IFI governance


New international economic architecture

No shortage of blueprints

27 November 2008

The financial and economic crises have brought out a plethora of ideas for reforming the international financial architecture. Below, we highlight a few of the many different blueprints.

Even those responsible for creating and safeguarding the economic system have said the whole system should be reconsidered. Simon Johnson, former chief economist of the IMF claimed that “everything’s on the table” and the European Central Bank President Jean-Claude Trichet said “there must be no taboos”. Which ideas gain the most credence over the coming months will matter enormously.

Jose Antonio Ocampo, former UN undersecretary general for economic and social affairs, wrote: “The current financial crisis has made the need for reform of the international financial architecture patently clear. But any summons to a ‘Bretton Woods II’ conference must be concrete in its content. A global system for prudential regulation and supervision; a revamped IMF managing a global reserve currency, coordinating global macroeconomic policy, and providing agile credit lines; and an international debt court – all of these must be on the agenda.”

Global Monetary Authority?

Jeffrey Garten, a professor at Yale, argues: “The current global institutional apparatus is woefully incapable of overseeing the financial system that is evolving. The International Monetary Fund is irrelevant to this crisis, the group of seven leading industrial countries lacks legitimacy… and the Bank for International Settlement (BIS) has no operational role. The US Federal Reserve is too besieged to act as a global central bank. That vacuum at the centre is dangerous for everyone.”

His proposed Global Monetary Authority (GMA) would be a “reinsurer or discounter for certain obligations held by central banks, scrutinise the regulatory activities of national authorities with more teeth than the IMF has and oversee the implementation of a limited number of global regulations.” It would also monitor global risks, establish an effective early warning system, and act as ´bankruptcy court´ for global companies.

What to do about banks?

Others have proposed a new international institution to deal with banking regulation and oversight. This new institution would then set global rules which could be enforced at the national or international level. This idea is supported by UK-based NGO Oxfam: “This new institution should act counter-cyclically, ensuring money is put aside during good times, and is released during slowdowns in order to minimise boom and bust. It should also be comprehensive; new rules should cover not just banks but also the parallel financial system, including hedge funds and private equity funds. Some first steps should include applying stricter international capital reserve requirements and stronger transparency rules.”

University of California professor Barry Eichengreen has supported this idea in a modified format – a voluntary arrangement only for those countries whose financial institutions are seeking access to foreign markets. He proposes obligations for supervision and regulation, but not hard rules, so that it would “permit regulation to be tailored to the structure of individual financial markets.”

Paul de Grauwe of the University of Lueven in Belgium advocates instead “returning to narrow banking”, meaning much stricter limits on commercial banks, preventing them from investing in equities, derivatives and structured finance products. Financial institutions not declaring themselves commercial banks would be required to ensure that the duration of their liabilities would be at least as long as the duration of their assets. This banking model would have to be “embedded in an international agreement” in order to “avoid a classic regulatory race-to-the-bottom”.

US officials have thrown cold water on such proposals, and the biggest blockers are likely to be the United States and the United Kingdom, the countries with the biggest financial sectors. One US official said “we believe there is little support … for empowering a single global authority to regulate all of the world’s financial markets.”

IMF to the rescue?

In September, at the height of the financial panic, former IMF managing directors Horst Kohler and Michel Camdessus called for a stronger Fund. Camdessus declared “it was obvious we must broaden the competence and jurisdiction of the IMF into financial transactions.” This has now been echoed by the G20 declaration from the mid-November summit in Washington. Unsurprisingly, IMF managing director Dominique Strauss-Kahn has been an enthusiastic advocate. “Finance should be controlled,” he said. “We are ready to do it if someone gives us the mandate.” A former socialist party leader in France, Strauss-Kahn also said “we must stop the financial market anarchy: the lack of transparency, greed and irresponsibility of a system which has lost touch with the real economy.”

For several years UK prime minister Gordon Brown has been calling for an “early warning system” to detect troubles before they start. Catchy title aside, the proposal amounts to little more than making sure national bank regulators and supervisors talk to each other, using the IMF as the talking shop. Such a ´college of supervisors´ approach would do little in terms of regulating cross border action, and nothing to tackle unregulated bodies. In fact the UK was instrumental in watering down EU joint position in advance of the G20 summit, ensuring that any mention of ´regulation´ was modified to include “.

In a speech to the UN in late September, Australian prime minister Kevin Rudd called for “globally agreed best practice standards of financial regulation” which would be “assessed by the International Monetary Fund.” This is basically what the IMF does already through its voluntary Financial Standards Assessment Programme (see Update 58, 57).

However, the IMF has also been the locus of blame for developing countries and many others. Even the IMF’s former chief economist Raghuram Rajan has been critical about the IMF’s role in the crisis so far: “the Fund has been represented in absentia”. The Commonwealth finance ministers statement just before the October annual meetings blamed the IMF’s surveillance of rich economies: “It has followed its traditional role of endorsing the moves of the G7 after the fact.” Without any real power to discipline rich countries, it is unclear that the IMF would ever be able to be more effective at this.

What to do about currencies?

Vijay Joshi and David Vines of Oxford University lay the blame for the crisis at the door of the monetary system not the financial one, but their prescription is unlikely to find favour with China, a pivotal player in negotiating any new architecture. They call for the IMF to “determine the appropriate exchange rate values for countries” and to “be given the power to require countries not to intervene in such a way as to steer their exchange rates away from these fundamental values.” This would be coupled with the IMF having the power to create its own currency. They hope to remove the incentive for countries to self-insure by building up large currency reserves.

Michael Bordo of Rutgers University and Harold James of Princeton have rehashed the idea that the IMF should be a global asset manager (see Update 59). This proposal is designed to take the strain off of the global system caused by the accumulation of large reserves. Countries would deposit their reserves with the IMF who would then manage the resources. Both the Joshi and Vines and the Bordo and James proposals would require developing countries to regain trust in the IMF, meaning significant governance reform.

Regionalism to the rescue?

A lot of store has been put into regional institutions and solutions, often following the euro model. The Japanese have been particularly strong proponents of an Asian common currency.

Though a common currency might be the long term goal, the Asian region has moved ahead on reserve pooling , creating a de facto Asian Monetary Fund (see Update 61). Thailand has committed to formally launch the multilateralisation of the Chiang Mai Initiative – now being dubbed ´self-managed reserve pooling´ – during its ASEAN presidency in 2009. Yung Chul Park of Seoul National University has said that to be effective such a pool of reserves in Asia needs to be much larger and not tied to IMF policy conditionality.

People-centred alternatives

Most mainstream ideas fail to live up to the ambitious goals of social movements and NGOs. The International Trades Union Congress (ITUC) issued its ´Washington Declaration´ just in advance of the G20 summit, calling for “an end to an ideology of unfettered financial markets”. The ITUC takes particular aim at inequality: “The new system of economic governance … must ensure more balanced growth in the global economy between regions, as well as within countries, between capital and labour, between high and low income earners, between rich and poor, and between men and women.”

A raft of demands have been made by NGOs including the European ATTAC network, the global BankTrack network, groups attending the peoples´ alternative event to the Asia-Europe summit in Beijing, and the global network of IFI watchers and debt activists. Though differing on how far to clamp down on different kinds of speculation and activity in the financial sector, they all have common messages.

First the governance of the global financial system, including negotiations about its reform, must be made much more democratic, accountable and inclusive. The economic system must no longer solely be based on the profit motive, but must also focus on equality, stability, justice, and fairness. And finally, environmental sustainability must be at the core of any new architecture, so that both short-term economic stimulus and long-term investment is directed at creating low-carbon economies.

Pushing for change: how to get involved

In addition to developing and debating ideas and proposals such as those above, NGOs and civil society organisations are actively developing strategies, lobbying, campaigning and mobilising to ensure that reform of the international financial architecture puts people and the planet first.

At international level, two global sign-on statements have been organised and supported by hundreds of organisations and networks from across the world. There are also active listservs at international, European and national levels, for sharing information and discussing strategies and ideas. Use the link below to our regularly updated web page to find out all the latest information.