Rethinking Bretton Woods | Sat, Nov 27, 2010
On November 11-12, G20 Leaders held a Summit in Seoul. The core of the agreements was contained in an outcome called “The Seoul Summit Document.” Some highlights follow:
The lead up to the Summit saw little improvement in unemployment figures, and an apparent weakening of the recovery trends. The expression “currency war,” that is, a competitive exchange rate devaluations, tough first expressed by Brazilian Minister Guido Mantega gave form to a ghost that was arguably in everybody’s mind.
The preceding G20 Finance Ministers meeting saw the foundering of a proposal advanced by the US government to cap current surpluses and deficits at a four percent of GDP. At the Summit, G20 Leaders requested their Ministers and Central Bank Governors to agree on “indicative guidelines… composed of a range of indicators” that are expected to serve as “a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.”
International Monetary system
Given the importance of global imbalances on the agenda, it is rather surprising that the reform of the monetary system, a key factor that could help actions by all governments to reduce the imbalances, received relatively little attention.
The Summit outcome document recognized that “While the international monetary system has proved resilient, tensions and vulnerabilities are clearly apparent.” The G20 Leaders agreed to “explore ways to further improve the international monetary system to ensure systemic stability in the global economy” and “asked the IMF to deepen its work on all aspects of the international monetary system, including capital flow volatility.”The IMF work that the document refers to has so far, unfortunately, been more akin to a review of literature on different monetary system options than to progress towards building consensus on policy. (For a deeper discussion on this issue see G20 Summit: Timid Nod Given to Reform of the Monetary System, at http://www.coc.org/node/6629)
IMF Governance reform
Before the Summit, the IMF announced having reached a deal on the reform of quota shares. On the main point that the discussions on quota reform involved, the resolution was rather disappointing. The language from the Pittsburgh and Toronto Summits left in ambiguity whether the objective was to shift voting from developed to developing and emerging countries (the reading of developing countries), or from those over-represented to those under-represented under the existing quota formula. After the agreement reached in Korea is implemented, a total of six percent of quota will have changed hands but approximately half of it comes –in the IMF’s own recognition—from emerging markets, a large part of them oil-producing countries.
Perhaps more significant than the change in quota is the agreement to hand two seats at the Board – that the European countries will have to cede—to emerging markets and developing countries. Indeed, due to rules that do not allow Executive Directors to split their vote, and the presence of several mixed (developed and developing country) constituencies, the effective power commanded at the Board by developed country EDs ranges between 65 and 70 percent. This might change with the new Board composition—but no deadline is given in the document for this to happen.
Also more promising than the transfers of quotas are the potential outcomes of a review of the quota formula itself, formula which is anachronistically carried over from the 1940s. In 2008 the agreement on reform had come with the promise that the quota formula would be comprehensively reviewed before the next quota review, scheduled for January 2011. This will not be done, but the G20 Leaders agreed to do it by January 2013.
Global Financial Safety Net
A top issue for the Korean government was the “global financial safety net.” Under this heading, a number of proposals have been debated throughout the year at the IMF, with the general objective of improving the lending capacity and modalities the IMF has available in the face of shocks of a systemic nature.
The G20 Leaders, in general, welcomed the upgrading that the IMF has introduced to some of its crisis credit lines and reaffirmed the decisions at the last Annual Meetings of the IMF in October. They called for an exploration of “a structured approach to cope with shocks of a systemic nature” and “ways to improve collaboration between regional financial arrangements and the IMF… while recognizing region-specific circumstances and characteristics of each regional financial arrangement.”
The Summit also announced the IMF Board agreement on so-called “multi-country swap lines.” This is a proposal that would allow the IMF to unilaterally offer a Flexible Credit Line – the arrangement that is available to the countries the IMF considers to have policies in best shape—to several countries at once. Rather than going through the creation of a new facility—which would have required a higher voting threshold--, a simpler clarification of procedures now allows the Fund to do this. It is questionable whether the arrangement represents as much of an advantage for members – since these could always apply for a FCL arrangement—as for the Fund itself. This way, in fact, the institution hopes to overcome the stigma effect of its lending, by enabling members to find out that they qualify for the credit without having had to apply for it first.
Civil society groups expressed concern that “megaloans” made possible under the global financial safety net proposals will, because of the absence of appropriate debt workout mechanisms that force all creditors to share on crisis burdens, translate into the bailing out of private creditors. Subsequently, citizens and workers are the ones to carry the burden of the bailout via adjustment and austerity programs. But sovereign debt workout mechanisms to prevent the ensuing increase in moral hazard on the side of the private sector remained absent from the agenda in Seoul.
Large and complex financial institutions
In Toronto, the G20 had promised to finalize, by 2010, measures to ensure that the large bailouts of global banks, as seen in the 2008-09 financial and economic crisis, were never required again.
In speaking of the “systemically important financial institutions” the Summit outcome affirms the principle that “no firm should be too big or too complicated to fail and that taxpayers should not bear the costs of resolution.”
But there is very little in the list of measures that follows this statement to support its credibility. For one, the idea of caps on large financial institutions has been discarded.
The most ambitious proposals endorsed on this point are “A resolution framework … to ensure that all financial institutions can be resolved safely, quickly and without destabilizing the financial system and exposing the taxpayers to the risk of loss” and “A requirement that SIFIs and initially in particular financial institutions that are globally systemic (G-SIFIs) should have higher loss absorbency capacity to reflect the greater risk that the failure of these firms poses to the global financial system.”
But a resolution framework for cross-border financial institutions is, indeed, ambitious. It has eluded policy-makers for a long time. Conjugating the multiple legal and institutional approaches to bankruptcy of banking institutions in a multilaterally accepted regime would be quite challenging. Adding to these difficulties is the need to agree on burden-sharing approaches between home and host countries.
As for the extra capital requirements, even in some of the best case scenarios, experts argue the actual impact on incentives to become large will be quite limited. They will probably not be even enough to offset the rating advantage that large financial firms enjoy because of the perceived implicit support that governments are expected to provide to them due to their systemic impact.
In other words, the limitations of these measures call for considering, at least on a complementary basis, the splitting in size of global institutions to make their failures more manageable or the incorporation and capitalization on a country-by-country basis. In an enumeration of issues “of particular interest to emerging and developing economies” that the FSB will be considering next year, the document mentions regulatory and supervisory capacity of such economies “… including with regard to local branches of foreign financial institutions which are systemic in their host country.” So, even from this agenda the issue of local incorporation seems to have been excluded, though the fact that the enumeration is not exhaustive leaves room for hope.
Trade and Investment
In a section on “trade and investment protectionism” G20 Leaders reaffirmed their “commitment to free trade and investment recognizing its central importance for the global recovery.” The document contains a renewed call for a “successful, ambitious, comprehensive, and balanced conclusion” of the WTO Doha Development Round, adding that 2011 is a “critical window of opportunity, albeit narrow” to get that done. Likewise, there was a reaffirmation of the standstill commitment on protectionist measures until 2013 and to rollback new protectionist measures that may have risen and renewal of the request for WTO, OECD and UNCTAD to provide monitoring reports on this. Reports delivered before the Summit confirmed that less trade restrictive measures are being introduced, but this partly obeys to the fact that previously introduced ones are being kept, and the reports worry about their cumulative effect. (Check http://www.coc.org/node/6630 for a more detail assessment of these reports).
In line with the host’s agenda to give higher prominence to development issues, the document focuses on Low Income Countries and welcomes the trade commitments in the Multi-Year Action Plan on Development (this Action Plan was produced by a Working Group on Development that, chaired by South Korea and South Africa, established at the Toronto Summit in June).
G20 leaders made commitments on the following areas:
Ø Market Access: G20 Leaders pledged to “make progress towards duty-free and quota-free (DFQF) market access for the least developed country (LDC) products in line with Hong Kong commitments without prejudice to other negotiations, including as regards preferential rules of origin” and to “explore, …the scope for further improvement and cooperation among G20 members leading to the implementation of this commitment.”
Ø Aid for Trade: “maintaining, beyond 2011, Aid for Trade levels that reflect the average of the last three years (2006 to 2008).” While this was a particularly high period of flows for Aid for Trade, choosing the year 2008 would have yielded a higher level, but that proposal which was part of the initial debate, was not finally adopted. The Leaders also promised to, in parallel, “ensure that aid flows to other sectors are sustained.” But after the commitments made by the G8 in Gleneagles to double aid to Africa by 2010 were unceremoniously dropped at the G8 Toronto Summit this year, there are reasons to doubt even this, much more limited promise, will be honored.
There is also an agreement to monitor the commitments and evaluate their impact on LICs’ capacity to trade. The outcome of the Global Aid for Trade Review, to be held July 2011, are to be used as an input to adjust the Multi-Year Action Plan. Also by the time of that review international agencies (including the World Bank and MDBs) are requested to coordinate a “collective multilateral agency response” to step up their capacity and support trade facilitation.
Ø Trade finance: G20 Leaders asked the G20 Trade Finance Expert Group, together with the WTO Experts Group on Trade Finance and OECD Export Credit Group to further assess the current need for trade finance in LICs. If a gap is identified, they promised to “develop and support measures to increase the availability of trade finance in LICs.”
What rests credibility to this commitment is that the continued difficulties by LICs to access trade finance have been already more than verified, so it is hard to understand the reason for further inquiries before taking action. For instance, the most recent report of the WTO Expert Group says in report dated two weeks before the Summit: “traders in low-income countries remained subject to the greatest difficulties in accessing to trade finance at affordable cost, particularly import finance” and “most participant banks had been closing correspondent accounts in recent months, in particular in Africa, in order to "rationalize" their trade portfolios around more profitable operations in other continents. “
Ø Regional integration: In order to develop practical measures that can be pursued nationally and regionally to support successful regional trade integration, in particular between African countries, G20 Leaders asked the African Development Bank, in collaboration with the WTO and MDBs to identify before the 2011 Summit the existing obstacles and barriers to regional trade integration.
Before the Toronto Summit, the FSB had begun to evaluate adherence to prudential information exchange and international cooperation standards in all jurisdictions. G20 Leaders in Seoul took a step further and asked the FSB to determine those jurisdictions that are not cooperating fully with the evaluation process or show insufficient progress to address weak compliance.
Taxation issues are also addressed under the Multi-Year Action Plan on Development. Therein, the G20 called on the OECD Task Force on Tax and Development, UN, IMF, World Bank and regional organizations such as the Inter-American Center for Tax Administration and African Tax Administration Forum, to carry a number of actions to broaden the tax base and combat tax avoidance. It is especially welcome that it asks them to “Identify ways to help developing countries’ tax multinational enterprises through effective transfer pricing.” (However, the language here is a bit convoluted. “Effective transfer pricing” by MNEs is, in purity, what hinders developing countries efforts to tax MNEs. So one can hope the G20 leaders’ intention was not to facilitate “effective transfer pricing.” It would have been more proper, however, to demand developing countries be able to tax MNEs through, for instance, the prevention, or effective practices to monitor, transfer pricing.)
There is also a mandate to the Global Forum on Tax Transparency and Exchange of Information to focus on countering the erosion of developing countries’ tax bases and highlighting in its report the relationship between the work on non-cooperative jurisdictions and development.