The Fox in the Henhouse: Reforming the Global Financial System (March 2009)

Rethinking Bretton Woods | Thu, Apr 2, 2009

By Aldo Caliari
Source: Center Focus
As the financial crisis, now clearly of global proportions, continues to expand taking its toll in jobs, real wage cuts and social benefits in all countries, the pressure for a multilateral response has grown. But, is the G20 it? In this article for Center Focus, Aldo Caliari argues that the short ambition of the G20 Summits may have to do with its limited composition, closed debate and closed, non-transparent working practices.

As the financial crisis, now clearly of global proportions, continues to expand taking its toll in jobs, real wage cuts and social benefits in all countries, the expectations and demands for a concerted, multilateral response have also grown. 

Heads of State of the Group of 20 (G20), hosted by the UK, which currently chairs the Group, will meet in London on April 2. This will be a follow up meeting to that which former President George W. Bush presided over in Washington. It was made clear at the time that that summit was only the first in a series and that the measures then launched were the starting point of a work program that would continue throughout this year. This was a partial explanation for the meager results of the November Summit. It was very short in ambition, especially taking into account that some of the attending leaders had billed the meeting as a sort of “Bretton Woods II” moment—referring to the New Hampshire conference held in 1944 that created today's main global financial institutions, the World Bank and the International Monetary Fund.  

A number of working groups were assigned by the G20 to develop reform proposals that will be considered at the leaders’ next meeting. Though the officials continue to try to bill the upcoming meeting as one that will come up with “far-reaching agreements” on reform, there are few reasons to believe that the long term views emerging from this more extended work program differ much from the short term ones that emerged from their gathering in Washington last November.  

Watchdogs like Center of Concern who followed the post-Asian crisis debate on reform of the international financial architecture cannot help but feel a certain déjà-vu as the G20 sets up its working groups, –more or less the same countries that in the late 1990s, as a then-constituted Group of 22, set up a number of working groups, some of them with very similar names!  

The very fact that one working group ‘s mandate is defined as reform of the International Monetary Fund while another as reform of the World Bank and regional development banks, already heralds low expectations. In fact, civil society demands have emphasized the need to rethink altogether whether the functions required by a better working financial system might be assigned to different mechanisms or institutions. Developing countries’ continued reluctance, even in the face of the crisis, to draw funding from the IMF, is a very telling symptom that something is not right with continuing to rely on this specific institution. Given the successive waves of “reform” that these institutions have gone through in the last decade, there is little room for optimism in yet a new attempt at promoting their change.  

Some of the reforms being discussed under this heading could, in fact, be quite dangerous. The government of Japan has decided to provide a line of credit that would increase the lending capacity of the IMF in USD 100 billion. The Japanese move may actually inspire other  governments to follow suit. This means, at exactly the time when the institutions’ legitimacy and effectiveness are most questioned by civil society and user member countries, the IMF would get a new lease on life through increased resources by some of the developed country members.

The other two working groups are examining transparency, regulation, and enhancing cooperation in oversight of financial markets. This would seem a more promising line of analysis, especially if it were to raise hard questions about international banking supervision, regulation of credit rating agencies, hedge funds, private equity funds and those of their practices that led to a plethora of complex financial instruments. The financial crisis has brought under challenge the prevailing philosophy that the financial system would be best served by leaving these actors largely to exert their own “self-regulation.” Yet, there are few signs that the G20 is ready to change the prevailing philosophy, even as developing countries in the G20 have clearly demanded it. 

Banking supervision would still be based on the general paradigm that guided it before the crisis: one reliant on the self-monitoring of risks by banks themselves and embodied in the Basel Accord. The Basel Accord is an agreement developed by a little known committee— the Basel Committee of Banking Supervision—made up solely of representatives of a few developed country governments. There is little willingness in the Group of 20 to increase the regulation of credit rating agencies, even though they are responsible for big mistakes in rating the financial instruments that helped banks justify their own lack of diligence in assessing the underlying risks of loans they were making.  

The limited agenda of the G20 may have to do with its limited composition. While it is often said that the members of the G20 represent 85 % of the world’s GDP and two-thirds of its population, basically this means that 172 countries are left out of it. While some developing countries are part of it, they have no mandate to represent the views of any other country than themselves.

In addition, the G20 is characterized by narrow debate and closed, non-transparent working practices. In spite of civil society demands, none of the G20 working groups has made its reports available to public scrutiny, let alone opened them to public comments. And in spite of the regulatory significance of the matters that are under discussion, Parliaments in G20 countries have not been able to weigh in on such reports, either.  

Not even an identity feature of the group, “G20,” its number of members, seems to be off limits to the discretion of the chair. This is evidenced by the recent UK decision to invite two more countries for the next meeting: Spain and Netherlands, both of them European and developed countries. Coming just as developing countries are told that no more of them can be invited because if the group got larger, the expedited nature of deliberations would be compromised, the UK’s gesture seems like a bad joke at their expense, except that there is nothing funny about it.

The G20 sources of inputs are also limited to wearily familiar ones. The same Basel Committee that developed the banking rules responsible for the crisis is the body acting as a think tank to G20 government experts!

That is why civil society groups from all over the world meeting in Belem, Brazil, for the World Social Forum, made a point of stating in their first demand that the G20 is not the legitimate forum to resolve this systemic crisis. 

Indeed, Heads of State meeting in Doha for the Financing for Development Conference Review last year gave the United Nations the mandate to convene a high level conference that will look at responses to the world economic and financial crisis. The President of the General Assembly convened a  Commission of Experts chaired by Nobel-Prize winner Joseph Stiglitz, in order to generate recommendations that could be discussed by governments in a much more inclusive process, one which will also welcome the participation of civil society and be open to public scrutiny.

The different nature of this process clearly shows in the range of proposals being discussed by the Commission. Some of the questions being asked by the Commission are strikingly different from those in the G20 deliberation. For instance, “Is it better to create new institutions or reform existing ones?” “How can large countries be more accountable to multilateral surveillance of macroeconomic performance?” “How can we deal with exchange rate volatility and currency speculation?” 

In the months ahead the Center of Concern will continue to fulfill its usual role providing analytical support to governments, intergovernmental organizations and civil society organizations around the Group of 20, Group of 8, and United Nations High-Level Conference processes. For continued updates both on the deliberations on responses to the global financial crisis please stay tuned through the Rethinking Bretton Woods Project’s listserv.