From Davos to the G-20 Summit in London: Six proposals to save a planet at risk!
Convened in the midst of the worst global financial crisis of this century, the 2009 World Economic Forum meeting in Davos will be remembered for being too long on rhetoric and too short on substance and bold action. While many of the corporate CEOs who shamelessly rewarded themselves with huge bonuses came to Davos to publicly deny any wrong doing, many honest business owners, private citizens who saw their pension funds evaporate, and delegates from many developing countries who attended the Davos forum were outraged by the lack of remorse from the banking executives and by the failure of western governments to initiate criminal investigation against the executives of big financial institutions. At the same time, there were calls from world leaders, such as Prime Minister Gordon Brown, Chinese Premier Wen Jiabao, President Calderon of Mexico , and the President of the tiny nation of Guyana , for a radical and far reaching reform in the management of the international financial system to prevent the threat of another systemic instability.
At times like this, what the world needs is visionary leadership the likes of Winston Churchill and Franklin D. Roosevelt. Having witnessed repeatedly over the past decade and half the collective failure of world leaders to preempt major financial catastrophes from happening, or to come up with sound economic recovery plans and programs of social protection when the crisis finally hits home, I am increasingly betting my life and my future on ordinary citizens and activist civil society groups around the world to find alternative strategies that will take us to the promise land. Since the debt crisis of the early 1980s, and followed by the 1994 Mexican peso crisis, and the 1998 Asian financial crisis and a few other that followed, a global coalition of civil society organizations (in and outside of the World Social Forum) have put forward innovative proposals on how to construct a ‘better world for tomorrow’. UNCTAD has been one of the leading international organizations that produced cutting edge research on a new global financial architecture going as far as 1998 under the leadership of Dr. Yilmaz Akyuz, the former Director of the Division on Globalization and Development Strategies. Similar proposals were presented during the many deliberations of the Helsinki Process on Globalization and Democracy, a joint initiative of the Governments of Finland and Tanzania . As to be expected, many of these proposals were completely ignored (as they were equated with socialism and Marxism) by powerful forces (both elected officials and CEOs of the corporate world) that have the ultimate responsibility for the management of the world economy.
When the G-20 leaders meet in London in April, they need not reinvent the wheel or recycle their old and tired ideas that created the current crisis in the first place. Instead, they should be open minded and take a second look at the other proposals that have been debated and discussed widely across the world, and these proposals try to address the structural problem to the current crisis. Moreover, any discussion on a new global financial architecture must include the views of African nations who are hard-hit by the current crisis. At the moment, only South Africa is represented in the G-20 and African voices can be enhanced by the inclusion of the African Union if we hope to have a stable financial system that meets the needs of all countries of the world. In terms of the key structural reforms that the G-20 should consider, the following are deemed important.
Regulation of international capital flows
The financial instability and sharp currency fluctuations caused by large inflows and outflows of external funds have led many developing countries into financial and economic crisis, with dramatic and sudden increase in poverty rates. The sub-prime mortgage crisis in the United States represents the tip of the crisis though many erroneously try to attribute the current crisis to the home mortgage problem.
Unlike international trade, however, there is no global regime applying to international capital flows, including foreign direct investment (FDI). A number of proposals have been floated in the aftermath of the 1998 East Asian crisis for the creation of international institutions and mechanisms to regulate and stabilize international capital flows. While the most ambitious proposals advocate for the establishment of fully-fledged global institutions for reducing risk, such as a Board of Overseers of Major International Institutions and Markets with wide-ranging powers for setting standards and for oversight and regulation of commercial banking, securities and insurance , others advocate for less ambitious global mechanisms by reforming the mandates, membership and/or governance of existing organizations such as the IMF, the Bank for International Settlements (BIS) and the Financial Stability Forum (FSF) that sets codes and standards in areas of financial regulation and supervision of macroeconomic policy.
My fear is that, given the composition of the membership of the G-20 (which include the G-8 and other middle income developing countries, each with competing interests and ambition), the London meeting could end up focusing attention on reforming existing organizations rather than a radical rethink of the whole system. Ever since the 1998 Asian Financial crisis, several measures were taken to ensure the soundness of the financial sector. These included reform in the operations of the Bank for International Settlements (BIS) (based in Basil, Switzerland) with reference to prudential capital requirements; standards for transparency, and banking regulation and supervision. Additional reforms were instituted by the Financial Stability Forum (FSF) with reference to financial supervision and surveillance (i.e., securities fraud, accounting and auditing practices). This came about on the heels of major scandals involving WorldCom and others in the United States in the early 2000. The FSF reforms also included improved risk-management practices and enhanced transparency on the part of private and public sectors in countries receiving international lending and investments as the principal means of countering the instability of these flows.
Needless to say, the common unifying theme of these self-imposed institutional reforms has been on setting guidelines and standards to discipline debtors (emerging market countries mainly), and providing incentives and sanctions for their implementation, on the assumption that the causes of the crisis rests primarily with policy and institutional weaknesses in the debtor countries. Little attention has been given to the role played by policies in creditor countries, and the shortcomings in international institutions designed to safeguard financial stability. Interestingly, emerging market countries have learned a lot from their own mistake and have taken the unusual measure to protect themselves from future financial collapse by amassing huge foreign currency reserves.
Crisis management and crisis prevention
During the 1998 Asian financial crisis, official intervention in the crisis relied on a combination of lending with policy adjustment designed to restore confidence and stabilize markets. However, there are problems regarding the modalities of provision of liquidity by the IMF, and the conditions attached to such lending. IMF assistance usually comes after the collapse of the currency, in the form of bailouts designed to meet the demands of creditors, to maintain capital-account convertibility and to prevent default. Moreover conditions attached to such financing go, at times, beyond macroeconomic adjustment, interfering unnecessarily with the proper jurisdiction of sovereign governments.
One instructive lesson from the Asian financial crisis is that fiscal and monetary tightening and high interest rates advocated in response to crisis generally fail to bring rapid stabilization, but instead deepen the impact of the crisis on the economy. Moreover, provision of funds needed for bailouts often depends on ad hoc arrangements with larger shareholders, opening the way to political influence. Therefore, policy proposals on crisis management and intervention would need to focus on financing (rapid response in liquidity provision), policy response and conditionality (i.e. allowing countries the right to determine appropriate macroeconomic, sectoral and social policies).
Creating a stable exchange rate system
An important reason for international financial instability is the failure to establish a stable system of exchange rates among the major reserve currencies after the breakdown of the Bretton Woods arrangements in 1971. Indeed many observers (e.g. former Federal Reserve Chairman Paul Volcker and philanthropist George Soros) have argued that the global economy will not achieve greater stability without some reform of the G3 exchange rate regime, and that emerging markets remain vulnerable to currency crisis as long as major reserve currencies are highly unstable. However, the exchange rate system has hardly figured on the reform agenda. In the face of persistent currency misalignments, the industrialized countries have refrained from intervening in currency markets except at times of acute imbalances that is likely to inflict huge damage to their economies. An international monetary system that enables the stability of currency exchange rates is urgently required and the G-20 should not overlook the need for speedy action on this front.
A call for an International Debt Arbitration Process
In the event of a financial crisis, in which a country is unable to service its external debt obligations, international measures and mechanisms are required to enable the affected country to manage the crisis effectively and in which the debtors and creditors share the burden equally. At present, there is no systemic treatment for debt workout, rescheduling and relief, and the debtor countries usually end up with carrying the overwhelming bulk of the burden and the outstanding debt in many cases remain or even grow. Thus, one of the main issues in the reform agenda is how to “involve” the private sector in crisis management and resolution so as to redress the balance of burden-sharing between official and private creditors as well as between debtors and creditor countries.
The idea of debt arbitration was first proposed by Kunibert Raffer of the University of Vienna . Drawing largely from Chapter 9 of the US Civil Code which regulates insolvency cases of municipalities—taking into account their special situation as public bodies with responsibilities and duties towards their citizens—Raffer continues to argue in favor of a neutral debt workout process. A fair and transparent arbitration mechanism must strike a balance between two contradictory principles: the right of creditors to interest and repayment on one hand, and on the other, the generally recognized principle by all civilized legal systems that no one country must be forced to fulfill contracts if that leads to inhumane distress, endangers one’s life or health, or violates human dignity. The main features of a sovereign insolvency should include: arbitration (a neutral institution assuring fair settlements; sovereignty (i.e. a country cannot go into receivership and its elected officials cannot be removed from office by the court); right to be heard (pursuant to Chapter 9, the debtor’s population has a right to be heard in proceedings; Equal treatment (different debtors are treated differently at the moment). The restructuring process must be enhanced through greater transparency.
Others suggested that the mandate of the Permanent Court of Arbitration based in The Hague could be expanded to include debt arbitration. The measures required should include an arrangement in which a country in financial trouble can opt for a debt standstill arrangement, and have recourse to the Arbitration Court, which would then arrange for a debt workout that fairly shares the cost and burden between creditors and debtors, and also facilitate that fresh credit be provided to aid the affected country’s recovery.
Streamlining conditionality and enhancing policy coherence
There is an urgent need for more transparent IMF and World Bank conduct regarding the content and mechanisms of conditionality. A common perception is that IMF-supported programs remain stringent, inflexible, and in some instances, punitive, leaving very little room for countries to maneuver. The common practice of lending with policy adjustment in the context of crisis management are not adequately governed by a set of policies and indicators that the countries themselves have specified to achieve development outcomes and monitor them accordingly. If IMF conditionality continues to be perceived by recipient-country governments and citizens to be illegitimate, what should be the guiding principles for constructing country-specific conditionality that is not only legitimate, but one that emphasize democratic decision-making, participation and real country ownership? At the end of the day, for development to be sustainable, poor countries must have the option to choose among appropriate fiscal, monetary, macroeconomic, trade and other economic and social policies without heavy-handed intervention by the IMF and the World Bank.
Democratizing the governance of the IMF and the World Bank
The debate on reforming the governance structure of the IMF and the World Bank has been going on for a long time. At the recent Davos meeting, UK Prime Minister Gordon Brown publicly stated that the IMF and the World Bank have outlived their functions and he called for a new Bretton Woods conference to establish a global financial architecture. The same sentiment was expressed by the International Financial Institutions Advisory Commission (best known as the Meltzer Commission) almost nine years ago. Developing countries have repeatedly been demanding to increase their voting power in these institutions.
In response to the cataclysmic failure of the IMF in handling the 1998 Asian financial crisis (which the Fund later admitted mistake and took responsibility for it), the Fund’s Executive Board initiated a number of reviews, with reference to surveillance and the content and scope of conditionality; structural and institutional reform, particularly the nature and conditions of liquidity provision in times of crisis, as well as reform on the distribution of voting power. The IMF also introduced its “Sovereign Debt Restructuring Mechanism” (SDRM) in November 2001. While the IMF proposal was warmly welcome initially, it lost credibility quickly when the US Treasury refused to support a legally binding framework, preferring instead voluntary inclusion of so called “Collective Action Clauses” (CAC) in bond contracts. There was also resistance from emerging market countries for fear of being locked out of future borrowing opportunities if such debt workout mechanism is up and running. Despite the resistance against the SDRM idea, the Board never took a decision to put some of the other proposals on conditionality and liquidity provision into practice, and by 2005, the relevance of the IMF itself was being questioned and many governments, including some conservative US legislators, were calling for its abolishment.
As the G-20 contemplates in crafting a new global financial architecture, it would be a disaster to exclude the poorest nations in Africa , who are particularly hard-hit by the current financial crisis. As it stands today, only one African country— South Africa —is invited to the G-20 summit. It is an opportune moment to expand the membership of the G-20 by inviting the African Union to represent the collective interest of African countries. 
In a very ironic twist, the current global financial crisis has helped save the IMF from extinction. The Fund is once again being called to put out fire all over the world using its outmoded economic tool-kit. This is unfortunate since the problem of today requires a different kind of medicine than what the fund carries in its outdated tool-kit. There is now an opportunity to define the mission of the IMF as a lender of last resort in times of major liquidity crisis. This must be one of the priority issues that the April meeting of the G-20 leaders should address urgently even as the Fund is being asked to put out fire all over the world. Central to the IMF’s new role is the need to expand ‘policy space’ for countries in crisis and to recognize the fact that the adjustment period will be long and that liquidity provision has to be quick and commensurate with the scope of the crisis that a country is experiencing.
Turmoil in world financial system is the first major crisis of globalization. The crisis of the past two decades, particularly the scope of the current meltdown, has underscored our inability to predict or prevent financial difficulties that can pose systemic threats. We are not able to prevent countries in trouble infecting others. The recent crisis is undermining confidence in free-market capitalism and motivating some governments to reverse course on liberalization.
Even before the current financial meltdown came to the fore, many developing countries have started to take national measures to protect their economies. In the emerging economies that were hit very hard by the 1998 financial crisis, accumulation of reserve currency became the most reliable form of insurance against global financial instability. In addition to building up reserves, many other countries took the decision to restrict currency convertibility by imposing Chilean-style capital control to reduce their vulnerability to risks. Other proposals include the Tobin tax—or currency transaction tax (CTT) in order to slow down speculative movements of currency and give governments greater ability to manage their own domestic monetary and fiscal policy.Through these and similar measures, countries can avoid excessive buildup of external debt, to curb the volatility of the flow of funds, and to enable the country more scope to adopt macroeconomic policies that can counter recession (such as lower interest rates or budget expansion). Many commentators believe that the potential benefits of increased financial regulation outweigh the immense human and economic costs of crises.
What outrages many citizens in the US and Europe in the context of the current crisis is the lack of ‘nationalization’ or public ownership provision in government bailout plans being rolled out, costing billions of dollars. Besides nationalization, the need for more stringent regulation of financial institutions, with empowered independent regulatory institutions, must be put in place if we are to avoid a repeat of the same mistake. It is worth looking at the Swedish experience of the early 1980s when the government intervened to bailout the banks, but the burden was not completely put on the Swedish taxpayers.
Finally, it is not enough to come up with a new global financial architecture. Efforts to bring calm in the financial market and renew confidence in the regulatory institutions must also be complemented with the other unfinished reform agenda. This is particularly important for the continent of Africa and other poor and vulnerable developing countries. These include: expanding the debt relief agenda; increasing the level of ODA and improving aid effectiveness and the predictability of aid; and bringing to a successful conclusion of the Doha Development Round of trade negotiations, particularly ending agricultural subsidies and expanding market access. The trade-aid-debt agenda must be part of the package of reforming the global financial system.
 Kaufman H (1992), “Ten Reasons to reform”, Euromoney, November.
 Andrew Cornford, (2002), “Standards and Regulation” in Yilmaz Akuyz (ed.), Reforming the Global Financial Architecture: Issues and Proposals, UNTAD/TWN/ZED Books, Chapter.2; IMF (2000), Report of the Acting Managing Director to the International Monetary and Financial Committee on Progress in Reforming the IMF and Strengthening the Architecture of the International Financial System, Washington, DC, April.
 Akyuz and Cornford, (1999), “Capital flows to developing countries and the reform of the international financial system”, UNCTAD Discussion Paper, 143, Geneva , November, p.31
 Yilmaz Akyuz (2002), “Crisis Management and Burden Sharing”, in Akyuz (ed.), Reforming the Global Financial Architecture: Issues and Proposals, pp.118-134
 Kunibert Raffer (1990), “Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face”, World Development, 18 (2), pp.301ff
 Kunibert Raffer, “Sovereign Debt Workout Arrangements”, paper presented at the Alternatives to Neoliberalism Conference sponsored by the New Rule for Global Finance Coalition, (May 23-24, 2002).
 Ahmed, Lane and Schultz-Ghattas, “Refocusing IMF Conditionality”, Finance and Development, IMF (December 2001).
 Vivien Collingwood, “Indispensable or unworkable? The IMF’s New Approach to Conditionality”, The Bretton Woods Project (2003).
 International Financial Institutions Advisory Commission (2000), Report of (‘Meltzer Report’). Washington , DC , March.
 “Kruger modifies sovereign debt plan”, IMF Survey, Vol. 31, No. 7 ( April 8, 2002 )
 James Weaver, R. Dodd and J. Baker (2003), Debating the Tobin Tax, New Rules for Global Finance ( Washington , DC : 2003).
 Ilene Grabel, “Capital Accounts Controls and Related Measures to Avert Financial Crises”, paper presented at the Alternatives to Neoliberalism Conference sponsored by the New Rules for Global Finance Coalition, Washington, D.C: May 23-24, 2002.