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Then International Monetary Fund managing director Christine Lagarde (right) waves from her office in Washington on September 20 after meeting her successor Kristalina Georgieva. The anachronistic “gentlemen’s agreement” that has kept an American in charge of the World Bank and a European in charge of the IMF has proved resilient. Photo: AFP
Opinion
Opinion
by Kishore Mahbubani
Opinion
by Kishore Mahbubani

When will the Western-led global order catch up with the world and include Asia?

  • The world order has not kept pace with the shifting economic dynamics. The US and EU retain control of the IMF and World Bank despite Asia’s economic might, and the US dollar remains predominant despite Trump’s weaponisation of it
Kishore Mahbubani
Kishore Mahbubani
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The world turned a corner in 2019. The problem is that the world order didn’t turn with it. This disconnect could have disastrous consequences.

The biggest global change has been the start of the “Asian century”. Today, Asia is home to three of the world’s top four economic powers (in purchasing power parity terms): China, India and Japan. The region’s combined gross domestic product exceeds that of the United States and of the European Union.

The US is no longer even the most globalised power; that title now goes to China. Already a larger trading partner to more countries than the US, China is signing on to more free-trade agreements as well, including potentially the largest in history, the Regional Comprehensive Economic Partnership.
The US, by contrast, is abandoning FTAs such as the Trans-Pacific Partnership, which Japanese Prime Minister Shinzo Abe has kept alive without the Americans. The US share of global trade continues to shrink.
The world order has not kept pace with these shifting economic dynamics. On the contrary, the US dollar remains the predominant currency for settling international trade. The US and Europe retain control of the two leading global economic organisations: the International Monetary Fund and the World Bank. And the United Nations Security Council – the only body that can issue binding decisions for the UN’s 193 member states – is dominated by just a few, largely declining, powers.

In theory, the easiest of these incongruities to address should be the inadequate influence of emerging powers like China in the IMF and World Bank. After all, the US and Europe have already acknowledged – including in the 2006 and 2007 G20 communiqués – that “the selection of senior management of the IMF and World Bank should be based on merit”, ensuring “broad representation of all member countries”.

Yet the anachronistic “gentlemen’s agreement” that has kept an American as head of the World Bank and a European leading the IMF has proved stubbornly resilient. In 2007, Dominique Strauss-Kahn became IMF managing director, succeeded by another French citizen, Christine Lagarde, in 2011.

Six years later, Lagarde declared that the IMF could be based in Beijing by 2027, if growth trends continue and are reflected in the fund’s voting structure. After all, she noted, the IMF’s by-laws call for the institution’s head office to be located in the largest member economy.

Yet, when Lagarde resigned from her post this year to become president of the European Central Bank, it was yet another European who took her place: the Bulgarian economist Kristalina Georgieva. Likewise, the World Bank presidency passed from Robert Zoellick to Jim Yong Kim in 2012, and then to David Malpass this year. Future historians will marvel at the imprudence of the old powers’ shameless refusal to share control of global institutions.
And yet the US and EU are not the only ones working to safeguard their clout. In the UN Security Council, the five permanent members (P5) – China, France, Russia, Britain and the US – also pay lip service to the need for reform, but consistently obstruct progress.

Complicating matters further, additional countries attempting to get a permanent seat on the council are facing resistance from their neighbours: Pakistan is blocking India’s bid; Argentina is blocking Brazil, and; Nigeria is blocking South Africa. Given these dynamics, the Security Council will be even more difficult to reform than the IMF or World Bank.

But, again, failure could be disastrous. If the Security Council’s composition is not updated, the body could lose its credibility and moral authority. If the African Union or India (each with over a billion people) refused to abide by council decisions – essentially the decisions of the P5 – the international community’s most important body wouldn’t have much recourse.

To avert such an outcome, the Security Council should adopt a 7-7-7 formula. The first seven would be permanent members – Brazil, China, the European Union (represented by France and Germany), India, Nigeria, Russia and the US – each of which represents a different region. The second seven would be semi-permanent members, a rotating selection of 28 countries, based on population and GNP. The remaining 160 countries would rotate into the remaining seven seats.

The most difficult incongruity to resolve will be that between America’s declining leadership and the US dollar’s role as the leading international reserve currency. Today, more than 40 per cent of cross-border payments and 90 per cent of foreign-exchange trading is settled in dollars. This reflects decades of trust: the US had deep markets, strong institutions, and it did not use the dollar as a tool to advance its own interests.

But, since 2017, US President Donald Trump has been aggressively undermining the international community’s trust in the dollar. He has pressured the Federal Reserve to lower interest rates to deliver short-term economic growth as he campaigns for re-election. And he has weaponised the dollar, labelling China a “currency manipulator” and instructing the US Treasury to put more countries under surveillance.

Trump’s behaviour has raised the hackles not only of adversaries but also of key allies. Jean-Claude Juncker, who recently stepped down as European Commission president, had pledged that the euro would become an “active instrument” of EU sovereignty. It is also telling that France, Germany and Britain – in collaboration with China and Russia – have created the Instrument in Support of Trade Exchanges (INSTEX) to bypass US sanctions on Iran.

But, in a sense, Trump has done the world a favour by making undeniable what was already obvious. If world leaders do not start addressing the contradictions plaguing the world order soon, the likely result is a crisis – and even more dangerous contradictions.

Kishore Mahbubani, Professor in the Practice of Public Policy at the National University of Singapore, is the author of Has the West Lost It? Copyright: Project Syndicate

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