6:26 AM Jul 7, 1994

WORLD WON'T CHANGE, FOR BETTER, AFTER NAPLES

Geneva 7 July (Chakravarthi Raghavan) -- When the Group of 7 leading industrial countries meet this weekend at Naples and disperse after issuing a long statement, one thing is certain: the world will be no better off, perhaps no worse off either -- there probably is a god around who is looking after people whom the markets try to wipe out.

The probabilities are the G7 will meet next year too - but not the same seven individuals -- time and the ballot box would bring changes.

For the G7 to cease or change, it would require an Oliver Cromwell to appear and tell them "You have set too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go".

The annual G-7 exercise, on which the total outlay (private and public) probably runs into a few million dollars, serves no global purpose. It only enables the spin-doctors accompanying each head to manipulate the hordes of media-persons and television crew and try to project an image of their boss in control that could win a few points in the next poll.

The first summit at Rambouillet (near Paris in France) in 1975 was the result of the initiative of then French President Giscard d'Estang's initiative, aired in a newspaper interview, for a Summit level meeting to tackle the economic crisis which, he said was being described as a 'crisis of capitalism', but was only 'a monetary crisis'.

It was difficult in 1975, when the East and its system seemed to provide a counterpoint and an ideological appeal as alternative, for any western leader to acknowledge a 'crisis in capitalism', and so he talked of a monetary crisis.

Even with the collapse of communism and the triumph of liberalism and the market ala Fukuyama, the seven can't talk about the crisis in capitalism -- of growth and growing unemployment -- nor even about global monetary and financial non-system and failure of ad hoc cooperation dominated by the G7 process, as the Volcker Commission on Bretton Woods describes it.

After the first two or three summits, and their ineffectual attempts to influence the course of the monetary and financial system or the real economy, the G7 communiques have ranged over a wide range of political, social and other topics but which no one remembers, excepting perhaps for their sherpas preparing for the next summit.

The first summit in 1975, came after the first 'oil price increase' which had been preceded by US inflation (as a result of attempting to fight the Vienam War and create 'Great Society', but without raising taxes), resulting in the collapse of the Bretton Woods monetary system and its fixed exchange rates.

At that time the East was seen as a counter-point and alternative ideology, and thus it was difficult for any of the western leaders to acknowledge a possible crisis of capitalism.

But the efforts of the G7 to tackle the monetary crisis got nowhere and, as the Paul Volcker Commission on Bretton Woods has said in its report now, a sustained reform effort is needed.

The Bretton Woods system ended in 1971, when President Nixon unilaterally abandoned the fixed-exchange rate system anchored on the US dollar and its 35 dollars for an ounce of gold value, and embraced the floating exchange rate system.

As a result, Humpty-Dumpty came down from the wall and broke, and all the recommendations of the Volcker Commission will not be able to put Humpty-Dumpty back on the wall again after 24 years, not even if the Seven at Naples endorse it in toto.

But a recognition from Naples that there is a major systemic failure and crisis and solutions have to be sought that look beyond the interests of the Seven or the North or the interests of the bankers and businessmen of the North that dominated the Volcker Commission, but take in the interests of the people in the South could be a beginning.

The Volcker Commission, from published press reports, talks of the IMF withdrawing from the 'development arena' and concentrating on the macro-economic policy functions and the World Bank taking on the entire development policy function in the South and the former East in order to promote private capital and market.

In April this year, at the Cartagena technical conference on the Bretton Woods system, sponsored by the Group of 24 (the Third World grouping in the Fund and the Bank), one of the ideas mentioned was the setting up of an intergovernmental committee, modelled on the 1971-72 Committee of Twenty (which later became the Interim Committee of the IMF) could be set up to consider the role of the international financial institutions in the changing economy of the world.

With finance ministers of developing countries as strong advocates of the Fund/Bank liberalisation policies, such an entirely official committee serviced by the Fund-Bank secretariats may not bring about any major, or even minor changes affecting the Fund-bank staff and the executive directors. Some outside non-banker, non-capital inputs of a political-economic nature might be needed.

But it would be a starting point.

There were also several other ideas and concrete points that were brought up at the Cartagena meeting. None of them will probably figure in any of the additional appeals and letters that go to the G-7.

At Cartagena was voiced the problem that has long been agitated by the developing countries, and now embraced to some extent by the Bank staff too, namely that the vast expansion of trade (in goods and services), with no matching official liquidity controlled by governments of the Third World who don't have the same ability to raise funds on private capital markets, needs urgent solutions.

This lack of liquidity has been forcing many of these countries to compress imports.

This requires, as conceived in the late 1960s and early 1970s, that the IMF should issue SDRs (special drawing rights) and that the SDRs allocated to the industrial countries or others that might not need them should be transferred or reallocated at concessional terms to the needy developing countries, directly via bilateral aid or indirectly via the World Bank's soft-lending affiliate, the IDA.

Another issue that is reported to have been discussed at the Cartagena meeting was the current state of the private financial markets, the extremely volatile private flows of capital, and their implications for a capitalist economy in terms of medium to long-term investment and the price signals for a market economy.

On this issue of private capital markets and exchange rate fluctuations and variations, the IMF views keep changing, going up or down like the annual designer-cloth fashions for women.

The IMF and World Bank between them employ more than 10,000 economists and have an economic research budget almost equal to the annual regular budget for e.g. of the UN Conference on Trade and Development.

And while the Fund/Bank economists are eminent and able, their final output, and even more the conclusions to be drawn from them, go through what US Academic, Prof. David Felix has recently called the "Congregation for the Doctrine of the Faith" (in these institutions) -- the Faith being the fundamentalist market doctrine that is not practised anywhere and has never been from the time of Adam Smith to now.

Monopoly has always been recognized in any capitalist system as dangerous and preventing the efficient and smooth functioning of the market, but nothing is more dangerous than a virtual research monopoly, which is what the Fund and the Bank have now managed to have.

The vast resources commanded by the Fund and the Bank for this and their technical assistance activity -- their budgets are funded, not by appropriations by its members but out of their earnings, mainly by way of interest on loans to developing, and now the transition economies -- and the constant cutting of the resources of the UN system in this area has now created such a monopoly.

Academics in Universities, and now a growing number of non-governmental organizations, are engaged in 'research' and challenge the Fund/Bank 'research claims', but they are often ignored even by policy makers in developing countries following the liberalization dogma.

The Bank, by its ability to provide funds for joint projects, is also trying to 'coopt' research work in other institutions and NGOs. Bank economists, aware of the challenges from outside, do engage in dialogue with the dissenters, but the outcome does not reach the upper policy-making levels of these institutions.

Their bureaucratic structures are notoriously rigid.

One of the things that was brought out during the African commodity crisis -- where individual countries were advised by their Bank desk mentors to expand production and export, resulting in everyone doing the same and bringing prices crashing down -- was this utter lack of coordination within the Bank.

Their rigid hierarchial set-up means that coordination among divisions is only feasible at the level of heads of these divisions, and not horizontally -- unlike in even the worst run national bureaucracy where a treasury junior official could and does still walk across to a trade or commodity or transport official to exchange views.

Country desk staff, of the rank of third or fourth level permanent treasury officials, perhaps may know what their colleagues within the same sub-region are doing, but not across regions and certainly not across divisions.

And with the top management, with their fundamentalist ideological blinkers, refusing to contemplate any 'fallacy of composition argument' (it is like asking a Roman Catholic to doubt the Virgin Mary dogma), the Bank's method of functioning resulted in some African country being advised by its Bank desk officer to expand coffee production and export, without his being aware that similar advice had been given to Indonesia and Guatemala, resulting in a coffee price crash, or Zaire and Zambia being asked to expand copper production even as Chile was being asked to do the same in Latin America.

A GATT economist at that time is known to have advanced a GATT view of trade economics, namely, that even if there had been cooperation and exchange of information within the Bank staff, any coordinated supply management orchestrated by the Bank would be GATT-illegal.

This view, in terms of strict GATT rules was somewhat erroneous, But GATT economists, like the Fund-Bank economists, have their own fundamentalist theology about trade policy.

The Volcker Commission recommendations for changes in the Bretton Woods institutions, not even the advice about cutting staff, will help resolve these issues of political economy.

And when the WTO comes into being, with its own economists preaching their fundamentalist theology, the combination of the WTO-Fund-Bank economists and staff on the developing and developed world could bring to the forefront a real crisis of capitalism of the Triad.