Worldwide financial uncertainty underscores need for better global governance

At the outset of the new year, concerns about the performance of emerging markets have dampened the prospects for the world economy, with commodity prices and stock markets in nearly every country declining sharply.

Under the present scenario of enormous global interdependence and greater dispersion of economic power resulting from the rise of key emerging markets, the current global financial and economic system has been exposed to heightened risks and uncertainties. More than ever, a global governance structure that is more robust and more in tune with the new reality is needed, experts say.

"The current global governance mechanisms need to be strengthened to respond more effectively to the international geopolitical, economic and financial conflicts and challenges," says Enrique García, executive president of CAF - development bank of Latin America, which will hold a conference titled "Global Governance in an Era of Uncertainty" on Jan. 15 in London.

Participants in the forum, the third annual conference organized by CAF and the London School of Economics (LSE), will include prominent global leaders such as the former managing director of the International Monetary Fund, Michel Camdessus, and the former president of the Inter-American Development Bank, Enrique Iglesias.

The topics to be addressed during the conference are particularly timely in the wake of recent global financial developments that have sparked numerous questions, some of which include: What will happen with China's reforms and the yuan? What impact will the U.S. interest rate hike have on countries with dollar-denominated debt? How will the economic tensions in the Eurozone play out? And, how much difficulty will countries dependent on commodity production face?

Although another crisis comparable to that of 2008-2009 seems improbable, the role played now and in the coming years by organizations and institutions responsible for global economic governance, including the IMF, the G7, the G-20, the World Bank and the WTO, will be crucial.

"To address the new challenges, we can't keep relying on governance mechanisms that have already failed because they've become outdated. We need to create alternative governance models," says Dr. Álvaro Mendez, an LSE professor of international relations. In his opinion, the solution is for "a hybrid to emerge so that traditional governance institutions include emerging economies in their decision-making, directives and policies."

The clout of emerging markets is now undeniable. The BRICS alone represent a fourth of global GDP. The OECD forecasts that by 2030 China and India will account for 39 percent of the global economy and that by 2060 that share will climb to 49 percent. Against this background, there is a pressing need for new and better global governance and for the adoption of reforms to ensure the current division of power is reflected in countries' representation and weight in international institutions.

"The complexity and fragmentation of the world we live in, the threat of global instability, as well as the rise of new emerging actors necessitate a profound revision of the current global governance system," García says. "There are new global powers that must have a say in the decision-making process."

Although incipient, some developments are beginning to reflect the changes now underway in the global economic governance system.

This year, China for the first time will assume the presidency of the Group of Twenty (G-20), a leading global economic cooperation forum. By that time, the New Development Bank promoted by the large emerging-market powers -Brazil, Russia, India, China and South Africa, or BRICS- and the Asian Infrastructure Investment Bank, formally established in December, will be fully operational.

"The recognition of China as an economic superpower is something that is no longer discussed. The inclusion of the renminbi in the IMF's basket of international reserve currencies was a symbolic but very clear sign, as was the decisive role China played at the recent climate summit in Paris in December," says Colombian economist José Antonio Ocampo, a Columbia University professor and the United Nations' under-secretary general for economic and social affairs.

The increased momentum gained in recent years by monetary and financial accords outside the traditional Bretton Woods multilateral institutions -dominated by the United States and Europe-, the emergence of regional pacts such as the Pacific Alliance in Latin America or, the rise of new alliances established to pursue common interests like the BRICS, also reflect the new global reality.

Nevertheless, the need for a global governance adapted to these profound transformations still constitutes an enormous challenge.

Analysts say that between now and 2050, continued dramatic changes in the world will pose significant challenges for economic management at the national level and for the global economic and financial system. Many aspects of these changes are difficult to predict, according to Jack Boorman, former director of the IMF's Policy Development and Review Department.

Therefore, "governance structures, both at the global level and at the level of individual institutions, must constantly change to successfully meet future challenges," he concludes in a study prepared for The Centennial Group, a global strategic and policy advisory firm.