The global financial crisis has discredited the financial institutions that played a part in causing it. Discussions of radical alternatives are beginning to flourish, with the world’s governments rushing to consult experts who previously found themselves out in the cold.
If only. In fact many of the same financial experts as a decade ago populate finance ministries, review panels, and talk shows. The commission of experts convened by the president of the United Nations General Assembly represents one rare exception.
This commission includes 18 researchers, politicians, former officials, and activists from all the world’s regions. Their mandate is to recommend “needed institutional reforms required to ensure sustained global economic progress and stability which will be of benefit to all countries, developed and less developed.” The body is popularly known as the “Stiglitz Commission” because it’s led by Nobel laureate and former World Bank chief economist Joseph Stiglitz. But it’s most notable for the participation of high-level experts from developing countries.
The commission is slated to release its 110-page report within days to foster public debate and to improve the outcome of the forthcoming United Nations conference on the world financial and economic crisis and its impact on development.
In much tougher language than we’ve seen from other official bodies this year, the commission wholeheartedly condemns the fundamentals of the mainstream thinking over the last 30 years. The commission’s draft report, released May 21, seeks to bury “previously fashionable economic doctrines, which held that unfettered markets are, on their own, quickly self-correcting and efficient.” It finds that the globalization constructed on these flawed hypotheses enabled defects in one economic system to spread quickly around the world, bringing recessions and impoverishment to developing countries.
The commission points out that inequality has left many people unable to buy what they need, even in richer countries. Working-class people in wealthy nations have gone deeper and deeper into debt, contributing to the severe financial imbalances between nations which were a major cause of the crisis.
Yaga Reddy, former governor of the Reserve Bank of India and Yu Yongding, director of the Institute of World Economics and Politics at Chinese Academy of Social Sciences, two of the commission’s members gave a preview of its findings at a meeting my network organised in Brussels. Reddy and his fellow speaker repeatedly stressed that politicians are currently too focused on fiscal stimulus measures, rather than plugging the gaping holes in policies and institutions. Without structural reforms, they warned, the world economy will continue to suffer repeated crises. The Stiglitz Commission appeals, sensibly, for short-term economic stimulus measures to help introduce, and above all not obstruct, required long-term changes.
The commission also points out that at present poorer countries are effectively lending to the richer countries at low interest rates because of the way the global monetary system works.Global financial redistribution is going the wrong way.Now, following a period where private funding was readily available, many developing countries are seeing massive outflows as rich country banks and investors repatriate funds. They can be expected to do little else, having been bailed out by politicians who want to ensure they make money available in their home economies.
Practical and Visionary Proposals
The commission will make a very comprehensive series of proposals — covering reforms to development funding, tax policies, regulation, and environmental investment. Most innovatively, the commission suggests some new structures that are required to make the world economy more stable and equitable.
Developing countries need access to extra sources of funding to plug the hole in their finances which may amount to $200 billion this year for the world’s 40 poorest countries. These countries are facing shocks from reduced investment, remittances and export earnings. The commission points out that countries such as China, which have money available, are reluctant to channel funding through existing multilateral organizations such as the World Bank because they don’t have enough say on the Bank’s board, the institution’s decision-making body that’s currently dominated by the United States, Europe, and Japan. This is the principle of “no taxation without representation,” well-established at the local and national level in most countries, but still lacking at the international level.
The commission concludes that the only way forward is to create a new “facility” to transfer money from richer to poorer countries. But it unfortunately recommends that this new facility might be housed in an existing institution, administered by the existing institution’s staff, albeit under a new kind of governance arrangement. It’s true that — in the unlikely event that significant sums of money are mobilized this year — the most pragmatic way to proceed is the channel them through the World Bank and the International Monetary Fund (IMF). However, there is a clear danger that giving them more money now will consolidate their power. This is worrying, unless accompanied by a transformation of the Bank and Fund’s governance and economic policy approach.
The commission recommends building up regional financial cooperation and regional financial institutions at the same time global ones are transformed. This is positive, although the European Union — the most mature regional grouping at the present time — hasn’t excelled itself in dealing with the current crisis.
To address the imbalances and injustices caused by the dollar being the world’s reserve currency, Stiglitz’s group of experts suggests creating a new global reserve system. This is a worthwhile discussion to initiate, but the commission isn’t likely to be very specific about it.
The commission creatively borrows from other policy areas that its members think can teach a sound lesson to finance officials. The Stiglitz experts recommend setting up a “Financial Products Safety Commission” similar to the U.S. Food and Drug Administration. Rather than assess new medical or edible products, this new body would scrutinize new financial products to see if they are safe to sell to unsuspecting consumers. The approach until now has been different: allow any kind of financial innovation and hope that consumers would wise up or regulators keep up. Many homeowners, credit card holders, and others can see the disastrous consequences.
The commission borrows another idea from the UN’s Intergovernmental Panel on Climate Change. This body of scientists has sounded the alarm on the need to address human-caused changes to our atmosphere, getting ahead of and driving the political consensus. Such a body could now be created on financial and economic issues. The body would produce public reports pointing out issues which need to be dealt with, and give advice to the United Nations General Assembly and other international organizations. If it’s constituted many of us would be happy to propose some of the Stiglitz panel’s commissioners as candidates.
Fearing a new and dangerous phase of the ongoing debt crisis in the next couple of years, the Commission recommends a Foreign Debt Commission, an International Debt Restructuring Court, and a Global Economic Coordination Council, all under the aegis of the United Nations. The latter would review the activities of the World Bank, IMF, and United Nations, as well as regional and other financial institutions, ensuring that gaps are filled and problems identified early.
The commission is slated to release its final report soon. One of the main strategies of General Assembly President Miguel d’Escoto Brockmann when he established the panel was to inform the inter-governmental negotiations for the UN conference on the world financial and economic crisis and its impact on development, scheduled previously for the first week of June now postponed until June 24-26. And one of the commission’s findings is that decisions concerning necessary reforms in global institutional arrangements must be made not by a self-selected group, such as the Group of the world’s eight richest countries (G-8), but by all the countries of the world working in concert.
The unfolding crisis should provide an opportunity to abolish the G-8, slim down the International Monetary Fund, and bring forward the United Nations as the more legitimate and therefore more effective forum to set global economic policies and priorities. Over the last six months this has looked unlikely, as the G-8 began to expand into the somewhat more inclusive G-20. This sounds more democratic, as it involves many countries with large populations including India, China, and Brazil. But most other countries are left out. The G-20’s view of what the United Nations should do at this time was merely “to monitor the impact of the crisis on the poorest and most vulnerable,” rather than actively do anything about it.
Diplomats in New York are still arguing fiercely over the text that will define the UN conference. Civil society groups organizing around the process have raised their concerns that the conference may prove a major missed opportunity, but are urging heads of state to attend to raise the chances of a success. Several of the Stiglitz Commission’s innovations are already present in the panel’s latest draft although there is still much negotiating to be done. A lively public launch of the commission’s findings should help energize public discussions about how to build political will to make a decisive break with the institutions, thinking, and policies that created this crisis.