International economic architecture: cleaning up the mess?

27 November 2008

The G20 group of large economies met in Washington on 15 November to discuss reform of the international economic architecture, but the summit failed to live up to the ‘Bretton Woods 2’ label some had given it. As the economic crisis continues to unfold, pressure for fundamental change to rebuild and repair the crumbling financial and economic architecture can only continue to grow.

Bretton Woods 2 build up

Over the summer, pressure began building in official circles for a new Bretton Woods-style conference to restructure the international financial architecture. A June Commonwealth statement called for such a conference, and was echoed by the draft document for the UN’s Financing for Development conference in Doha, due to start on November 29 (see Update 62). In early October, the calls were made publicly by leaders of several big European countries, including France, the UK and Germany, as well as by Brazil and UN Secretary General Ban Ki-Moon, among others.

The sudden rebirth of enthusiasm for redesigning the economic and financial architecture reflects the now mainstream view that the current crisis has highlighted the failures and weaknesses of existing institutions. As Russia’s finance minister Alexei Kudrin said: “We are absolutely sure that today the current system of institutions used for crisis settlement, including the IMF, are inadequate.”

G20 steps in

The week before the World Bank and IMF annual meetings in October, World Bank president, Robert Zoellick said “the G7 is not working”, but dismissed the G20, calling it valuable but “too unwieldy in moving from discussion to action.”

Until recently, few people had heard of the G20. Now this group of the world’s largest economies – the G8 plus some emerging markets (Brazil, India, China, Argentina, Turkey, South Africa, Mexico and Indonesia) and other OECD countries (Australia and South Korea), as well as Saudi Arabia and the EU – has been thrust into the limelight. The World Bank and the IMF leaders have been invited to join the G20 table for discussions on the financial crisis.

Calls by civil society and others for an inclusive, UN-led process have so far been resisted, with the G20 being the likely locus for future international summits. Before the November summit, IFI watchers and debt activists launched a global sign-on letter to governments about the process for designing a new international financial architecture. The statement, signed by more than 850 civil society organisations, supports a UN-convened conference, but only if the meeting is: inclusive and participatory of all governments of the world; includes external stakeholders; has a process for regional consultations; is comprehensive; and is transparent, with proposals and draft outcome documents made publicly available and discussed well in advance of the meeting.

US president Bush spurned the offer from the UN secretary general to hold the G20 conference at UN headquarters in New York. Previously only a meeting of finance ministers and central bank governors, the November G20 meeting was held at head of state level. Future meetings will follow suit.

Little concrete agreed

Despite being billed as a ‘Bretton Woods 2’ meeting, the first G20 heads of state meeting in Washington in mid-November resulted in few substantial agreements, and was criticised for an opaque, closed preparation process.

Immediate and medium term actions have been proposed in the G20 statement, but most raise problems rather than proposing specific solutions. Finance ministers are tasked with coming up with additional actions in a number of areas, including: “reviewing the mandates, governance, and resource requirements of the IFIs”. A revival of the Doha ‘development’ trade round is also promised by the end of the year.

Poverty reduction and climate change merit only a passing reference. By addressing short-term and limited financial sector reforms first, the G20 risks a repeat of the mistake made in the wake of the Asian financial crisis, a loss of momentum. If the leaders fail to address the systemic issues now, political will may be lost after lengthy negotiations over tweaking financial regulation.

Most of the focus of the declaration for the heading “strengthening transparency and accountability” is on accounting standards. Agreement was reached to “address weaknesses in accounting and disclosure standards for off-balance sheet vehicles” and regulators asked to “ensure that … financial statements include a complete, accurate and timely picture of the firm’s activities.” The inadequacy of the current governance structure for accounting rule-setting – standards are set by the industry body the International Accounting Standards Board (IASB) – is only hinted at.

Despite “sound regulation” being the longest section, little concrete is agreed. Most ‘actions’ are really a list of issues for further examination or regulation, including on: credit ratings agencies, capital adequacy requirements, credit default swaps and over-the-counter derivatives.

Under “promoting integrity in financial markets” the focus is, indirectly, on tax havens. In the medium-term “measures to protect the global financial system from uncooperative and non-transparent jurisdictions” are called for. “Lack of transparency and a failure to exchange tax information should be vigorously addressed.”

The shortest section was “reinforcing international cooperation”. “Supervisory colleges for all major cross-border financial institutions” are proposed, though their role seems to be little more than meeting regularly with banks to discuss risk.

Under “reforming international financial institutions” there is support for enhanced roles for the World Bank and International Monetary Fund throughout the declaration. The statement says that “the Bretton Woods institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy” and the need for “emerging and developing economies [to] have greater voice and representation.” However, even the Europeans, the most opposed to significant IMF governance reform over the past two years, have publicly proclaimed the need for reform. Some will be sceptical about whether the statement will amount to more than rhetoric.

More money for both the Bank and IMF is hinted at: “We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary.” Through the expanded Financial Stability Forum (FSF, see related article) , the IMF is asked to “take a leading role in drawing lessons from the current crisis.” No mention is made of who will be asked to join the expanded FSF, though it is clear that it will only be large emerging markets and will exclude the smaller and poorer economies that are currently facing economic crises due to the global events.

What happens next?

G20 governments, swept off their feet by the financial crisis, were never going to be able to reach a consensus on deeper reforms within the few weeks taken to prepare the summit. Critics argue that the G20 can never tackle this agenda alone.

As Miguel D’Escoto, president of the UN General Assembly said: “Only full participation within a truly representative framework will restore the confidence of citizens in our governments and financial institutions.” He continued, “Solutions must involve all countries in a democratic process.”

The ten member commission of experts on reforms of the international monetary and financial system, established by D’Escoto in October and led by former World Bank chief economist Joseph Stiglitz, is expected to release a report by February next year. Most of the commission members participated in a meeting chaired by Stiglitz the day before the G20 summit. The one-day conference at Columbia University included 55 regulators, policy makers and academics. Its statement established key principles for regulatory reform which included the need for comprehensive coverage of all financial activity and for a global regulator with broadly inclusive participation.

In addition, Commonwealth Ministers agreed at a meeting in St. Lucia in October to establish consensus on objectives of the purpose and governance of the Bretton Woods institutions. Immediate attention now turns to the upcoming UN Financing for Development conference which begins on 29 November in Doha. Rumours that the G77 group of developing countries have threatened to boycott the conference show how angry they are about both the spillover impacts of the crisis and the efforts by rich countries to block changes they really want.

The next major dates are the follow up G20 meetings. The G20 heads of state have committed to meet on 2 April 2009 in London as the UK holds the rotating G20 chair that year. The finance ministers have committed to meet before that, but no dates or locations have been set. There is also no public information about the promised technical working groups.

One thing is certain; as the crisis deepens, public pressure will grow across the world to fix the underlying problems, not just clean up the mess.