From multilaterals to ratings agencies, institutional bias is rife, but it is not only threatening their reputation, it is also proving counterproductive for the very countries that it supposedly favours.
The biggest deficit troubling the world is not a financial one but an information shortcoming. The current system of oversight, checks and balances was created for the old world when the US and Europe could dictate terms, rightly or wrongly, to the rest. Now the biggest worry is that institutional bias is preventing the former great powers from either receiving or accepting home truths about their economies.
The furore over Standard & Poor’s (S&P) downgrading of US debt is a case in point. While press reports dismissed the idea that the departure of Deven Sharma as S&P’s president was in any way related to the downgrade, the company is hoping that his replacement – Douglas Peterson, chief operating officer of Citibank – will help repair relations with Washington.
But why should it? The rating agencies had a terrible crisis and made all kinds of errors with the rating of structured products. They are now coming under much greater scrutiny by a combination of Dodd-Frank and European Securities and Markets Authority oversight. All this doesn’t alter the fact that S&P’s call on US debt was the right one given the lack of political will to put any kind of deficit reduction plan together.
So the rating agencies may be flawed but in the absence of an alternative it would be foolish to disregard their opinions or pressure them into changing their minds.
Another important source of economic opinion – the International Monetary Fund (IMF) – also has its weaknesses. The IMF failed to predict the current crisis and its own evaluation office concluded that it was hindered by group think among the staff, intellectual capture and a mindset that a major financial crisis in advanced countries was unlikely.
So far IMF reform is an example of plus ça change – a French managing director has replaced a French managing director, and Europe and the US hold a majority of the voting shares. How can such an institution have credibility among the new emerging powers?
Logically we need an overhaul of the global architecture and some competing sources of information. One problem is the democratic deficit in some of the new powers, especially China. It means that while much is wrong about the old system and it is failing to reflect the new reality, the lack of independent thinking (or the perception that this is the case) in parts of the emerging world stymies the development of alternatives – a veritable catch G-20.
