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Democracy in credit: new agency, new order

The formation of a non-western credit-ratings agency is an important sign of the global power-shift, say Ernesto Gallo & Giovanni Biava.

Ernesto Gallo Giovanni Biava
13 January 2014

A new world order is in the making, though its precise shape and charater are yet to emerge. The IMF's growth forecasts for 2014 tell at least part of the story: despite recent troubles and adjustments the "Brics" countries are predicted to grow by 2.5% (Brazil), 3% (Russia), 5.1% (India), and 7.3% (China), whereas figures for the four biggest western economies are 2.6% (United States), 1.4% (Germany), 1% (France) and 1.9% (Britain). Moreover, China's director of customs, Zheng Yuesheng, stated on 10 January 2014 that on the basis of its 2013 trading performance China had overtaken the United States to become the world's number one in this category. Such trends, along with others, reflect longer-term shifts in the orientation of the world economy.

At the same time, some analysts argue that "the west" will resurge and that "emerging powers" will lose momentum. They are supported by the fact that most major international institutions - financial, economic, and security - are still mainly under western control. The IMF itself is an example: China, whose GDP approximates to 13.3% of the world economy (according to the World Bank in 2012) has a voting share of 3.65%, while Brazil, at 3.9% of the world economy, has a share of 1.72%. The Bric representatives have grounds to complain about their countries’ marginalisation here.

A comparable situation is seen at the United Nations, where the aspiration of several non-western states to a permanent seat on the Security Council has been continually frustrated. This is despite the ostensible support for India's membership (by the US) and Brazil's (by Russia, Britain, and France, among others).

In the financial arena, too, Wall Street remains the global engine and the US dollar the world's reserve currency, with the leading credit agencies (Moody’s, Fitch, and Standard & Poor’s) in charge of deciding sovereign credit ratings. The role of the "three sisters" in the post-2007 financial crisis has been deeply questioned, especially the downgrading of several eurozone states; it has been noted that the big three, which control 90% of the world market, are intertwined with other corporate US interests (S&P is part of the McGraw-Hill conglomerate, and Fitch a subsidiary of the Hearst Corporation).

But if the gradual rise of the non-west is reflected in global growth figures and investment flows, the challenge to traditional centres of western power is also expressed in efforts to create alternatives to New York's credit agencies. China’s Dagong Global, for example, has joined forces with RusRating to create a potential force with a foothold in two major Brics states. In November 2013, an even more international agency was forged: ARC Ratings, which will include India’s CARE Ratings, Brazil’s SR, South Africa’s GCR, Malaysia’s MARC and Portugal’s CPR (thus including three Bric countries). Its London headquarters and the participation of Portugal’s CPR ensures European status, symbolised by registration with the European Securities and Markets Authority.

The establishment of a new credit-rating agency, global in its organisation and purposes, is no mere technical issue but in two ways an important development in world politics and democracy.

A critical juncture

The first is that it shows another aspect of the Brics countries' cooperation in search of more "voice" in international affairs. A number of new or possible coalitions of interest is forming. The CEO of India's CARE, Desh Raj Dogra, says that "Russia and China, from the Brics' stable, are right now part of our alliance." Sergei Glazyev, economic advisor of Russia's president, Vladimir Putin, has also highlighted the need for a Brics-based rating agency that can attract emerging countries such as Malaysia.

This is a very important issue in democratic terms: empowering countries with a population of billions would enable many of their citizens and enhance the democratic quality of the international order (though it must be remembered that China and Russia are undemocratic, and there are democratic flaws in several Brics states). Yet the non-west, like western states such as Greece, has suffered from the power of financial markets and is justified in looking for means to protect itself from destructive speculation by investment banks, hedge funds, traders, and their allies in rating agencies. In this context, new and more transparent rating instruments could become part of a more balanced and inclusive international financial order. 

The second way in which a new credit-rating agency is significant has to do with capital markets. The emerging economies need to develop a financial system different to that centred on Wall Street and the dollar. This is particularly relevant to China, which needs a competitive financial system to support her giant economy. So far small steps have been undertaken, but two directions seem clear: the renmimbi’s internationalisation and the integration of stock exchanges.

Hong Kong is already a major renmimbi-trading financial centre; Shanghai will become the main "onshore"’ exchange; other stock markets, also outside China, will probably be attracted by the rise of a global hub centred in one or both leading Chinese cities. The financial ambitions here are based on an immense market with 1.34 billion people, which could at least incorporate Brics states and compete with (or even eclipse) Wall Street. This would call into question the entire global financial order.

But a new financial order requires an overall political reorganisation. Europe's experience in adopting a single currency before having a unified, accountable European government is an important lesson here. Democracy in the European Union remains (to say the least) an unfinished job. But elements of greater democracy could be inserted into the UN system - for example, by reforming the Security Council, perhaps even creating some form of world assembly with elected members.

In all this, the shift away from western domination will remain on the agenda. The risk, however, is that crisis will produce not change but destructive conflict. In the past, such critical junctures have ended in major wars. That experience makes it all the more vital to take speedy, concrete steps towards a more balanced and democratic global order.

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