By John Ross Source: China.org.cn published: 2016-8-26
The world economy has undergone major changes since the international financial crisis in 2008 with changes in the position of developing economies being crucial in this – China`s in particular. However, these shifts have not been adequately reflected in corresponding changes in global economic governance. This latter problem reflects in an interrelated way defects in the structure of international economic bodies and in the strategies they have pursued. This article analyses the interrelation of both processes.
Trends in the world economy
Starting with the world economy`s structure, Table 1 shows longer term changes in world GDP and trade and those since the international financial crisis. The years chosen to demonstrate the key trends are:
· 1989 – year of formulation of the "Washington Consensus," the dominant development strategy promoted by the IMF and the World Bank
· 1993 - as statistics only becomes available for some countries from that year
· 2007 - the last year before the international financial crisis
· 2015 - the latest available data.
Table 1 shows that after 1989/1993 a sharp increase in the weight of developing countries in the world economy took place with this accelerating after 2007.
· Developing countries share in world GDP, measured at current exchange rates, rose from 15% in 1993 to 35% in 2015.
· Measured in purchasing power parities (PPPs), developing countries share in world GDP rose from 36% to 53%.
· Developing economies share of world trade rose from 18% to 31%.
China`s relative position increased strongly both globally and among developing countries.
· China`s share of world GDP at market exchange rates rose from 2% in 1989 to 17% in 2015, while in PPPs it rose from 4% to 17%. China`s share of world trade rose from 1% to 11%.
· As a percentage of developing economies, by 2015 China`s share of GDP at current exchange rates was 42%, in PPPs it was 33%, and in trade it was 35%.
China`s development model
Considering the economic policies which global development demonstrates are the most successful, there is no doubt that China`s "socialist development model" was far more successful than the "Washington Consensus" promoted by the IMF and the World Bank.
Table 2 summarises this by showing not only China`s annual average rate of per capita GDP growth but the three economies most influenced by its development approach – Vietnam, Cambodia and Laos.
From 1993-2015, when all four countries can be analysed, China, Cambodia, Vietnam and Laos ranked respectively 1st, 2nd, 3rd and 4th in world per capita GDP growth – peripheral cases of countries with populations of less than 5 million or dominated by oil production are not included. From 1989 to 2015 China, Vietnam and Laos ranked respectively 1st, 2nd and 3rd in the world for countries in per capita GDP growth. From 1978 onwards, China ranked 1st among all economies in terms of economic growth.
The contrast between China`s economic development model and capitalist alternatives were equally overwhelming in terms of poverty eradication. From 1981, China lifted 728 million people out of World Bank defined poverty. Another socialist country, Vietnam, lifted over 30 million from poverty by the same criteria. The whole of the rest of the world lifted only slightly over 120 million people out of poverty.
In summary 83% of the reduction of the number of those living in poverty in the world was in China, 85% was in socialist countries, and only 15% of the reduction in the number of those living in poverty was in capitalist countries.
Problems in global governance
If the facts show that China`s economic development strategy far outperformed the "Washington Consensus," why did a failed economic model continue to be promoted by the IMF and the World Bank? A significant part of the answer lies in problems in the structure of some global economic governance institutions- which no longer corresponds to the shifts in the world economy which have been analysed.
This can be seen clearly in Table 3, which compares percentages of world GDP with voting shares in the IMF and the World Bank`s most important lending institution – the International Bank for Reconstruction and Development (IBRD). Three groups of economies are analysed – the US, non-US G7 members, and the most important developing economies -- the BRICS nations. The key features are the following:
· The crucial fact about the US 16.6% IMF voting share is that key decisions require an 85% majority, so the US is the sole country with a veto in the IMF – the US is equally the only country with veto rights concerning the World Bank`s structure.
· Non-US G7 members are over represented in voting powers compared to their share of world GDP. At current exchange rates they have 24.9% voting rights in the IMF compared to a 21.9% GDP share, and they are extremely over represented compared to their 15.6% share of world GDP measured in PPPs.
· The BRICS countries, the most important developing economies, are greatly under represented – their share in world GDP at current exchange rates is 22.3%, and in PPPs 30.8%, but their IMF voting share is only 14.2%. This is particularly due to the under representation of China – which is 14.8% of world GDP at current exchange rates, and 17.2% in PPPs, but has only 6.1% of IMF voting rights.
Not only is under representation of key developing countries, particularly China, in world governance bodies unreasonable but it undoubtedly helps maintain in place failed development advice such as the "Washington Consensus."
G20`s key role
Given that changes in the IMF and the World Bank will take a prolonged period, a major way of moving closer to global economic governance arrangements better corresponding to the real structure of the world economy would be to enhance the G20`s role.
Going back to 1989, the G7 at that time was not a formal decision making body but the countries within it played a key role in the world economy accounting for over two thirds (67.4%) of world GDP at current exchange rates. Therefore, the de facto coordination of G7 policies could play a major role in world economic policy making. But by 2015, the G7`s weight in world GDP had declined to less than half - 46.4%. In PPPs, the decline was from 47.1% in 1990 to 31.8% in 2015.
In contrast to the declining role of the G7, the G20 economies are now decisive – accounting for over 85% of world GDP at current exchange rates and almost 80% in PPPs. Coordinated action between the G20 countries can therefore play a major role in world economic policy.
Strengthening the G20`s role is therefore a key step towards enhanced global economic policy coordination and governance in the new structure of the world economy.
The author is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.