International Monetary Fund

Breaking the avaricious circle of global inequality

David Woodward | 28 March 2013

Economics follows politics, not the other way around. Until we have a genuine political commitment to resolve global inequality, we will not get the economics we need. 

If, as I argued in my previous blog post, orthodox economic solutions are no longer valid in our grossly unequal world, why do these remain the preferred option among decision-makers? The answer lies not in economics, but in politics.

I started work as a development economist more than 30 years ago, motivated by the conviction that the gravest global problems had their roots in economics, and that economics alone could provide their solutions. But, over the last three decades, I have been forced to the conclusion that the fundamental problem lies not in economics but in politics.

Yes, economics (though a rather different economics from that currently practised) could provide solutions; but economics and politics are inseparable; and unless and until we have a genuine political commitment to resolve global problems, we will not get the economics we need. As the dominance of neoliberal economics over the last three decades demonstrates, it is the economics that follows the politics, not the other way around. Inequality, as Nicole Metz and Tom van der Lee argue in their blog post, is a political issue.

However, just as the problem is political, so is the greatest obstacle to its solution. As Naomi Woltring points out in her commentary at the beginning of this debate (and as highlighted in the World Bank’s 2006 World Development Report), political systems in practice give greater power to the wealthy (and to corporate and financial interests) than to the poor; and this allows the former to skew decision-making to their own economic advantage. This skewing of economic policies in turn increases makes the rich still richer, at the expense of the poor. Economic inequality rises; and this further increases inequality of power. The result is the most pernicious and intractable of vicious circles.

Moreover, this phenomenon arises, not only in national political systems, but equally in the governance of global institutions. In the IMF and the World Bank, inequality of power is institutionalised in the form of an “economically-weighted” voting system unthinkable in any democratic society. Even after recent reforms, this gives a substantial majority of the votes to a rich minority of developed country governments representing less than one-sixth of the world population. Even if they all voted together, the low-income and least developed countries could muster only a fraction of the votes need to block a major change to the IMF’s rules or policies; but the US can do this alone. This extreme inequality in voting power is further increased by a number of other mechanisms which further disempower the representatives of low-income countries in particular.

The World Trade Organisation is no better. Impeccably democratic as its one-member-one-vote formal structures may be, the reality is that effective decision-making takes place behind closed doors in secretive processes outside these rules, governed by systematic arm-twisting and pay-offs by the developed countries (see, for example, Fatoumata Jawara and Aileen Kwa’s Behind the Scenes at the WTO: the Real World of International Trade Negotiation)

The inevitable result – from the debt crisis through structural adjustment to the WTO Agreements – is a process of commercial globalisation which has systematically favoured the financial interests of (mostly rich country) elites at the expense of the disadvantaged, particularly in the poorest countries.

Global economic governance is thus characterised by a vicious circle of political and economic inequality, driven by the ability of a relatively small advantaged minority to dominate political processes, and their willingness to abuse this opportunity to further their own financial interests irrespective of the interests of the disadvantaged and disempowered minority, and often at their expense. It is this avaricious circle that entrenches the extreme inequality of global income and wealth.

There is a widespread perception that the global balance of power is shifting in favour of the developing world. Certainly, a shift is taking place, reflecting a shift of economic advantage, mainly towards China, but also to some extent towards other relatively industrialised countries. And this movement has been given added momentum by the spectacular self-inflicted wound to the North of the current financial crisis – itself largely a result of over-reach, both in the North’s abuse of its global power to secure a reckless abandonment of prudent regulation in global finance, and in the financial sector’s short-sighted and spectacularly unsustainable abuse of the opportunities this afforded.

However, this shift in global power also has critically important limitations. Yes, some more successful and better-off developing countries now have more influence than they had. The “BRICS” now have a seat at the WTO table, and the “emerging markets” more votes in the IMF. But their influence still falls far short of their share of the world population – even collectively, they at best have the power to say no to an agenda driven by the North, which is a recipe for inertia rather than progress.

Worse, low-income and least developed countries are still clearly excluded: their influence in the WTO remains minimal, and they gained nothing from the recent IMF voting reform. This is critical: not only are their needs greatest (and least well served by global governance as it stands), but their interests are very different from – and often diametrically opposed to – those of the “emerging market” economies whose power is increasing.

Unless and until developing countries, and particularly low-income and least developed countries, have a say in global decision-making which reflects their preponderant weight in the world population (84%) rather than their much smaller weight in the world economy (34% of global GDP), our progress on development, poverty and global health will be limited. 

How, then, can we escape from this vicious circle? The first step is to break the formal links between economic power and votes in institutions such as the IMF and World Bank; to establish democratic decision-making systems, and to ensure that decisions are made through these mechanisms.

We would not for a moment consider an “economically weighted” voting system at the national level – deliberately and systematically giving rich people more votes than poor people. Neither would we accept a system governed by blatant arm-twisting and pay-offs in unofficial, informal and wholly unaccountable processes behind closed doors while formal mechanisms of governance are side-lined, as in the WTO. So why do supposedly democratic governments in the 21st century continue to defend such anachronistic and explicitly anti-democratic relics of the colonial era at the global level? Such hypocrisy should be exposed, and developed country governments shamed into accepting democratic principles in global governance.

However, this is not enough. As long as national governments are themselves disproportionately influenced by elites and financial and corporate interests, merely shifting power among them will have a limited effect. Ultimately, this can only be resolved by reforms within each country (North as well as South). But on the global stage, a first step might be to shift the accountability of global institutions from governments to Parliaments.

This would be no more than a partial solution. But, coupled with an increase in transparency (e.g. live web-casts of major discussions) and more formal and effective accountability mechanisms (e.g. election of representatives by the Parliamentarians of the countries they represent, and regular appearances before Parliamentary committees), this could start to move power in global institutions towards where it belongs – with the world population as a whole.

Then, and only then, when we at least begin to weaken the avaricious circle of economic and political power, if not to break it, might we expect to see some real progress on global inequality.

Photo credit main picture: International Monetary Fund