Introduction and executive summary
The Bretton Woods Project is an independent NGO established by a network of UK-based NGOs in 1995 to take forward their work of monitoring and advocating for change at the World Bank and International Monetary Fund (IMF). See www.brettonwoodsproject.org/about for more details. We warmly welcome the Treasury Committee’s decision to hold this inquiry, which is both timely and important.
The current crisis shows a profound mismatch between the global reach and interconnectedness of financial flows crossing all national borders, and the absence of any international systems to oversee them. There are two major problems which interacted together to cause the crisis: the failure of the financial regulatory and supervisory systems and the failure of the international monetary system.
Global financial regulation: Financial regulation must prioritise social and environmental goals and understand that a stable financial system is only a means towards these ends. International regulatory standards in their current format are incomplete in scope, are not legally binding, are not specific enough and therefore do not ensure appropriate national regulation. They are not developed in a transparent and accountable manner and most countries affected by them do not participate in their development. This leads to externalities, because countries with important financial sectors do not have to compensate countries harmed by regulatory failures, leading to inefficient low levels of regulation. There is inadequate incorporation of environmental sustainability into regulation. The failure of international regulation has negative impacts on stability, poverty reduction, growth, environmental sustainability, investment and economic development.
There is a need for a new vision of global financial regulation to ensure sound regulation at an international level, what some have called a World Financial Organisation or World Financial Authority. This can be accomplished by reforming the Financial Stability Board (FSB) so that it fulfils the role of a global regulatory authority. Important reforms include increased membership and extensive institutionalised outreach; increased accountability and transparency; and democratic decision-making procedures. Once these reforms have been undertaken, the FSB would have the legitimacy to issue specific guidelines that have to be implemented by national regulators.
International monetary system: The current monetary system creates high costs for developing countries and business and does not adequately deal with imbalances in financial and trade flows. Any reform will need to ensure it is seen as legitimate by all countries, and allows for the policy space needed for economic development in poorer countries.
To reform the international monetary system, countries should agree to create an international currency, international clearing union, and system of globally managed exchange rates. This kind of reform will take time to agree among all countries of the globe, so a process must be launched immediately to begin the negotiations. In the meantime deeper reform of IMF governance is necessary.
Vision of a global regulatory authority
The need for effective and efficient global regulation
The current crisis shows a profound mismatch between the global reach and interconnectedness of financial flows, and the absence of an effective international regulatory regime that could govern them.
The international financial system is regulated by a set of 12 voluntary standards and principles developed by a range of private and public standard setting bodies and multilateral organisations.1 The ones directly important for financial markets cover insolvency, corporate governance, accounting, auditing, payment settlements, market integrity, banking and insurance supervision, and securities regulation.2 Furthermore, the Financial Stability Board (FSB)3 is currently working on standards for compensation schemes and guidelines for the establishment of supervisory colleges and how national regulators should define a ‘systemically important firm’; and the participants of the London summit have agreed to use Code of Conduct Fundamentals developed by the International Organisation of Securities Commissions (IOSCO) for overseeing credit rating agencies.4 Lacking so far are standards for alternative investment firms such as hedge funds, and the existing standards do not cover all important aspects. In the case of banking regulation, for example, Basle II does not cover the problems of off-balance sheets.
Besides the gaps, one should also not overrate the capacity of the standards to ensure appropriate national regulation. Not only are they voluntary, they are also very broad. They take the form of principles, practices and guidelines, whereby, as the Financial Stability Board explains, principles are broad tenets, practices are more specific and only guidelines allow for “objective assessment of the degree of observance”.5 Most of the standards such as the ones governing accounting, market integrity, banking and insurance supervision, and securities regulation, are in the form of principles, i.e. still in very broad form; and the one on market integrity is only in the form of recommendations.6 As the FSB argues, standards are not a guarantee for successful implementation and thus effective regulation by national regulators, since they require interpretation, application, implementation and enforcement.7 This is especially true for broad principles, whose observance cannot be objectively assessed. The existence of a set of principles must therefore not lead to the illusion, that we currently ensure appropriate national regulation through international agreements.
Furthermore, the Financial Stability Board argues that the current standards are “generally accepted by the international community as being objective and relatively free of national biases”.8 However, almost all developing countries and emerging markets are still excluded from the important standard setting bodies or at least their most powerful committees. Currently, only very few countries are members of the Basel Committee on Banking Supervision (BCBS), and many countries are not in the technical committee of the International Organization of Securities Commissions (IOSCO), which is its most powerful body.9 The US-based Financial Accounting Standards Board (FASB) and its international counterpart, the International Accounting Standards Board (IASB), are even more problematic, since they are private bodies with no public accountability. This leads to dangerous externalities, because countries with globally important financial sectors that can and did trigger crises do not have to compensate those countries harmed by regulatory failures. This is not only problematic under aspects of fairness, externalities also lead to inefficient, i.e. too low, levels of regulation.
To counter this lack of international regulation, the G20 have agreed to establish colleges of supervisors for the 30 largest banks. However, these are by no means satisfactory, because they cover only a small portion of international financial flows, and the international colleges do not create any legal rights or obligations but merely facilitate the exchange of information and views. As Lord Turner, chairman of the FSA, has pointed out in his review, the crisis raises question about appropriate regulation of issues relevant for banks “irrespective of whether they operate entirely within national markets or on a cross-border basis”.10 The G20 countries agreed that all systemically important financial firms shall be overseen and that the assessment shall be made according to economic substance not legal form, potentially bringing in firms such as hedge funds. However, colleges of supervisors for those firms would again have no decision-making powers and merely facilitating the exchange of information and opinions.
The lack of an effective international regulatory regime is problematic not only in times of crises. The market for commodities derivatives, for example, is said to have a profound impact on the price level and volatility of underlying commodities.11 Research produced at the Bank of International Settlements has shown that price development in the commodities market is not fully determined by supply and demand but also by speculation, making it less influenced by fundamentals.12 This has a profound impact on producers as well as consumers, of which many live in countries with no or marginal influence over the regulation of these markets, leading to inefficiently low levels of regulation.
To sum up, the current regulatory regime needs considerable improvement regarding content as well as governance aspects. Standards need to be more specific, in the form of concrete guidelines rather than broad principles, they need to be legally binding and enforcement at national levels must be assessed and incentivised at an international level. To ensure adequate levels of regulation, the process of standard settings need improvement in the realm of participation, accountability and transparency. All countries affected by regulation need to have a clear, institutionalised channel of participation in the development of standards, and the process needs to meet high standards of transparency and accountability to ensure the involvement of parliament, other stakeholders, and national constituencies.
Given these weaknesses in the current architecture, we see the need to develop a new vision of how global financial regulation should look like to ensure sound regulation at an international level. Among the first ones to propose a global regulatory authority were Lord Eatwell and Lance Taylor and it has also been backed by economists such as Barry Eichengreen.13 Along the same lines, several UN bodies including the UN Committee for Development Planning and the Secretary-General of UNCTAD have called for a World Finance Organisation14, which could serve as an institutionalised forum for the development and assessment of regulatory guidelines.
Such an authority must aim for regulation that integrates social and environmental goals and understands that a stable financial system is a means towards these ends. The goals of any regulatory authority, including a global one, should not be only the stability of a financial system to enable the individual accumulation of wealth. There must be a wider social remit.
The idea of a global regulatory authority
A global regulatory body could be set up as a super structure under which national regulators still exist but are guided and overseen by an international body. Power should be assigned according to the principle of subsidiarity, ensuring that countries retain as much national sovereignty as compatible with sound international regulation.
A global financial regulator could issue guidelines for regulation that give national regulators sufficient room to respond to national peculiarities, but are more specific than most of the current standards and, most importantly, are legally binding. Monitoring compliance and supervision of day-to-day activities of financial firms should stay with national regulatory authorities.
To ensure that a global authority actually has the capacity to regulate and becomes more than a talking shop, incentive mechanisms for national compliance with international standards and principles have to be in place. Incentives for membership in such a regulatory body and for subsequent compliance could take the form of restrictions for financial firms chartered in non-compliant countries to enter member countries’ markets.
Democratic principles for global regulation
Given the importance and political nature of regulation, such a body must not be run by independent officials but rather be multilateral to ensure accountability to citizens in member countries.
To ensure efficient regulation and tackle current externalities, it is important that global financial regulation, just like national regulation, is decided along democratic lines. This means that those that are affected by regulation should have the power and the right to influence it. This means that in principle, all countries should be able to participate, a demand also made by the President of the UN General Assembly, and echoed by the Secretary-General of UNCTAD.15
However, direct participation in day-to-day discussions needs to be limited to ensure effectiveness. One possibility is that countries are represented by regional multilateral bodies. However, interests and power differ and representation must ensure that poorer countries are not sidelined again as they have been in the IMF. As regional trade and economic integration increases, regional groupings could fulfil the role of representation. The prime example is the EU, with highly integrated markets including in financial services, within which the Commission, overseen by the European Parliament, could be given the authority to represent the EU member states.
Furthermore, voting and other decision-making mechanisms must follow democratic principles. National GDP should not be taken as the criterion for determining voting shares, since the rich countries are, as this crisis shows, not the only nor the most affected ones in a global crisis triggered by regulatory failure. Additionally GDP bears no relation to the subject at hand, as the ratio of the financial sector to GDP varies dramatically across countries. One possibility could be a combination of population size; vulnerability (measured by an index that captures the fact that poor people are hit hardest due to spill-over effects of financial crises into the real economy); and the size of national financial sector (to ensure systemically important markets are engaged). Strong consideration should be given to either positive consensus, or the use of multiple majorities in decision making.
Other key components of democratic governance are accountability (including accountability of country representatives to national parliaments), transparency (working under a presumption of disclosure with very limited clearly specified exemptions), and participation of all stakeholders at the national as well as directly at the international level. This must include the participation of civil society, trade unions, the private sector, and other stakeholders. Additionally, such a regulatory authority could be accountable to a UN body like ECOSOC or the currently discussed UN Economic Council.
The existing international financial institutions all have problems with their governance structures. The World Bank and IMF are dominated by developed countries, and they have used these institutions to push their own agendas. The same is true of the World Trade Organisation (WTO), which has a more equitable governance system, but within which exclusionary meetings and power politics still dominate. For a global financial regulator to have genuine clout it should have a distribution of power markedly different from the existing institutions.
The problem of differentiation
One fundamentally problematic aspect of global financial regulation is that it has to manage a tension. On the one hand, as has been argued above, rules need to be specific enough to render them effective and to set a bottom floor to ensure that countries do not deregulate at the expense of others. On the other hand, countries have very different preferences for the level and content of regulation depending on their overall economic and financial structure, and values such as risk-aversion and degree of state involvement prevailing in society. Developing countries can thus not be expected to implement the same rules as developed countries, and rules implemented in any country should not adversely affect the financial flows needed for development.
One worry about a global financial regulator is that if the governance is dominated by developed countries, it may end up with an institutional bias towards policies that are favourable to developed countries and their large financial services firms. Within a global financial regulator it must be clear that powers to control the capital account and limit financial services liberalisation must remain with countries, especially developing countries.
Therefore, a global regulator should strictly operate on the principle of subsidiarity. Similar to the system in the WTO, rules need to be specific, but exemptions and differentiation must be possible. These, however, should not be purely at the discretion of a country, but need to be negotiated multilaterally, ensuring that rules and exemptions enable, not hinder, prosperity and development in all parts of the world. Basel II, for example, had higher capital requirements for banks not rated by external rating agencies, putting smaller banks in developing countries at a disadvantage. Given that under Basle II unrated banks cannot have a lower charge than the sovereign they are located in, small banks in developing countries had higher capital costs and less incoming financial flows regardless of their actual creditworthiness.16 This example also shows the link between governance structures and rules. Only if all developing countries, not just the big emerging market economies, can affectively participate in decision-making processes, will regulation take into account all costs and benefits.
Some argue that regulatory competition helps to identify successful regulatory strategies and better regulation. However, as the current crisis shows, countries cannot shield themselves from the negative effects of a crisis in another country however well-designed their own regulation turns out to be. To ensure that risk-taking financial activity is beneficial, countries must be able to ensure that they do not pay the price for regulatory failures in other countries. Therefore, they should have a say and share responsibility for systemically relevant firms, markets and products present at the international level.
If decision-making and representation mechanisms in a global regulation authority are democratic and inclusive, people, including British citizens, regain the possibility to influence the decisions that profoundly affect their lives.
Establishing a global regulatory regime: reforming the FSB
Such a regulator is not likely to be founded overnight. To avoid overlapping or contradictory mandates, it is would be easier to reform existing institutions rather than creating a completely new one. The Financial Stability Board (FSB) could serve as a starting point, since it already has some of the responsibilities a global regulator needs. However, several immediate changes are required:
- The FSB should change its current commitment to “open markets” in favour of a more fine-tuned commitment to financial markets that promote development, justice, access and sustainability. It should recognise that greater capital account openness or financial services liberalisation is not always positive.
- The FSB needs to increase participation. Extensive outreach to countries affected by regulatory standards should be guaranteed, institutionalised and becomes rules-based as a first step to improving the current arbitrary and insufficient outreach activities. Membership should be expanded to give affected small countries a voice.
- Transparency and accountability of the FSB need to be radically increased, ensuring that parliaments and stakeholders can effectively monitor FSB activities and provide input. This is especially important given the importance assigned to the FSB at the London summit. Countries need to be mainly represented through ministries that are subject to democratic scrutiny and accountability rather than independent regulators or central banks, which should have a consultative function.
- The chair of the FSB and, depending on his or her responsibilities, also the secretary-general should be appointed in a transparent merit-based selection process, open to all regardless of nationality. Patently problematic rules, such as the appointment of the members of the steering committee by its chair they are supposed to oversee, have to be replaced.
These immediate changes need to be complemented by gradual changes in the mid- to long-term future: If such governance reforms were undertaken, the FSB would have the legitimacy to not only recommend broad principles but to actively regulate systemically relevant firms, instruments and markets.
- The FSB could regulate firms by issuing specific guidelines for regulation to be implemented by national regulators. Implementation should not be voluntary but made legally binding by decision at the FSB.
- The FSB already has the mandate to monitor the work of standard setting bodies (SSBs). This should be expanded to also monitor their governance and set-up. The SSBs should gradually be incorporated into the FSB and subject to the same standards of governance, accountability, transparency and participation. In addition to opening up to more countries, the decision-making process at these bodies should also institutionalise mechanisms for input from civil society and other stakeholders including from other government departments.
- The FSB need to closer cooperate with other international organisations, not only with the IMF but also with the WTO and relevant UN bodies to ensure that global financial regulation is coherent with other international trade, environmental r social agreements and vice versa. Additionally, such a regulatory authority could be accountable to a UN body like ECOSOC or the currently discussed UN Economic Council.
Although we are convinced of the urgent need and principal possibility of a global financial regulatory authority, we are aware that currently the political will to give up sufficient sovereignty is low. However, it is noteworthy to point out that countries have committed themselves similarly in other areas, such as trade, subjecting themselves to legally binding agreements, a one-country-one-vote decision-making mechanism, and a dispute settlement panel in the WTO. This is a long process but first steps and the establishment of a long-term vision should be made now.
Reforms to the international monetary system
While regulatory failure has been a key driver of the crisis, it has interacted with public policy failures in the international monetary system to create the conditions for a deeper and more pervasive economic crash. Distortions and imbalances in the international monetary system, have built up over the last decade. The massive current account surpluses in some countries have fed the liquidity of the financial system, pushing financial ‘innovation’ that attempted to satisfy the search for profit from an increasing large pool of investable resources.17
The current international monetary system has negative effects on both developing countries and business investment globally. Volatility and the speculation that ensues only benefits traders who profit from volatility, while creating enormous costs. The system needs reform in order to make it more development-friendly and more stable. One of the key ways to do this is through the creation of an international currency, international clearing union, and system of globally managed exchange rates.
Problems with the existing system
Effect on business investment: Even in times of relative global stability, volatility in exchange rates damages economic planning and investment in rich and poor countries. Business investment often requires several years if not more to recoup costs and start generating profits. Sales and income growth for businesses often come through exports. If there is a lack of stability in exchange rates, businesses must either undertake costly hedging strategies to manage exchange rate risk, or plan on volatility and incorporate that risk into their projections. In either case, investment will be lower, because investments which might be profitable with stable exchange rates, will either be unprofitable, or not undertaken by risk-averse investors. This reduces job creation, growth, trade and economic development.18
Risks to developing countries: Developing countries and small economies are extremely vulnerable to swings in their exchange rates. One need only think of Europe to realise the benefits of stability in exchange rates. A country like Ireland, had it not been in the eurozone, would have been forced into a destabilising and damaging devaluation of its currency. Smaller developing countries are even more susceptible to this problem in times of crisis. This devaluation increases foreign debt service and makes imports, including of essential commodities more expensive. The small nature of the markets in most developing countries’ currencies also makes them susceptible to speculation and even manipulation of currency markets. The flows of “hot money” into and out of countries increase the risk of financial and economic crisis. Crises of these sorts have devastating social impacts, increasing poverty, worsening human development, and reversing the gains of economic development.
Costs to developing countries: Aside from the costs of volatility in exchange rates, the current system has direct costs for the governments of developing countries. Assets held in reserves are by definition those not used to finance productive activity, including investment in infrastructure, education, health or other activities which have long-run benefits in terms of growth, productivity, and employment. Additionally the accumulation of large balances of reserves affects the domestic monetary supply, and to counteract inflation, countries will have to undertake ‘sterilisation’. This has a direct cost to the country concerned, as generally the interest a government must pay on the domestic debt that that is issued in the sterilisation operation, is higher than the interest received from the holding of foreign currency-denominated assets. This may seem like a small differential, but as countries hold large volumes of reserves, these costs have increased significantly.19
Accumulation of reserves: Developing countries have accumulated large stashes of foreign currency reserves for a number of reasons. One of the primary reasons was wariness about the IMF. During the Asian financial crisis from 1997-8, the IMF was perceived to have required policy changes that were detrimental to Asian countries, forcing devaluations, causing massive unemployment, corporate bankruptcy, and poverty. This has pushed countries, particularly in Asia, to opt for self-insurance in the form of foreign reserves rather than relying on the IMF as a crisis resolution mechanism. This is compounded by the perceived lack of legitimacy of the IMF’s governing structure.20
An additional reason for the large accumulations of foreign exchange was an economic model oriented toward exports. This model was part of the Washington consensus heavily pushed by the World Bank and the IMF. Investment is predicated on achieving exports and thus profitable investment for export will push trade imbalances. While export-oriented growth has achieved remarkable results in some countries in East Asia, it also created vulnerabilities to economic growth in the case of export market slowdowns. The export oriented model creates the modalities by which current account surpluses flourish and foreign exchange reserves are built.
Limits of IMF influence: Since the end of the Bretton Woods exchange rate system in 1971, the IMF has not had the ability to concretely influence the policies of rich countries. The last time the IMF put conditions on a developed country (before the Iceland loan of last year) was in 1976 when Britain went to the IMF. Since then, the free-floating of exchange rates and ability of rich countries to raise balance of payments financing on credit markets has meant that the IMF does not lend to rich countries, and thus can not use conditionality. There is no mechanism except persuasive power to influence rich country policies. In the context of global imbalances, despite repeated exhortations to rich countries to rein in current account deficits, they have not taken action.
The IMF did institute a new process called “multilateral consultations” in early 2006, and undertook a year long exercise with US, China, Japan, the euro zone and Saudi Arabia in order to address global imbalances. In the end the consultations yielded many policy recommendations but few concrete actions.21 The Turner Review by the Financial Services Authority has also identified that IMF analysis is subject to political influence so that it “fit[s] in better with dominant intellectual assumptions and … avoid[s] overt criticism of major powers.”22 Without independent, sanctioning power the IMF will be unable to address imbalances and thus not able to mitigate the risks that they create.
International spillovers: The policies of major economies, as the issuers of reserve currencies, have international spillovers, which those countries are not forced to think about when they decide their policies. For example, changes in interest rates of the major reserve countries are usually targeted at domestic price stability and, in the case of the US, domestic unemployment. However those interest rate decisions have enormous impact on developing countries’ access to and cost of capital.23 There are worries that increased borrowing by highly credit-worthy countries to finance fiscal stimulus may mop up liquidity in the market and increase the costs of developing country sovereign and corporate borrowing. The IMF has no way force rich countries to think about the international impacts of their domestic policies.
Issues that need to be resolved
The IMF is the institution that was created to manage the international monetary system. However, its governance has not kept pace with changes in the world economy. Thus its voting rights are dominated by rich countries, despite having most of its operations in emerging markets and low-income countries. This democratic deficit, combined with the perception that its prescriptions in the Asian financial crisis were influenced to the benefit of rich countries, has reduced the IMF’s legitimacy. With a lack of legitimacy, it will be difficult to give the IMF greater control or power in international monetary arrangements.
The changes to IMF governance that were agreed in April 2008 are too small to overcome the perceived lack of legitimacy. Less than 3 per cent of the IMF’s votes will be shifted from rich countries to low- and middle-income countries. Belgium, with a population of 10 million, will still have more votes than G20 members Brazil (200 million people), Mexico (111 million people) or South Korea (48 million). Additionally the changes did not address the composition of the IMF executive board or the lack of transparency and accountability at all levels of the institution. Adequate reforms must be in place before the IMF can resume a leading role in managing any international monetary system, including one with a supra-national international reserve asset (see paras 46-50).24
There is also a clear need for any reforms to the international monetary system to take into account the different needs of different countries. At different stages of economic development, there are different concerns, including the balance between inflation, investment and employment creation. The size of economies also differs, meaning that some will be more at risk from currency speculation or hot money flows, while others will have more scope to manage such concerns. The system needs to be rules-based, but will need to have flexibility for countries in different circumstances.
Whatever the reform to the international monetary system, the international body that is tasked with implementing any aspect of the system must be accountable to both its members and to a broader set of stakeholders. A lack of accountability is a recipe for inappropriate, ineffective and inefficient policy-making. The IMF has some accountability to its members, but none to stakeholders. For example in the UK, Her Majesty’s Treasury is supposed to report annually to parliament on its activities at the International Monetary Fund. However, HM Treasury has not yet submitted the report for calendar year 2007, let alone 2008.25 There is clearly scope for creating more accountability.
Potential reforms to the system
In 2007 the IMF rewrote its surveillance decision – the framework under which the IMF analyses country’s exchange rates and economic policies.26 It included the concept of “fundamental exchange rate misalignment” but did not agree any sanctions for countries that had misaligned exchange rates (either overvaluation or undervaluation). In the same year, the IMF’s Independent Evaluation Office (IEO) issued a report about the IMF’s exchange rate surveillance. One of the clear subtexts of the report and subsequent discussions was the accusation that exchange-rate surveillance was not even-handed simply because the IMF has no ability to influence the exchange rate policy decisions of advanced economies. The evaluation finds: “The reduced traction is in danger of being extended to large emerging market economies, and beyond. Such an evolution is corrosive, breeds cynicism amongst the staff as well as the members, and builds on perceptions of a lack of even-handedness.” Some have proposed that the IMF strengthen its exchange rate surveillance as the mechanism for helping to resolve global imbalances, but without sanctioning power, this is unlikely to be effective.
The current crisis has helped to revive interest in the original proposals made by John Maynard Keynes in the run up to the creation of the IMF in 1944. In a government White Paper (CMD 6347), the UK treasury set out its proposals for an international currency called the ‘bancor’ and an International Clearing Union which would settle transactions in this currency. The bancor would have been based on a basket of commodities prices, giving it a basis in the real economy, and not just a basket of currencies.
The clearing union idea effectively removes the holding of foreign exchange reserves, and replaces it with a system whereby balances are managed by the clearing union. These balances would be denominated in the bancor. Persistent large trade surpluses and deficits would be penalised by an interest charge, providing incentives for both surplus and deficit countries to change policy to eliminate the imbalances. Notional exchange rates would be changed, by mutual consent at the clearing union, based on trade balances. This is roughly how exchange rates were managed under the Bretton Woods system that was in operation from 1945 to 1971, with the exception that the balances were denominated in dollars that were backed by gold. Keynes’ ideas remain an excellent basis to start a new discussion, but need updating in the context of freer mobility of capital and international financial flows. The basic proposals would be workable only if countries with freely floating exchange rates are willing to move away from such a system.
The UN Conference on Trade and Development (UNCTAD) has long argued that the current international monetary system is detrimental to development prospects of developing countries. In a mid-March report27, UNCTAD wrote: “Multilateral or even global exchange rate arrangements are urgently needed to maintain global stability, to avoid the collapse of the international trading system and to pre-empt pro-cyclical policies by crisis-stricken countries.” In the absence of a global system, regional currency arrangements, such as the euro, can help moderate risk and improve the ability of countries to manage volatility.
In March, the governor of the Peoples Bank of China published a paper calling for reform of the international monetary system.28 He argues for “an international reserve currency that is disconnected from individual nations and is able to remain strong in the long run, thus removing inherent deficiencies caused by using credit-based national currencies.” However, governor Zhou calls for a gradual process that would begin with giving the IMF’s special drawing right29 (SDR) a greater role, including larger allocations, a settlements system, the use of SDRs in trade and commodity pricing, and financial assets denominated in SDRs.
The UN General Assembly president’s commission of experts on financial reform, a task force of economists and policy makers from around the globe that was chaired by Nobel laureate Joseph Stiglitz, also recommended the creation of an international reserve currency.30 “The global imbalances which played an important role in this crisis can only be addressed if there is a better way of dealing with international economic risks facing countries than the current system of accumulating international reserves.” The committee concluded: “To resolve this problem a new Global Reserve System—what may be viewed as a greatly expanded SDR, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations—could contribute to global stability, economic strength, and global equity.” [original emphasis]
The current crisis has shown that the system has failed to deliver on many of its objectives. While the persistent under-development and under-investment in developing countries was evidence of this, the crisis has also demonstrated that it has not worked for rich countries, where massive losses due to risky financial activity are being socialised and economies are entering deep recessions. As the economic hegemony of the US wanes, there is a practical limit to how long the anachronistic system of a single country’s currency serving as the vehicle for all global reserve holdings can be maintained. The creation of an international currency, international clearing union, and system of globally managed exchange rates should be on the agenda.
In times of crisis there is much greater political will to undertake reform. Agreement on ambitious reforms such as these will take considerable negotiation. If the run up to the Bretton Woods conference in 1944 is any guide, it will take two years of work. A fair, transparent process will be needed to undertake these negotiations: one that involves all countries of the world, and is open to civil society and parliaments, under the auspices of the United Nations. This has been demanded by thousands of civil society organisations31, but as of yet this call has not be heeded by the leaders of the G20.
Given that the IMF will likely be at the centre of any international monetary system, a profound reform of its governance is needed even more urgently.32 Following up on our evidence to your inquiry on the IMF in 2006, the following actions are needed:
- The IMF should adopt a double-majority voting system as an interim step to a more comprehensive reform leading to the inclusion of population size in determining voting shares.
- Leadership selection, for all management and director level positions, should be transparent, open and merit-based, without respect to nationality.
- All executive board chairs should be elected, express their position with formal votes rather than informal indications, and be subject to democratic accountability. The UK should step forward by abandoning its appointed chair in favour of elections and push on a European level for a consolidation of European seats on the board.
- The IMF should increase transparency, quickly publish transcripts of IMF board meetings and draft policy documents, work under the presumption of disclosure and base exemptions on a clear description of the harm of disclosure, keeping them to a minimum.