The days of US dominance are over, and multilateralism is with us

In January 2009, when I started writing the book China and the Credit Crisis: the emergence of a new world order, I could see that the financial crash of September and October 2008 had seriously weakened US financial power, and that some big changes would follow as a result. What I did not know then was how long these changes would take, nor did I realize that Europe had been as badly affected as the US by the boom and bust of the first eight years of the millennium.

Now, nearly four years later, the destruction wrought by the West's love affair with debt and derivatives, and the extent of Western economic decline since 2008 has become plain for all to see. Most people thought that the G20 summit held in Washington after the crash, in November 2008, would mark a temporary weakness of the West, and that normal service would be resumed after at most a couple of years. The expression "From G8 to G20" would become "From G8 to G20 and back again".

Although the G8 has continued to meet (supported particularly by Japan, which in China's absence can aspire to the G8 role of leading Asian power), it is the larger G20 grouping that is starting to show the real staying power. It is not hard to see why. As usual, it comes down to money.

The larger emerging countries, led by China, have the economic growth and the ready cash that the West lacks and increasingly needs. The question now is: How long before China and the other BRICS countries (Brazil, Russia, India and South Africa) come to play the dominant role in the international arena?

The statement issued by the G20 leaders when the summit ended in the Mexican seaside resort of Los Cabos on June 19 shows the impact of the emerging-country agenda, in a way that would have been thought impossible five years ago. For many years, in contrast to the US-led Western unilateral approach to global problems marked by the end of the Cold War and the wars in Iraq and Afghanistan, China has stressed a multilateral approach that champions the unique situation and characteristics of each country as a key factor in promoting global peace and prosperity.

This approach is underlined in clause 8 of the G20 summit leaders' declaration: "Despite the challenges we all face domestically, we have agreed that multilateralism is of even greater importance in the current climate, and remains our best asset to resolve the global economy's difficulties."

In other words, a different perspective - of inclusion, not exclusion, and of collaboration - not confrontation, is starting to govern the way global affairs are conducted. The superiority of a global grouping that includes a number of important countries from each continent, including Africa, over a narrow, US-dominated, Western-oriented grouping like the G8 is beginning to follow naturally from the new economic and financial influence exerted since the credit crisis by the big emerging countries, led by China.

An important question that follows from the reshaping of global governance is: Can the International Monetary Fund resume the pre-eminent and beneficial position that it occupied in global financial affairs after 1945? Or will it be left to enjoy the peaceful backwater of global affairs to which it retreated in the 1980s and 1990s, in the face of an increasingly strident US, which ignored it? Does the IMF have a key role to play in the new, post-crisis world of multilateralism? You might think that the IMF is an obvious winner from a multilateral world in financial crisis. In reality, though, it is still unclear how important the IMF will be in global affairs, because it remains controlled by the Western powers, particularly the US, which still holds 17 percent of the voting power, in an organization in which the agreement of 85 percent or more of shareholders is needed for any important policy changes.

The overdue changes in IMF voting power of 2010, which shifted about 6 percent of votes toward China and other emerging countries, have still to be ratified. Meanwhile, the next stage in the reform of IMF voting power (due to take effect in 2014) has yet to begin. For the IMF the danger is that the formerly dominant, but now financially weak, West continues to drag its feet in yielding control over the organization and other institutions of global governance, so that these potentially valuable institutions become irrelevant in a world driven by the economic and cultural power flowing from China, India, Russia, Brazil and the rest of the emerging world.

The continuing euro crisis makes the role of the IMF in global financial affairs particularly important. The raising of $456 billion (360 billion euros) from a wide range of countries to provide the IMF with additional means to support financially troubled countries indicates the potentially central role that the IMF could play. While China, Germany, France and Japan contributed 44 percent of these new support funds, the US contributed nothing. US global power, previously dominant, may have been substantially reduced by the financial crisis, but the country is still powerful enough to prevent the effective execution of any global solution with which it disagrees. So although the IMF could become the key global institution at a time of financial crisis and economic change, one has to wonder whether it really can play a significant role in the resolution of the European financial crisis, even with more than half a trillion US dollars at its disposal.

In the long section of the G20's final declaration that was devoted to resolving the European financial crisis, it is possible to see a reflection of several different, competing views, from the establishment of the Europe-wide fiscal compact beloved of German believers in spending discipline, to the more liberal French growth-oriented perspective of making better use of European financial means, such as the European Investment Bank and structural funds, to support investment that can restore growth and employment and improve economic competitiveness.

Whatever the competing views, it is clear from the G20 summit declaration that, at last, almost all the steps necessary to resolve the European crisis are now being considered, from fundamental banking reform and recapitalization to fiscal retrenchment and economic reflation by way of targeted investment projects. Only debt forgiveness, an important feature in resolving earlier financial crises, failed to make an appearance in Los Cabos. Here, it is easy to guess that Germany successfully opposed any mention of easier repayment terms for Greece and other indebted Euro countries, although debt rescheduling will undoubtedly feature significantly in reduced European financial stress as lenders are forced to share the burden of economic readjustment with borrowers.

For the first time since the end of World War II, resolution of a major financial crisis will not happen because US money has underwritten a financial solution, thus extending US global influence. The latest G20 summit has shown that the post-1945 US-dominated world has gone for ever, to be replaced by something quite different - a multilateral world in which many different countries will increasingly be able to express their particular concerns, viewpoints and interests, supported by the financial power of the large emerging economies. Whether this new world order turns out to be better and more stable than the one it replaces depends on the wisdom and far-sightedness of its leaders. Among these China will count as pre-eminent.

The author is a visiting professor at Guanghua School of Management, Peking University. The views expressed do not necessarily reflect those of China Daily.

(China Daily 06/22/2012 page9)