TWN Info Service on Finance and Development (Nov10/10)
No solutions likely from
Geneva, 11 Nov (Chakravarthi Raghavan*) - As the Group of 20, described variously as "the world's leading economies" and "the premium forum for international economic cooperation", foregather at Summit level at Seoul (South Korea), one thing seems clear: whatever they may decide on or achieve, it will not take the world and the global economy any nearer to a solution to the three-year-old monetary and financial crisis that has morphed into a global economic crisis.
Some of their intended decisions (apparently recommended by their finance officials) endorsing the Basel and Financial Stability Board recommendations, and moves for an international insolvency process for the too-big-to-fail (TBTF) financial institutions, are also non-starters - given the current state of national sovereignty issues.
As Yves Smith has pointed out on her "Naked Capitalism" blog post, the only real solution would be for each national jurisdiction to require foreign banks operating in their territories to be incorporated as subsidiaries, and their central banks to require such subsidiaries to set aside the necessary capital and keep them as assets in the country and/or as reserves in the central bank of the country (and not point to the capital available with home TBTF enterprises).
And hopefully, the G20 summit will refrain from
its usual call for the conclusion of the Doha Round at the WTO (which
among other things, on the basis of proposals on the table or in chairs'
texts) will allow the foreign financial firms of the US and Europe to
use their cheap credits to undertake carry-trades in local currencies,
and "subsidise" their operations in developing countries,
thus creating an even greater imbalance and unfair competition, as well
as not allow local domestic regulatory powers to curb their activities.
Keynes and White - with White's views (because of the US power, both military and economic) prevailing over that of Keynes - had a clear perspective, but even that perspective and framework that emerged in the Bretton Woods accords got partially discarded in the IMF that emerged, and began functioning.
As US academic, Jane d'Arista, has pointed out, at Bretton Woods, both Keynes and White laid great emphasis on ensuring liquidity for a country facing a payments problem and agreed that "policy conditions should only apply ex post - after a borrower's needs were met - and only if that borrower was unable to take appropriate action or unable to repay. Their position on conditionality was, in fact, reflected in the initial framework for the IMF. It was only in the 1950s that the Executive Board of the IMF 'introduced the conditional lending that gradually became standard practice' (Boughton, 2006, IMF working paper 06/6, p. 11). Also missing from the final agreement was the automaticity and apolitical structure that Keynes envisioned. It is likely that either his overdraft plan or White's swaps would have provided liquidity in a more timely fashion than the IMF's quota-based lending. But another serious loss was White's proposal for subscriptions of transferable securities to provide the framework for counter-cyclical open market operations. This would have made the International Stabilisation Fund a true lender of last resort - unlike the IMF that depends on contributions of taxpayer funds and, like Keynes's International Currency Union (ICU), plays an essentially passive role in international transactions." (Cambridge Journal of Economics, 2009, 33, pp 633-652).
And when the Bretton Woods system, and its Dollar-gold
convertibility and fixed exchange rates, collapsed (with US President
Richard Nixon's unilateral devaluation of the dollar against gold in
1971, with just half-hour notice to the then IMF Managing Director),
a patchwork emerged as a result of the Smithsonian and
If at Bretton Woods, and again in the 70s, the US opposed symmetrical adjustment, and pushed for open capital accounts and for trading of money as a commodity, now in 2010, while calling for symmetrical adjustment (and pushing for revaluation of the renminbi by the Chinese), it is engaged in its own currency manipulation and dollar devaluation through the US Fed's "QE2" (quantitative easing operations, an euphemism for printing dollars and buying Treasury and other bonds).
In his Washington Post op-ed explaining it, and in the subsequent speech at the meeting at Jekyll Island to celebrate the 100th anniversary of the founding of the Fed (New York Times, November 10), the Chairman of the Federal Reserve, Mr. Ben Bernanke, has not cared to address the concerns of other countries over the impact of the Fed policy on these countries, given the position of the US dollar as a universal reference and transaction currency.
In a comment to SUNS on not addressing the concerns
of other countries on the effects of the Fed's actions, Mr. Andrew Cornford
of the Observatoire de la Finance says: "It is extraordinary but
perhaps predictable from a prominent member of the establishment of
a country to which other countries' concerns often seem at best secondary.
If a Gibbon eventually chronicles the decline of the American empire,
he will probably devote significant space to this failing of the
In her article (pp 644-5), Jane d'Arista has cited the writings of Nicholas Kaldor, in 1971, on the dollar crisis: "... The persistent large deficits in the United States balance of payments - given the universal role of the dollar as the medium for settling inter-country debts - acted in the same way as a corresponding annual addition to gold output ... So long as countries preferred the benefits of fast growth and increasing competitiveness to the cost of part-financing the United States deficit (or what comes to the same thing, preferred selling more goods even if they received nothing more than bits of paper in return), and so long as a reasonable level of prosperity in the United States (in terms of employment levels and increases in real income) could be made consistent with the increasing un-competitiveness of United States goods in relation to European or Japanese goods, there was no reason why any major participant should wish to disturb these arrangements ... [But] as the products of American industry are increasingly displaced by others, both in American and foreign markets, maintaining prosperity requires ever-rising budgetary and balance of payments deficits, which makes it steadily less attractive as a method of economic management. If continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome ..."
D'Arista, in her paper, has pointed to the spillover
effects of the investment of emerging economies' current account surpluses
Hence, in d'Arista's view, one of the more pressing
issues in dealing with global imbalances is to find ways to recycle
the developing countries' savings (as a result of exports of goods and
services to the rich countries) back into their own economies in support
of development strategies that increase demand and income more equitably
and reduce dependence on export-led growth. Towards this end, she suggests
a public international investment fund for emerging economies. She also
suggests a revival of Keynes' idea of an international clearing agency
to serve as the institutional platform for a new global payments system
that would foster egalitarian interactions and more balanced outcomes.
She also suggests a new structure for issuance of SDRs (Special Drawing
Rights) by reviving the idea of a substitution account which would provide
some limited protection as the
A South Centre paper (November 2010), authored by its chief economist, Mr. Yilmaz Akyuz, draws attention to the main shortcomings in international monetary and financial arrangements, but notes that the agendas of the G20 and the IMF still miss some of the most important issues that need urgent attention. The paper says that the current turmoil in the world economy has demonstrated once again that the international arrangements lack mechanisms to prevent financial crises with global repercussions. Not only are effective rules and regulations absent to bring inherently unstable international financial market and capital flows under control, but there is no multilateral discipline over misguided monetary, financial and exchange rate policies in systemically important countries despite their disproportionately large adverse international spillovers.
Both national and international policymakers, Akyuz complains, are preoccupied with resolving crises by opening the faucets and spigots to support those who are at the origin of the problems, rather than introducing institutional arrangements to reduce the likelihood of their recurrence.
Through such interventions, he says, they are creating more problems than they are solving, and indeed sowing the seeds for future difficulties. For the first time in the post-war era, widespread economic difficulties are seriously threatening to disrupt whatever order the international economic system may have, by giving rise to beggar-my-neighbour policies in major economies, largely because of absence of multilateral disciplines over exchange rate policies and orderly and equitable adjustment to global trade imbalances without scarifying growth.
The international monetary and financial arrangements need a major overhaul. The primary objective should be to deliver "the global public good of financial stability."
The missing components in the current arrangements, according to the South Centre paper, are:
* need to establish credible and effective surveillance over national monetary and financial policies with global repercussions. This depends on introducing enforceable commitments and obligations regarding exchange rates of major currencies and adjustment to imbalances by both deficit and surplus countries.
* The world economy should move away from the current reserves system centred on the US dollar. This is essential not only for reducing global trade imbalances and securing greater international monetary stability, but also for the scarce resources of poorer countries to be used for investment and growth, rather than being transferred to the reserve issuer enjoying the exorbitant privilege of being able to live beyond its means without encountering serious costs.
* Crisis intervention and lending should not undermine market discipline and distort the balance between debtors and creditors. Private creditors and investors should be involved in the resolution of payments crises through both voluntary and mandatory mechanisms. With mounting sovereign debt with international dimensions in several emerging and mature economies, it is no longer possible to deny or ignore the need for impartial sovereign insolvency procedures.
(* Chakravarthi Raghavan, Editor Emeritus, contributed this comment to SUNS.)