It is important to remember that institutional reform is only one of several topics that will be discussed and resolved (we hope) by the leaders of the G20 countries when they meet in London on April 2.
The core of the present crisis concerns the banking system, but G20 leaders will be constrained because most of them have given primary responsibility in this area to independent central banks whose independence they will be anxious to preserve. That still leaves certain decisions which are unarguably political, like whether to temporarily nationalise banks, but leaders may still be feeling their way on this question and reluctant to have their hands tied by a formal decision.
The leaders will surely wish to ensure that all of their countries are playing an appropriate role in the necessary global fiscal expansion and will repeat a pledge to resist protectionist pressures. One hopes that they will also depute some organisation to monitor the fulfilment of that pledge. Several European participants will press for sketching the principles of financial regulation that they would like to see after the crisis, though whether ideas in this area have gelled to the point where constructive decisions would be possible is open to question. There seems little point in subjecting additional institutions to regulation of the sort that has prevailed in the past given the record of bankruptcy by regulated and unregulated alike, or in increasing the required capital-asset ratio to a new fixed level, yet there are a number of more promising ideas on which a consensus may be reached after further discussion.
Institutional reform of the international financial institutions
Institutional reform is unique in that it could simultaneously address the short-run agenda of combating the collapse of aggregate demand and the long-run agenda of building a global economy fit for the 21st century.
IMF reform has to be at the forefront of such an initiative, since the Fund is potentially the most relevant institution in the current crisis but in practice is greatly under-utilised. The agenda that I outlined in my previous Vox column – reform governance in order to give appropriate weight to the new powers of Asia and increase its lending power, especially through no- or low-conditionality mechanisms – seems to be basically right. But the agenda needs modifying in two ways.
- I expressed scepticism about special drawing rights (SDR) allocation as a mechanism of low-conditionality lending, but perhaps this is unjustified (as Truman, Rodrik, and Bird argued in their posts). SDRs do exist, and an allocation would be a relatively straightforward way of increasing aggregate demand which could be deployed on a meaningful scale in the short run, while previous critics of SDRs seem to be less dogmatic now.
- I proposed that industrial countries make sacrifices but held out no carrot to them. If one believes that the global imbalances were at least a permissive factor in nurturing the current crisis (my own view), then one also has to believe that there would be potential social benefit in meeting the (admittedly ambiguous) desire of the industrial countries for a system of multilateral surveillance with teeth.
In my view, it would be unjustified for the leaders to limit their attention to a part of this agenda. In particular, they cannot dismiss concerns about the long term by arguing that we are in a crisis and therefore need to focus on immediate problems. Some of the participants, and many of those watching, regard this as a historic occasion analogous to Bretton Woods and would feel seriously let down if the leaders confined their attention to stimulating demand, pledging not to embrace protectionist measures, and adding to IMF resources, even if they also said something about banks. The only times we ever get serious reforms are in the midst of crises. The present crisis should trigger the IMF reform that was squelched last year and the reform of the regulatory system that the crisis has demonstrated to be acutely needed. The leaders are not going to have the time, even if they had the capacity, to agree on the design of the new system, but they must find the time to maintain the pressure for change. There is no contradiction between responding to the shortfall in demand and reforming the system.
Reform need not be perfect
On the other hand, reform should not be construed as achieving perfection. Some analysts have talked of the need to invent a new theory or of the desirability of basing a new system in the UN rather than the Bretton Woods institutions or the G20. If we hold reform hostage to achieving agreement on a new theory, we shall be stuck indefinitely with the IMF we have. As it happens, I would prefer to see the power to direct the world economy that seems likely to be wielded by the G20 exercised instead by a UN-based Economic Security Council with a pretty similar composition to the G20 (I could go along with the proposals sketched in the conclusion of the Zedillo Report (Zedillo 2001). But realism tells us that the G20 is unlikely to call for its own euthanasia, and the above is written in the belief that reform is urgent, not an academic prospect that can be delayed a few decades as would probably be implied by making the best the enemy of the good.
Zedillo, Ernesto (2001). The Zedillo Report, 2001 (UN A/55/1000, p.29 or pp. 66-67).