Memorandum from the Bretton Woods Project
1. The Bretton Woods Project is an independent
NGO established by a network of UK-based NGOs in 1995 to take
forward their work of monitoring and advocating for change at
the World Bank and International Monetary Fund (IMF). See www.brettonwoodsproject.org/about
for more details. We warmly welcome the Treasury Committee's decision
to hold this inquiry, which is both timely and important.
2. The current crisis shows a profound mismatch
between the global reach and interconnectedness of financial flows
crossing all national borders, and the absence of any international
systems to oversee them. There are two major problems which interacted
together to cause the crisis: the failure of the financial regulatory
and supervisory systems and the failure of the international monetary
3. Global financial regulation: Financial regulation
must prioritise social and environmental goals and understand
that a stable financial system is only a means towards these ends.
International regulatory standards in their current format are
incomplete in scope, are not legally binding, are not specific
enough and therefore do not ensure appropriate national regulation.
They are not developed in a transparent and accountable manner
and most countries affected by them do not participate in their
development. This leads to externalities, because countries with
important financial sectors do not have to compensate countries
harmed by regulatory failures, leading to inefficient low levels
of regulation. There is inadequate incorporation of environmental
sustainability into regulation. The failure of international regulation
has negative impacts on stability, poverty reduction, growth,
environmental sustainability, investment and economic development.
4. There is a need for a new vision of global
financial regulation to ensure sound regulation at an international
level, what some have called a World Financial Organisation or
World Financial Authority. This can be accomplished by reforming
the Financial Stability Board (FSB) so that it fulfils the role
of a global regulatory authority. Important reforms include increased
membership and extensive institutionalised outreach; increased
accountability and transparency; and democratic decision-making
procedures. Once these reforms have been undertaken, the FSB would
have the legitimacy to issue specific guidelines that have to
be implemented by national regulators.
5. International monetary system: The current
monetary system creates high costs for developing countries and
business and does NOT adequately deal with imbalances in financial
and trade flows. Any reform will need to ensure it is seen as
legitimate by all countries, and allows for the policy space needed
for economic development in poorer countries.
6. To reform the international monetary
system, countries should agree to create an international currency,
international clearing union, and system of globally managed exchange
rates. This kind of reform will take time to agree among all countries
of the globe, so a process must be launched immediately to begin
the negotiations. In the meantime deeper reform of IMF governance
The need for effective and efficient global regulation
7. The current crisis shows a profound mismatch
between the global reach and interconnectedness of financial flows,
and the absence of an effective international regulatory regime
that could govern them.
8. The international financial system is regulated
by a set of 12 voluntary standards and principles developed by
a range of private and public standard setting bodies and multilateral
The ones directly important for financial markets cover insolvency,
corporate governance, accounting, auditing, payment settlements,
market integrity, banking and insurance supervision, and securities
Furthermore, the Financial Stability Board (FSB)
is currently working on standards for compensation schemes and
guidelines for the establishment of supervisory colleges and how
national regulators should define a "systemically important
firm"; and the participants of the London summit have agreed
to use Code of Conduct Fundamentals developed by the International
Organisation of Securities Commissions (IOSCO) for overseeing
credit rating agencies.
Lacking so far are standards for alternative investment firms
such as hedge funds, and the existing standards do not cover all
important aspects. In the case of banking regulation, for example,
Basle II does not cover the problems of off-balance sheets.
9. Besides the gaps, one should also not
overrate the capacity of the standards to ensure appropriate national
regulation. Not only are they voluntary, they are also very broad.
They take the form of principles, practices and guidelines,
whereby, as the Financial Stability Board explains, principles
are broad tenets, practices are more specific and only guidelines
allow for "objective assessment of the degree of observance".
Most of the standards such as the ones governing accounting, market
integrity, banking and insurance supervision, and securities regulation,
are in the form of principles, ie still in very broad form;
and the one on market integrity is only in the form of recommendations.
As the FSB argues, standards are not a guarantee for successful
implementation and thus effective regulation by national regulators,
since they require interpretation, application, implementation
This is especially true for broad principles, whose observance
cannot be objectively assessed. The existence of a set of principles
must therefore not lead to the illusion, that we currently ensure
appropriate national regulation through international agreements.
10. Furthermore, the Financial Stability
Board argues that the current standards are "generally accepted
by the international community as being objective and relatively
free of national biases".
However, almost all developing countries and emerging markets
are still excluded from the important standard setting bodies
or at least their most powerful committees. Currently, only very
few countries are members of the Basel Committee on Banking Supervision
(BCBS), and many countries are not in the technical committee
of the International Organization of Securities Commissions (IOSCO),
which is its most powerful body.
The US-based Financial Accounting Standards Board (FASB) and its
international counterpart, the International Accounting Standards
Board (IASB), are even more problematic, since they are private
bodies with no public accountability. This leads to dangerous
externalities, because countries with globally important financial
sectors that can and did trigger crises do not have to compensate
those countries harmed by regulatory failures. This is not only
problematic under aspects of fairness, externalities also lead
to inefficient, ie too low, levels of regulation.
11. To counter this lack of international
regulation, the G20 have agreed to establish colleges of supervisors
for the 30 largest banks. However, these are by no means satisfactory,
because they cover only a small portion of international financial
flows, and the international colleges do not create any legal
rights or obligations but merely facilitate the exchange of information
and views. As Lord Turner, chairman of the FSA, has pointed out
in his review, the crisis raises question about appropriate regulation
of issues relevant for banks "irrespective of whether they
operate entirely within national markets or on a cross-border
The G20 countries agreed that all systemically important financial
firms shall be overseen and that the assessment shall be made
according to economic substance not legal form, potentially bringing
in firms such as hedge funds. However, colleges of supervisors
for those firms would again have no decision-making powers and
merely facilitating the exchange of information and opinions.
12. The lack of an effective international
regulatory regime is problematic not only in times of crises.
The market for commodities derivatives, for example, is said to
have a profound impact on the price level and volatility of underlying
Research produced at the Bank of International Settlements has
shown that price development in the commodities market is not
fully determined by supply and demand but also by speculation,
making it less influenced by fundamentals.
This has a profound impact on producers as well as consumers,
of which many live in countries with no or marginal influence
over the regulation of these markets, leading to inefficiently
low levels of regulation.
13. To sum up, the current regulatory regime
needs considerable improvement regarding content as well as governance
aspects. Standards need to be more specific, in the form of concrete
guidelines rather than broad principles, they need to be legally
binding and enforcement at national levels must be assessed and
incentivised at an international level. To ensure adequate levels
of regulation, the process of standard settings need improvement
in the realm of participation, accountability and transparency.
All countries affected by regulation need to have a clear, institutionalised
channel of participation in the development of standards, and
the process needs to meet high standards of transparency and accountability
to ensure the involvement of parliament, other stakeholders, and
14. Given these weaknesses in the current
architecture, we see the need to develop a new vision of how global
financial regulation should look like to ensure sound regulation
at an international level. Among the first ones to propose a global
regulatory authority were Lord Eatwell and Lance Taylor and it
has also been backed by economists such as Barry Eichengreen.
Along the same lines, several UN bodies including the UN Committee
for Development Planning and the Secretary-General of UNCTAD have
called for a World Finance Organisation,
which could serve as an institutionalised forum for the development
and assessment of regulatory guidelines.
15. Such an authority must aim for regulation
that integrates social and environmental goals and understands
that a stable financial system is a means towards these ends.
The goals of any regulatory authority, including a global one,
should not be only the stability of a financial system to enable
the individual accumulation of wealth. There must be a wider social
The idea of a global regulatory authority
16. A global regulatory body could be set
up as a super structure under which national regulators still
exist but are guided and overseen by an international body. Power
should be assigned according to the principle of subsidiarity,
ensuring that countries retain as much national sovereignty as
compatible with sound international regulation.
17. A global financial regulator could issue
guidelines for regulation that give national regulators sufficient
room to respond to national peculiarities, but are more specific
than most of the current standards and, most importantly, are
legally binding. Monitoring compliance and supervision of day-to-day
activities of financial firms should stay with national regulatory
18. To ensure that a global authority actually
has the capacity to regulate and becomes more than a talking shop,
incentive mechanisms for national compliance with international
standards and principles have to be in place. Incentives for membership
in such a regulatory body and for subsequent compliance could
take the form of restrictions for financial firms chartered in
non-compliant countries to enter member countries' markets.
Democratic principles for global regulation
19. Given the importance and political nature
of regulation, such a body must not be run by independent officials
but rather be multilateral to ensure accountability to citizens
in member countries.
20. To ensure efficient regulation and tackle
current externalities, it is important that global financial regulation,
just like national regulation, is decided along democratic lines.
This means that those that are affected by regulation should have
the power and the right to influence it. This means that in principle,
all countries should be able to participate, a demand also made
by the President of the UN General Assembly, and echoed by the
Secretary-General of UNCTAD.
21. However, direct participation in day-to-day
discussions needs to be limited to ensure effectiveness. One possibility
is that countries are represented by regional multilateral bodies.
However, interests and power differ and representation must ensure
that poorer countries are not sidelined again as they have been
in the IMF. As regional trade and economic integration increases,
regional groupings could fulfil the role of representation. The
prime example is the EU, with highly integrated markets including
in financial services, within which the Commission, overseen by
the European Parliament, could be given the authority to represent
the EU member states.
22. Furthermore, voting and other decision-making
mechanisms must follow democratic principles. National GDP should
not be taken as the criterion for determining voting shares, since
the rich countries are, as this crisis shows, not the only nor
the most affected ones in a global crisis triggered by regulatory
failure. Additionally GDP bears no relation to the subject at
hand, as the ratio of the financial sector to GDP varies dramatically
across countries. One possibility could be a combination of population
size; vulnerability (measured by an index that captures the fact
that poor people are hit hardest due to spill-over effects of
financial crises into the real economy); and the size of national
financial sector (to ensure systemically important markets are
engaged). Strong consideration should be given to either positive
consensus, or the use of multiple majorities in decision making.
23. Other key components of democratic governance
are accountability (including accountability of country representatives
to national parliaments), transparency (working under a presumption
of disclosure with very limited clearly specified exemptions),
and participation of all stakeholders at the national as well
as directly at the international level. This must include the
participation of civil society, trade unions, the private sector,
and other stakeholders. Additionally, such a regulatory authority
could be accountable to a UN body like ECOSOC or the currently
discussed UN Economic Council.
24. The existing international financial
institutions all have problems with their governance structures.
The World Bank and IMF are dominated by developed countries, and
they have used these institutions to push their own agendas. The
same is true of the World Trade Organisation (WTO), which has
a more equitable governance system, but within which exclusionary
meetings and power politics still dominate. For a global financial
regulator to have genuine clout it should have a distribution
of power markedly different from the existing institutions.
The problem of differentiation
25. One fundamentally problematic aspect
of global financial regulation is that it has to manage a tension.
On the one hand, as has been argued above, rules need to be specific
enough to render them effective and to set a bottom floor to ensure
that countries do not deregulate at the expense of others. On
the other hand, countries have very different preferences for
the level and content of regulation depending on their overall
economic and financial structure, and values such as risk-aversion
and degree of state involvement prevailing in society. Developing
countries can thus not be expected to implement the same rules
as developed countries, and rules implemented in any country should
not adversely affect the financial flows needed for development.
26. One worry about a global financial regulator
is that if the governance is dominated by developed countries,
it may end up with an institutional bias towards policies that
are favourable to developed countries and their large financial
services firms. Within a global financial regulator it must be
clear that powers to control the capital account and limit financial
services liberalisation must remain with countries, especially
27. Therefore, a global regulator should
strictly operate on the principle of subsidiarity. Similar to
the system in the WTO, rules need to be specific, but exemptions
and differentiation must be possible. These, however, should not
be purely at the discretion of a country, but need to be negotiated
multilaterally, ensuring that rules and exemptions enable, not
hinder, prosperity and development in all parts of the world.
Basel II, for example, had higher capital requirements for banks
not rated by external rating agencies, putting smaller banks in
developing countries at a disadvantage. Given that under Basle
II unrated banks cannot have a lower charge than the sovereign
they are located in, small banks in developing countries had higher
capital costs and less incoming financial flows regardless of
their actual creditworthiness.
This example also shows the link between governance structures
and rules. Only if all developing countries, not just the big
emerging market economies, can affectively participate in decision-making
processes, will regulation take into account all costs and benefits.
28. Some argue that regulatory competition
helps to identify successful regulatory strategies and better
regulation. However, as the current crisis shows, countries cannot
shield themselves from the negative effects of a crisis in another
country however well-designed their own regulation turns out to
be. To ensure that risk-taking financial activity is beneficial,
countries must be able to ensure that they do not pay the price
for regulatory failures in other countries. Therefore, they should
have a say and share responsibility for systemically relevant
firms, markets and products present at the international level.
29. If decision-making and representation
mechanisms in a global regulation authority are democratic and
inclusive, people, including British citizens, regain the possibility
to influence the decisions that profoundly affect their lives.
Establishing a global regulatory regime: reforming
30. Such a regulator is not likely to be
founded overnight. To avoid overlapping or contradictory mandates,
it is would be easier to reform existing institutions rather than
creating a completely new one. The Financial Stability Board (FSB)
could serve as a starting point, since it already has some of
the responsibilities a global regulator needs. However, several
immediate changes are required:
30.1 The FSB should change its current commitment
to "open markets" in favour of a more fine-tuned commitment
to financial markets that promote development, justice, access
and sustainability. It should recognise that greater capital account
openness or financial services liberalisation is not always positive.
30.2 The FSB needs to increase participation.
Extensive outreach to countries affected by regulatory standards
should be guaranteed, institutionalised and becomes rules-based
as a first step to improving the current arbitrary and insufficient
outreach activities. Membership should be expanded to give affected
small countries a voice.
30.3 Transparency and accountability of the FSB
need to be radically increased, ensuring that parliaments and
stakeholders can effectively monitor FSB activities and provide
input. This is especially important given the importance assigned
to the FSB at the London summit. Countries need to be mainly represented
through ministries that are subject to democratic scrutiny and
accountability rather than independent regulators or central banks,
which should have a consultative function.
30.4 The chair of the FSB and, depending on his
or her responsibilities, also the secretary-general should be
appointed in a transparent merit-based selection process, open
to all regardless of nationality. Patently problematic rules,
such as the appointment of the members of the steering committee
by its chair they are supposed to oversee, have to be replaced.
31. These immediate changes need to be complemented
by gradual changes in the mid- to long-term future: If such governance
reforms were undertaken, the FSB would have the legitimacy to
not only recommend broad principles but to actively regulate systemically
relevant firms, instruments and markets.
31.1 The FSB could regulate firms by issuing
specific guidelines for regulation to be implemented by national
regulators. Implementation should not be voluntary but made legally
binding by decision at the FSB.
31.2 The FSB already has the mandate to monitor
the work of standard setting bodies (SSBs). This should be expanded
to also monitor their governance and set-up. The SSBs should gradually
be incorporated into the FSB and subject to the same standards
of governance, accountability, transparency and participation.
In addition to opening up to more countries, the decision-making
process at these bodies should also institutionalise mechanisms
for input from civil society and other stakeholders including
from other government departments.
31.3 The FSB need to closer cooperate with other
international organisations, not only with the IMF but also with
the WTO and relevant UN bodies to ensure that global financial
regulation is coherent with other international trade, environmental
or social agreements and vice versa. Additionally, such a regulatory
authority could be accountable to a UN body like ECOSOC or the
currently discussed UN Economic Council.
32. Although we are convinced of the urgent
need and principal possibility of a global financial regulatory
authority, we are aware that currently the political will to give
up sufficient sovereignty is low. However, it is noteworthy to
point out that countries have committed themselves similarly in
other areas, such as trade, subjecting themselves to legally binding
agreements, a one-country-one-vote decision-making mechanism,
and a dispute settlement panel in the WTO. This is a long process
but first steps and the establishment of a long-term vision should
be made now.
33. While regulatory failure has been a
key driver of the crisis, it has interacted with public policy
failures in the international monetary system to create the conditions
for a deeper and more pervasive economic crash. Distortions and
imbalances in the international monetary system, have built up
over the last decade. The massive current account surpluses in
some countries have fed the liquidity of the financial system,
pushing financial "innovation" that attempted to satisfy
the search for profit from an increasing large pool of investable
34. The current international monetary system
has negative effects on both developing countries and business
investment globally. Volatility and the speculation that ensues
only benefits traders who profit from volatility, while creating
enormous costs. The system needs reform in order to make it more
development-friendly and more stable. One of the key ways to do
this is through the creation of an international currency, international
clearing union, and system of globally managed exchange rates.
Problems with the existing system
35. Effect on business investment: Even
in times of relative global stability, volatility in exchange
rates damages economic planning and investment in rich and poor
countries. Business investment often requires several years if
not more to recoup costs and start generating profits. Sales and
income growth for businesses often come through exports. If there
is a lack of stability in exchange rates, businesses must either
undertake costly hedging strategies to manage exchange rate risk,
or plan on volatility and incorporate that risk into their projections.
In either case, investment will be lower, because investments
which might be profitable with stable exchange rates, will either
be unprofitable, or not undertaken by risk-averse investors. This
reduces job creation, growth, trade and economic development.
36. Risks to developing countries: Developing
countries and small economies are extremely vulnerable to swings
in their exchange rates. One need only think of Europe to realise
the benefits of stability in exchange rates. A country like Ireland,
had it not been in the eurozone, would have been forced into a
destabilising and damaging devaluation of its currency. Smaller
developing countries are even more susceptible to this problem
in times of crisis. This devaluation increases foreign debt service
and makes imports, including of essential commodities more expensive.
The small nature of the markets in most developing countries'
currencies also makes them susceptible to speculation and even
manipulation of currency markets. The flows of "hot money"
into and out of countries increase the risk of financial and economic
crisis. Crises of these sorts have devastating social impacts,
increasing poverty, worsening human development, and reversing
the gains of economic development.
37. Costs to developing countries: Aside
from the costs of volatility in exchange rates, the current system
has direct costs for the governments of developing countries.
Assets held in reserves are by definition those not used to finance
productive activity, including investment in infrastructure, education,
health or other activities which have long-run benefits in terms
of growth, productivity, and employment. Additionally the accumulation
of large balances of reserves affects the domestic monetary supply,
and to counteract inflation, countries will have to undertake
"sterilisation". This has a direct cost to the country
concerned, as generally the interest a government must pay on
the domestic debt that that is issued in the sterilisation operation,
is higher than the interest received from the holding of foreign
currency-denominated assets. This may seem like a small differential,
but as countries hold large volumes of reserves, these costs have
38. Accumulation of reserves: Developing
countries have accumulated large stashes of foreign currency reserves
for a number of reasons. One of the primary reasons was wariness
about the IMF. During the Asian financial crisis from 1997-98,
the IMF was perceived to have required policy changes that were
detrimental to Asian countries, forcing devaluations, causing
massive unemployment, corporate bankruptcy, and poverty. This
has pushed countries, particularly in Asia, to opt for self-insurance
in the form of foreign reserves rather than relying on the IMF
as a crisis resolution mechanism. This is compounded by the perceived
lack of legitimacy of the IMF's governing structure.
39. An additional reason for the large accumulations
of foreign exchange was an economic model oriented toward exports.
This model was part of the Washington consensus heavily pushed
by the World Bank and the IMF. Investment is predicated on achieving
exports and thus profitable investment for export will push trade
imbalances. While export-oriented growth has achieved remarkable
results in some countries in East Asia, it also created vulnerabilities
to economic growth in the case of export market slowdowns. The
export oriented model creates the modalities by which current
account surpluses flourish and foreign exchange reserves are built.
40. Limits of IMF influence: Since the end
of the Bretton Woods exchange rate system in 1971, the IMF has
not had the ability to concretely influence the policies of rich
countries. The last time the IMF put conditions on a developed
country (before the Iceland loan of last year) was in 1976 when
Britain went to the IMF. Since then, the free-floating of exchange
rates and ability of rich countries to raise balance of payments
financing on credit markets has meant that the IMF does not lend
to rich countries, and thus can not use conditionality. There
is no mechanism except persuasive power to influence rich country
policies. In the context of global imbalances, despite repeated
exhortations to rich countries to rein in current account deficits,
they have not taken action.
41. The IMF did institute a new process
called "multilateral consultations" in early 2006, and
undertook a year long exercise with US, China, Japan, the euro
zone and Saudi Arabia in order to address global imbalances. In
the end the consultations yielded many policy recommendations
but few concrete actions.
The Turner Review by the Financial Services Authority has also
identified that IMF analysis is subject to political influence
so that it "fit[s] in better with dominant intellectual assumptions
and | avoid[s] overt criticism of major powers."
Without independent, sanctioning power the IMF will be unable
to address imbalances and thus not able to mitigate the risks
that they create.
42. International spillovers: The policies
of major economies, as the issuers of reserve currencies, have
international spillovers, which those countries are not forced
to think about when they decide their policies. For example, changes
in interest rates of the major reserve countries are usually targeted
at domestic price stability and, in the case of the US, domestic
unemployment. However those interest rate decisions have enormous
impact on developing countries' access to and cost of capital.
There are worries that increased borrowing by highly credit-worthy
countries to finance fiscal stimulus may mop up liquidity in the
market and increase the costs of developing country sovereign
and corporate borrowing. The IMF has no way force rich countries
to think about the international impacts of their domestic policies.
Issues that need to be resolved
43. The IMF is the institution that was
created to manage the international monetary system. However,
its governance has not kept pace with changes in the world economy.
Thus its voting rights are dominated by rich countries, despite
having most of its operations in emerging markets and low-income
countries. This democratic deficit, combined with the perception
that its prescriptions in the Asian financial crisis were influenced
to the benefit of rich countries, has reduced the IMF's legitimacy.
With a lack of legitimacy, it will be difficult to give the IMF
greater control or power in international monetary arrangements.
44. The changes to IMF governance that were
agreed in April 2008 are too small to overcome the perceived lack
of legitimacy. Less than 3% of the IMF's votes will be shifted
from rich countries to low- and middle-income countries. Belgium,
with a population of 10 million, will still have more votes than
G20 members Brazil (200 million people), Mexico (111 million people)
or South Korea (48 million). Additionally the changes did not
address the composition of the IMF executive board or the lack
of transparency and accountability at all levels of the institution.
Adequate reforms must be in place before the IMF can resume a
leading role in managing any international monetary system, including
one with a supra-national international reserve asset (see paras
45. There is also a clear need for any reforms
to the international monetary system to take into account the
different needs of different countries. At different stages of
economic development, there are different concerns, including
the balance between inflation, investment and employment creation.
The size of economies also differs, meaning that some will be
more at risk from currency speculation or hot money flows, while
others will have more scope to manage such concerns. The system
needs to be rules-based, but will need to have flexibility for
countries in different circumstances.
46. Whatever the reform to the international
monetary system, the international body that is tasked with implementing
any aspect of the system must be accountable to both its members
and to a broader set of stakeholders. A lack of accountability
is a recipe for inappropriate, ineffective and inefficient policy-making.
The IMF has some accountability to its members, but none to stakeholders.
For example in the UK, Her Majesty's Treasury is supposed to report
annually to parliament on its activities at the International
Monetary Fund. However, HM Treasury has not yet submitted the
report for calendar year 2007, let alone 2008.
There is clearly scope for creating more accountability.
Potential reforms to the system
47. In 2007 the IMF rewrote its surveillance
decisionthe framework under which the IMF analyses country's
exchange rates and economic policies.
It included the concept of "fundamental exchange rate misalignment"
but did not agree any sanctions for countries that had misaligned
exchange rates (either overvaluation or undervaluation). In the
same year, the IMF's Independent Evaluation Office (IEO) issued
a report about the IMF's exchange rate surveillance. One of the
clear subtexts of the report and subsequent discussions was the
accusation that exchange-rate surveillance was not even-handed
simply because the IMF has no ability to influence the exchange
rate policy decisions of advanced economies. The evaluation finds:
"The reduced traction is in danger of being extended to large
emerging market economies, and beyond. Such an evolution is corrosive,
breeds cynicism amongst the staff as well as the members, and
builds on perceptions of a lack of even-handedness." Some
have proposed that the IMF strengthen its exchange rate surveillance
as the mechanism for helping to resolve global imbalances, but
without sanctioning power, this is unlikely to be effective.
48. The current crisis has helped to revive
interest in the original proposals made by John Maynard Keynes
in the run up to the creation of the IMF in 1944. In a government
White Paper (CMD 6347), the UK treasury set out its proposals
for an international currency called the "bancor" and
an International Clearing Union which would settle transactions
in this currency. The bancor would have been based on a basket
of commodities prices, giving it a basis in the real economy,
and not just a basket of currencies.
49. The clearing union idea effectively
removes the holding of foreign exchange reserves, and replaces
it with a system whereby balances are managed by the clearing
union. These balances would be denominated in the bancor. Persistent
large trade surpluses and deficits would be penalised by an interest
charge, providing incentives for both surplus and deficit countries
to change policy to eliminate the imbalances. Notional exchange
rates would be changed, by mutual consent at the clearing union,
based on trade balances. This is roughly how exchange rates were
managed under the Bretton Woods system that was in operation from
1945 to 1971, with the exception that the balances were denominated
in dollars that were backed by gold. Keynes' ideas remain an excellent
basis to start a new discussion, but need updating in the context
of freer mobility of capital and international financial flows.
The basic proposals would be workable only if countries with freely
floating exchange rates are willing to move away from such a system.
50. The UN Conference on Trade and Development
(UNCTAD) has long argued that the current international monetary
system is detrimental to development prospects of developing countries.
In a mid-March report,
UNCTAD wrote: "Multilateral or even global exchange rate
arrangements are urgently needed to maintain global stability,
to avoid the collapse of the international trading system and
to pre-empt pro-cyclical policies by crisis-stricken countries."
In the absence of a global system, regional currency arrangements,
such as the euro, can help moderate risk and improve the ability
of countries to manage volatility.
51. In March, the governor of the Peoples
Bank of China published a paper calling for reform of the international
He argues for "an international reserve currency that is
disconnected from individual nations and is able to remain strong
in the long run, thus removing inherent deficiencies caused by
using credit-based national currencies." However, governor
Zhou calls for a gradual process that would begin with giving
the IMF's special drawing right
(SDR) a greater role, including larger allocations, a settlements
system, the use of SDRs in trade and commodity pricing, and financial
assets denominated in SDRs.
52. The UN General Assembly president's
commission of experts on financial reform, a task force of economists
and policy makers from around the globe that was chaired by Nobel
laureate Joseph Stiglitz, also recommended the creation of an
international reserve currency.
"The global imbalances which played an important role in
this crisis can only be addressed if there is a better way of
dealing with international economic risks facing countries than
the current system of accumulating international reserves."
The committee concluded: "To resolve this problem a new Global
Reserve Systemwhat may be viewed as a greatly expanded
SDR, with regular or cyclically adjusted emissions calibrated
to the size of reserve accumulationscould contribute to
global stability, economic strength, and global equity."
53. The current crisis has shown that the
system has failed to deliver on many of its objectives. While
the persistent under-development and under-investment in developing
countries was evidence of this, the crisis has also demonstrated
that it has not worked for rich countries, where massive losses
due to risky financial activity are being socialised and economies
are entering deep recessions. As the economic hegemony of the
US wanes, there is a practical limit to how long the anachronistic
system of a single country's currency serving as the vehicle for
all global reserve holdings can be maintained. The creation of
an international currency, international clearing union, and system
of globally managed exchange rates should be on the agenda.
54. In times of crisis there is much greater
political will to undertake reform. Agreement on ambitious reforms
such as these will take considerable negotiation. If the run up
to the Bretton Woods conference in 1944 is any guide, it will
take two years of work. A fair, transparent process will be needed
to undertake these negotiations: one that involves all countries
of the world, and is open to civil society and parliaments, under
the auspices of the United Nations. This has been demanded by
thousands of civil society organisations,
but as of yet this call has not be heeded by the leaders of the
55. Given that the IMF will likely be at
the centre of any international monetary system, a profound reform
of its governance is needed even more urgently.
Following up on our evidence to your inquiry on the IMF in 2006,
the following actions are needed:
55.1 The IMF should adopt a double-majority voting
system as an interim step to a more comprehensive reform leading
to the inclusion of population size in determining voting shares.
55.2 Leadership selection, for all management
and director level positions, should be transparent, open and
merit-based, without respect to nationality.
55.3 All executive board chairs should be elected,
express their position with formal votes rather than informal
indications, and be subject to democratic accountability. The
UK should step forward by abandoning its appointed chair in favour
of elections and push on a European level for a consolidation
of European seats on the board.
55.4 The IMF should increase transparency, quickly
publish transcripts of IMF board meetings and draft policy documents,
work under the presumption of disclosure and base exemptions on
a clear description of the harm of disclosure, keeping them to
5 For an overview about the standard setting bodies
and which standards they develop, see: Financial Stability Board,
"Who are the Standard-Setting Bodies?", http://www.fsforum.org/cos/wssb.htm,
retrieved 28 April 2009; and footnote 16. Back
Financial Stability Board, "12 Key Standards for Sound Financial
Systems", http://www.fsforum.org/cos/key_standards.htm. Back
The Financial Stability Board is the re-established Financial
Stability Forum. The Financial Stability Forum and now the Financial
Stability Board brings together national financial authorities,
international financial institutions, international regulatory
and supervisory groupings, committees of central bank experts
and the European Central Bank to facilitate the exchange of information
and opinions. It acquired new responsibilities and a renew mandate
at the London summit, spelled out in the "Declaration on
Strengthening the Financial System", http://www.londonsummit.gov.uk/resources/en/PDF/annex-strengthening-fin-sysm. Back
"Declaration on Strengthening the Financial System",
Financial Stability Board, "What are Standards?", http://www.fsforum.org/cos/standards.htm. Back
As can be seen in the case of the Madoff fraud, insufficient national
regulation regarding market integrity has ramifications far beyond
national borders, affecting investors all over the world. Back
Financial Stability Board, "Why are Standards Important?",
Financial Stability Board, "Why are Standards Important?",
The BCBS has 11 countries, including no developing countries or
emerging market economies. The IOSCO technical committee has 15
members, including only Hong Kong and Mexico from the group of
emerging markets, but including neither important emerging markets
such as China, India, Russia, or Brazil, nor any other developing
Financial Services Authority, "The Turner Review", March
2009, http://www.fsa.gov.uk/pages/Library/Corporate/turner/index.shtml. Back
Noemi Pace; Andrew Seal; Anthony Costello, "Has financial
speculation in food commodity markets increased food prices?",
2008, http://fex.ennonline.net/34/has.aspx. Back
Dietrich Domanski; Alexandra Heath, "Financial investors
and commodity markets", BIS Quarterly Review, March 2007,
John Eatwell and Lance Taylor, "Why We Need a World Financial
Authority", WiderAngle, No. 3, 1998, http://www.wider.unu.edu/publications/newsletter/en_GB/introduction-angle/_files/80458472453374328/default/angl9802.pdf;
Barry Eichengreen, "The Global Credit Crisis as History",
2009, http://www.econ.berkeley.edu/~eichengr/global_credit_crisis_history_12-3-08.pdf. Back
No author, "UN body proposes new world financial organisation",
Journal of the Group of 77, No. 3, 1998, http://www.g77.org/nc/journal/3-98/9.htm;
Supachai Panitchpakdi, 2008, "Towards a World Financial Organisation",
World Economy & Development In Brief, Luxembourg, 24. November
2008, http://www.weltwirtschaft-und-entwicklung.org/cms_en/wearchiv/042ae69b600e5fd01.php. Back
Supachai Panitchpakdi, 2008, "Towards a World Financial Organisation",
World Economy & Development In Brief, Luxembourg, 24. November
Stijn Claessens; Geoffrey Underhill; Xiaoke Zhan, "The Political
Economy of Basle II: the costs for poor countries", The
World Economy, Vol. 31, Issue 3, pp. 313-344, 2008. Back
See International Monetary Fund, "Lessons of the Global Crisis
for Macroeconomic Policy", International Monetary Fund, IMF
Policy Paper, 19 February 2009, http://www.imf.org/external/np/pp/eng/2009/021909.pdf,
retrieved 28 April 2009. Back
See for example: Luis Servén, "Real-Exchange-Rate
Uncertainty and Private Investment in LDCs", The Review
of Economics and Statistics, February 2003, Vol. 85, No. 1,
pp 212-8; Back
See for example: Abhijit Sen Gupta, "Cost of Holding Excess
Reserves: The Indian Experience", Indian Council for Research
on International Economic Relations, Working Papers 206, March
Jang-Yung Lee, "Sterlizing Capital Inflows", International
Monetary Fund, Economic Issues No. 7, March 1997, http://www.imf.org/EXTERNAL/PUBS/FT/ISSUES7/issue7.pdf. Back
See for example: Davesh Kapur and Richard Webb, "Beyond the
IMF", G-24 Discussion Paper Series No. 43, February 2007,
See Bretton Woods Project, "IMF crisis prevention: running
on the spot", Bretton Woods Update No. 54, 31 January
2007, http://www.brettonwoodsproject.org/crisis54. Back
Financial Services Authority, "The Turner Review: A regulatory
response to the global banking crisis", March 2009, pp 85-6. Back
For a fuller discussion see: William Cline, The United States
as a Debtor Nation, Institute for International Economics,
September 2005, available at: http://bookstore.petersoninstitute.org/book-store/3993.html. Back
For more detail on the changes to IMF governance in 2008 see:
"IMF governance renovations: fresh paint while foundations
rot", Bretton Woods Project, Bretton Woods Update
No. 60, 1 April 2008, http://www.brettonwoodsproject.org/imfgov60;
Bretton Woods Project, "IMF challenged on accountability,
governance", Bretton Woods Update No. 61, 17 June 2008, http://www.brettonwoodsproject.org/imfgov61. Back
HM Treasury's annual reports (2001-2006) on the IMF can be found
at: http://www.hm-treasury.gov.uk/int_ii_ukimf.htm. Back
For a more in-depth treatment of the surveillance decision see
Bretton Woods Project, "Heated exchanges over exchange rates",
Bretton Woods Update No. 56, 2 July 2007, http://www.brettonwoodsproject.org/imfxrates56;
Bretton Woods Project, "IMF surveillance role: fundamentally
misalign?", Bretton Woods Update No. 57, 5 October
2007, http://www.brettonwoodsproject.org/imfroles57. Back
The global economic crisis: systemic failures and multilateral
remedies, UN Conference on Trade and Development, 19 March
2009, http://www.unctad.org/Templates/webflyer.asp?docid=11200&intItemID=2068. Back
Zhou Xiaochuan, "Reform of the International Monetary System",
People's Bank of China, 23 April 2009, http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=178. Back
For an explanation of the special drawing right (SDR) see: Bretton
Woods Project, "Inside the institution: the IMF's special
drawing rights (SDRs)", Bretton Woods Update No. 65,
1 April 2009, http://www.brettonwoodsproject.org/sdrs65;
and International Monetary Fund, "IMF Factsheet: Special
Drawing Rights (SDRs)", February 2009, http://www.imf.org/external/np/exr/facts/sdr.htm. Back
United Nations General Assembly, "Recommendations by the
Commission of Experts of the President of the General Assembly
on reforms of the international monetary and financial system",
19 March 2009, http://www.un.org/ga/president/63/letters/recommendationExperts200309.pdf. Back
See: "Let's put finance in its place! Call to action from
the 2009 World Social Forum", http://www.choike.org/campaigns/camp.php?5;
"Statement on the proposed "Global Summit" to reform
the international financial system", http://www.choike.org/bw2/index.html.
In the UK see: "Put People First", http://www.putpeoplefirst.org.uk/wp-content/uploads/2009/03/ppf-policyplatform.pdf. Back
See "UK NGO open statement on governance reform of the IMF",
Bretton Woods Project, 21 July 2006, http://www.brettonwoodsproject.org/ukimfreform;
and "European CSO open statement on governance reform of
the IMF", Bretton Woods Project, 17 July 2006, http://www.brettonwoodsproject.org/euroimfreform. Back