The King Is Dead, Long Live the King! -Part 2

The King Is Dead, Long Live the King! -Part 2
If a new world order is in the making, what are the course corrections it should take?

In this second of the three-part series, the author describes two more shortcomings of the U.S.-led Liberal World Order − nepotism in international institutions and the woes of the international monetary system 

Shortcoming 2: Nepotism in International Institutions

 Many historians attribute the failure of the League of Nations as a primary reason, for the devastating World War II. When the UN was formed in 1945, the founders gave ‘irreplaceable’ members permanent seats in the Security Council, with the power of veto. The five permanent members (U.S., U.K., France, Russia, and China) are called the P-5. The veto empowers any permanent member to scuttle a resolution in the event of disagreement. Thus, for any resolution to be passed in the Security Council, there needs to be consensus among the P-5. This principle of the UN was founded on the basis of pragmatic diplomacy, even though it is fundamentally undemocratic. The privilege of the veto ensures in the event of major disagreements, permanent members are not forced to abandon the UN. In the League of Nations, all members of the League Council, both permanent and non-permanent, were given the power of veto, which, eventually led to its collapse.

Analysis:In 1945, there was necessity for pragmatic diplomacy in appointing victors of the World War as permanent members of the Security Council. However, in 2020, it is questionable why U.K. and France (both with populations of 67 million), continue to be permanent members of the UN Security Council, while India (population 1,350M), is denied a legitimate place. Also of concern is that in 75 years of existence, there has never been a Secretary-General from India or indeed China, who constitute one-third of the world’s population. The UN has had nine Secretary-Generals: Europe – 4, Africa – 2, Asia Pacific – 2, and South America -1. The allegation of nepotism in appointment of the Secretary-General, also extends to other senior appointments in the UN. There are almost 60 Undersecretary-General positions in the UN, who serve as commissioners, secretariat staff, and advisers. Among this top management team, representation from China, India and Russia, is almost non-existent. The allegation of nepotism in international institutions can also be extended to the IMF, World Bank, WTO and WHO, among others.

Assessment: Ideally, international institutions should have developed as meritocracies, where the most able of the human species work towards achieving Utopian ideals. However, the special considerations for the Security Council inadvertently transcended into normal business as well.It is more convenient to appoint those to senior positions, who are more compromising than idealistic, more accommodating than innovative, and more pragmatic than empathising towards human needs and suffering. Multilateralism in international relations has suffered because of these biases and accommodations within international institutions.

Recommendation: At this juncture, only the U.S. and China are deserving of veto powers, in the UN Security Council. It might be best if the other three powers voluntarily relinquish their veto and join the ranks of the other 187 members. As democratic countries, they should celebrate relinquishing privilege, in favour of standing shoulder-to-shoulder with the rest of the world. The proposed P-2, in place of the existing P-5, may be able to restore merit, impartiality, and innovation-excellence in the world bodies, from which the people of the world expect so much.

Shortcoming 3: Global Monetary System

In July 1944, the U.S. hosted the Bretton Woods Conference in New Hampshire. It was attended by 44 nations and at the end of three weeks of deliberations, they laid the foundation for the post-war international monetary system. The Bretton Woods Agreement sought to provide a framework to foster economic growth and international trade. The articles of the agreement linked world currencies to the U.S. dollar by an adjustable peg. Also, the U.S. dollar was to maintain the gold standard at a rate of US$ 35 per ounce. However, the special status for the U.S. dollar increased international demand for the sovereign currency. Large capital outflows resulted in balance of payment deficits in the U.S. budget. Further, it was soon evident that gold production was insufficient to meet the demand for the U.S. dollar gold standard. On August 15, 1971, President Richard Nixon permanently suspended the dollar-gold convertibility and the U.S. began practising the inflationary monetary policy (production of currency without gold standard, in order to meet demand). By 1973, major currencies like the U.K. pound, the French franc, and the Japanese yen were ‘free floated’, with their value determined by demand and supply. This is the international monetary system as it exists to date.

Analysis: Many economists suggest that the Bretton Woods Agreement failed between 1971 and 1973. However, while we continue with the same system, there is no alternative in place. The trust and confidence the world has in the U.S. ability to pay debts has maintained the dollar as the most redeemable currency for world trade and commerce. The overseas demand for the dollar also allows the U.S. to maintain persistent trade deficits, abundantly increase money supply, and hold trillions of dollars in international debit. If it were not for the recognition of the U.S. dollar as the foremost international reserve currency, the value of the currency may have been forced to depreciate and structural readjustments to the U.S. economy may have been necessitated. Some economists also caution that at some uncertain future period, fiscal and monetary pressures will precipitate a run on the U.S. dollar, with serious global financial consequences.

Assessment: Even in the midst of the current pandemic, the U.S. dollar has actually appreciated in value. The appreciation was not in U.S. interests as it made its exports more expensive and exposed U.S.-manufactured goods to competition from cheaper imports. In the absence of a world currency, it is perhaps both unwise and unfair that the U.S. dollar should fill the void. The test-bed for a world currency was the Euro, which in two-decades became the official currency of 19 countries in the 27-member alliance.

Recommendation: The world needs an international currency for basic monetary functions; a medium of exchange, a safe means of saving, and a common unit of measure. An international currency unit would require a global central bank to manage monetary policy. But as the Bitcoin and other cryptocurrencies have demonstrated, it should preferably be disabled from fiscal interventions.

Author: Maj Gen Moni Chandi (retd)