Inefficient markets

Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.

Officially the round is indefinitely suspended, but there are already hopes of reviving it early next year. Besides, optimists point out that while 12 years have elapsed since the previous round was completed, globalisation continues apace and the world economy is booming. Such complacency is misplaced. If a deal can’t be done when the going is good, perhaps it can’t be done at all. After all, the only break in the WTO’s run of failure — Seattle, Cancún, Hong Kong and now Geneva — was the Doha launch, when circumstances were truly exceptional.

Next year hardly looks promising: President Bush is set to lose his power to push through trade deals without congress unpicking them, precluding US negotiators from striking a credible bargain with other WTO members; a new farm bill that could entrench America’s contentious subsidies is in the offing; and an economic downturn could sharpen fears about trade-related job losses.

But if the round remains on ice for too long, the WTO risks being sidelined, with the benefits of global competition, multilateral rules and impartial adjudication giving way to tit-for-tat protectionism and a web of bilateral arrangements that privilege rich-country companies at the expense of the poor.

BP’s biggest blunders
If petrol costs over £1 a litre next time you fill up, blame BP. Oil prices spiked to nearly $80 a barrel when it announced it was shutting down America’s biggest oil field — possibly until 2007 — to repair leaky pipes. The lost production from Alaska’s Prudhoe Bay is only a tiny fraction of global output, but oil supplies are so tight — and speculators so frenzied — that the slightest disruption sends prices rocketing. (The terrorist threat to air travel and the fragile ceasefire in Lebanon have since pushed prices down somewhat — at least for now.)

But in any case, the damage to BP could be great. The issue is not so much the financial cost of lower output and higher repair bills; it’s the stain on the company’s carefully polished eco-friendly reputation and, above all, the growing doubts about its competence. Last year, an explosion at its largest refinery, Texas City, killed 15 workers and injured over 100. In March, a corroded BP pipeline caused the biggest ever oil spill on Alaskan soil. In June, regulators charged it with rigging the US propane market.

And the timing of the latest mishap could hardly be worse. The US Congress, which is desperate to deflect some of the fire from voters fuming at soaring petrol prices, is planning a probe into BP’s Prudhoe Bay operations, and angry shareholders are suing BP for compensation. And with Venezuela, Russia and other oil-rich countries feeling flush and questioning why they need foreign help to extract their oil, BP’s bungling is hardly a persuasive sales pitch.

The World Bank and corruption
The World Bank’s controversial new boss, Paul Wolfowitz, has stirred up a huge fuss by making battling graft his top priority. His anti-corruption drivewill be the most hotly debated topic at September’s IMF/World Bank annual meetings in Singapore. He has frozen loans to India, Kenya, Bangladesh and Chad because of concerns about fraud, tightened the strings attached to debt relief for the notoriously kleptocratic Republic of Congo, beefed up the Bank’s anti-graft department, and pledged to spend more on promoting good governance. Wolfowitz is adamant: the Bank will not tolerate corruption.

A crackdown is certainly desirable: it is scandalous if bank funds destined to help the poor are siphoned off by crooked contractors or funnelled into politicians’ Swiss bank accounts. It also erodes rich-country voters’ support for debt relief and aid. More  broadly, corruption impedes development: it stifles business, cuts into spending on public goods such as health and education, and hampers poor people’s efforts to improve their lot. So the Bank should try to ensure its money is well spent, monitor countries’ corruption levels and help them root it out.

But there is only so much the Bank can do, and Wolfowitz appears to be going about it in the wrong way. His actions so far — a cancelled loan here and there—appear arbitrary, when they ought to be transparent and systematic. Nor is the Bank meant to meddle in politics, and although the line is fuzzy, his bolder ambitions — such as fostering freedom of speech — overstep that fuzzy line. The Bank’s mandate is to promote development, not democracy. And while waging war on graft may sound good in Washington, in practice the bank must tolerate some, or stop lending altogether, since no country is whiter than white. Indeed, the bank itself is hardly above reproach. Its boss is appointed not through an open and fair selection process but by the US president — and Wolfowitz, who happens to be one of Bush’s close chums, has since recruited a coterie of neocon cronies with few development credentials.

Fantasyland for the Fund

As I explained in a recent post, the notion that the IMF can act as a global economic policeman is pure fantasy. But that won't stop the Fund from trying. It is sending crack teams to the US, the eurozone, Japan, China and Saudi Arabia to examine how their economies contribute to the worrying global trade and currency imbalances. The IMF will then suggest how governments should change their policies to reduce the imbalances while supporting economic growth. And then?

And then nothing. America is not going to take orders from the IMF to shrink its budget deficit. Contrary to US hopes, China will not bend to Fund pressure to let its currency float. The eurozone is not going to reform and reflate at the IMF's instigation. The most likely  trigger for unwinding the global imbalances is a collapse of the dollar - something over which the Fund has no control.

The IMF lacks the teeth to be an effective watchdog

If you believe the hype in today's Guardian and FT, leading governments achieved "a breakthrough in the governance of the global economy" over the weekend, transforming the International Monetary Fund into a "world economic watchdog". Larry Elliott's ebullience can be explained by his closeness to the UK Chancellor, Gordon Brown, who happens to chair the IMF's key policy making committee, while the FT is adopting an increasingly tabloid style to sex up its financial coverage. But in fact, what was decided at the weekend was pretty modest.

The IMF was set up in 1944 to oversee exchange rates and help countries smooth their trade imbalances. But since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, its main role has been as a lender of last resort to governments that have no-one else to turn to in a crisis. The Fund has had little to do recently, however, because financial markets have been relatively calm and governments have stayed out of trouble. What's more, many East Asian governments, notably China's, are hoarding vast reserves of foreign currencies to insure themselves against the risk of a financial crisis - in effect, doing away with the need to borrow from the IMF (and all the onerous conditions that this entails) altogether. But the Asian countries have achieved this by holding down their currencies, artificially propping up the US dollar and swelling America's already vast trade deficit. With exchange rates out of kilter and trade imbalances growing perilously large, many have suggested that the Fund should rediscover its original vocation as a global economic policeman.

The changes agreed on the weekend are a small step in that direction. The IMF has been asked to look at how various countries' policies contribute to global imbalances and suggest how they might act together to resolve them. Since the Fund already conducts regular reviews of individual countries' economic policies, the only significant change is that it will now also monitor groups of countries collectively. But that is unlikely to make much of a difference. While the IMF has huge power over developing countries to which it has lent money, it has little sway over the United States, China or Britain.

For years, the Fund has been telling Gordon Brown that he should raise taxes to plug the government's budget deficit - and has been roundly ignored. Likewise, it has been banging on for ages about the risk that global imbalances could spark a financial crisis, urging the US government to borrow less and US consumers to save more, telling the Chinese to let their currency rise and advising the Europeans and Japanese to reform and stimulate their economies. Again, it has had little impact.

The IMF will now be able to make suggestions in a more joined-up fashion. But the blunt truth is that governments each have their reasons for ignoring the IMF's advice - and there is little the Fund can do about it. If leading governments fail to act of their own volition to rebalance the global economy, only financial markets - not the IMF - can eventually force their hand.

Listening banks

The protesters who make a habit of disrupting big international financial gatherings have wrought at least one desirable change. The sprawling annual meetings of the IMF and the World Bank have been slimmed down this September. But this gesture of modesty has not silenced the critics. The global financial establishment is under unprecedented attack-not just for the alleged harm it causes, but for its perceived lack of legitimacy.

Joseph Stiglitz, the former World Bank chief economist, delighted the anti-globalisers recently with his claim that: "The most fundamental change that is required to make globalisation work in the way that it should is a change in governance."

The problem, he says in his book Globalisation and its Discontents, is that international financial institutions are not democratic enough. "The IMF... affects the lives... of billions throughout the developing world; yet they have little say in its actions." Rich-country bankers call the shots. Moreover, these financial mandarins operate in secret. This limits public scrutiny-all the more important when officials are not directly elected-undermines democratic accountability and breeds suspicion.

Undeniably, the IMF and the Bank are undemocratic and often secretive-as, indeed, are many of their critics, such as Greenpeace. So are other lending institutions, such as Barclays Bank. So what should be done? Stiglitz calls for three big reforms: a change in voting rights at the IMF and the Bank to give poor countries a bigger say; changes to ensure that it is not just the voices of finance ministries and bankers that are heard there; and greater openness to improve their legitimacy and democratic accountability.

Breaking the stranglehold that rich countries-in particular, the US-have over the IMF and the Bank seems reasonable. People in developing countries not only outnumber those in rich ones five to one, they are also the main beneficiaries (or victims) of IMF and Bank decisions. One option is to weight voting rights at the IMF and the Bank according to population. Another is to copy the WTO, where each country has one vote and a veto.

Unfortunately, in the unlikely event that rich countries agreed to it, a change in voting rights that gave poor countries control of the purse strings would not work. Banks cannot be run by their borrowers. While the WTO sets rules that apply equally to all, the IMF and the Bank basically lend rich countries' money to poor ones. They do make mistakes, but allowing developing countries to decide how and when money is lent to them would make matters worse. Imagine what would happen if China, India, Indonesia and sub-Saharan Africa-which together account for just over half the world's population-could help themselves to international loans at will.

Developing countries should not be given a majority vote, but they deserve a louder voice. Let them make the case for the help they want. Others beyond the narrow policy-making elite in Washington should be consulted too. In particular, NGOs, especially those from poor countries, often have valuable insights. (The Bank is already giving NGOs a bigger voice. Many NGO specialists work in the Bank's field offices and NGOs with relevant expertise are involved in most of its projects.)

But the biggest change needed is that international institutions should become more open. In a democratic age, secrecy is unacceptable (save in exceptional circumstances). Our parliaments meet in public so we can see what is being decided in our name. Our courts operate openly so that we trust that justice is being done. International economic policy is too important to take place in private.

Secrecy is a refuge for the wicked and the incompetent-and casts a shadow over even the good and the wise. I know this from my time working at the WTO. Governments use the cover of secrecy to blast the WTO for failings that are either invented or their own. Thus a minister who had participated in negotiations but had failed to get his way, or made a concession that he was loath to admit publicly, would claim that the decision had been taken behind his back. Other critics would infer skulduggery where there was none: for instance, an impartial dispute-settlement ruling that happened to benefit a US company would be put down to illicit corporate influence. What is true for the WTO is even more so for the more secretive IMF.

Defenders of the status quo object that international organisations could not function if they became more open. The officials who enjoy an easier life working in private certainly have a vested interest to claim so. Yet holding trade negotiations in public, for instance, might make them easier: governments might be too ashamed to face the public with their brazen defence of sectional lobbies at the expense of the national interest. Sunlight is the best disinfectant. Such a move would also dispel fears that the WTO is plotting to take over the world. Equally, as Stiglitz says, IMF policies ought to be debated publicly: what is proposed, why and the implications for winners and losers all ought to be discussed before the court of public opinion.

As I argue in my new book, Open World: The Truth about Globalisation, global institutions that are seen to be open and accountable will have more legitimacy and thus be more effective. They cannot escape from politics: they deal with highly political issues. They must become more political, not less.