Some proposals on international financial reform
Statement by Martin Khor, Director, Third World Network, presented at UN Asian Regional Meeting on Financing for Development, Jakarta, 3 August 2000.
A CENTRAL feature of the Asian crisis had been the role of financial liberalisation and deregulation that facilitated excessive short-term borrowing by local firms and that enabled international funds and players to manipulate and speculate on currencies and stock markets in the region. The prevailing mainstream view that liberalisation was beneficial and had little dangers had been promoted by the IMF, the World Bank and rich countries that wanted market access for their financial institutions to the emerging markets.
When the crisis struck, the IMF made it worse by misdiagnosing the cause and promoting even further financial liberalisation as part of conditionality, as well as a policy package (high interest, tight money and closure of local financial institutions) that converted a financial-debt problem into a structural economic recession.
Two sets of actions are urgently required at international level for the interests of developing countries.
The first set involves the need to avoid new policies or agreements that would ‘lock in’ further financial liberalisation. The following are proposed:
* The IMF should stop pursuing amending its articles of association to give it the mandate over capital account convertibility as this would enable the IMF to discipline developing countries to open up their capital account and markets;
* The OECD countries should stop altogether any attempt to revive their proposed Multilateral Agreement on Investment, which would have given extreme freedom of mobility for all types of capital flows;
* There should not be an investment agreement in the WTO as this would put intense pressures on developing countries for compulsory financial liberalisation;
* There should be a review of the financial services agreement in the WTO to take into account the new knowledge and lessons learned from the negative effects of financial liberalisation resulting from the latest round of the financial crisis.
The second set of proposals relates to international policies and measures that need to be put in place, including:
* Measures and guidelines to help countries prevent debt and financial crises;
* Once a crisis has broken out, measures to manage the crisis effectively, including debt standstill arrangements and a debt workout system that fairly shares the cost and burden between creditors and debtors. An international bankruptcy court along the lines of Chapter 11 of the US bankruptcy law should be set up to implement this;
* A framework that allows and encourages countries (especially developing countries that are more vulnerable than rich countries) to establish systems of control over the inflow and outflow of funds, especially those of the speculative variety;
* Governments of countries which are the sources of internationally mobile funds should be obliged to discipline and regulate their financial institutions and players to prevent them from causing volatility and speculation abroad;
* International regulation is needed for activities of hedge funds, investment banks and other highly leveraged institutions, offshore centres, the currency markets and the derivatives trade;
* An international system of stable currencies (including possibly a return to fixed exchange rates or rates that move only within a narrow band) should be considered;
* A reform of the decision-making system in international institutions like the IMF so that developing countries can have a fair say in the policies and processes of institutions that so greatly determine the course of their economies and societies;
* A change in the set of con-ditionalities (‘structural adjustment policies’) that accompany IMF-World Bank loans so that recipient countries can have options to choose among appropriate financial, monetary, fiscal, macroeconomic, trade, ownership and other economic and social policies.
In the absence of such international measures, developing countries have to institute domestic measures to protect themselves. In particular, they should have regulations that control the extent of public and private sector foreign loans (restricting them to projects that yield the capacity to repay in foreign currency); that prohibit manipulation of their currencies and stock markets; and that treat foreign direct investment in a selective way that avoids build-up of foreign debt.
The array of national policy instruments should include selective capital controls and the fixing or stabilising of their local currencies, that would allow them to have greater freedom to have macroeconomic policies that can counter recession (such as lower interest rates or budget expansion) whilst reducing the risks of volatility in the exchange rate and flow of funds.
There should also be a review of the appropriateness of policies in other areas such as trade liberalisation. Inappropriate trade liberalisation can cause or contribute to or worsen financial crisis; for example, when a country liberalises its imports when its local sectors are not yet prepared to compete whilst at the same time it is unable to earn more export revenue, the country’s trade and balance-of-payments deficits may worsen significantly, adding to debt pressures.