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August 2000

IMBALANCES IN GLOBAL FINANCIAL REFORM

In the discussions and processes in reforming the ‘global financial architecture’, there are unfair imbalances and asymmetries in the different treatment given to issues of interest to developed and developing countries, as well as debtor and creditor countries. A recent United Nations meeting in Jakarta brought up these imbalances. (This is the second of two articles)

By Martin Khor

Third World Network Features

The United Nations regional meeting in Jakarta in early August heard a panel of experts analysing how the process of reforming the global financial system is taking place in an imbalanced way.

There is an unfair imbalance in that the demands and issues of developed countries are being stressed whilst the developing countries’ issues and interests are ignored.

Ariel Buira, Mexico’s Ambassador to Greece and former Deputy Governor of Bank Mexico, said it is recognised today that all is not well with the global financial system. The role of the international financial institutions and the conventional wisdom of the Washington Consensus are both being questioned.

‘We have an international monetary system that is crisis-prone,’ he said, pointing to the currency crises in Europe (the crisis of the early 1990s in Italy, Spain, the UK and France), Mexico (1994-5), Asia (1997-8), Russia and Brazil.

‘Private capital flows can destabilise any economy by being too big or too little. We have failed to put reforms in place. We are not sure there won’t be a crisis in the coming months or years.’

Buira said there have been some changes in a somewhat reluctant fashion. Capital controls to avoid excessive inflows, that some countries have instituted, have become increasingly acceptable, with the IMF becoming a little more tolerant.

A report of the US Council of Foreign Relations had favoured this measure, and even US Treasury Secretary Larry Summers had said it may be useful in some cases.

Buira recounted how the IMF and US policy-makers had pushed for capital liberalisation (or the free movement of funds into and out of a country).

He said a New York Times article revealed how the then US Treasury Secretary Robert Rubin prevailed to persuade President Clinton to press the IMF to promote capital account liberalisation.

The article suggested there were strong interests in Wall Street pushing for capital account liberalisation. This had precipitated such liberalisation when the conditions to absorb it were not present.

On the issue of debt ‘bail-out’ and ‘bail-in’ of the private sector, Buira said that people who lend or invest in developing countries earn high premium because of the high risk.

He said in Mexico and other countries, the rescue packages had been aimed at rescuing creditors, who took no loss. They had obtained the high benefit of premia but did not face any loss (when the countries went into crisis). He added this was the real issue of ‘moral hazard’.

Buira suggested that in the reform process, the question is how to move from bailing out the private sector to bailing in the private sector.

He added that since the crisis had to do with capital flows, there were two choices in coping. The first was to provide unlimited support or huge amounts of funds to the affected country, which then would not run out of reserves (in supporting its currency) and this would thus discourage further speculation as the speculators would not be able to gain.

The second was for the country to stop or temporarily suspend payments to creditors in order  to  enable debt  restructuring.  To do this,  the private sector  had  to be ‘bailed in’.

In the exercise, no creditor or investor must run out in the next few weeks, payments for trade would continue but not debt-service payments, and there would be restructuring where everyone shares some of the costs. Thus, for example, instead of collecting in the next three years, creditors may be asked to collect in five or six years.

Buira pointed out there are some crucial issues where very little is being said in the reform discussion. There is no progress on IMF reform. There is also no progress on crisis prevention.

He said although there may be discussions on an early warning system and the need to bail in creditors, there is no development of rules. For instance, there is reluctance by some governments to determine when a debt standstill should be done, there are no rules for debt workout, and so far the IMF has not developed a facility to deal with preventing a crisis.

Buira added that other basic issues of interest to developing countries are not even on the table, for example the asymmetry in the adjustment process. By focusing on issues related to the Washington Consensus, the issues of developing countries are being neglected.

Among these neglected issues are: How can developing countries obtain benefits of globalisation whilst minimising the costs? What can be done to deal with reversal of capital flows, lender of last resort, and debt restructuring?

He said the IMF only comes in after a crisis has occurred, and this is inconsistent with the IMF’s stated objective of preventing crisis. The legitimacy of international financial institutions has come into question. There is awareness of a heavy concentration of power in a few countries and the need to have wider participation.

Aziz Ali Mohammed, Adviser to the Group of 24 (developing country members of the IMF and World Bank), gave a review of the state of the debate on the new international financial architecture (IFA).

He highlighted the imbalance in the process: the issues that have an impact on developed countries (requiring action on or by them) are not on the table whilst those issues affecting developing countries are.

He discussed four of the issues that should be on the table but are not.

First are the global implications of exchange rate movements of major currencies on which the IMF surveillance system had little to say despite the fact that they are sources of financial and economic disturbance to other countries.

Second is the unequal distribution of voting power in the global financial system, which derives from a totally arbitrary formula designed to perpetuate the dominance of developed countries.

Third is the internal governance of the IMF, in which a very few countries, and particularly the US Treasury, have an undue influence over the executive board and staff.

Fourth is the reluctance to apply the obligations of transparency, accountability and equity on the capital markets and institutions of developed countries.

Aziz stressed that the issue of equity must be put forward by the South in preparing its negotiations with the North in the context of the UN event on Financing for Development.

He said the global financial system is ‘full of asymmetries’. There is asymmetry (or imbalance) between borrowers on the one hand and creditors and investors on the other hand in the way they are treated; asymmetry in the governance of the international financial institutions; in the debt resolution process; and in the surveillance process in relation to major currencies as contrasted to developing countries’ currencies.

Aziz said that in taking up these concerns, developing countries must try to agree among themselves first, and highlighted five areas in which they need to develop positions.

First is the need to strike the correct balance between rules and discretion. On the one hand, we want to have rules (for example in the debt workout process) but rules also create risks for developing countries. A rule that enables temporary debt standstill can also increase risks of contagion. Would ‘constructive ambiguity’ be a better route on debt workouts?

Second is the question of who represents developing countries. Should their interests be promoted through treaty-based institutions like the Bretton Woods institutions, or should developing countries take part in ad hoc groupings?

Aziz said it was a strange situation when the United States decided to invite 11 developing countries to enter a Group of 20 (a new grouping established last year by the US to discuss financial issues) and those 11 jumped to take part, considering it a great privilege that they were chosen.

‘They lend themselves to a procedure that takes oxygen away from their own institution,’ said Aziz. He posed the question of whether developing countries should play this game, or stay on with representative institutions.

Third, on the development of regionalism, what importance do developing countries want to give to accepting peer pressure within regional arrangements?

‘Should our neighbours be enabled to engage in surveillance, or should the task be given to an institution located in Washington?’ he asked. - Third World Network Features

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About the writer: Martin Khor is Director of the Third World Network.

 

2082/2000

 


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