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Op-eds and articles by the Executive Secretary | ||||||||||||||||||||||||||||||||
| The New Multilateral Institutional Framework for a World in Transition Over the past couple of decades, the world underwent a reorganization of global institutions that gave supremacy to the market and increasingly shrunk State action. The current global economic crisis has revealed serious problems in global and national financial institutions, and it has become evident that there is an enormous institutional and regulatory void in coordinating and governing markets. ------------------------------------------------------------------------------------------------------------------------------------ The developments over the past year have opened new avenues for economic, social and environmental discussion, which has been dominated until recently by dogmas whose validity has not been confirmed by the facts. Moreover, the world is going through a period of enormous uncertainty and increasing interdependence. This opening should be regarded as one of the positive aspects of the current crisis, as a response to demands for change that have become evident in the international community. Some economic views are under scrutiny and the mistakes in diagnosis and in the application of recipes that predominated in the 1990s are being acknowledged. Over the past couple of decades, the world underwent a reorganization of global institutions that gave supremacy to the market and increasingly shrunk State action. This was accompanied by the most profound technological revolution humanity has ever seen, combined with the sustained opening and liberalization of financial and commercial transactions. For example, the creation of global value chains has become a distinctive productive and commercial trait of globalization. The current global economic crisis has revealed serious problems in global and national financial institutions, and it has become evident that there is an enormous institutional and regulatory void in coordinating and governing markets. Multilateral international institutions have been weak in mitigating and preventing economic cycles. The events have shown that volatility is not a thing of the past or a problem only in emerging economies, and that developed countries are just as vulnerable to the swings of international financial markets and contagion. The current financial crisis has also exposed the weaknesses of multilateral financial institutions. Added to the discussion on crisis management and prevention is the issue of their legitimacy and representativity. The emergence of new actors with increasing international clout, like China, India and Brazil, has transformed the world geopolitical map, impacting on the relative weight of post-war actors, defining new winners and losers, shifting the balance and correlation of forces of the "centre-periphery" and suggesting structural transformations of multilateral institutions. This implies designing international instances that can provide greater representation to these new actors and better market governance. The absence of a multilateral forum of these characteristics is perhaps one of the main challenges we must now face. The natural instance for such a forum is the United Nations, because it is currently the only global institution that counts with the necessary representativity and legitimacy. To make up for this void, this article supports the creation of a global economic coordination forum based on the United Nations Economic and Social Council (ECOSOC), proposed by the Stiglitz Commission (created in 2008 under the coordination of Joseph Stiglitz, the commission was tasked to propose the foundations of a new international financial architecture). This new forum should not only focus on analyzing issues related to the functioning of the global economic system and the challenges of development, but also count with clear mandates that may allow it to put in effect the guidelines it establishes. This forum should also serve as a central coordinator of the policies and actions of the different institutions that compose the global architecture. The role of the United Nations would not be limited to the Global Economic Coordination Forum. It should also take a more active role in crisis prevention by strengthening countries' capacities of applying economic policies and particularly regulatory systems, surveillance and monitoring. Under this rationale, the main challenges faced by global financial institutions centre on improving their representation and decision-making mechanisms and providing them with more resources and instruments to enable them to address country needs. With respect to the former, the International Monetary Fund (IMF) and the World Bank need to significantly reform their quota structures, seeking to balance the voice and vote of developing countries. Regarding the latter, and with the goal of distinguishing the current situation from the need for structural changes, initiatives to increase the capital of these institutions and provide greater flexibility to resource allocation instruments are necessary steps in support of countries, especially mid-income nations. THE UNITED NATIONS AND GLOBAL GOVERNANCE TRADITIONALLY, GLOBAL GOVERNANCE has been based on the collective will of a group of developed countries that enjoy the greatest power of participation, vote and decision-making in international bodies: the Group of 7 (G-7), the Group of Eight (G-8). The G-7 is composed of the United States, Japan, Germany, Canada, Italy, France and the United Kingdom. Russia joined the group, making it the G-8. Four of the five members of the United Nations Security Council belong to the G-8, and G-8 countries control more than 44% of the votes in the World Bank and the IMF. Efforts have been made recently to improve the participation of developing countries. Specifically, there were efforts to encourage greater dialogue between industrialized countries and emerging economies on issues related to the international financial architecture, as reflected in the actions of the G-20, composed since 1999 by the G-8 countries, 11 recently industrialized countries from every region of the world and the European Union as a bloc. However, these groups lack the necessary representativity and do not reflect the changing relative participation of emerging countries in the world economy. Data available for the period 1980-2007 show that emerging countries have increased their participation in total world exports of goods and services, in foreign investment flows and total international reserves (Chart 1).
Although the G-20 represents an important advance with regard to the G-7 and G-8, it is not enough, because it is a self-appointed group of countries without international or regional legitimacy. From this perspective, it is impossible to create the instances and collective agreements needed to address the main economic, social and environmental challenges of this century. In an increasingly globalized and interrelated world, global governance must be based on collective and almost simultaneous actions that support and coordinate internationally-agreed development goals, including social and environmental sustainability. Monetary, financial and commercial systems should operate as instruments and not as goals in themselves, and, above all, act in keeping with and in coordination with the goals of a more inclusive development. Globalization requires the creation of global public goods that facilitate integration among countries. Although the current institutional architecture possesses some instances of global coordination, the diversity of international bodies with specific mandates in certain areas of action has hindered a comprehensive approach to the challenges of development. The need for global coordination instances is not new. Eatwell and Taylor (2000) argued in favour of the creation of a global financial authority with a comprehensive approach to different areas of action, functions and policies as vital to improving the international financial system. Stiglitz (2002) also asserted the need to create global instances of participation in decision-making related to the functioning of the world economic system. The Untied Nations, through ECOSOC, offers an instance for country coordination on economic, social and environmental issues. The representativity of countries in the Council is based geographically, with its members elected by the UN General Assembly. This includes 54 member States whose representativity includes 14 slots for Africa, 11 for Asia, six for Eastern Europe, 10 for Latin America and the Caribbean and 13 for Western Europe. Although ECOSOC constitutes a key forum for the discussion and formulation of policy recommendations for member States, it lacks mechanisms to effectively enforce the recommendations it sets forth. The proposal for United Nations reform in 2006 suggested strengthening ECOSOC with a Development Forum with the participation of Heads of State and Government every two years. This adds to the institutional proposals of the normative decade, when the United Nations Summits were held and which have sought to strengthen ECOSOC's capacity to analyze the advances in the application of recommendations. In this context, a first, important change in the global institutional framework would consist of advancing towards the creation of an instance that may strengthen ECOSOC's current role through the creation of a representative forum with the capacity to put into effect proposals in order to analyze issues related to the functioning of the world economic system with a more comprehensive approach. This would be a Global Economic Coordination Forum, in line with the proposals of the Experts Commission of the UN General Assembly, which held its first meeting in early 2009. The natural place for a Forum of this kind is in the context of the United Nations, because it is the only global institution of universal membership that counts with the credibility needed to ensure the legitimacy and viability of any reform to the global governance system. Additionally, this Forum should foment the participation of other important multilateral organizations, such as the World Bank, the IMF and the World Trade Organization (WTO). In keeping with what a number of analysts have said, and as suggested by the Experts Commission of the President of the UN General Assembly, the function of a forum of this type should include the discussion and adoption of economic and social development goals, as well as the coordination of actions of different global institutions in their more specialized spheres. Its representativity should follow ECOSOC's current logic, which allows for adequate country participation through regional quotas. This forum should promote economic development, ensure the consistency of the policy goals of the main international bodies and support consensus-building among governments to seek efficient and effective solutions to economic, social and environmental governance. To do this, it is important to provide it with instruments that may allow it to put into effect the guidelines it suggests. The Global Economic Coordination Forum, in its capacity of establishing proposals, should also promote the accountability of all international organizations and identify the voids that need to be filled in order to guarantee the operation of the global economic and financial system. THE INTERNATIONAL FINANCIAL ARCHITECTURE THE INTERNATIONAL FINANCIAL ARCHITECTURE has been unable to prevent and mitigate economic cycles, as made evident by the unleashing of the crisis and its systemic nature. The current crisis is considered to be the most severe since the Great Depression, because it affects developed and developing countries. The losses in world financial wealth have been substantial and unprecedented: in total worldwide, US$ 50 trillion for 2008, approximately the nominal world GDP for that year (US$ 54 trillion). These losses reflect a strong deflation in asset prices and have led to severe contractions in lending. The impact of the crisis has not just affected the financial sector. It has also significantly impacted the real economy. Today there is consensus that world economic activity will experience a contraction at a global scale for the first time since the Second World War. The developed world is expected to contract nearly 3.4%, while GDP growth in the developing world will be approximately 0%. Along the same lines, the WTO expects international trade to contract 9% in 2009. The crisis has also significantly affected the most vulnerable population, both in developed and developing countries, hindering the compliance of the Millennium Development Goals. The International Labour Organization (ILO) expects the number of unemployed to rise between 39 and 59 million people in 2009 in relation to 2007 (Chart 2).
Over the past two decades, based on a diagnosis of the origin of financial crises (the 1980-1983 debt, the 1994-1995 Mexican crisis, the Asian-Russian crisis in 1997-1999 and the Argentinean crisis of 2001-2002), the proposed reforms of the international financial architecture have focused on crisis prevention and management in emerging economies' open capital accounts. The current crisis shows, on the one hand, that volatility and financial contagion are not problems solely of developing countries, and, on the other, that the challenges of crisis management and prevention are compounded by problems of legitimacy and representativity. Under this rationale, the main challenges of reforming these institutions centre on their governance, decision-making and the availability of resources and instruments. In the case of the IMF, there is a concentration of decision-making power in favour of industrialized countries. As Figure 1 shows, the participation of these countries in world GDP is similar to that of developing economies. However, developed countries control nearly 60% of quotas. This leads to the hegemony of developed countries in the definition of IMF goals and the allocation and distribution of financial resources.
This imbalance should be corrected by reforming IMF governance, an even more extensive reform than that agreed upon in the G-20 meeting (April 2009), more inclusive and representative, with significant changes in the IMF's voting structure, in order to give developing countries more voice and decision-making power in the design of international economic policy according to their economic importance and level of development. There is a proposal to strengthen the use of the basic votes that currently represent an insignificant percentage of the total and the vote per double majority. (Currently, each IMF member has 250 basic votes plus one vote for every 100,000 SDR of their quota. Originally, basic votes represented 11% of the total, but now they only represent 2%). The current quota allocation system also limits the participation and decision-making power of developing countries in the World Bank. The suggested reforms on governance focus on allocating quotas according to a country's economic significance, their contribution levels and development needs. Likewise, developing countries have only recently attained a small degree of representation in the Basel Committee on Banking Supervision and until recently, they were not represented in the Economic Stability Forum. Developing countries' lack of representation in these forums makes their analyses and regulatory policy recommendations incomplete, leading to important mistakes, as reflected in the supervision and regulation failures that were important causes of the current crisis. These institutions need the participation of all countries in order to draft globally-accepted regulatory codes and norms. The recent reform to the Economic Stability Forum (renamed Economic Stability Board in 2009) that increased its membership, including G-20 developing countries such as India, China, Indonesia and South Korea, is a step in the right direction. However, mechanisms must be sought to attain the adequate representation of different experiences and viewpoints in order to establish effective, coherent and appropriate regulatory laws that can be applied nationally and internationally. In addition to promoting reforms to institutional governance, they should also be provided with greater and better capacities to manage economic cycles. This can prevent the risks imposed on the global economy by volatility and contagion that are characteristic of the international market from leading to significant losses in the real economy, in lower living standards and the ballooning of unemployment at a global scale. The impact of the crisis on developed and developing economies prompted initiatives to strengthen the lending capacity of multilateral institutions and make their instruments more flexible. Some of the most relevant ones include, in the first place, the recapitalization of the IMF with US$ 250 billion to US$ 750 billion (G-20). A new emission of US$ 250 billion in Special Drawing Rights (SDR) was also approved, allocating US$ 100 billion to multilateral development banks and using US$ 250 billion to encourage global trade. This would be financed with IMF member loans, contributions already made by the European Union and Japan of US$ 100 billion each and US$ 40 billion to be contributed by China. There is also a proposal to increase the lending capacity of multilateral development banks by at least US$ 100 billion. These initiatives have been accompanied by the flexibilization of the IMF's financing facilities. This includes the establishment of a flexible credit line (FCL) without a pre-established maximum limit, which provides funds for countries with solid economic performance and policy frameworks. Since the creation of the FCL, the IMF has provided loans for a total of US$ 78 billion (to Colombia, Mexico and Poland). These initiatives should also include strengthening stand-by agreements and promoting their use as regular, available credit instruments of precautionary nature. The conditions to access IMF funds have also become more flexible. This includes the modernization of IMF conditionality, by way of monitoring structural reforms in a broader framework of national programmes instead of under the criteria of how they are implemented in specific areas. Lastly, the limits to borrowing on concessional terms has doubled accumulatively, starting with 200% of the quota and up to a maximum of 600% of the quota in three years. As for the World Bank, the proposed increase in its financing capacity has been accompanied by a series of specific programmes aimed at raising spending in infrastructure and social spending to protect the most vulnerable population and in this way strengthen social protection networks. However, more efforts are needed to strengthen the capacity of response of multilateral institutions so they can provide liquidity in a timely, flexible and countercyclical manner. This implies, on the one hand, broadening the funding base of agreements and loans. The active use of Special Drawing Rights should be promoted and a multilateral framework should be established for issues related to debt restructuring. The efficient and coherent functioning of a multilateral financial institutional framework requires broad coordination among the different organizations that compose it so as to ensure coherence between their actions and policy proposals. The Global Economic Coordination Forum in the framework of the United Nations mentioned above can serve to articulate the different global financial institutions. In this aim, it is necessary to formally include the WTO in the United Nations system. The inclusion of the WTO could improve dispute settlement mechanisms, which are an important venue to establish fair trade practices and use trade as an instrument of social and economic development. In addition to its coordinating function, the United Nations can perform a more specific role in terms of crisis management and prevention, using its knowledge of the economic dynamics of its member countries. For example, the UN Regional Commissions have a wealth of regional knowledge that could contribute to the design and creation of relevant economic and social indicators, to the design of economic policies that may heighten development in the long-term, to the promotion of improvements in the practice of transparency and accountability, to the development of an early alert system, strengthening surveillance and helping promote the coordination of macroeconomic policies among member countries of one same region. FINAL CONSIDERATIONS Two global public goods that are vital for the survival of the world as we know it are in peril: financial stability and climate security. Both issues reflect two types of crises. One is temporary and the other is structural. Both the financial and economic crisis and the climate crisis have revealed the need to strengthen multilateral institutions in an increasingly globalized and interrelated world. The lack of global public goods - financial stability and climate security - makes increasingly evident the urgent need to seek a more equal and representative multilateral institutional framework that may guarantee collective and simultaneous action and that fully acknowledges the principle of shared but differentiated responsibilities. In this aim, the mechanisms that allow countries and diverse sectors to coordinate actions need to be strengthened so they may serve internationally-agreed development goals, including social and environmental sustainability. For this to happen, we support the creation of a Global Economic Coordination Forum based on what is now ECOSOC. This forum should serve as an axis to coordinate the activities of different multilateral institutions, promote discussion on the kind of development that should be sought and count with instruments that allow it to implement the mandates and guidelines it sets forth. In terms of the global financial architecture, added to the challenges of crisis management and prevention are the problems of legitimacy and representativity. This demands reforms to improve the governance of these institutions and give voice and vote to developing countries. It also requires that this new mechanism achieve the goal of preventing crises by strengthening countries' capacities to implement economic policies, and, in particular, regulatory systems, surveillance and monitoring. This requires creating indicators of vulnerability that may also establish early alert and prevention mechanisms in order to impede reaching an irreversible situation. The role of the United Nations should not be limited to the Global Economic Coordination Forum. The UN should also fulfill a more active role in order to arrive at a more comprehensive view of economic and social issues. This is why it is important to reconsider development in a broad perspective, as the international economic order is rebuilt, to address the future agenda with profound global solidarity. Alicia Bárcena, | ||||||||||||||||||||||||||||||||
