Everyone now recognises the need to
reform the international economic regime. But the idea should not simply
be to fix a system that is obviously broken: we need to exchange it for
a better model. That is because the current financial architecture has
failed in some very important ways.
Most importantly, the international financial system has failed to meet
two obvious requirements: of preventing instability and crises, and of
transferring resources from richer to poorer economies. Not only have
we experienced much greater volatility and propensity to financial meltdown
across emerging markets and now even industrial countries, but even the
periods of economic expansion have been based on the global poor subsidising
the rich.
These global failures are so immense that they constitute enough reason
to abandon this system. But there are other associated failures in terms
of what the regime has implied within national economies: it has encouraged
pro-cyclicality; it has rendered national financial systems opaque and
impossible to regulate; it has encouraged bubbles and speculative fervour
rather than real productive investment for future growth; it has allowed
for the proliferation of parallel transactions through tax havens and
looser domestic controls; it has reduced the crucial developmental role
of directed credit.
So we clearly need a new system, even if the goals remain the same as
that of the original Bretton Woods: to ensure currency stabilisation through
international monetary co-operation; to encourage the expansion of international
trade in a stable way; and to promote development by facilitating productive
investment.
To achieve this in the current context, four elements are crucial. First,
the belief that self-regulation supported with external risk assessment
by rating agencies is an adequate way to run a financial system has been
blow sky-high. There is no alternative, therefore, to systematic state
regulation of finance.
Second, since private players will inevitably attempt to circumvent regulation,
the core of the financial system - banking - must be protected, and this
is only possible through social ownership. Therefore, some degree of the
socialisation of banking (and not just socialisation of the risks inherent
in finance) is also inevitable. In developing countries it is also important
because it enables public control over the direction of credit, without
which no country has industrialised.
Third, to cope with the adverse real economy effects of the current crisis,
fiscal stimulation is essential in both developed and developing countries.
Enhanced public expenditure is required to prevent economic activity and
employment from falling, to manage the effects of climate change and promote
greener technologies, and to advance the development project in the South.
Fourth, we need an international economic framework that supports this,
which in turns means that capital flows must be controlled and regulated
so that they do not destabilise any of these strategies.
It may be argued that such an international system based on state regulation
will reduce the possibility of developing countries to access much-needed
capital for their own economic expansion. But this perception is wrong,
because in fact the current liberalised system did not provide for a net
transfer of resources to the developing world. In the past six years,
there has been a net flow of financial resources from every developing
region to the North, primarily the US, even as global income disparities
have increased. And within countries, the idea that deregulated finance
could put more resources in the hands of the poor (as in sub-prime lending)
has proved to be unsustainable.
So greater state involvement in economic activity is now both necessary
and desirable. The time for arguing about whether to have it or not is
over. Instead, we should be thinking of how to make such involvement more
democratic and accountable, within our countries and internationally.