Saturday, December 13, 2003

International Finance & Global Governance


What Role For The IMF?
By Jane D'Arista*

Criticisms of the International Monetary Fund (IMF) by progressives and nongovernmental organizations (NGOs) currently focus on six issues: (I) the need for debt relief; (ii) the need to democratize the Fund's governance; (iii) the need to increase transparency; (iv) issues related to bailing-out and/or bailing-in private investors; (v) the Fund's future mission; and (vi) the need to reform the policy paradigm that countries must accept to qualify for borrowing. First I will provide a brief overview of progressive critiques on these issues. Then I will discuss other areas that also should be a focus of concern and criticism. I will conclude with some proposals for alternatives....

....Alternative Proposals

In addition to the reorientation of IMF and World Bank loans as a means to achieve social and environmental goals, progressives support a variety of ideas, both old and new, for reforming the international financial and monetary architecture. They argue for using capital controls to moderate pro-cyclical private flows seeking short-term profits.

Many support instituting some form of the securities transaction tax proposed by Tobin, that would discourage short-term turnover of investments in source countries (Pollin and Baker, 2000). Palley (2000) proposes extending asset-based reserve requirements to all financial sectors and assets, so as to reestablish monetary control over the supply of credit in national markets. Eatwell and Taylor (2000) propose the establishment of a World Financial Authority (WFA) to provide global oversight of international financial institutions, on the grounds that the monitoring of global markets via national regulation is inadequate. They argue that the IMF should not be involved in financial regulation, and that a WFA is needed both to reestablish the primacy of stability and soundness as regulatory objectives and to reverse the current push for deregulation.

Elsewhere (D'Arista, 1999), I have offered three proposals to reform the international financial and monetary systems. The first is a proposal for a closed-end international investment fund for emerging markets, with investment decisions based on development goals rather than short-term profit opportunities. The fund would be financed through private institutional investors' purchases of marketable World Bank securities. As a closed-end fund, investors could sell shares without triggering sales of underlying assets.

This structure would serve to insulate underdeveloped markets from volatile flows of foreign portfolio investment, while providing a highly-rated, guaranteed investment asset for institutional investors.

My second proposal is to issue new special drawing rights (SDRs) that would augment the international reserves of developing countries and reduce their debt burdens. SDRs were originally intended to become a primary reserve asset and to give the IMF limited powers to act as a lender-of-last resort (IMF, 1987). The most recent allocation, however, was in 1981, and only $28 billion in SDRs are currently outstanding, compared to $1.6 trillion of foreign exchange reserves. Moreover, as of yet, none have been issued to Russia and other new member countries. Yet, SDRs represent an existing mechanism for relieving the liquidity squeeze that has affected developing countries since the Mexican crisis in 1995. A new allocation, targeted to highly indebted and crisis-affected countries, could be even more effective than debt relief in re-igniting global growth.

My third proposal calls for the creation of an international clearing agency to address the basic problem in the global economy: the unraveling of the international monetary system. Failures of exchange-rate regimes and the push for dollarization and other currency blocs are symptoms of international monetary fragility. Under the privatized, post-Bretton Woods system, the volatility of changes in the valuation of currencies has widened their impact and deepened the economic damage they cause. The fact that only a few countries issue currencies that can be used in international transactions greatly exacerbates this instability. The primary objectives of the proposed clearing agency would be to allow all currencies to be used in international transactions and to shift control of international payments from private to public institutions.

This system would replace the current system of foreign exchange that is based on oligarchy. Resources would be valued in terms of the entire basket of currencies of member countries. All international reserves would be held by the international clearing agency. Changes in exchange rates would be tied to changes in the reserves of member countries and adjusted at two-week to four-week intervals. The clearing agency would also have the means and authority (on the basis of a majority vote of its member countries) to create reserves by conducting open market operations in national markets.

This power would create a true lender-of-last resort for the global economy, responsive not only to balance-of-payments problems stemming from trade and investment flows, but also to the often greater problems that can result from natural disasters and the devastation of war.

Creating an international clearing system that reestablishes public control over crossborder payments is necessary to end the pro-cyclical rule of market forces and to restore sovereign control over policy determination. It would allow national central banks to reintroduce the use of credit allocation and countercyclical policies; it would also allow governments to pursue development and growth as objectives of economic policy. Furthermore, since it would allow developing countries to pay their transactions and service their debts with wealth created in their own national economies, such a system would end the export-led growth imperative of the current system and reinstate demandled growth as an alternative policy paradigm for developing countries.

The reform of the international financial and monetary architecture requires a democratic basis for governance. The clearinghouse proposal envisions a rotating council composed of member countries that would represent half the world's population and half the world's wealth at all times. The EU has taken steps in a similar direction by weighing both population and monetary contributions to determine voting shares within the European Central Bank. Similar criteria must be applied to shaping the governing structures of international institutions, old and new. Whatever the specifics, the issue of democratic governance must be addressed. ...Complete Text

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