PRINCETON – In the aftermath of the global financial crisis, world leaders repeated a soothing mantra. There could be no repeat of the Great Depression, not only because monetary policy was much better (it was), but also because international cooperation was better institutionalized. And yet one man, the American former intelligence contractor Edward Snowden, has shown how far removed from reality that claim remains.
Prolonged periods of strain tend to weaken the fabric of institutional cooperation. The two institutions that seemed most dynamic and effective in 2008-2009 were the International Monetary Fund and the G-20; the credibility of both has been steadily eroded over the long course of the crisis.
Because the major industrial economies seem to be on the path to recovery – albeit a feeble one – no one seems to care very much that the mechanisms of cooperation are worn out. They should. There are likely to be many more financial fires in various locations, and the world needs a fire brigade to put them out. The IMF’s resources were extended in 2009, and the organization was supposed to be reformed in order to give emerging markets more voice. But little progress has been made.
The Fund was the centerpiece of the post-1945 global economic system. It subsequently played a central role in the management of the 1980’s debt crisis and in the post-communist economic transition after 1989. But every major international crisis since then has chipped away at its authority. The 1997-1998 Asian financial crisis undermined its legitimacy in Asia, as many governments in the region believed that the crisis was being exploited by the United States and US financial institutions.
The post-2007 Great Recession discredited the IMF further for three reasons. First, the initial phase of the crisis looked like an American phenomenon. Second, the IMF’s heavy involvement in the prolonged euro crisis looked like preferential treatment of Europe and Europeans. In particular, the demand that, because the world was focused on Europe, another European (and another French national) should succeed the IMF’s then-managing director, Dominique Strauss-Kahn, was incomprehensible to the large emerging-market countries. Eventually, as in the Asian crisis, European governments and the European Commission fell out with the Fund and began to blame its analysis for having confused and unsettled markets.
On the big issues underlying the global financial crisis – the problem of current-account imbalances and deciding which countries should adjust, and reconciling financial reform with a pro-growth agenda – the IMF cannot say much more, or say it more effectively, than it could before the crisis.
The G-20 was the great winner of the financial crisis. The older summits (the G-7 or, with the addition of Russia, the G-8), as well as the G-7 finance ministers’ meetings, were no longer legitimate. They consisted of countries that had actually caused the problems; they were dominated by the US; and they suffered from heavy over-representation of mid-sized European countries.
The G-20, by contrast, brought in the big emerging markets, and its initial promise was to provide a way to control and direct the IMF. The new mood of global economic regime change was captured in the official photograph that was widely used in coverage of the most successful of the G-20 summits, held in London in April 2009.
In the short term, the London summit mitigated financial contagion emanating from southern Europe; gave the World Bank additional resources to deal with the problem of trade finance for emerging-market exports; appeared to give the IMF more firepower and legitimacy; and seemed to catalyze coordinated fiscal stimulus to restore confidence.
But only the more technical of these four achievements – the first two – stood the test of time. Everything else that was agreed at the London summit turned sour. The follow-up summits were lame. The idea of coordinated fiscal stimulus became problematic when it became obvious that many European governments could not take on more debt without unsettling markets and pushing themselves into an unsustainable cycle of increasingly expensive borrowing.
And yet, however limited the London summit’s achievements proved to be, the summit process itself was not fully discredited until Snowden’s intelligence revelations. It may be that leaders and their staffs were naive in believing that their communications were really secure. But Snowden’s revelations that the London summit’s British hosts allegedly monitored the participants’ communications make it difficult to imagine that the genuine intimacy of earlier summits can ever be recreated. And, with the espionage apparently directed mostly at representatives of emerging economies, the gulf between the advanced countries and those on the rise has widened further.
World leaders appear partly ignorant and partly deceptive in responding to the allegations. They are probably right to emphasize how little they really know about surveillance. It is in the nature of complex data-gathering programs that no one really has an overview.
But the lack of transparency surrounding data surveillance and mining means that, when a whistleblower leaks information, everyone can subsequently use it to build their own version of how and why policy is made. The revelations thus encourage wild conspiracy theories.
The substantive aftermath of the London summit has already caused widespread disenchantment with the G-20 process. The Snowden affair has blown up any illusion about trust between leaders – and also about leaders’ competence. By granting Snowden asylum for one year, Russian President Vladimir Putin, will have the bomber in his midst when he hosts this year’s summit in Saint Petersburg.
Copyright: Project Syndicate, 2013.