Kunibert Raffer

Let Countries Go Bankrupt. The Case for Fair and Transparent Debt Arbitration

Insolvency procedures are a useful institution which enable a rapid resolution of an untenable debt situation. They aim to limit the damage for creditors and debtors alike, and to prepare the ground for a fresh economic start by the debtor. Something that is quite normal for insolvent companies is still denied to overindebted countries. Debt crises are drawn out unnecessarily, often with disastrous consequences for the populations affected. Human rights are subordinated to formal creditors' rights. At the same time, endless debt rescheduling does not serve the material interests of the creditors. The main argument used against insolvency procedures for sovereign states is that states cannot be placed under the guardianship of creditors. That argument does not hold water. In agreement with their creditors, sovereign countries can very much subject themselves to an arbitration process which confirms the insolvency of the country and defines a schedule for the service of the residual debt which can be coped with by the economy. There are a number of precedents for this. Chapter 9 of the US bankruptcy code can serve as a legal model for the sensible handling of sovereign insolvency. It refers to territorial authorities whose governments are elected and which, in the course of the insolvency procedure, are by no means curtailed in their constitutional powers. Procedures to deal with overindebtedness can be managed ad hoc – without international treaties – if creditors and debtors are politically prepared to accept an arbitration body with an equal number of representatives from both sides plus an additional neutral member. So far, all the decision-making powers rest with one of the two parties: the creditors. The idea of an insolvency procedure for over-indebted countries has become an increasing focus of debate since the Asia crisis, but meets with the uncompromising resistance of the G7 governments. Private creditors, in contrast, are much more open to the idea.

Lukas Menkhoff

Fair Shares for Developing Countries in the International Financial System

There is no doubt that the international financial markets need better regulation in order to make financial crises less likely and their repercussions less detrimental to welfare. The debate about the reforms of the international financial system, however, is excessively oriented towards the priorities of the highly developed countries. The markets are to be made "efficient" in terms of the primary objectives of these countries. Such efficiency is not necessarily in the interest of developing countries as well. After all, in view of their underdevelopment, which can only be tackled over the long term, large segments of their economies are much less able to share in the advantages of "well functioning" global financial markets than companies in the industrial countries. Also, developing countries are much less able to protect themselves against the remaining dangers of crises. They therefore place the priority on different areas of reform than the tone-setting G-5. What is important for them is to maintain traditional credit-granting mechanisms for the foreseeable future, even if they are not up to the demands of the modern financial markets. Their manufacturing companies are also far less able to adapt to rapidly shifting financial market trends than those of industrial countries. It is therefore important for these countries to be able to fence themselves off from the international financial markets to a certain extent. Less free financial markets are more appropriate for them than for industrial countries. Because of their much higher vulnerability, developing countries also have a greater interest in stabilizing macroeconomic intervention in the global financial market activities. For the industrial countries, and the United States in particular, such intervention primarily represents a restriction on their own economic policy options. They are not reliant on the stabilizing effects, for example of exchange rates. An international financial system which neglects the objectives of the developing countries is unfair. No matter how efficient it is in the view of the industrial countries, it cannot meet with acceptance. In order to make it fairer, the developing countries would need to be given a greater say in the current debate about reform.

Carlos Santiso

Development Co-operation and the Promotion of Democratic Governance: Promises and Dilemmas

In the past, the promotion of democracy was based on erroneous approaches, i.e. the identification of democracy with its liberal Western version, the technically abridged equivalence of democratization with the design of institutional models, and the assumption that democratization works in a linear and predictable sequence of stages. In the past, these approaches toward promoting democratization in developing countries and countries in transition were based on a three-pronged democracy template: firstly the promotion of elections and (to a much lesser extent) of political parties, secondly the design of institutions to act as checks and balances for the executive (courts, parliaments, etc.), and thirdly support for civil society. In contrast, too little attention was paid to the costs of democratization in poor countries with many priorities and few resources. Also, assistance towards democratization was provided completely independently of economic development assistance. Now, in the concept of "good governance", which has become more important in terms of development policy, there is an approach which can overcome the separation of political and economic assistance and can place the interplay of economic and political reforms at the heart of development policy. But above all, in its "benign idealism", the promotion of democracy has overlooked the fact that, in the recipient countries, it is working with political power structures which are resistant to democratic reforms and are in a position to undermine them. Those promoting democracy will have to take account of the power relationships and interests in which democratic institutions are embedded.

Harald Müller

Middle Eastern Threats to the Atlantic Community

The Middle East contains some of the most dangerous and longest-burning conflicts in the world. Given the presence of weapons of mass destruction in several Middle Eastern countries, there is a potential threat to countries outside the region. Israel is the only undeclared nuclear weapon state in the Middle East, while Iraq was close to becoming one. Iran is generally regarded as possessing chemical weapons, the same as Syria and probably Libya. Egypt is very active in nuclear non-proliferation, but is working on chemical and biological weapons. In general, proliferation of weapons of mass destruction has been stagnant. Of all conflict scenarios, only one affects a European country in a direct way: Turkey is a potential target for the Iraq and for Syria, due to its role in the Gulf War, to military cooperation with Israel, to incursions into Iraq territory and to the Ataturk Dam project. Another country that has a serious security problem with several neighbors is Iran, and if it remains economically and politically isolated, it is likely to build up weapons of mass destruction. Therefore, a critical policy dialogue seems to be the best way to prevent an escalation that might jeopardize regional stability. A popular scenario is a regional conflict that interrupts the flow of crude oil with devastating consequences for the world economy, provoking a Western military intervention -  i.e. Gulf War, part two. But the highly asymmetrical distribution of destructive capabilities makes this scenario unlikely. While the European countries rely upon diplomacy, arms control and multilateral regimes to defuse the security threats, the United States accept international regimes only as long as they do not constrain American options. In recent years, the U.S. has given priority to military responses. In the conflict over Palestine, Europeans tend to be more critical towards actual Israeli politics than the USA. This includes Israel's refusal to discuss its nuclear policies, which is bound to diminish Arab cooperation with non-proliferation. While the European countries see no immediate threat to their national security coming from the Middle East, the US regards the Iranian and Iraqi missiles as a serious threat that calls for military countermeasures. The US-European disagreement reflects a deep cleavage about principles and visions for a new world order, which could develop into a serious problem for the Atlantic community.

Jürgen Kahl

The Great Leap into Globalization: China on the Verge of WTO Membership

The decision to join the WTO is the most important step towards reform taken by the Chinese leadership since the beginning of economic opening and liberalization. It makes the gradual restructuring of the Chinese economy into a market-based system irreversible. The agreed tariff cuts and the reductions in non-tariff trade barriers will boost competition on the Chinese market. The necessary structural reforms which will go hand in hand with the opening up to international competition will improve the preconditions for sustainable economic growth, but will also bring social hardship with a potentially destabilizing effect. So far, foreign investment and the lion's share of export business has been concentrated on the coastal region, whilst the Chinese hinterland is hardly integrated into these modern trade and investment flows at all. This has exacerbated the regional and social disparities. The liberalization of the internal market will cause further social problems which, in view of the limited scope for the state to alleviate the adjustment process with social transfers, will particularly affect employees of state-owned companies. This will impact on the interests of a part of society which is important for the continuing rule of the Communist Party, and it may lead to significant changes in the political system. Also, the introduction of international standards of law and the breaking up of the links between state/party and commerce will increase the pressure on the Chinese leadership to open up the political system to more codetermination and to bring it into line with the economic system, which will increasingly be directed by independent decision-making and by competition. At international level, China will in future have a say about the rules of global competition. The political weight and the ambitions which China is bringing with it into the WTO as an upcoming economic and regional power will create fresh challenges for the ability of the World Trade Organization to form a consensus and for the functioning of the dispute-settlement process.