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Meeting Summary
FFD MULTI-STAKEHOLDER CONSULTATIONS ON SYSTEMIC ISSUES
November 16-17, 2004
Washington, DC
Co-sponsored by:
Foreign Ministry of Sweden, UN Financing for
Development Office, UN Foundation, New Rules for Global
Finance Coalition
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The International Conference on Financing for
Development (Monterrey, Mexico, 18-22 March 2002) was a turning point in the
approach to development cooperation by the international community. More than
fifty Heads of State and Government and over 200 ministers of foreign affairs,
trade, development and finance gathered in Monterrey. The Monterrey Consensus,
the outcome document of the conference , contains commitments in six key areas
of Financing for Development:
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Mobilizing domestic financial resources for
development.
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Mobilizing international resources for
development: foreign direct investment and other private flows.
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International Trade as an engine for
development.
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Increasing international financial and
technical cooperation for development.
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External Debt.
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Addressing systemic issues: enhancing the
coherence and consistency of the international monetary, financial and
trading systems in support of development.
It concludes with a section on “Staying Engaged” in
which it calls on the “United Nations, the World Bank and the International
Monetary Fund, with the World Trade Organization, to address issues of
coherence, coordination and cooperation, as a follow-up to the Conference, at
the spring meeting between the Economic and Social Council and the Bretton woods
institutions.” In the consensus UN member states further decided to hold a
biennial High-Level Dialogue on financing for development , with inputs of all
stakeholders including civil society and the private sector, to assess the
implementation of the Monterrey Consensus. To ensure effective secretariat
support to the intergovernmental follow-up process to the Monterrey conference
the General Assembly (GA) passed a resolution (A/RES 57/273) calling for the
establishment of the Financing for Development Office (FFDO) within the UN
Department of Economic and Social Affairs. In resolution A/RES/58/230, the GA
mandated the FFDO to organize multi-stakeholder consultations, involving the
private sector, civil society, national governments, the relevant UN agencies,
the WTO, World Bank and the IMF to examine issues related to the mobilization of
resources for financing development and poverty eradication.
In July 2004, the FFDO invited the New Rules for
Global Finance Coalition to organize a series of multi-stakeholder consultations
on behalf of civil society, and to focus on the systemic issues portion of the
Monterrey Consensus. In fulfillment of this agreement, New Rules for Global
Finance Coalition organized the first in a series of multi-stakeholder
consultations at the IMF in Washington, DC on November 16-17, 2005. The
attendees (listed in Appendix I) came from the IMF, the World Bank, UNDP, the
FFDO, Central Banks, Bank for International Settlements, Financial Stability
Forum, the private sectors, academics, and NGOs. The Agenda for the overall
consultation on Systemic Issues. (Appendix II) is posted on both
www.un.org/esa/ffd and
www.new-rules.org The agenda at the first consultation focused on specific
subtopics, as described in the November Agenda. (Appendix III).
The summary of discussions follows as the
Rapporteur’s Report, which will be posted on both the UN/FFDO and New Rules
websites. As agreed by the participants, the content can be shared, but no
remarks or comments will be attributed to any individual. At the conclusion of
the consultative meetings, New Rules for Global Finance Coalition will prepare
both a comprehensive publication including background papers, Rapporteurs’
Reports for each of the 3 input sessions (Washington, Lima, Nairobi), the
Summary Meeting to be held in New York at UN Headquarters in May 2005, and
recommendations for the High-Level Dialogue on financing for development to be
held on 27 and 28 June 2005. The recommendations will represent the position
of the New Rules for Global Finance Coalition and its members alone; it will not
pretend to be a consensus or majority position of the attendees of any of these
meetings.
Session 1: Welcome and Introduction
Participants were welcomed to the opening meeting
of the Multi-Stakeholder Consultations on Systemic Issues by representatives
from the New Rules for Global Finance Coalition and from the Boards of the
International Monetary Fund and World Bank. All were thanked for their
willingness to continue the inclusive mode of the FFD Conference, and to work
together toward implementing its goals.
The framework for the Systemic Issues conversations
was set by a summary presentation of research just concluded by the Swedish
Ministry for Foreign Affairs, entitled: The Future of Development Financing:
Challenges, Scenarios and Strategic Choices.
According to the authors, at the beginning of the
21st century, more than five decades after international development
began to emerge as a field in its own right, the international development
financing ‘system’ is still not a system. It is rather a collection of
disjointed entities that lack coherence, often work at cross purposes and are
not up to the task of mobilizing finance in the amounts and ways required to
assist a growing diversity of developing countries in their efforts to reduce
poverty and improve living standards.
Yet, the early years of the 21st century
have brought about an unprecedented ‘window of opportunity’ for a conscientious
re-examination and re-alignment of the institutions and organizations that
configure the international development architecture. There is a renewed impetus
for reform, partly because global communications have increased awareness of the
plight of the poor in developing countries, partly because criticisms about the
effectiveness of the development financing system have multiplied, and partly
because of increased awareness that the haphazard approaches to reforms of the
past have not been successful. In addition, the specific and time-bounded
nature of the Millennium Development Goals has helped to focus attention on the
inadequacies of current international development financing arrangements. There
is also evidence that the terrorist attacks of September 11 2001 have forced
political leaders to acknowledge that a series of international security crises
may be looming (and perhaps imminent) unless the widespread poverty,
marginalization and growing inequalities that lead to frustration and despair
are significantly reduced.
If meaningful and sustained reform is to occur, the
authors maintain, it will need to be guided by a long-term vision and what we
term in this study a ‘radical incrementalism’ perspective.
This study, The Future of Development Financing,
develops four scenarios (business as usual; inertia; limited, and comprehensive
reform). It also addresses a of series of 9 questions to assist policy makers in
assessing alternatives and prospects for international development financing.
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How important is finance in the process
of development?
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Are the current structures, channels and
mechanisms to provide external development finance appropriate to the needs
of developing countries?
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What would be the main characteristics of
a more effective and adequate set of international development financing
institutions? Some 8 characteristics include: adequacy; predictability;
diversity and choice; capacity to absorb shocks; complementarity of external
financing with domestic resource mobilization; voice, representation and
accountability; and flexibility, efficiency and learning.
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What are the prospects of international
development financing during the next decade and a half? Their
response to this particular question is: very uncertain. Yet those prospects
are arguably much better at the moment than they have been in at least two
decades….In 2005 there will be the special session of the UN on the MDGs and
the pledges of Monterrey will need to be extended beyond their current
framework that extends only to 2006.
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Is it necessary to explore new ways of
classifying developing countries from a development financing perspective?
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How can change in the international
development financing system be brought about?
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Who are the main actors in the process of
moving towards a more effective international development financing system
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What are the main issues in the reform of
institutional arrangements?
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Which are the main issues and initiatives
regarding financial instruments to channel resources towards developing
countries?
Their fundamental conclusion and recommendation is
a process they call “radical incrementalism” They believe that this oxymoron
fits well the paradoxical character of the emerging fractured global order, and
may be the best approach to advance towards their Transformation scenario
for development financing in the mid-2010s. It implies the simultaneous
articulation of a shared vision of the desired future and the design of
pragmatic, down to earth, means to approach it.
Session 2: Review of the
Official Reform Agenda
By the end of the 1990s, the
decade’s repeated financial crises had brought a sense of urgency for reform of
the international financial architecture. Session two focussed on adjustments to
the global financial system that were part of the official response to the East
Asian crisis, especially that cluster of domestic financial and regulatory
policies better known as “Standard and Codes” (S+Cs).
The framework of Standards
and Codes
Participants agreed that the
development of Financial Standards and Codes were part of a process of “groping”
toward a set of globally accepted rules as a pre-requisite for provision of
international financial support for countries experiencing currency crisis. The
Financial Stability Forum, which was established by the G7 finance ministers and
central bank governors in 1999, identified twelve key standards which could be
categorized as directed towards three broad subjects: (1) transparency, (2)
regulation and infrastructure of the financial sector, and (3) market integrity.
Uniformity vs. country
specific needs
While the participants agreed
that developing economies have shown great progress in implementing these
standards, there was a spectrum of views regarding the S+Cs themselves, ranging
from the view that S+Cs should be an integral part of an international
rule-based system to the view that their design and implementation should take
more account of countries’ different levels of development and capacities.
Several participants supported the second view that a ‘one size fits all’ was
unlikely to appropriately address the functioning of the international financial
system, whereas other speakers explained that the limited but albeit important
role of S+Cs would enhance the efficiency and effectiveness of the international
financial system to withstand systemic crises. It was suggested that the aspect
of uniformity and particular country needs should be addressed in the upcoming
regional meetings that will be organized by the New Rules for Global Finance
Coalition.
Merits and Weaknesses of S+Cs
The conversation highlighted some of the merits and
weaknesses of Standards and Codes. There was wide agreement on the intrinsic
limits of S+Cs and that their overall utility is often exaggerated. While they
some maintained they incorporated the principles for best practices, by
reflecting policies of financial leaders in the most advanced economies, and
that they could support the creation of a sound domestic financial market, by
themselves S+Cs were unable to solve major macroeconomic problems that may occur
prior to or during financial crises. Several participants strongly asserted that
capital controls were a prudential measure available to developing countries to
use unilaterally in response to international disruptions, and they should be
internationally recognized and protected as such.
Other participants in the meeting underscored that
the implementation of standard and codes, in particular by emerging market
countries, could enhance their access to external private capital and could
reduce the risks of contagion and volatility in financial markets in crisis
situations. It was argued by some speakers that there is also empirical evidence
that standards and codes have been useful for benchmarking progress towards
development and reform of financial systems in several developing countries. One
weakness of S+Cs that several participants pointed out was a lack of policy
ownership by developing countries. These countries were either absent from or
enjoyed restricted access to the discussion in the standard-setting bodies that
designed S+Cs. This asymmetry in agenda-setting processes could create
competitive advantages for industrial countries in the financial sector.
The new Basle Capital Accord
The core principles for
effective banking regulation and supervision were also discussed, even though
work on a new Basel Capital Accord (Basle II) is not formally part of the
Standard and Codes Framework. Participants agreed that the two processes are
closely linked. One strong line of argumentation was challenged the general
problem of prescribing global standards for banks at different levels of
development, since the Basle Capital Accord does not account for regulatory
differences among national regimes in developing countries. Others, while
acknowledging the significant regulatory implications of Basle II, explained
developing countries were under no obligation to implement the full Basle II
framework.
Regulation of
over-the-counter derivatives
The discussion also touched on
the role of over-the-counter derivatives. Some participants deplored the lack of
proper standards of regulation in this area and warned about resulting systemic
instability. The counter-position asserted that derivatives markets were
sufficiently regulated through banking supervision standards such as Basle II.
There was consensus that a subsequent meeting of the FFD Multi-Stakeholder
Consultations on Systemic Issues should explore how far systemic risk might be
related to under-regulation of derivatives market.
Summary of Session 3: Crisis Prevention
The opening statement of Session 3 contrasted two
types of financial crises. The first primarily affects developing countries,
such as the debt crisis of the poorest, which continues for decades without
resolutions. The second are systemic crises of major middle income countries
which threaten the stability of the money centers. These latter crises, such as
those in East Asia and Brazil in the late 1990s, receive major funding and
policy response for early resolution.
Participants were also reminded that this
discussion about crisis prevention was taking place in a dramatically changed
financial environment. Unlike the 1990s, many middle income countries (MICs)
now export capital to industrial countries, instead of being capital
importers. Several MICs have built high levels of reserves to insure
themselves against the old form of financial crisis. Further in this current
situation, several MICs are lending to the US, with its impending double debt
crisis, involving both the fiscal and current account deficits.
An underlying tension throughout the discussion in
Session 3 was the appropriate balance between collective rules for crisis
prevention and rules that are the responsibility of local governments. Although
the overt purpose of the session was to address proposals at the collective
level, that is, addressing elements exogenous to the economy affected by a
crisis, considerable attention was paid to domestic policy measures potential
crisis-affected countries could implement. Specifically, it was recommended
that MICs regulate domestic risks differently than they were regulated in
industrial countries, especially for domestic banks to avoid treating domestic
sovereign debt as a risk less asset--a common action in developing countries.
Regarding collective rules for crisis prevention,
some participants highlighted the political difficulties of achieving change at
this level. Some even questioned the desirability of collective rules. Without
collective rules, developing countries could enjoy greater policy space to seek
creative or sui generic policy responses. There was broad agreement that, at a
minimum, it was important to ensure that global rules not limit local options,
as happened when Chile gave up its right to regulate capital in-flows when it
signed the bilateral trade agreement with the United States.
Those participants calling for greater collective
mechanisms for crisis prevention cited two reasons. First, no amount of domestic
reform can guarantee that a developing country will be free from crises
originating from exogenous factors. Second, even if self-insurance mechanisms
proved to be effective, they would still be costly in terms of foregone
development opportunities.
Among the collective action measures proposed were:
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Establishing precautionary financial
arrangements: Ideally, these should incorporate the best elements of the
defunct Contingent Credit Line (CCL), without its worst. The CCL was judged
a failure since it was available only to countries carrying no risk, or what
one participant called “an empty set.” It provided no protection from
external shocks even for countries adhering to IMF policies. The current
stand-by arrangements are not sufficient since they are too slow moving
(taking 6 weeks to assess data), too small, especially the first tranche of
any arrangement, and regarded negatively since the borrowing country is
stigmatized as a long-term borrower of Fund resources.
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Reducing volatility in international
financial markets, for example by strengthening regulation of
highly-leveraged institutions. One participant suggested that, since
industrial governments tended to oppose these measures, it might be more
realistic, and equally effective, to identify the few large banks that fund
them and regulate those banks.
There was no consensus regarding a proposal to
establish a rules-based debt workout scheme. Some strongly endorsed a
comprehensive debt work out mechanism provided it was outside the framework of
the IMF, which, as a creditor, was not qualified to serve as an impartial
arbitrator. Others resisted any consideration of a legal workout framework,
fearing a negative reaction from private financial institutions. They argued
that the promise of official credit would suffice to prevent crises or to
resolve crises. This latter position evoked several questions: How much
official lending was “enough”? When would the additional lending not be
appropriate, i.e., how to distinguish insolvency from illiquidity? Also, how
would the moral hazard of private creditors awaiting official bail out be
addressed?
Policy tools that could be useful for crisis
prevention but warranted further debate included: overcoming original sin,
i.e., the inability to borrow in one’s own currency; rekindling attention to
growth, rather than fixation on stability; addressing the impacts of derivatives
and off-balance sheet activities on increased volatility of capital flows;
addressing the vulnerability of countries exposed to those sudden capital
movements; comprehensive debt work outs for sovereign debtors; the
appropriate use of capital controls; and mechanisms for stabilizing commodity
prices.
Another proposed topic for a future meeting of the
Multi-Stakeholder Consultations on Systemic Issues was the crisis that would
result from China’s over-valued currency and excess capital supply ending its
support for US demand for China’s products and no longer financing the US fiscal
and current account deficits.
Session 4: Provision of Credit in Times of Crisis
Discussion during Session 4 focused on how to
overhaul the International Monetary Fund so it could effectively provide credit
in times of crises. Recent crises showed the Fund was ill equipped to fulfill
the goals articulated in the Articles of Agreement, namely, limiting damage in
the crisis country and avoiding damage to the global economy. To date, the Fund
has responded in two ways: through the Contingent Credit Line, introduced in
2000, but dropped in 2003, and through the use of precautionary stand-by
arrangements.
Participants also addressed the adequacy of Fund
resources. Some participants felt the Fund did not have enough resources, given
that total resources relative to global trade flows have decreased dramatically
since the Fund’s foundation and that trade flows were probably not an adequate
indicator, as financial flows currently dwarf trade flows. They maintained that
the size of the Fund’s resources should be assessed against the possible needs
for credit in the event of a large financial crisis involving large economies
such as US and China. Others maintained that the size of global markets was
being exaggerated, and that a scenario of worst cases was not the appropriate
context. The size of the1990s crises in Asia or Russia were more appropriate.
Still others argued that the Fund has adequate resources, based on indicators
such as the one-year commitment capacity (as of September 2004, 93 billion SDRs)
which exceeds the maximum amounts available under the three largest crises
arrangements.
Broad consensus was evident around a comprehensive
proposal to enable the Fund to address the needs of members in times of crises,
building on the analogy of a lender of last resort. The proposal involved four
elements:
First, overall increase in
quotas and redistribution thereof. Countries in crisis need adequate resources
available quickly. This funding would calm the market and enable the member to
negotiate longer term solutions from a stronger position. Present Fund financing
is ill-suited for modern financial crises which can hit overnight. All financing
still require the Fund to conduct “rigorous and systematic analysis that debt
will remain sustainable.” Satisfying this criterion requires time, which is not
available when a crisis if breaking. The conflict between the needs for
cautious lending and speedy financing could be resolved by enlarging the first
tranche. However, this sensible solution is precluded by the size of the
country’s quota which severely limits the size of any arrangement. Consequently,
for the Fund to provide prompt and adequate credit at the on-set of a crisis,
the quota sizes must be dramatically enlarged. Quotas must be redistributed to
reflect the fact that the relative sizes of economies has changed significantly
since 1944, and under current rules, MICs are not allowed to expand their quotas
to suit their growing needs.
Second, short-term use of capital controls is
needed, as no amount of resources would meet the demands of a market-driven
crisis (“stop the bleeding” while one engineers long term solutions).
Third, the Fund should be empowered to make
generalized emissions of SDRs to calm the market. This would enable the Fund to
play a role similar to that played by the US Federal Reserve Board during the
Long-Term Capital Management crisis. One could not rely on the Fed (much less
the tighter arrangements of the European Central Bank) to provide the global
market with extra liquidity needed in crisis situations, since the Fed’s mandate
is designed to protect the US domestic market. For this proposal be effective,
extra SDR emissions would need to be monetized through particular central banks.
However, even without being monetized, the issuance of additional SDRs would
help emerging market countries by providing them additional reserves.
Fourth, in signing a longer term program, which
would be larger and include higher conditionality, the Fund would necessarily
follow good practices appropriate for any lender of last resort, namely, it
would lend against good collateral. This requires early asset revaluation (that
may mean revaluation of the currency and the outstanding external claims on the
country) before further lending. It was noted that early debt restructuring or
debt forgiveness would also be central to resolving the problem of long term
users of Fund resources and to avoid having to write off later what were, from
the outset, bad loans.
Other issues that were raised in the discussion and
singled out as deserving further attention in future meetings of the
Multi-Stakeholder Consultations on Systemic Issues included:
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Regional Monetary Funds:
Some participants discussed the desirability of moving towards establishing
Regional Monetary Funds to take advantage of the reserves countries in East
Asia were building. The advantage would be that, instead of having to
struggle to increase their quotas (and votes) in the Fund, these countries
could create their own monetary cooperation arrangements to fulfill their
needs. This could provide healthy competition to the Fund. The Latin
American Reserve Fund was named as a positive, if incipient, experience in
that direction. Others were of the view that regional cooperation systems
would not be as solid as a global response, and that no region had so far
bought into the idea of a regional monetary fund, which thereby cast doubt
into the feasibility of the idea.
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Moral hazard: while lending
in times of crises may be needed, the prospect of large bail-out packages
also has implications for moral hazard on the part of private creditors. In
the past, large amounts of private debt have been socialized this way,
thereby sheltering private creditors from market discipline for bad lending
decisions.
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CFF: Participants agreed
that the Compensatory Financing Facility, currently on “life-support”, has
proven to be a poor response to income uncertainty due to commodity price
decline and fluctuations. Participants agreed the problem persists, and
adequate financing responses still need to be developed.
Session 5: Credit in Times of
Crisis
Underlying causes for systemic risk:
In the fifth panel participants discussed the importance of
financial markets in promoting sustained investment and growth, and that the
efficiency and stability of these markets – i.e., the prevention of systemic
vulnerabilities -- was imperative for improvements in living standards. It was
argued that risk-taking and information externalities as well as monopolistic
and destructive competition represent micro imperfections that could lead to
serious systemic market failures. These market imperfections raise the question
of whether good public policy can improve financial market efficiency and
stability. Moreover, the existence of macro-imperfections such as business
cycles, surges and droughts of capital flows as well as herding and contagion
would strengthen the case for appropriate policy and a prudential regulatory
framework.
The adequacy of existing regulatory frameworks
to prevent systemic failures:
Capital Adequacy Requirements:
One proposal that participants discussed in this session focused on the question
whether domestic financial regulations in developing countries effectively limit
the impact of volatile capital flows. It was argued that despite increasing
financial liberalization and the internationalization of the banking system,
financial deepening was still low and deposit volatility had remained high in
these countries.
Existing prudential regulations
such as capital requirements had not proven to be effective tools in dealing
with flow volatility and did not help in predicting banking crises. Part of the
debate focused on the adequacy of capital requirements in the banking sector as
a risk-prevention measure. One particular proposal was to promote liquid
secondary markets in subordinate bank debt so that banks’ creditworthiness would
be priced more efficiently than in equity markets or measured by bank capital
adequacy.
Another point was made that
government risk was usually highly correlated to bank risk, which brought up the
suggestion that banks should hold capital against their holdings in government
securities. Many participants were in favour of modifying Basle II accordingly,
while others warned that this would unnecessarily raise the borrowing costs of
developing countries’ governments. Restricting the share of government bonds in
the lender’s portfolio was suggested as a more sensible strategy.
Some speakers also underscored
that while inappropriate accounting standards and reporting systems would reduce
the effectiveness of capital requirements, capitalization ratios would also be
less effective in developing countries due to the lack of deep and liquid
capital markets. These markets existed only in industrialized countries and
could provide supervisors there with information regarding the quality of
reported capital. According to some participants, the solution would lie in
policies that promote greater deepening and sophistication in developing
countries’ financial institutions so that they would price risk correctly and
better internalize the costs associated with their risk exposure.
Trade issues and trade in financial services
While some participants
attempted to underscore the benefits of developing countries “importing
financial services” or relying on foreign owned financial institutions for
financial services, others warned that there was at best conflicting evidence to
support the claim that the entry of multinational banks in developing countries
would enhance domestic credit supply.
The discussion also ventured
into broader international trade policy issues and trade in financial services.
It was suggested that developing countries might have more success in gaining
market access to developed country agricultural markets if they were willing to
offer more concessions on opening their domestic financial markets to developed
country financial services providers. Contrarily, it was pointed out that some
provisions in many bilateral trade treaties required developing countries to
forego prudential safeguards that they were guaranteed under the General
Agreement on Trade in Services (GATS) and that these bilateral anti-regulatory
provisions were not supportive of financial system stability.
The way forward
As the debate focused heavily on
the banking sector it was suggested that future meetings look more closely at
other markets, such as security markets, insurance markets and derivative
markets.
Session 6:
Institutional Matters: Are the Right Issues on the Agenda?
In opening the discussion on governance, it was
recalled that the Monterrey Consensus called for two broad areas of action:
broadening the base for decision-making on issues of development concern and
filling organizational gaps.
Several participants addressed the fact that
globalization is characterized by interpenetration of domains, interrelatedness,
and intersectorality. Such characteristics manifest themselves in areas such as
the Millennium Development Goals. Fulfilling development objectives requires
better coordination at the level of local and national governments. But, at the
international level, this reality pointed to the need for a way to provide broad
political and strategic guidance so that this multi-sectoral agenda could be
implemented through the patchwork arrangements of formal institutions. Strong,
coherent political leadership was identified as the only way to get the
fragmented arrangements of institutions committed to single issues—such as food,
health, trade—to coordinate and to collaborate to achieve the MDGs and related
goals. This undertaking clearly required the active role of the United
Nations.
Opinions divided on the shape of such a broad
political guidance mechanism. Some proposed building on the G20, upgrading it to
a Heads of State meeting (it could possibly replace the G7), adding a chair for
the African Union, practicing outreach to other countries. Others challenged
this idea on the grounds that a G20 would lack legitimacy, since it is an ad hoc
body with no formal basis for selecting representation. Others, while
recognizing the G20 was not perfect, recommended using it as an experiment to
open new spaces and achieve some more transparency as a way to improve upon the
existing practices of the G7. Several speakers warned of substituting informal
bodies for formal institutions. In this context the proposal to strengthen
ECOSOC’s decision-making power was formulated.
Participants also articulated the need to keep in
mind how the whole system functioned, and not to be distracted by reform of one
or two institutions. The Monterrey Consensus was not about the reform of the IMF
or the World Bank, per se, but rather about a fresh look at better instruments
for decision-making credible to the larger constituency. Problems in the Bretton
Woods Institutions could not be analyzed in isolation from the UN system. One
speaker explained that the urgency of enhancing the legitimacy of multilateral
institutions stemmed from a current trend that could deepen, namely, that
countries, not feeling well-represented by multilateral formal institutions,
tended to launch regional and informal limited membership forums. This
fragmentation should be avoided. Others, however, acknowledged that the
prominence of bilateral and regional mechanisms also owed to the fact that they
had proved more effective in addressing certain challenges, so one could not
take for granted multilateral was always better, and an argument needed to be
made on a case by case basis.
Regarding the governance of the Bretton Woods
Institutions, a participant addressed two important trends that, in his view,
were undermining the IMF: 1) increased interference by the G7, as opposed to the
International Monetary and Finance Committee, with two by-products: less
emphasis on consensus-building and weakened authority of Managing Director and
Executive Board; and 2) growing obsolescence of the quota formula, resulting in
quota distribution and voting power (currently 60-40 between developed and
developing countries) which was not in sync with the stronger role of emerging
markets (particularly in Asia).
In terms of reforming the Bretton Woods
Institutions, several participants stressed the need for a new quota formula.
Because the quota of any member cannot be reduced without its consent, quota
increases seem to be necessary which, in turn, makes it necessary to gather 85 %
of the votes to approve the change. The package has, thus, to be one that
appeals to members holding that percentage. The calculation of GDP on Purchasing
Power Parity rather than market-based exchange rate was proposed as an element
in any new quota formula.. In addition, Europe’s weight in the Board (counting
votes commanded by EDs as heads of constituencies, not only the votes a
particular country held) is above 40 percent, compared with 17 percent held by
the United States. The EU, now comprised of 25 members, could bundle into a
single member and the EU intra-trade no longer be counted as foreign trade. In
this way, EU quotas would go from 32 percent to 22 percent. The Board was
judged to be too large to be effective. Consolidation of European seats could
reduce the Board from 24 seats to 14. Proposals were also made to address the
secretive process for selecting the Bretton Woods Institutions leadership; and
redistributing shares in the World Bank by taking into account contributions
made by middle income countries to the capital of the World Bank via interest
payments.
Not everyone supported consolidation of EU members’
quotas and seats, as well as greater European coordination. Some members of the
EU feared losing their individuality; others raised concern about losing the
pro-development voices of countries like the Nordics. Participants also called
for developing countries themselves to take more leadership. So far, there was
no consistent voice coming from them and calling for increases in their voice
and vote. Others highlighted concerns with the potential role developing
countries could play on issues that could be divisive among themselves. For
example, would newly-empowered middle income members act in solidarity with the
interests of low income members? |
