Introduction

The global financial crisis confirmed the growing interdependence of the world economy and the need to coordinate economic policy on a global scale. As they scrambled to respond to the crisis, heads of major economies upgraded the Group of Twenty (G20) finance ministers meeting into a leaders' process that would act as the “steering committee of the world economy.”¹ The 2009 London Summit placed special emphasis on building or rebuilding international institutions by increasing the financial capacity of the International Monetary Fund (IMF), establishing a new Financial Stability Board (FSB), and committing to reforms in the management, staffing and voting shares of major international organizations.² Following a general capital increase of the Asian Development Bank (ADB), the Pittsburgh Summit suggested similar capital increases in other multilateral development banks.

The world's international economic organizations—essentially designed in 1944—now face the challenge of managing the global economy in an unusually demanding and radically different environment. The influence of the IMF, in particular, had declined in the long prosperous era before the crisis, and by 2007 its lending had fallen to near zero. One-quarter of its staff had taken early retirement and plans were in place to sell gold reserves to sustain operations. In addition, considerable distance had emerged on the role of the IMF between the IMF itself and policymakers in important parts of the world. Voting reforms had not kept pace with changes in world production, and the much-criticized role of the IMF in the 1997–1998 Asian financial crisis had made it a “third rail” in the politics of many developing economies.³

A central feature of the new global economic and financial landscape is the rise of emerging economies, particularly People's Republic of China (PRC) and India. In addition to their large populations, their economic size and financial power—measured by output, trade volume and foreign exchange reserves—have grown very rapidly. These economies are also playing an unexpectedly large role in the recovery from the global financial crisis, having continued to grow at rapid rates even during the global recession. A new design of global economic architecture—led by the G20 summit and supported by key international organizations—would require greater commitments and responsibilities from these emerging players. In turn, this would call for fundamental reform of their governance.

In this paper we explore reforms in the governance of the global economy, with particular attention to the potential role of regional institutions. We examine the challenges of key international organizations using an analytical perspective—based on the theory of clubs—that highlights the objectives and constraints embedded in their structure. We argue that the reforms currently discussed (principally in voting shares), while important, are not sufficient. The structure of existing organizations is inherently inflexible, and innovations focusing on regional organizations would be required to make the system responsive to the needs of a rapidly changing world economy.

The paper is organized as follows. Section 2 discusses the recent and prospective rise of new players in the global economy, particularly the PRC and India, and suggests that the voice and responsibilities of these economies in global economic management will have to be substantially upgraded. Section 3 examines the pressures for reform in key global economic organizations. Section 4 considers the challenges to reform from the perspective of club theory. Section 5 suggests possible solutions, including “federalizing” global economic governance by developing “families” of closely linked regional and global organizations. We believe that such a system would provide building blocks for a stronger global architecture where major emerging economies can play more active roles. Section 6 concludes the paper.

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Comment(s)

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1. Sritanu Chatterjee
   (posted 12 August 2010 / 12:31:26 PM)
   
   Dear Sir,
   
   The suggestions put forward in the paper are quite pertinent in today's scenario. In a multipolar world, regional institutions will have much bigger and responsible role to play.The paper would be more interesting if the shortcomings or problems of having too many regional institutions had been mentioned. Decentralisation leads to many benefit - increasing bureaucratic efficiency, localisation of knowledge base and global institutions gaining more confidence while taking decisions. But the problem lies in the implementation of the idea. In India, decentralisation or "panchyati raj" started in 1980s. But very few states have been able to implement it properly till date. For some states, it has aggravated the problems. Therefore, I think if more intense thought is given on the idea of implementation then it would expedite the process of formation of regional institutions.
   
   Thanks & Regards,
   Sritanu