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Who runs the global economy?

The world financial crisis has made it clear that, although we have a globalised world economy, there is no clear way governments can work together to solve global economic problems. ut the lack of co-ordination, both now and in the future, could mean a deeper and longer global recession with more unemployment and poverty around the world. The G20, an ad-hoc grouping of the worlds major economies, has stepped in and performed a major role during the past year. But the crisis has also spurred efforts to reform the existing global financial institutions, the World Bank and the International Monetary Fund (IMF), which were set up at the end of World War II to help revive the battered global economy and whose job it is to lend to countries in trouble.

Out of date

Countries contribute funds to the IMF according to the size of their economies, and they then receive voting rights based on their contributions. But the current voting structure does not reflect the rise of powerful new economies like China and India, which are leading the world out of recession even while growth collapses in Europe and the US. And a row has broken out between the US and China on the one hand, and Europe on the other, over how much voting rights should be changed.

Although all sides have pledged to come up with solutions by January 2011, there are significant practical problems. European countries, which make up 25% of the world economy, hold 40% of the votes. The US, which makes up another 25% of the world economy, only holds 17% of the voting rights. But under IMF rules, all major decisions require a majority of 85%, making the US the only individual country that can block any decision.

The US and China have proposed that European countries give up 5% to 7% of their quota in order to provide more votes to the emerging economies. But smaller European countries, such as the Netherlands and Sweden, are reluctant to give up their seats on the 24-member IMF board. Even the UK is resisting immediate pressures for reform. A UK Treasury official told the BBC that, as Europe had made the biggest contribution to renewing IMF funds (lending over $150bn of the $500bn asked for), now was not the time to ask it to reduce its authority.

Changing China

Strengthening the role of China and India in the newly emerging system of international economic governance is going to be essential if they are to play their proper role in the world economic system

Most economists doubt that the US and Europe can return to their role as the consumers of last resort for the rest of the world, fuelled by lots of debt, believing they will have to grow in future by increasing their exports. That would mean China would have to reduce its exports as a proportion of its economy and shift towards greater domestic consumption – a tall order.

This would go a long way to solving one of the fundamental causes of the current economic crisis – the growing global imbalance between China as an exporter with a trade surplus, and the US as the worlds biggest consumer, living on borrowed money. The US is no longer able to play this role, and the sooner China turns to domestic consumption, the more likely it is the US can grow by producing more for export, rather than consuming more and increasing its debts. So giving China a bigger role in the IMF may encourage those within China who want to shift its priorities in a way that would help the world economy to grow.

Reform and revive

Reform is all the more important given the new powers and resources the IMF and the World Bank were given at the London summit. The World Bank lends long-term funds to developing countries to help them build infrastructure such as dams and roads and to improve their health and education systems.

The IMF – which gives short-term support to countries facing financial hardship – was given vastly expanded resources to deal with the crisis. Countries pledged an extra $500bn (�300bn) in loans, and $250bn in Special Drawing Rights, a currency facility which countries can draw on without restrictions.

The IMF was also given more authority to monitor the world economic situation and report to the G20 leaders. In return, the IMF pledged to moderate the often harsh conditions attached to its loans – a practice that has frequently attracted complaints from developing countries in the past. With hopeful signs in the global economy, at least compared to six months ago in London, this week is meeting could determine whether the G20 emerges as the key organisation with influence over how the world economy is run, or whether it will disappear into insignificance when the immediate crisis is over.