from the dollar in 2005, has now instituted a Fund for investing and diversifying part of its monetary reserves. A wise decision, considering that US investments abroad (mostly direct investments) yield an average return of 7% and tend to revaluate themselves, while foreign investments in the USA (mostly bonds) yield a meager 2.5% and suffer heavy devaluations. A risky decision, if one recalls Japan's painful experience: development model Borderless Debate: Globalization and World Federalism based on exports, dollar accumulation and then dollar devaluation, portfolio diversification through real-estate investments in the USA and then burst of the real-estate bubble, huge investments in Wall Street and then collapse of the stock exchange market, with the result of years of recession from which just now an exit may be glimpsed. Anyway, China's is a unilateral decision, that will affect the value of the dollar and the other currencies used in the international scene, and in the end will also affect the competitivity and the real economy of countries that have to bear the burden of global interdependence with no possibility to participate in its governance. From the unilateral decisions to create "baskets of reserve currencies", unjustified fluctuations of exchange rates are produced, which are not coherent with the goal to make macroeconomic regulations, remained national, correspond to the needs of the economy undergoing a globalization process. Examples are the euro's appreciation despite its area does not contribute to create the fundamental malfunctions, the pound's revival despite Great Britain is supporting the US in creating the fundamental malfunctions with a current-account deficit of 4.5% of its GDP, the yen's depreciation despite Japan's trade surplus. More in general, the proliferation of unilateral and bilateral initiatives contribute to increase uncertainty and the distrust in multilateral institutions, and to intensify the search for ways of better insuring oneself, as demonstrated by the increasing of currency reserves by all countries, the in-advance reimbursement of debts to the IMF, and the diversification process of reserves, implying the reducing of one's dollar-denominated holdings. Therefore, it seems ever more urgent to create institutions and instruments that allow: to avoid that the decline of the dollar's international role produces a financial crisis and an economic recession at the global level; to harmonize national macroeconomic regulations; to favor a proper use of the planet's resources and their allocation to an equitable and sustainable development; to guarantee an adequate production of those public goods lacking which the world market would greatly suffer. This is what an international monetary conference, a "new Bretton Woods", should deal with. There is, as Stiglitz' reflection points to, to make globalization work. On the one hand, globalization has brought with it a withdrawal of (national) public action in the fields of regulation, redistribution, correction of "market's failures", prevention and solution of financial crises. On the other, the crisis of national states and the delay in the creation of supranational institutions (similar to those that were set up to favor the formation of national markets) are by now compromising the globalization process. We are faced with the possibility and the necessity to bring about a U-turn. The attempt to exercise a unilateral governance of the global economy, of which market fundamentalism is the ideological guise, has failed. Market fundamentalists apply their "perfect competition" model as if that would exist in real life, whilst the actual free-exchange is characterized by power and information asymmetries, by cartels,oligopolies and monopolies, by non-rational choices. However, we must avoid that the rejection of unilateralism and fundamentalism brings with it attitudes of refusal of globalization, and nationalist regressions. In order to avoid that globalization fails, it must be governed. Stiglitz won the Nobel prize for economics precisely for his studies on asymmetries, and at the same time he knows from within the mechanism of governance, having been Clinton's advisor at the White House and Senior Vice-President and Chief Economist at the World Bank, a post he left in protest against how the Asian crisis was managed. It is no surprise then that it is him to provide the first great systematic contribution to the solution of the problems posed by globalization of the economy. In his work, concrete reforms of trade regulations, the book-keeping and use of natural resources, environment protection and an equitable sharing of its costs and benefits, the control of multinational companies, the management of debt of poor countries and the guidelines for how to allocate funds are systematically arranged by integrating all of them through a clever use of existing organizations and mechanisms, the play of incentives and disincentives, and the creation of international tribunals. For the purpose of this article, suffice it to highlight Stiglitz' proposals presented in the last part of his book: "a reform of the global reserve system"4, and"a democratic globalization"5. All countries accumulate reserves in order for them to escape, should monetary difficulties arise, the conditions imposed by the "Washington Consensus" rules. The reserves-to-imports ratio has shot up after the Asian crisis. Such a form of risk protection, Stiglitz observes, is, first of all, too costly: at the end of 2005, world reserves amounted to 4500 billion dollars and were invested at a 1-2% interest rate, whilst the possible return from investments in developing countries could have been as high as 10-15%; secondly, it produces a lower, insufficient global demand; finally, it creates monetary instability, instead of constituting a protection from it. Thus he proposes to replace the present system, based on the dollar (in addition to which the euro is beginning to be used), with"global greenbacks". Should the US refuse to support the new system, which would make it lose its privilege of getting indebted in the same currency it has the power to issue, the other countries should go on with a concerted diversification of their reserves, so as to make it necessary for the US to get indebted in the global currency instead of dollars. Stiglitz'plan, to be carried out under the auspices of the UN, contemplates biennial 100 billion dollar-worth emissions of "global greenbacks"; they are to be added to the 100 billion dollar yield of the Carbon Tax, proposed in another part of his book, and to the 300-400 billion dollars coming from a better use and the decrease of global reserves: all these resources should be earmarked for the production of global public goods and for the realization of a better social justice to make globalization sustainable. At the international level, democratic public institutions should be created, as necessary to make globalization work, starting with several reforms of the existing institutions. In sum, the international monetary system is on the brink of ruin and only decisions taken in Beijing, in China's national interest, are so far preventing it from falling into it. Keynes suggested in the 1930s and 1940s the necessary corrections for the survival of the national systems of political economy. Similarly, Stiglitz is suggesting today the corrections necessary to make the global economic system sustainable. We have once again a "practical visionary"6, but there must be a strong political initiative for convening an international conference that avoids more unilateral steps and gives origin to a multilateral governance of globalization. The WFM should take upon itself the task to promote it. 1 - Alfonso Iozzo, Antonio Mosconi, The Foundation of a Cooperative Global Financial System. A new Bretton Woods to confront the crisis of the international role of the US dollar, in The Federalist Debate,Year XIX, Number 2, June 2006 2 - Joseph E. Stiglitz, Making Globalization Work, 2006 3 - The most enlightening analyses, in my opinion, are those of the Institute for International Economics in Washington, DC, directed by Fred Bergsten, and of the Center for European Policy Studies in Brussels, Belgium, directed by Daniel Gros. Of the former I suggest in particular the study, covering several foreseeable scenarios, by William R. Cline, The United States as a Debtor Nation, Washington, DC, 2005. Of the latter: Daniel Gros, Thomas Mayer, Angel Ubide, A World out of balance?, Brussels, 2006 4 - Ibid., Ch. IX 5 - Ibid., Ch. X 6 - So is Keynes defined by his biographer Robert Skidelsky
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