A critical assessment of the strategy and tactics for reforming global financial governance

Daniel Bradlow 06 September 2011

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The G7 countries have long acknowledged that the “gentlemen’s agreement” that ensured that the IMF is always led by a European was an anachronism and should end. They even promised, in a G20 summit communiqué, that future heads of the IMF and World Bank would be selected on merit in transparent procedures. Nevertheless, after the Europeans decided they needed IMF assistance, they concluded that they “needed” another European IMF Managing Director. Thus, the new IMF Managing Director, like all her predecessors, is a European and her first Deputy, like all his predecessors, is an American.

This development forces us to critically reassess the prospects and tactics for achieving global financial governance reform – a process that has been ongoing among analysts (see for example Truman 2009 on this site).

The current prospects of substantial governance reform

The failure of the developing countries to rally around one candidate to oppose Christine Lagarde and the relative ease with which she was appointed IMF Managing Director highlights two unpleasant realities.

  • First, it demonstrates the limited success these countries, particularly those that are members of the G20, have had in reforming global financial governance. They are not yet sufficiently organised to stop the G7 from enforcing their will on matters of most interest to them. To do so, the developing countries need a mechanism for quickly reaching and implementing agreements on global financial governance affairs. The costs of failing to do so are highlighted by the story of the Special Drawing Right. When the SDR was being created, participating developing countries argued it should have a developmental purpose but could not agree on that purpose. As a result, the rich countries got what they wanted – an SDR with no development purpose.
  • Second, it shows that, despite their progress in building global networks, international civil society groups, particularly in the North, have not achieved sufficient influence to make their own governments live up to their commitments about international financial institution (IFI) governance reform.

These realities suggest that there is scope for a tactical bargain between the developing countries and international civil society. This bargain will require both parties to acknowledge their limitations and realistically assess the prospects for change. They will also each need a long-term strategic vision of global financial governance that they can use to identify a set of mutually acceptable and achievable short term reforms. This long-term vision should be based on the following five factors.

1. A holistic vision of development

All states are developing states in the sense that they are striving to create better lives for their citizens. While states may differ in defining this task, they all acknowledge that development is a comprehensive and holistic process in which the economic, social, political, environmental, and cultural aspects are integrated into one dynamic process. The ability of global financial governance institutions to help all states achieve their developmental objectives depends on how effectively they incorporate this holistic vision of development into their operations.

2. Comprehensive coverage

Comprehensive coverage means that the mechanisms and institutions of international financial governance should be applicable to and serve the interests of all stakeholders in the international economy. Three important corollaries follow from this principle.

  • First, the mechanisms of international financial governance must be flexible and dynamic enough to adapt to the changing needs and activities of their diverse stakeholders.
  • Second, international financial governance arrangements must ensure that the international community receives all the services it requires from a well-functioning global financial system: A lender of last resort; monetary regulation; development finance; regulation of trade and investment in financial services; regulation of the cross border activity of financial institutions; coordination of national financial regulation; appropriate incentives for financial actors; coordinated taxation of financial transactions; arrangements for dealing with sovereign debt problems and complex cross-border bankruptcies; and regulation of international money laundering.
  • Third is the principle of subsidiarity, which holds that all decisions should be taken at the lowest level in the global financial governance system compatible with effective decision making both in standard operating conditions and in crisis situations.

3. Respect for applicable international law

The institutional arrangements for international economic governance should comply with applicable international legal principles. There are at least three sets of such principles.

  • The first is respect for national sovereignty. While it is inevitable that in an integrated global system states forego some autonomy, the principle of national sovereignty helps them preserve as much independence and policy space as is consistent with effective global financial governance.
  • The second is non-discrimination, which ensures both that all similarly situated states and individuals are treated in the same way and that differently situated states and individuals receive disparate treatment. In the case of states, this requires adapting the principle of special and differential treatment to international financial governance. This may require, for example, the creation of special communication and accountability mechanisms that enable weak and poor states to enjoy a meaningful level of participation in international financial decision-making structures and institutions.

In the case of non-state stakeholders, the relevant principles should be derived from documents like the Universal Declaration of Human Rights, which many now consider to be part of customary international law.

  • The third set of principles is derived from international environmental law. At a minimum this requires all international governance institutions to fully understand the environmental and social impacts of their operations and practices.

4. Coordinated specialisation

Coordinated specialisation acknowledges that international financial governance requires institutions with limited and specialised mandates. It has two requirements.

  • First, the mandate of each of the institutions of international financial governance must be clearly defined and limited to international financial affairs.
  • Second, these institutions must have transparent and predictable mechanisms for coordinating with other global governance organisations and arrangements.

5. Good administrative practice

The arrangements for global governance should be guided by the same principles –  transparency, predictability, participation, reasoned and timely decision making, and accountability – as are applicable to any public institution. Thus, they must conduct their operations pursuant to transparent procedures that provide all stakeholders with opportunities for participation and which produce results that are predictable and understandable. Finally, the stakeholders should be able to hold the institutions accountable for their decisions and actions.

Tactical considerations

Clearly there is neither general agreement among developing countries and international civil society on the details of this long term vision nor on how to implement it. Moreover, given the current geopolitical dispensation, it is not possible to create global governance arrangements that are fully consistent with this vision. Instead, developing country governments and civil society should concentrate on reform issues that can both result in immediate real gains for their countries and their citizens and open up further reform opportunities that are consistent with their long-term vision. This will require them to deepen and enrich their contacts with each other.

The first issue on which the two groups can cooperate is raising the importance of financial inclusion on the financial regulatory reform agenda. They should advocate for regulations that encourage financial institutions to develop products and services for the currently unbanked and small businesses. In this regard, they should remind their counterparts of Paul Volcker’s contention that the most important recent financial innovation was not a fancy derivative but the ATM because it enhanced access to financial services. Africa could also point out that the next such innovation could be cell phone banking, in which Africa is a leader. They can also advocate for regulations requiring international financial institutions to recycle at least a stipulated proportion of the capital flight that they attract from developing countries back into these countries.

Second, they can prioritise realistic reform of the institutions of global financial governance. Given that substantial structural reform of these institutions’ governance, which requires treaty amendments and member state ratification, is unlikely to take place soon, they should concentrate on reforms that are possible within the existing legal frameworks. One such reform is increasing the IMF’s public accountability. Unlike the other IFIs, it does not have an independent accountability mechanism that allows non-state actors to have their claims that they have been harmed by the failure of these IFIs to comply with their own policies and procedures investigated. Such a mechanism, adapted to the IMF’s operations, could both enhance the IMF’s responsiveness to its stakeholders and enable it to obtain more detailed empirical knowledge about the impact of its policies and operations, thereby contributing to improved IMF performance.

Another potential governance reform is increased transparency in and accountability of the Financial Stability Board and such international standard-setting authorities as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. These reforms should increase the likelihood that they will develop standards and decision-making procedures that are responsive to the needs of all their stakeholders, thereby incentivising financial institutions to address such global problems as poverty, inequality, and environmental degradation.

Conclusion

Given the current environment, the G20 developing countries and international civil society can only win limited tactical victories in their efforts to reform global financial governance. In order to effectively capitalise on all opportunities for such victories, they should use the above principles to both shape their long term vision of international financial governance and to identify the tactical alliances and actions that can slowly build to their long-term vision.

References

Truman, Edwin M (2009), “The G20 and international financial institution reform: Unfinished IMF reform”. VoxEU.org, 28 January. 

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Topics:  Global governance

Tags:  IMF, World Bank, global financial governance, international financial institutions

SARCHI Professor of International Development Law and African Economic Relations at the University of Pretoria, South Africa, Professor of Law and Director of the International Legal Studies Program at American University

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