A New International Financial Architecture?

". . . the current international financial system is unable to safeguard the world economy from financial crises of high intensity and frequency and devastating real effects", reported the Task Force of the Executive Committee on Economic and Social Affairs of the United Nations on 21 January. Reforms relating to international monetary and financial issues, which is the main focus of the report, should be addressed with a sense of urgency, based on a broad discussion involving all countries, and a clear agenda, including all key issues. The United Nations, as a universal and the most democratic international forum, should play an important role in those discussions and in the design of the new system, it stated. The six priorities:

* Improved consistency of macroeconomic policies

The most appropriate institution or set of institutions to ensure such consistency should be subject to debate, but proposals include granting greater policy powers to the International Monetary Fund (IMF) Interim Committee and broadening the Group of Seven to include representatives of developing and transitional economies, as well as strengthening the United Nations Economic and Social Council, to provide political leadership and promote broad consensus on international economic issues.

* Ensuring adequate international liquidity in crisis

IMF resources should be enlarged in order to enable it to enhance the stability of the international financial system. Recent contingency financing mechanisms should become the basis for a stable, low-conditionality facility for countries experiencing financial contagion. Today, IMF operates more as an organizer of rescue than as a provider of funds. The conditions attached to the use of its funds are not always appropriate to the problems faced by countries in distress, and it has very limited capacity to stop contagion.

* Codes of conduct, governance, transparency, supervision

These should include international standards to combat money and asset laundering, as well as corruption and tax evasion, and be consistent with the main international human rights instruments. A central element of a new international financial architecture is the development of regulatory and supervisory mechanisms that will better correspond to today's globalized private capital and credit markets. An important proposal in this area is the recommendation to create a world financial authority - or a standing committee for global financial regulation - in charge of setting the necessary international standards for financial regulation and supervision and of supervising their adoption at the national level.

* Autonomy of developing economies on account issues

The recent financial crisis has clearly shown that abrupt or premature liberalization of the capital account is inappropriate for developing and transition economies, and strong domestic financial systems, regulation and supervision are essential elements to guarantee appropriate liberalization. Developing and transition economies should retain the right to impose disincentives or controls on inflows, particularly in times of capital surges, and on outflows during severe crises.

In this regard, a flexible approach is certainly superior to mandatory capital account convertibility. Any ambitious liberalization of the capital account of developing and transition economies would require equally ambitious reforms in other areas of the international financial architecture, particularly a true and effective "lender of last resort".

* Standstill provisions in international lending

A standstill on debt servicing is an efficient alternative to disorderly capital flight once a country faces illiquidity. To ensure that this mechanism operates properly, two rules are essential: firstly, there should be internationally agreed "collective action clauses" in international lending; and secondly, renegotiations should take place within a specified time-limit. Repeated debt renegotiations have been one of the most troublesome features of the international financial landscape in recent decades and an underlying cause of the prolonged periods of crisis or slow growth in some developing and transition economies.

* Support for management monetary and financial issues

Networks of regional and sub-regional organizations can play a significant role in the reform of the international financial architecture in terms of the stability of the world financial system and the balance of power relations at the international level. Most regional financial institutions arc small, where they do exist, and thus have limited effectiveness, but an investment in their development would certainly pay off in the long run. Strong regional reserve funds would at least partially deter would-be speculators from attacking the currencies of individual countries and from threatening regional trade and financial relations; they could also supplement IMF funds in times of difficulty.

Since the international financial system was an organic whole and required a comprehensive approach, reform had to encompass a number of interrelated aspects of international liquidity management, global consistency of macroeconomic policies and financial crises, as well as finance for development and the resolution of outstanding debt issues, the report said. Indeed, reliance on any one or a few of those proposals would not generate a balanced world system, either in terms of its ability to prevent and manage crises or of equitable participation by all members of the international community.