Complacency a risk to reform

People have placed high hopes on the outcomes of the Third Plenum of the 18th Communist Party of China Central Committee, which was widely expected to be at least as significant as, if not more, than the earlier Third Plenums of 1978 and 1993. But the experience with global economic reforms shows that the leadership must be wary of complacency.

Following the Asian Financial Crisis of 1997 and 1998 there were calls for the reform of the international financial system to promote stability. A large number of global economic reforms were proposed for crisis prevention and crisis resolution.

However, with the faster than expected recovery of Asian countries after the crisis, complacency set in and these reforms were abandoned. This complacency partially set the stage for the global economic crisis of 2008 and 2009, when once again, a large number of reform policies were announced. Have they been implemented and has the world become a safer place? Not really, for several reasons.

The first is complacency, yet again. Five years ago, credit markets were frozen, international trade had fallen off the cliff, and the global economy was headed toward a great depression similar to the one experienced in the 1930s. There was an acute sense of urgency; the major economic powers agreed to coordinate monetary and fiscal policies. Policy coordination efforts were successful and instead of a global depression the world experienced the "great recession".

Now financial markets no longer pose an immediate systemic threat to the global economy. The global economy is also showing signs of recovery although it is far from healthy, operating well below capacity with millions unemployed in the west. Policy coordination is still very much required, but it is difficult to attain. The G20, which had made substantial progress in global economic reforms during its first three summits - that is, until the Pittsburgh summit - is now headed toward obsolescence.

The second reason for lack of progress in global economic reforms is the reluctance of the United States to give up its veto power in the International Monetary Fund. In 1944, the US, as the hegemon, helped establish the rules and institutions of global economic governance. This led to financial stability and unprecedented economic prosperity, not only in the members of the G7 club, but also in other countries around the world especially the members of BRICS (Brazil, Russia, India, China, and South Africa).

Given their growing economic footprint in the world economy, the BRICS countries now desire a greater say in running the IMF, but some IMF members are loath to allow this. This is because, like many other clubs, the IMF is designed in such a way that the founding members ultimately maintain control. Hence, one of the centerpieces of the proposed global reforms, namely the G20 pledge to transfer 6 percent of quota and voting power to large emerging markets, has not been be implemented.

The third reason for limited progress in reforms is the relatively weak cohesion within BRICS. The establishment of the G20 in the aftermath of the global financial crisis has given the BRICS countries a historically unprecedented opportunity to sit around the high table with the G7 members and participate in discussions on international economic policies as key stakeholders. But BRICS is still "without mortar". For example, when the position of the managing director of the IMF fell vacant last year, even though it was well-known that the IMF tradition of locking out non-Europeans would be strongly protected, the BRICS countries should have quickly made a claim for the position, fielded a top-rate candidate, and provided strong backing for their candidate. But that did not happen. The BRICS claim came late, perhaps as an after-thought.

For the above reasons, many of the proposed global economic reforms have not been implemented and the world is not much safer now than it was before the global economic crisis.

An important lesson that China can learn from all this is not to allow complacency to set in. It is the more detailed policy packages and their implementation that will be the key to the success of the Third Plenum. The decision to establish a top-level group responsible for planning reform and supervising its implementation is a step in the right direction. This group must now act swiftly to dispel any doubts and misunderstandings about the design and pace of reforms.

The author is an associate professor of international political economy at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. He is also coordinator of economic multilateralism and regionalism studies at the RSIS' Centre for Multilateralism Studies.