Preserving the World Economy


By Mitchell Eubanks


September 2007


          ?As the twentieth century progresses and the power of the United States economic and political engine becomes decreasingly less influential in comparative world terms, the pressing need for a new system of global governance becomes progressively paramount. As outlined in The Grand Alliance, an integrated coalition of liberal democracies whose continued virtues in the international system should become governors to the rest of the world. As authoritarian capitalism gains momentum, the need for a new system of rules outlining behavioral expectations in the global market gains more relevance. One such proposal suggested to facilitate the creation of the Grand Alliance is the strengthening of the G8 forum as the most feasible answer for a united body of democracies. In order to preserve the world economic framework as we presently know it, a new financial architecture growing out of the stronger G8 forum would also need to be implemented. A second Bretton Woods system continuing in the wake of the first collapse in 1971 is a viable first step in securing the western economic model for the future. This report aims to reinforce the proposal for a stronger G8 forum and why it is feasible as outlined in The Grand Alliance of democracies in addition to explaining the implementation of a new Bretton Woods financial order for the future by highlighting the positives, negatives, and actionable proposals of each.


Why the G8 framework?


Currently the G8 forum stands as an able-bodied financial roundtable in which the world’s industrialized liberal democracies can unite on political issues. Constructed in 1975 as the “Group of 6,?it enjoys numerous strengths which can be harnessed and elaborated on in the future. Hosting worldwide summits annually, the organization already enjoys a favorable historical track record and a high degree of recognition globally. The markedly boisterous protests in the face of each G8 summit are quite the proof of the organization’s “popularity.?As a whole, member nations of the current G8 represent the world’s largest military force and an overwhelming amount of economic capability, controlling over 50% of world GDP. Meetings between member nations exhibit a flair for innovative new ideals and a perseverance to find solutions to persistent problems. The intervention in the Kosovo conflict in 1999 after repeated United Nations failures is a good example. This is facilitated to a greater degree by the member nation’s success in controlling bureaucracy and inefficiency, an example being the refusal of the establishment of a secretariat. An obvious but important fact is the longevity of ideals between member nations. Each of the eight democracies have consistently shown a cohesive coherence of democratic capitalist ideals (ex. good governance, transparency, etc.), which will not be jeopardized in the future. This collective nature of the coalition will work powerfully to keep ideals strong within each country. While opponents against the current system claim a lack of enforcement against member countries, a strengthened system will have an inherent enforcement mechanism, membership in the G8 itself. Membership will include numerous incentives economic and politically. Last but not least is the increasing level of openness by the United States regarding trade agreements and policy action, a positive sign for future G8 success. As per The Grand Alliance, the “star-shaped?alliance could be a fact of the past with future cooperation between the United States and its allies as diplomatic and economic initiatives become more focused. Thus, the current G8 framework would provide a concrete base for strengthening and expansion, with a historically positive record paving the way for confidence domestically and abroad. Above all else, it is the most logical transition in the implementation of the Grand Alliance, as outlined in the book for the above reasons and those discussed later.


Aim of a strengthened G8


          ?A newly structured G8 forum transformed from an administrative role to a global governance institution would first and foremost contribute to the stability of the world economic market in a host of new means. Of the new G8 missions, the incentives for non-member countries to democratize and adopt free market ideals would be paramount. A future system of admittance into the G8 framework would also be a possibility as an incentive which would take advantage of the economic liberalization between member nations. As the rise of authoritarian China becomes more and more apparent, the G8 also provides a vehicle to isolate China until democratic cooperation may take place. This holds especially true for Japan, whose financial assistance is of great importance to a rapidly growing Chinese economy. Pressure from many of China’s largest trading partners within the G8 would have the possibility of promoting much needed change. Cooperation with private sector interests as well as governmental agencies is another aim. As foreign direct investment (FDI) spreads internationally through the forces of globalization, the G8 could provide incentives to invest in democratic, free-market countries, both developed and emerging. In the case of China and its enormous level of FDI inflows, businesses would be increasingly warned to the nature of China’s political instability. As democratic India becomes another player in the G8 (posed in The Grand Alliance as the G9), foreign investment could increasingly be attracted to the country, putting pressure on its close northern neighbor to reform. Another important player within the G8 is the newly adopted country of Russia. As of 1997, the former G7 “plus 1?forum became the G8 by the admittance of Russia. As forecasted for the future, Russia will control over 70% of the earth’s energy resources. As demand grows and supplies reduce, an effective alliance with Russia will help to secure the precious resources needed so dearly by the entire industrialized world.      


A New Bretton Woods System


          ?In an age characterized by the rise (not the decline) of authoritarian capitalism a la Singapore and China, a new international financial system emphasizing increased cooperation and a bolder set of rules and incentives among its non law abiding participants is ever important. The current “Bretton Woods II?system proposal by Doole, Folkerts-Landau and Garbe, which emphasizes U.S. and Asian cooperation in order to finance American deficits are not in the best interest of the global system, especially when the advocates suggest leaving Europe behind, compromising geopolitical concerns.? A completely new financial order based loosely off of the Bretton Woods model of 1944 would encourage the many facets of economic participation between the G8 nations. In the original vein of post-World War II economic cooperation, a new financial architecture will maintain stability through the adoption of a common monetary policy.?Of the perceived benefits, the first would be trade liberalization between industrialized nations. Public and private sector interests would capitalize from the reduction in protectionist policies between the world’s richest industrialized nations while also benefiting from a streamlined trade system. Much like the previous Bretton Woods system, another important reform is the adoption of more stable exchange rate policies.?While the feasibility of a pegged rate (gold) of the previous system is outdated, a common currency is still realistic. This common currency, combined with a new symbiotic relationship between member central banks will facilitate stability. With the strengthened political ties between the G8 member nations, an easy coordination of economic policy between U.S, European, and Japanese central banks would help to reduce currency exchange volatility, decrease speculative attacks, and control capital flows. Increased banking coordination also provides a stronger safety net in case of impending financial crisis. A new system would also call for the restructuring of the institutions still alive, including the International Monetary Fund (IMF). Increased transparency, more accountability to pay back outstanding debts, and more coordination between developed and developing nations would be the primary objectives of a reformed IMF. In sum, a new Bretton Woods system working synonymously with the G8 is a good step towards a harmonious balance between financial liberalization and regulation.


Reforms to the current G8 and emerging challenges


          ?While many of the successes have been highlighted earlier in this report, it is evident that numerous challenges are present in the face of a reform of the G8 forum.?At the heart of the challenges is the danger of the loss of its primary mission, as a non-institutional forum where industrialized liberal democracies discuss pertinent topics.? Coupled with this is a severe loss of credibility that is possible if the newly strengthened global institution does not continue to hold true to its actions and allow for growth multilaterally. As with any large governing body, large bureaucratic tendencies and inefficiency stifle quick action and easy implementation of policy. This holds especially true for the United Nations whose intervention in Darfur (UNSCR 1706) has been on the back burner due to bureaucratic difficulties and is an example of how large organizations with heterogeneous members operate. While the non-bureaucratic efforts are proven, the leadership will have to continue to fight it in the future. Keeping a non rigid structure, keeping staff to a minimum, and encouraging criticism both from within and outside are a few recommendations. Another of the G8’s positive aspects discussed earlier may become its most daunting challenge yet, a discontent public. Due to the enormous amounts of positive (and negative) press that the G8 receives, public discontent is an influential factor in the implementation of a stronger framework. Although, as events in the middle-east, uneasy feelings towards economic cooperation with China, and a lack of trust in much of the United Nations would definitely draw copious amounts of support for an organization whose ideals are in line with the majority of the democratic world and who supports multilateral action. In fact, the outdated nature and bureaucratic gridlock of the United Nation’s Security Council lends an even greater heir of credibility to the G8 whose policy recommendations are persistent and ambitious by many views. As viewed by John Bolton, former United States ambassador to the U.N., “There's no such thing as the United Nations. If the U.N. secretary building in New York lost 10 stories, it wouldn't make a bit of difference.?o:p>

          ?When a newly strengthened G8 emerges, the current controversy regarding the admittance and presidency of Russia will be an issue which can lead an overwhelming sense of confidence or a severe loss of credibility for the administration. As Russia’s current president, Vladimir Putin, continues to display increasing signs of a reversal to authoritarian rule (shutting down media sources, arrests without due process, rigged elections, marginal rule of law, etc), the G8 membership must enforce democratic free-market ideals in order to preserve an economic union and protect the credibility of the organization. This encompasses being firm with reform and keeping dialogue open. Pushing for modernization of governmental institutions, education, and infrastructure domestically as well as listening to Russian concerns is a key step to stabilizing Russia.

          ?In conclusion, the strengthening of the G8 as proposed in The Grand Alliance stands as the feasible step towards the implementation of the actual Grand Alliance of democracies. With the political and economic conditions of the world under constant change and threat from numerous arenas, a body of international governance becomes an increasingly vital step to secure a stable financial future. The current G8 embodies the principles that the democratic world looks to for leadership and an overall strengthening of effectiveness to promote western economic and political ideals is a natural progression.


"The economic health of every country is a proper matter of concern to all its neighbors, near and far."

               - Franklin Roosevelt