REFORM OF THE BRETTON WOODS INSTITUTIONS

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1 REFORM OF THE BRETTON WOODS INSTITUTIONS Yılmaz Akyüz Chief Economist South Centre 26 May 2010, New York

2 ISSUES 1. International monetary and financial stability: IMF Mandate: IMFC call on the IMF to review its mandate and to seek views regarding reform of surveillance, financing role and the international monetary system. Governance: Recognition by G20 of the need to improve IMF governance, notably greater voice and participation of DCs. 2. Development finance: MDB, IMF and UN overlap 2

3 IMF: MISSION AND RECORD Mission: Created to safeguard international monetary and payments stability in support of expansion of income, employment and trade. Poor record in anticipating and preventing instability and crises: blind faith in financial markets and capital flows. Intervention in crises in DCs often counterproductive: reason for mistrust of IMF and self-insurance by building reserves, often at high costs. Mission creep into development and poverty alleviation; unnecessary and unjustified duplication. Should transfer PRGF to where it belongs. Also need to keep out of trade policy hence, no more IMF structural adjustment and conditionality. 3

4 MANDATE: A MORE FOCUSSED IMF Need to focus on sources and consequences of instability: Surveillance over macroeconomic, exchange rate and financial policies of systemically important countries (SICs) with a view to their global impact: Monitoring international financial markets to provide early warnings for fragilities, promoting policy interventions and adjustment How to improve the reserves system; enhanced role of SDRs Better management of exchange rate, BOP and debt crises through lending and other means, including debt workouts. 4

5 POLICY SURVEILLANCE The Fund is unable to exert policy disciplines over its non-borrowing members, notably systemically important countries. IMF surveillance cannot be effective under current rules and obligations because they are superfluous and non-binding. Unlike trade, int. monetary system lacks effective multilateral disciplines Separate surveillance from lending and give to an independent body? Need for binding rules and commitments? For exchange rates, financial regulation, control over capital flows? 5

6 THE RESERVES SYSTEM Instability: combination of floating, free capital flows and absence of multilateral policy (spending) discipline for reserve countries. DCs cannot stabilize their currencies as long as $, euro are subject to gyrations. Take self-insurance, but exposed to costs. Return to gold standard, gold-exchange standard (BWS) or creation of a genuinely international currency not feasible. Promote SDRs as a composite reserve asset and increase its share in international reserves as a buffer to instability: Regular, predictable SDRs allocations, linked to world trade etc. Substitution account provided that exchange rate risk does not fall on IMF. Making IMF an SDRs-based institution, allocating SDRs to itself SDRs-aid and SDRs-climate finance link. 6

7 IMF INTERVENTIONS IN BOP CRISES AND LENDING Original rationale/framework: Provide liquidity to countries facing payments difficulties to avoid deflationary adjustments and trade and exchange restrictions. IMF resources should not be used to finance capital outflows In practice pro-cyclical conditionality regardless of the origin of difficulties. More willing to support capital outflows than finance CA; massive bailout packages to keep countries current on payments to international creditors and investors and to maintain capital convertibility (as in Greece now). Creates moral hazard and unequal burden sharing. Threatens IMF s financial integrity. Cannot tell when the problem is one of illiquidity (Argentina, Russia). No legal basis for IMF to escape without haircut in case of default 7

8 REFORMING IMF FINANCING Bail-in private creditors and investors through statutory mechanisms temporary debt standstills, exchange restrictions and debt restructuring (Chapter 11). These also give Fund lending seniority status. UNCTAD proposed it in 1986, IMF took it up 15 years later (SDRM) but abandoned. Now needed in eurozone. Reconsider the rationale and possible effects of FLC; a credible and feasible alternative to reserve holding is not an ILOLR but regulation of capital flows and orderly debt workouts. Focus on CA financing; trade, income and jobs. No conditionality for lending to meet external shocks and non-debt flows to LICs. Separate drawing rights from governance shares; focus on need Regular and predictable SDR allocation. 8

9 GOVERNANCE IMF is more participatory and democratic than G8, G20, FSB, BIS etc; each country is represented even though only 24 sit round the table But serious problems of governance: voice, transparency, accountability. Undermining its credibility and distancing DCs from it. Voting rights: erosion of basic votes (from 16% in 1950s to 2% now) and bias in the determination of quota-based votes against DCs, not reflecting relative importance of countries in global economy. Shifting 5% to EMs as proposed in Pittsburgh is not a solution; will work against the poor countries. Need to change the formula; bring back basic votes. No single country should enjoy veto power over key policy decisions. IMF an SDR-based institution, instead of relying on quotas and GAB and NAB; to keep it at equal distance to all members. 9

10 DEVELOPMENT FINANCE Financing by BWIs relies heavily on aid (IDA/PRGF). Unlike trade, bilateralism is not seen as a potential threat to multilateralism even though bilateral aid and debt relief are as politically-motivated and discriminatory as FTAs. Dependence of BWIs on a few donors subverts their governance and undermines autonomy of the secretariat. Aid should be taken out of BWIs. Too many problems for very little money ($10-12b). IMF should get out of it altogether. WB should again become a genuine DB; to intermediate between financial markets and DCs; provide loans not grants; only to countries without regular access to private capital; and to finance specific investment projects rather than try to fix everything under SAPs. Pool and allocate aid (grants) through a Development Fund under UN, run by a competent secretariat without day-to-day interference from its contributors, reporting to GA and audited regularly by an independent body. 10

11 GLOBAL TAXES FOR GLOBAL PUBLIC GOODS Poverty reduction is declared as a global public good hence a strong case for global taxes for aid financial and environmental taxes, taxes on arms trade etc. Taxes imposed to involve financial sector in paying for costs of public interventions to repair banking system should account for need to compensate DCs for damages inflicted by financial instability. Consideration should be given for linking SDR creation to aid (and to climate finance), to be allocated to a UN Development Fund. These could also be supplemented by voluntary contributions from governments, private foundations and wealthy individuals provided that they agree to hand them over to an independent secretariat. 11