Prior to the G-20 Summit held on April
2, there was a rush of suggestions on what world governments and international
institutions should do to address the global financial and economic crisis.
Not all were coherent or even remotely feasible. But among the many plans
to resolve the global crisis and reform the international monetary and
financial system to pre-empt such crises in the future, one stood out.
This was prepared by the Commission of Experts set up by the President
of the General Assembly, Nicaraguan statesman and priest Miguel d'Escoto
Brockmann. The Commission is chaired by Nobel Laureate and Columbia University
Professor Joseph Stiglitz and consists of an internationally representative
and diverse group of distinguished experts.
The mere fact that this plan was prepared on behalf of and would be debated
at an inclusive forum like the United Nations with 192 member states makes
it noteworthy. This in itself is an advance on the efforts still under
way to negotiate and formulate recovery plans in self-constituted, unrepresentative,
and therefore partly illegitimate groupings like the G-8 and the G-20.
Despite the expansion of their membership beyond the numbers indicated
by their labels and selective invitations to “significant” non-members
to sit at the table, the G-8 and the G-20 have not garnered the legitimacy
they have been seeking. This is what makes the group of experts commissioned
by Father d’Escoto different.
That difference, fortunately, is also visible in the tenor and substance
of the Commission’s recommendations which begin by recognising: (i) that
the crisis that engulfs the world today originated in and was triggered
by developments engineered in the developed industrial countries; and
(ii) that poor countries and their populations are disproportionately
affected by such crises. On the other hand national stimulus plans which
are bound to be larger and more comprehensive in the more developed countries
might have marginal or even adverse affects in the less developed world.
Thus an inclusive recovery plan must consciously seek to take account
of the “externalities” or effects on other countries of national strategies.
Recognition of inevitable asymmetries in responses to the crisis and in
the in-country and out-of-country fall-out of these responses is crucial.
The Commission is clear on what the proximate determinants of the crisis
were. Loose monetary policy was erroneously used as a means to spur credit
financed consumption and investment as an offset for the insufficiency
of aggregate demand spontaneously generated by the system. This tendency
was strengthened by rising global inequality and by the pressure on developing
countries to accumulate foreign exchange reserves as insurance against
financial crises, which make them dependent on institutions like the IMF
that tend to recommend policies that precipitate or aggravate such crises.
Of course, it is not just the need for insurance that explains the distribution
of global surpluses but the changed geography of global competitiveness
and the fact that there are no national budget constraints on the US because
the dollar serves as the world’s reserve. The credit-financed boom in
the US was also facilitated by financial deregulation that not merely
diluted the checks and balances that would have prevented the proliferation
of credit and associated risk, but incentivised risk-taking and speculation.
And finally, the “liberal” policy environment encouraged regulatory forbearance
of a kind that led to poor corporate governance.
Importantly the Commission underlines the fact that: “Many of these failings,
.., have been supported by a flawed understanding of the functioning of
markets, which also contributed to the recent drive towards financial
deregulation.... Globalization too was constructed on these flawed hypotheses;
and while it has brought benefits to many, it has also enabled defects
in one economic system to spread quickly around the world, bringing recessions
and impoverization even to developing countries that have developed good
regulatory frameworks, created effective monetary institutions, and succeeded
in implementing sound fiscal policies.”
To deal with the crisis resulting from this market fundamentalism, the
Commission’s preliminary report (which is a summary of its analysis and
a statement of its recommendations) begins by making clear that it must
pursue multiple objectives. It must advocate immediate measures that can
ensure recovery from the crisis. It must recommend reform of the monetary
and financial systems and the economic structures that underlie them,
which can be pursued in the medium and long term. And it must do these
in ways that promote the “global good”, with equitable and sustainable
growth, protection for the poor and the long term redistribution of global
surpluses to strengthen the less and least developed countries.
The prescriptions for recovery are influenced by the recognition that
the crisis is in substantial part the result of market failure and that
real economy growth that rides on a credit-financed bubble is unsustainable.
Hence, recovery from the crisis requires the restoration of balance in
the relative roles of the market and the state and a greater dependence
on a state-financed stimulus as the basis for growth. This leads to the
plea for coordinated and strong stimulus packages in all countries, that
are framed in ways in which the downstream, “multiplier” effects are large,
the impact on the poor significant, and the global fall-out large and
positive. To enhance the global effects of the stimulus, given the limited
manoeuvrability of poor countries and the decline in world trade and financial
flows, the Commission suggests that at least one per cent of the spending
on the stimulus packages of the developed countries should occur in developing
countries. This would avoid also pre-empt the tendency towards deflation
in developing countries aimed at generating surpluses on their balance
of payments, either because they cannot access foreign capital to finance
deficits or because of conditions imposed when they turn to the IMF for
financing their deficits.
To support this globally coordinated effort at recovery and a subsequent
globally coordinated effort at monitoring and supervising the financial
and real sectors, the Commission makes the case for a new set of democratic
and participatory institutions including an inter-governmental expert
panel to advise the relevant United Nations bodies. These institutions
are to include a Global Economic Council equivalent to the General Assembly
and the Security Council that meets annually at the Heads of State level.
The latter would “promote development, secure consistency and coherence
in the policy goals of the major international organisations and support
consensus building among governments on efficient and effective solutions
for issues of global economic governance.”
Needless to say, the problem the Commission grapples with is complex.
For example, the difficulty in opting for a coordinated fiscal stimulus
is that it could aggravate global imbalances in two ways. First, it could
enlarge current account surpluses in countries like China while worsening
current account deficits in the US. Second, the benefits of expansion
in poorer countries may leak out abroad resulting in a widening of their
current account deficits. If in response to the first of these imbalances
developed countries like the US opt for protectionism, the benefits of
the coordinated stimulus would be far less and far more unequally distributed
than would otherwise be the case. Hence, “advanced industrial countries
should observe their pledges not to undertake protectionist actions”,
while allowing poor countries to adopt measures that give them the space
to opt for counter-cyclical policies. The transfer of around one per cent
of spending out of global stimulus packages to poorer developing countries
can help here as well. Spending a part of the money in developing countries
not only ensures global coherence and reinforces the stimulus, but could
through import demands reduce the deficit in developed countries such
as the US. In fact, in addition to this one per cent, it is necessary
to identify and operationalise new and stable sources of funding for developing
countries that could be disbursed quickly without inappropriate conditionality.
While these immediate and short term measures are being implemented, the
work of restructuring the global financial and economic architecture must
begin, suggests the Commission. For example, policies adopted and subsidies
provided to restore stability in the financial system of the developed
countries could lead to a reduction in capital flows to developing countries
and even a return flow of capital to the former. This must be countered
to the extent possible. Making such distinctions when the crisis affects
developed countries significantly, even if because of their own failures,
is indeed radical.
However, the most radical proposal put forth by the Commission is a new
Global Reserve System with a unit such as the IMF-hosted Special Drawing
Right (SDR) as its anchor. The system is defined as “a greatly expanded
SDR, with regular or cyclically adjusted emissions calibrated to the size
of reserve accumulations.” In other words, countries with larger reserves
would be eligible for larger SDR allocations they can invest in. This
alternative to the dollar would of course need an increase in the quotas
and voting strength of countries like China, challenging the leadership
of the US in more ways than one. The US would lose control of the global
financial architecture and the dollar would lose its position of supremacy.
There are, however, a number of global advantages to this. The departure
from the dollar reserve system ridden with uncertainties of the kind revealed
by the 1997 crisis would reduce the need for countries to insure themselves
with huge reserve holdings. Countries would also not be forced to hold
their reserves in dollar denominated assets, which results in lending
by developing countries to the developed at extremely low rates of interest.
And this would reduce the push that such enforced lending gives to credit
financed investment, consumption and speculation in the US that precipitated
the current crisis.
There are a number of unanswered questions with regard to the feasibility
of the SDR serving as the global unit of account and store of value. These
relate to the determinants of the value of the SDR which would be a reserve
currency not backed by a single state, the organisation that would serve
as the clearing house for international transactions denominated in SDRs
and the rules and procedures that would govern the periodicity and size
of emissions of the reserve unit. But the fact that an international commission
of this pedigree has flagged the need to move away from the dollar, as
is now being suggested by many other analysts and players, is a major
step forward.
But there is more work at hand. It is obviously also necessary to begin
the work of restructuring the financial sector with a move away from an
excessively liberalised and self-regulated system to one in which elements
of structural regulation are once again embedded. The details of the nature
of reregulation that is being recommended by the Commission would feature
in the full report. But the contours are clear: institutions are to be
prevented from growing to sizes that generate systemic risks and make
them too big to fail; financial instruments and practices are to be vetted
by a Financial Products Safety Commission to curb excessive risk accumulation;
core depository institutions are to be once again tightly regulated as
under Glass-Steagall and prevented from diversifying into risky activities;
non-bank institutions, including hedge funds and private equity firms,
are to be brought under supervision; derivatives trading is to be regulated
with a substantially reduced role for over-the-counter transactions and
controls on the nature of products generated; credit rating agencies are
to be monitored; and democratically constituted global institutions such
as a Global Financial Regulatory Authority and a Global Competition Authority
would take on the responsibilities of governing global finance.
Given the sweep and the as yet unfathomed depth of the crisis even this
menu of policies may be just the beginning. But it possibly is one set
of recommendations that is most global in perspective and adequately goes
the distance needed to make a difference when addressing the biggest crisis
capitalism has experienced since the 1930s.