Global Governance and the Democratic Deficit: Stifling the Voice of the South

A summary from John Glenn’s article in Third World Quarterly, Vol. 29, No.2, 2008, explaining how the International Financial Institutions (IMF, World Bank & WTO) have continually failed the Global South. It focuses on input legtimacy, output legitimacy & procedural fairness. 

This article analyses the democratic credentials of the IMF, WTO & WB with regard to developing nations. Industrialised nations have been relatively successful at aggregating and managing their interests. The West’s political elite sees these institutions as legitimate. For the developing world these institutions lack input legitimacy, output legtimacy and procedural fairness.

Input Legitimacy Failures:

  • IMF: allocations of votes is based on a small number of basic votes and a second tranche of votes reflecting donations. As more states joined the institution, the percentage of basic votes fell from 11.3% to 2.1%. Changes were made at the Singapore AGM in 2006 and this doubled the amount of basic votes (total changes accounting to 1.7% of total votes with increases given to China, Turkey, Mexico and South Korea), the figure still remains very low. The G7 control 43.7% of the second tranche, the OECD nations represent 63.2%. In contrast, Sub-Saharan Africa holds only 4.6%. On major issues a majority of 85% is required and it is therefore incredibly difficult for the developing world to block anything.
  • World Bank: the US holds 16.38% of total votes. The combined vote of the majority of the African continent accounts to 6%. This effectively guarantees a US veto on any issue. The same imbalances are found on the board – Africa as a continent holds 2 seats whilst the UK alone has 1. Currently votes are determined by GDP, foreign exchange reserves etc. but why not based on population?
  • WTO: each member has equal representation in the adoption of trade round decisions. Using Mathias Koenig-Archibugi’s threefold classification of institutions (publicness, delegation & inclusiveness) the WTO scores well in all fronts.

Procedural Fairness:

  • WB & IMF: since the 1980’s the WB would agree to lend large amounts of money if strict conditions focused on a neo-liberal economic agenda were met (e.g. Turkey was lend $200 million just after a military coup). Refusal to accept Structural Adjustment Policies would likely result in a financial crisis for the state involved. Loan negotiations are highly secretive. Neither the votes, nor minutes of the IMF’s Executive Board (the ultimate decision-making body) meetings are made public. This process took substantial power away from state governments. Some described this relationship as local responsibility without power and supranational power without responsibility. Changes were made following the Heavily Indebted Poor Countries intitative (1996), however from the onset these have required ‘sound economic policies’. Following these failures, the World Bank’s Comprehensive Development Framework may be viewed as an attempt to go beyond economic measures to encompass social and institutional arrangements too. Lending is now subject to the approval of national Poverty Reduction Strategy Papers. Conditionality has transformed. Some belief this gives states greater autonomy, others see it as a way to shift accountability on to national governments whilst at the same time the IFIs yield considerable power. 
  • WTO: during the Uruguay round, many states were excluded from talks because of the ‘Green room’ process whereby a group of states chosen by the director-general would discuss the issue at hand and report back to everyone else. This has been finished however procedural unfairness still exists. Any nation can bring a dispute to the Disputes Settlement Body however many cannot afford the legal costs. The EC, US and Japan were complainants in 143 of 305 bilateral disputes in this system between 1995-2002. Winners of cases are also able to impose additional tariffs on exports against the offending country. Even if a small nation were to be successful, such punishments would have relatively little impact on a major economic power. Developing countries are forced into participation through dire need to access foreign markets and in hope of influencing future trade initiatives.
Output Legitimacy of the International Financial Institutions:

  • The World Bank & IMF: structural adjustment can be divided into 3 steps. Firstly stabilisation whereby inflation is controlled (reduced government spending, higher interest rates & floating exchange rates to prevent competitive devaluation). Secondly, structural adjustment (privatisation, deregulation & removal of government interference from markets). The final stage aims to promote export-led growth (liberalisation, reduction of non-tariff barriers to trade & creating an investor-friendly environment). Estimates claim that during the 80’s the first stage saw cuts to government spending of 2/3rds in African nations. Social services, particularly education, were badly hit (falling from 15.4% of total spending to 12.8% in the same period). These gaps were filled in by private corporations, mostly from industrialised Northern nations. In many ways, it has been a ‘new scramble for Africa’.
  • The World Bank & IMF ctd: all this whilst industrialised countries continue to provide substantial subsidies to inefficient domestic industries. Additionally, the ‘one-size fits all’ approach means that these new markets in developing countries are forced to go against new competitors following a similar strategy; this ensured cheap goods for the North. Between 1980 and 2000, prices for 18 major export commodities fell by 25% in real terms. Consequently, Africa suffered a serious decline in the terms of trade. At the same time, the promised growth resulting from these reforms has not occurred. Growth rates in nations that followed import-substitution were far higher in the same period that those that followed export-led growth. In reality, the relationship between trade openness and growth is likely to be contingent on a host of internal and external factors. That nearly all of today’s industrial countries embarked on their growth behind tariff barriers, and reduced protection only subsequently, surely offers a clue . . . it is also true that no country has developed simply by opening itself to foreign trade and investment. The trick has been to combine the opportunities offered by global markets with strategies for domestic investment and institution building, to stimulate domestic entrepreneurs”
  • The WTO: since the ending of GATT, most trade talks have focused on industrialised products and services, rather than primary commodities (i.e. those sectors in which industrialised countries hold competitive advantage). Excluding a few exceptions, Mexico (NAFTA) and East-Asia (tariff-based protectionism), developing countries have seen falls in their share of world trade in merchandise (see table below). The primary sector in which developing countries stand a chance in competing has seen little or no reduction in global subsidies. The subsidy income on one cow within the EU is greater than the income of more than half the world’s population does not represent free or fair trade. Given that these subsidies amount to a billions of dollars a day, reductions would have substantial impacts on economic prospects in the developing world.

Conclusions:

As explained, we are in a situation where the industrialised states dominate the international economy. The neo-liberal agenda pursued by the IFIs, with a few exceptions, has not benefited the developing world, but MNCs. The G7 nations have the fate of the Global South in their hands and the recent Doha rounds have shown promise. Unfortunately it has disintegrated into an agriculture-for-manufacturing and services bargaining match with little progress being made. The IFIs have long applied a one-size-fits-all approach and much respect indigenous strategies for growth. The IMF has made significant policy changes, although for the South the core mandate of the Fund remains the same. The IMF’s future remains uncertain (both Argentina and Brazil made massive repayments early) due its continuing failures. Failure to change the fundamental structures of these institutions, making them more accountable and legitimate, will cause further disengagement from nations in the Global South.

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