‘Developing Countries Should Have a Bigger Say in the World Bank and IMF’

Nayan Chanda:

The first question I'd like to ask is this issue of North Korea's declaring to have nuclear weapons. That issue brings the question or world security right to the doorstep of the United Nations. And the United Nations at this stage seems incapable of handling it, because the Security Council is not in a position to decide anything. So how does one move on this problem of world security if the Security Council is paralyzed because of differences that exist within the five permanent members?

Kemal Dervis:

This is the heart of the security problem, the collective security problem. In fact, we discussed this today at the Center for Globalization at Yale. I think the Security Council is the only institution really in the international system that does have power. Potential power, if you like. But too many times, that power is deadlocked by the veto power of individual countries. And I think that one important thesis in the book, which has a lot of support in the world, is that one has to move to a more representative Security Council, but at the same time a Security Council that works.

Global democracy cannot be just one country, one vote. You cannot have China and Malta have the same weight in the international system. So one has to weight them both, a weight that reflects the size of the country and the population and the resources the country contributes to the international system. So one proposal is to move to a Security Council that is more universal, with weighted voting. It's tough, because the existing veto holders, of course, they have it. They don't want to give it up. So it's not an easy proposition at all.

Chanda:

But from what you're suggesting, this doesn't require the United States or China to give up the veto, does it?

Dervis:

Individual vetoes – maybe not immediately; there can be a transition period. But 15 or 20 years from now, it will be very hard to justify, for example, that the United Kingdom – which is an important country, but compared to India or China or even Brazil is a small country and will become smaller in time – should keep its individual veto power forever. Instead, I think Europe should have enough weight in the system that a weighted majority voting system would give it de facto veto power. The United States, by its size, population, resources, could block important decisions, could in a sense have a way to stop things that it really doesn't want. But I think one has to graduate this. It's only the very, very, very important decisions that should be subject to large supermajorities, which would give these important countries blocking power. In other cases, decisions should be made more easily by simple majorities or smaller supermajorities. That's what's discussed in the book.

Chanda:

Yes, I think you were saying that for a decision to invade a country -

Dervis:

You really need a supermajority.

Chanda:

Yes, four-fifths of the weightage.

Dervis:

Right, that's my proposal.

Chanda:

Now if you could explain a little bit how the weightage works. What are the components of the weightage?

Dervis:

The proposal I have – and of course other ways are possible – but the four weights that I propose are, population – very important in today's world, where we want democracy to triumph and we say that democracy needs to be supported, it can't stop at the borders of the nation-state. So population is important, you have to give countries weight according to their population. But other things also should count: GDP (the resources a country has), the part of the resources it contributes to global public goods, and also the capacity for peacekeeping in the security area (its military capacity to enforce security) should also be one of the weights. That's what I'm proposing. And of course whether one wants to weight this equally or give more weight to one of these factors is open to debate.

Chanda:

And you said that you have support from quite a lot of people?

Dervis:

Well, not necessarily the ones that make the final decisions! But I do work with quite a few Social Democrats around the world – in Europe, in Latin America. There is support for this kind of system because conceptually, logically, if we believe in collective security – really believe in a legitimate system of global collective security – then there is really no alternative to something like this. One of the points I often make is that if we had a strong system of collective security that could have prevented, for example, the war in Yugoslavia, or the Iraq war, by joint collective action that would have influenced events much more, we could have saved maybe 100 billion, 200 hundred billion, 300 billion dollars. So it's so important that we get it right.

In the fight against AIDS, which is very important, we try to mobilize three or four more billion, five more billion, and save hundreds of thousands, millions of people. And then, when somewhere the security system breaks down, the world has to spend – the American taxpayer, the British taxpayer, the Turkish taxpayer – has to spend much, much more than that. So it's important, and I think citizens should realize how important it is.

Chanda:

Prevention costs much less than curing.

Dervis:

Exactly. Exactly.

Chanda:

And prevention, of course, when things move to a stage where you have to take military action, is one. But before things reach that stage there is a long period where the economy is collapsing, and failed states are created. How do you address that question? How does one prevent that?

Dervis:

That's another major message, of course, and that is that the economic, social, and environmental aspects of security are deeply interlinked with the purely military aspects of security, or the physical aspects of security. Failed states – like Afghanistan was a failed state – lead to tremendous catastrophes. In Africa when governance breaks down, you have millions of Africans dying. And also in Europe: We always say Africa, but you should remember that the tragedy of Bosnia was in Europe, was in the heart of Europe, so to speak. So we have to look at economic and social aspects, too.

And we have to have the mechanisms by which – before it gets to the disaster point – one doesn't let the economic and social situation deteriorate to the point that it then becomes very costly to fix it. And on the economic side, one has to distinguish between the different kinds of countries. The very poor countries are getting some help; they need more. They also need much better governance, and the two have to go together. Just throwing money at problems never works. We know that. In economics, we know that. So yes, money is needed, but it has to be used appropriately, it has to be used within a system of governance.

But there are still many problems even in the middle-income countries. In my country, in Turkey, we have lots of very poor people. In Brazil – in Northern Brazil, in the slums around the Brazilian cities. Of course even in China and India, which are countries that are growing very rapidly, but inequality is a problem; quite severe poverty still remains a problem in these countries. So you have to look at the poverty everywhere, not just in the poorest of the poorest countries.

Chanda:

Now you are in a unique position to address this question raised by many of the people who oppose globalization [regarding] the heavy-handed intervention by the IMF and World Bank. You worked more than 20 years with the World Bank, and then you were back in Turkey as the minister of economic affairs at a time when the economy was collapsing; 90 percent of GDP was going to pay foreign debt. You turned it around with the help of the IMF and World Bank. So what would you tell the critics of the IMF and World Bank? Are they right? Are they wrong?

Dervis:

Well, I would say, like all international organizations, they are as good as the countries that make them up let them be. When we say, "The IMF does this, or the IMF does that," we have to remember that it's the big shareholders, the G7 countries, that make a lot of the really important decisions. And you know, it's the same for the UN. It's very easy to say the UN doesn't do this, the UN doesn't do that, but does the UN have the means to do the things we want it to do? The same holds quite often for the IMF and World Bank.

I think they're important institutions, they have to step in in crisis moments very often, and people are in difficulty at that time. There's a tendency sometimes to say the difficulty was due to the IMF, when I think the difficulty was there before. However, I also strongly believe – and I felt it in Turkey – that things have to change at the IMF and at the World Bank, that these institutions have to become much more the institutions of the developing countries, as well. They cannot remain under this strong dominance of the G7, the richest countries. And that change is very important for those institutions to become more effective.

Chanda:

Is this change in terms of governance? In terms of ideology?

Dervis:

In terms of ideology, in terms of governance, in terms of the boards and the way they function. It makes these institutions that have tremendous potential to do useful things. It makes them suspect, and it makes them illegitimate in the sense of a large majority of humanity. Whether it's in Turkey or in Brazil or in Argentina or in Indonesia or in India, there's no real trust. And for these institutions – which have resources, which have staff, which have technical knowledge – to really be useful, fully, and to do what they could do, I think we have to make them more legitimate.

Chanda:

The interesting example you have in your book is the question of farm subsidies. The Turkish farmers were given subsidies so that the economy could benefit, and at the same time the poor farmers could benefit. But the IMF was opposing it, right?

Dervis:

There was an episode where instead of having price supports, we moved to a system called income supports for poor farmers. This is a better system because the budget resources are directed towards the poorest people, and also price structures aren't distorted. And hopefully a better, more viable agriculture can come out of this. But then an IMF commission came, and because there was a hole in the budget, was looking for something to cut. Together with the government, actually, they agreed to cut the direct income support to the poor farmers, which I think was a big mistake.

The World Bank actually spoke up against this and said, "You can't do this. You shouldn't do this. We promised the poor farmers this direct income support, and that's how they will transform the system. We owe it to them to pay these supports." So there was a disagreement. But that disagreement was about the substance of the policy and people immediately started to say, "Oh, that's because this bank is run by an American president who wants Turkey to be dependent on the US," and things of that sort which had nothing to do with the issue.

Chanda:

How did you finally get it resolved?

Dervis:

Well they did cut – unfortunately – some of the support. But then the economy improved, and we raised hell also in the opposition (I was at that time in the opposition), and the support was reinstated a few months later. So in a sense it got protected, happily.

Chanda:

You also talk about development-oriented World Trade Organization policies. If you can elaborate on that – what do you mean?

Dervis:

Well, trade is important to the world economy. It is something that potentially increases prosperity. It has worked well for India, which has benefited from some of the trade, from some of the technology that has come. It has been going quite rapidly lately. China also has benefited from the global economy by exporting a lot. So it's clear that some developing countries, poor countries, can benefit from trade.

But at the same time, the whole mechanism through which trade is being managed – very often, powerful interests try to capture it. We saw, for example, at the end of the Uruguay round, that the powerful rich-country pharmaceutical companies introduced certain provisions about intellectual property rights that were excessive, that were really not reasonable, and that in a way captured the WTO process to benefit them. So I think it's very important that this should not be allowed, that the trade expansion mechanism and world trade should benefit everyone – particularly the poorest people – and should not be captured by special interests backed by the richest countries.

So this is one of the themes we need to develop. But I think trade is a beneficial thing, it helps growth, it can help poverty eradication, but it must be governed – like finance, like other areas – by an international governance system that is much more democratic and much more oriented towards development and where the people from developing countries have a much greater say.

Chanda:

So are you then saying that TRIPS – the trade-related intellectual property issue – should not be raised in the WTO?

Dervis:

It should be raised, but the way it was done – and even very free-trade economists like Jagdish Bhagwati, for example agree, with this – the way it was done was to restrict access to medical products and to the production of medical products in poor countries and raise the costs for the poor people. And I think to a degree this is not justified. Of course intellectual property rights have to be protected, to a certain point.

One should reward the people who do the research and invent new products. But, how much and how long? Who should bear the costs, and who should pay the costs for this? Should it be monopoly profits for these companies? Or should it perhaps be the taxpayer who contributes to some of these costs? I think these things need to be discussed. The way that TRIPS was introduced, I think, reflected the international system at its worst.

Chanda:

Finally, the question of indebtedness has been very much debated. People have been proposing complete debt relief for poor countries. But emerging economies also have quite sizeable debt – even Turkey has 75 percent GDP in debt. So how do you resolve that nagging issue?

Dervis:

It's a big issue. In the poorest countries, it's a debilitating issue, and I think the international community is finally doing more for the poorest countries' debt. But as you say, it's not just the poorest countries: Brazil has huge debt burden, and of course Turkey has it – the Philippines, and other Latin American countries have large debt burdens. And some of that debt has been accumulated due to the excessive volatility of the international capital market.

You have periods - not now, interest rates are quite low right now – but there are periods where the interest rate shot up. Not because of anything Mexico did, or Turkey did, but because of something the Federal Reserve did or something that happened in Europe, particularly if you recall the big debt problem of the 1980s. So it's a collective problem. It's too easy to say, "If you've got debt, you must have really misbehaved in the past." Sometimes the misbehavior has been on the part of the lenders, who rushed in and then overwhelmed the country with credit, so to speak, without actually channeling it to the best sectors and the most productive investments.

So the responsibility for that is shared, often, and we must look at the debt problem from that point of view. Of course, international capital markets can bring additional resources and we should work with them, we should not lock our doors to international flows, not at all. But I think we should manage the debt in a much more corrective way.

Chanda:

What is the recommendation?

Dervis:

The recommendation is that for the poorest countries, there really should be forgiveness, on a large scale. Particularly because some of these debts are very political. Like the oldest debt problem from the old days when there was still the Cold War. You would give loans to your friends without really looking at how they used it. Did they use it for their own people, or did they divert it into their own pockets or did they buy arms with it? So for this kind of debt, I think we should create a clean slate.

For the other types of debt in the middle-income countries, such as Brazil and Turkey, they should be brought down over time. And I think the international institutions – the IMF, the World Bank – should accompany this effort by providing longer-terms funds at lower costs. That's one of the proposals in my book.

Chanda:

A soft loan.

Dervis:

Well, not very soft. Not as soft as for Africa. But there should be reasonably low interest rates on long-term resources that can be used for poverty reduction. We have to remember that a country like Brazil, for example, has huge numbers of poor people, very many poor people. And therefore, they should not suffer from the macroeconomic stabilization efforts that are needed.

Now of course, this should be done over a long period. It cannot be solved overnight; there is no magic solution. But if we work on it together, and if we recognize the problem, and don't simply say that it's all the fault of these countries, but if we work internationally in solving these problems, then I think we can make progress.

Chanda:

This also has to come with some conditionality, because otherwise soft loans will disappear.

Dervis:

Yes, I am not against conditionality. I think there has to be government-related conditionality, economic and social policy-related conditionalities. For example, if there is going to be a subsidy that benefits to some degree from international support, it should go to the poor people, not to vested interests. That kind of conditionality, I think, is needed. But for conditionality to be accepted – and we come back to the beginning of our chat today – these institutions have to be perceived as truly legitimate, as truly international, and also owned and supported by the developing countries. And so you see it's all linked. If you want to have good conditionality, you have to have legitimacy.

Chanda:

But when you have seven rich countries basically dictating terms, how do you make them take a little less prominent role and allow other countries to play a role? How do you do that in the Bretton Woods institutions like the Fund and the Bank?

Dervis:

Well I think in the end, you know, the world is interdependent. A stronger India, a more rapidly growing Brazil or Turkey, or a better economic situation in Africa, helps everyone – including the G7 countries. Crisis, lack of security, failure in government mechanisms breed disease, breed terror, breed environmental degradation. Increasingly, the citizens of the world realize – I think the young people more than the others perhaps – that their future is interlinked.

And therefore, I believe that if you want to have good policies and legitimacy, then the citizens in the richer countries have to agree to share – not give up totally, because they also deserve influence and certain abilities to influence events – but it has to be shared better. And I think the enlightened interests of the rich countries themselves indicate that there is need for reform, there is need for sharing, there is need for a more democratic international system. Everybody will benefit from it in the long run. And I think that's the message of a better globalization.