Theme 1: Financial regulation
The banking crisis is the result of a period of more than two decades in which financial institutions were able to create credit far beyond what responsible national regulators would ordinarily have allowed. This led to a process of boom and bust. The boom characterised by high growth of consumption and by bubbles in unproductive assets, until eventually the bust feeds through from the banking sector into a sharp contraction in real economic activity.
These new dynamics have resulted in the generation and creation of price differences to create profit regardless of real economic productivity.
The orientation of accounting standards towards short-term speculative investors creates the valuation of assets that is based on market demand rather than ‘real’ economic productivity. This leads to volatility in the prices of stocks, bonds, and other forms of investment, which can depart radically from their ‘real’ value.
Financial markets are fundamentally driven by the efficient use of information to price assets and liabilities appropriately. Over more than a decade however, asset structures were allowed to develop where no one - not investors nor regulators, nor even market players themselves - knew the underlying value. Their complexity was made more opaque by the deliberate use of tax havens.
Assets were being priced on the basis of a complete lack of information about the nature and ownership of the risk involved. Well-functioning markets have a crucial role to play in facilitating economic progress, but financial markets can only function well with good information and strong regulation.
The response must be based on recognition that the extent of global economic and financial integration has surpassed the ability of national regulation systems to cope alone.
Information provision by financial market players to investors and regulators, and information exchange between jurisdictions, is necessary to ensure appropriate regulation. Financial opacity and regulatory arbitrage has also facilitated capital flight as a result of corporate tax evasion; a significant barrier to development economic productivity and development.
There must be a new approach to responsibilities and rights. Risks taken should not be divorced from the potential negative consequences.
States, which have the capacity to control, regulate and underwrite their own financial systems, have been deprived that capacity through the ending of capital controls imposed through IMF conditionality, and through pressure to commit to liberalisation of trade in financial services under the WTO GATS and in bilateral and regional trade agreements.
A framework of international cooperation is needed to ensure that capital adequacy is relegated effectively, there are no deliberately created regulatory gaps to be exploited, and that participants are held to a duty not to exploit those they may uncover.
(1)The International Accounting Standards Board should expand the definition of stakeholders beyond speculative investors to include all those affected by the activities of companies. Accounting standards should disclose and account for real economic productivity on a country-by-country basis.
(2)International Accounting standards should distinguish between speculation and enterprise.
(3)Automatic information exchange of beneficial assets and liabilities between jurisdictions should be implemented.
(4)Banking secrecy in Offshore Financial Centres and Tax Havens should be abolished.
(5)In the spirit of responsibility, no bank should be allowed to become ‘too big to fail’. A bank which knows it will be ‘rewarded’ with a bail out when systemic failure occurs, will not evaluate risk effectively.
(6)The Basel 2 agreement for self regulation has demonstrated itself to be ineffective. Options for a democratised financial regulatory commission which monitors, regulates and has power to limit highly leveraged institutions should be explored.
(7)Regulation should have a strong counter-cyclical focus thus preventing excessive leverage and force the accumulation of increasing capital reserves during boom times.
(8)A commission should be established to evaluate the safety of new financial products. In particular, speculative financial instruments in securitisation and derivatives markets should be made transparent and should be strictly regulated and supervised.
(9)The possibility of a fiscal instrument which levies revenue proportionate to of the level of risk taken by an institution should be explored. This would both de-incentivise high levels of risk and ensure that where risks are taken, the revenue system builds reserves to address potential negative fallout of those risks.
(10)Members of the World Trade Organisation (WTO) and parties to bilateral and regional trade agreements should be able to renegotiate commitments to reflect their development needs.
Theme 2: Multilateral issues
The Global Financial Crisis had highlighted the need for clarity of the purpose of the World Bank (WB) and the International Monetary Fund (IMF). It is clear that these institutions are not fully equipped to deal with the challenges presented by the current financial architecture.
These institutions were setup following the Second World War. The original purpose of the World Bank was as a facilitator of post-war reconstruction and development. Its present day mandate of is worldwide poverty alleviation. The International Monetary Fund was established to ensure global macro-economic stability by helping countries with balance of payment problems and by ensuring order orderly workout of exchange rates.
In practice, these institutions have pushed an agenda of market liberalisation and light touch regulation. In many cases these policies, created without consultation with governments or civil society, have adopted a ‘one size fits all’ approach. This has resulted in a situation where they have neither provided a world free of poverty, nor macro-economic stability for many of the world’s countries and have frequently impoverished poor people further.
Radical reform of the international financial institutions is required if they are to play an effective role in the enabling developing countries to manage their own development and sustainable economic growth. A new global financial structure must be transparent and accountable. It must be representative by including all the members of the United Nations (the G192) in decisions.
Since the mid-90s, the World Bank’s strategic plan has focused on fostering private sector participation infrastructure development and essential social services.
The IMF’s loans are relatively small and provided at relatively high interest rates. Its loan programmes and country surveillance are used by donors and private financiers to assess countries’ economic performance. If a country goes off-track, other donors often withhold their funds from the country. So, although the IMF provides little finance itself, it has the potential to unlock much more. Its importance derives far more from the ‘signals’ it provides for other donors than from the volume of funds it provides.
The function of the IMF as a global macroeconomic stability mechanism should be re-evaluated. In particular, the function of the IMF as a global ‘central bank’ should be explored, providing counter-cyclical liquidity in times of crisis.
(1)The World Bank and IMF should both separate the provision of grants and loans from technical assistance and policy advice, as the latter is often used to restrict policy choices and reinforce conditions.
(2)Both institutions should undertake reforms to make their Boards and management more accountable to recipient country citizens and parliaments.
World Bank Reform
(1)IDA should become an independent grant-giving agency, allocating funding without economic conditions. There should be a separate governance structure, giving a more equal weight to customers (low income countries) and donors.
(2)IBRD should remain a loan agency, allocating loans without economic policy conditionality. There should be a separate governance structure, giving a more equal weight to customers (middle-income countries) and donors.
(3)It should reform its structural conditions to recognize and reward, the role of the central role of the state in the regulation of capital flows and for the provision of essential services.
(4)The IMF should have a surveillance role to monitor markets and countries’ economic policies, which have a potential negative impact on other countries. It should have an early warning system to predict future economic instability. In this regard, the Chiang Mai Initiative provides an example of a function and consensual surveillance mechanism.
(5)The IMF should not provide long-term development lending to low-income countries and focus instead on balance of payments support and monitoring. It should act more like a central
(6)The Poverty Reduction and Growth Facility has been used as a trigger for the tying the IMF and countries into a relationship. This should be stopped.
(7)The IMF currently enjoys a monopoly on the market for providing macroeconomic advice to low income countries. Alternative sources of assessment should be established with the support of donors to increase the breadth or such assessments.
(8)The IMF should expand its shock facility, through the issue of SDR, and ensure rapid disbursements to developing countries in need, unencumbered by structural conditionalities
(9)The IMF is well placed to assist developing countries strengthen their tax systems, including capacity to plug illicit capital flight and negotiate fairer sharing of natural resource rents. These bad times must not be used as an excuse to roll back efforts to address revenue sharing.
The effectiveness of the IFIs should always be evaluated by their ability to achieve economic stability - globally - and share prosperity for the world’s poorest people.
Theme 3: Macroeconomic issues and addressing the crisis
Broad Principles The poor in developing countries will suffer most from the fallout of the Global Financial Crisis for which they bear no responsibility. Export oriented economies are suffering from serious declines in trade credit and export demand, and a correction in asset prices. In addition, falling Official Development Assistance (ODA), Foreign Direct Investment (FDI) and flight of investment capital are leading to increased unemployment in developing countries.
There is concern from some developing countries regarding the impact of developed country subsidies and stimulus packages which could have a dramatic impact on trade. Developing countries do not have the means to adopt these kinds of measures. Essentially, developed countries are increasing the capacity of their industry to compete in a way that developing countries cannot.
Widespread employment is one of the strongest instruments to address the complicated problem of poverty. A genuinely global economic stimulus programme is required to stimulate both international and domestic demand, and create environmentally sustainable employment in developed and developing countries. This investment should not however, be diverted from social sectors at a time when human needs are rising.
These stimulus packages should be administered through expansionary fiscal policy by both developed and developing country governments. For governments without foreign exchange reserves, Drawing Rights could be expanded and provided at low interest rates and without structural and contractionary conditionality.
Many of the sources of development finance emphasized in the UN Financing for Development Process are pro-cyclical. FDI, Investment Capital, and ODA are unpredictable and volatile. This re-emphasises the need for domestic resource mobilisation through providing policy-making space for domestic production and consumption and effective domestic taxation of the private sector and individuals.
Counter-cyclical measures are required. Capital reserve accumulation during boom times would provide a buffer against macroeconomic shocks. However, this is costly. Other counter-cyclical policy mechanisms such as GDP linked bonds to smooth debt service payments, counter-cyclical guarantee facilities, or the provision of counter-cyclical liquidity to compensate for trade shocks should be explored.
There is a need to control both capital inflows to developing countries which generate credit, asset and investment bubbles and maturity mismatches in private balance sheets and create unsustainable currency appreciation and external deficits.
(1) A genuinely global economic stimulus programme is required to stimulate domestic and international demand and create environmentally sustainable employment.
(2) Given that ODA is likely to decline, the IMF should significantly free up its inflation and budget deficit targets so that governments have the leeway to provide their own stimuli. The issuance of IMF Special Drawing Rights should not be conditional on policy prescription but should provide policy-making space for governments to take appropriate action on the basis of poverty, social and environmental impact assessments.
(3) Domestic production and resource mobilisation should be prioritised to limit the vulnerability of developing countries to contagion of future financial crises.
(4) Developing country governments should be given (or sieze) greater policy-making space in relation to investment in export orientation and/or domestic consumption.
(5) Generalised reserve requirements on cross-border flows and minimum stay periods for capital investment should be investigated as a means of controlling volatile capital inflows and outflows.
These proposals aim to provide a framework for macro-economic stability, which ensures that women and men in developed and developing countries alike, benefit from the economic system through increased prosperity.