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IFI governance

Background

The UN conference and the G20 summit

Civil society policy forum discussion on 3 October 2009

4 October 2009

Moderator: Bhumika Muchhala, Third World Network

Speakers: Jomo KS (UN DESA); Prof. Joseph Stigtilz (IPD)

 

Bhumika:

  • G20 3 conferences, is a broadening, is it legitimate? Does it address needs?
  • UN conference from June 25-8 – legitimate and inclusive, consensus achieved
    • Shows that UN is reasserting itself
    • only forum to look exclusively at developing countries
  • G20 did notable work, but striking absence of critical issues – like debt distress, financial protectionism, IMF conditionality, transformation of the global reserve system

 

Joseph Stiglitz

  • Difference between UN and G20 is 172 countries – these are important. No LICs, only one SSA country, but South Africa is sui generis not represented
  • G20 is a strange basis for governance
    • Suggest a global economic coordinating council with a constituency system
  • G20 strategy to give more money to IFIs just burdens countries with debt burdens
    • This is a long-term downturn, but being addressed with short term loans
    • Needed grants rather than loans
    • Still there is stigma to take money from the IMF – political consequences
    • The delay can be very costly as countries try to avoid the IMF
    • Still controversy over whether the IMF has given up traditional austerity policies
    • Remember IMF pushed deregulatory and liberalisation policies that were responsible for crisis spreading rapidly
    • We called for utilisation of a diversity of instruments to give grants, plus a new credit facility with a different governance model
  • On IMF governance – 5% shift of voting will not change any decisions. It is too small and too slow. It will set a poor model for others
    • Confidence is slow low in IMF, that countries go to other country central banks for funds – undermining the multilateral system
  • We all agree on the need to regulate the financial system
    • We begin with an analysis of the purpose of the financial system – the G20 never addresses this; a look at this would indict the current system.
    • G20 fingered “non-complying states”, but offshore had nothing to do with the crisis.
    • Tax evasion and corruption are of concern to developing countries – finally we had some discussion of this in Pittsburgh
    • We have not done enough in reform – it won’t prevent the crisis; focus on incentives in Europe but the US is still resistant
    • On “too big to fail” problem – situation is worse now than a year ago. Banks are bigger, too big to resolve a bankruptcy – extended the corporate safety net much broader than anyone thought possible. So moral hazard problems are greater than before
    • Nothing done on leverage, nothing done on CDS either
    • Agenda of capital and financial liberalisation is flawed, but G20 didn’t want to talk about it. Single market thinking in Europe failed. Need to move from home country regulation to host country regulation. And rethink liberalisation
  • Other topics not discussed at the G20 – both diagnostics and policy response
    • Insufficient aggregate demand – need to know why: increase inequality
    • Massive reserves – paradox of thrift on a global scale: so need to address global reserve system
    • Big market failure in terms of debt creation: need a restructuring regime for countries

 

Jomo KS 

  • Bretton Woods was a “United Nations” conference – a redefining moment
    • recognised failure of League of Nations, eschewed bilateral/cozy arrangements, commitment to inclusive multilateral processes
    • Attempt of US to balance budget in the middle of the Depression plunged the economy again; US also a model for green jobs at the time
    • BW was for sustained growth and job creation
    • Of 44 countries, 28 were developing, 19 from Latin America; also included countries under colonial rule
  • Post-war order was a golden age, sustained growth, economic recovery, including for those that got early independence
  • Then we had a non-system
    • BW system came unstuck because of problematic global reserve system, US deficits
    • “Interim” committee lasted for decades and Fund sought new role
    • 97% of cross-border transaction did not involve real economy in 1986; up to 98% by 1997.
  • Financial globalisation and liberalisation hasn’t had positive effects on development – even IMF research showed this
    • Capital was flowing uphill! To rich economies
    • Cost of funds for developing countries did not go down because more levels of intermediation – financial rents have significantly increased
    • More volatility, increased frequency of crisis
    • Transition economies moved this way even faster than others – had lots of short-term flows
  • Impacts on developing countries
    • Higher cost and unavailability of credit
    • Reverse wealth effect – inequality, power asymmetries
    • Export oriented countries hurt by loss of demand, including commodities
      • SSA grew for 5 yrs before crisis because of high commodities prices
    • Delay in stimulus measures mean even greater delay in recovery; lag between output recovery and job recovery
    • Overinvestment problem and excess capacity means reluctance to invest – will also delay recovery
  • Who saw this coming?
    • BIS, UNCTAD, UN DESA – G24 published work on sub-prime in Q2 07
    • IFIs failed to prepare the world, but there has been a coup for G20 to seize leadership
  • Global governance
    • L20 (not G20) – plus Spain and Holland; but others kept out
    • G7 coup in Pittsburgh – reasserting itself through the G20
    • GECC: Merkel, Singh, had all talked about this; Dervis wanted an L27 (half size of ECOSOC) with accountability and representation
    • UN Commission report remains main statement of an alternative

 

Discussion

From Serbia – elaborate on bilateral swap lines please; Glass-Steagall – would it help to rebuild the system; Bancor versus dollar – politics won then and will win now won’t it?

Max Lawson – taxes on financial services – are there really technical obstacles that can’t be overcome?

Questioner – more details on the global reserve system?

Soren Ambrose – what is next on follow-up mechanism for global reserve system?

Stiglitz – US is not totally enthusiastic about global reserve system, but some people realise advantages – macro management problem is costly for the US

  • Two or three ways to move forward – countries are already moving out of the dollar; question is orderly or disorderly?
  • Two currency (_/$) solution is not stable; Maastricht parameters means it would be a disaster for Europe
  • Bottom-up approach – Chiang Mai, SUCRE
  • International approach like BWII, mildly optimistic, Chinese support
  • Details – issuance, distribution, conditions; rules based system is good
    • Tax excess surplus countries? Use it to finance global public goods like climate mitigation?
  • Bilateral swap lenders – US and China
  • Glass-Steagall is central and shouldn’t have been repealed – conflicts of interest; risks from losses to ordinary people’s money; excessive bank growth
    • Economies of scale and scope? No evidence, downsides very large
  • FTT – basic concept makes sense; bloated fin sector is a symptom of negative externalities
    • Evasion? I think you can with modern technology, but it wont be easy – need to figure out appropriate base of the tax on derivatives
    • All transactions are electronically recorded, esp because of enforcement need
    • Higher tax on derivates may not be that terrible a thing

Sony Kapoor – regulatory changes may have negative impacts on developing countries

Fraser Reilly-King – Chiang Mai – evolution? Not used yet? Why?

Stiglitz – right to be worried on regulation; Basel I had problems; Basel II also was discriminatory; so not being at the table raises problems

  • Basel II led us to this mess; we should not resuscitate; we need to identify discriminatory issues and bring them out more clearly
  • Chiang Mai – if you draw a significant amount you have to go to IMF, this is politically unacceptable in Asia – there is a discussion to get rid of it