EU-LDC Network conference 2002
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Improving Global Governance for Development: Issues
and Instruments - 7-10 December, Chiang Mai
Session 1.1 - Global governance and
the functioning of global financial markets - Summary
The first speaker discussed the role of international institutions
in global governance and poverty reduction issues in Argentina.
Argentina has experienced serious set backs in its development since
the 1970s. Partly, this stems from problems in local, Argentinean
governance structures. However, international institutions have
also had an influence on economic policies in Argentina.
The speaker presented some lessons for international institutions
on how they can contribute to development and poverty reduction
in countries like Argentina in the future. First, international
institutions should focus on objectives like poverty reduction,
local governance, and sustainable development, rather than on instruments,
e.g. fiscal balance and the degree of economic liberalisation. Secondly,
the policies recommended by international institutions need to based
on detailed assessments of the long-term consequences including
social implications. Thirdly, the institutions should play a greater
role in introducing experiences of institution building in developed
countries to developing countries. Also, in the fields of fiscal,
trade and investment issues, the international institutions need
to pay more attention to specific circumstances in developing countries.
Finally, an institution like the IMF should not defend private interests
in forcing conditionalities upon countries which receive assistance
from the Fund. According to the speaker, this has sometimes been
the case in privatisations of state-owned enterprises.
The second presentation gave a more in-depth look into governance
issues of the IMF. The IMF promotes governance externally through,
among others, surveillance, financial assistance and technical assistance.
The speaker however focused on the internal governance of the IMF,
expressing five points of criticism.
First, the voting structure of the IMF is undemocratic since there
is no counterbalance of major industrial countries. The voting power
of countries is determined by economic size. As a result, the US
has 17.4 percent of the votes, while other industrial countries
occupy 44.2 percent. Developing countries and transition countries
account for 30.9 and 7.5 percent of the votes respectively. A solution
for this imbalance can be found by using other variables than mere
economic size, or the adoption of a one vote per country system.
Secondly, important decisions need an 85 percent majority vote.
With more than 15 percent of the voting power, the US is always
able to veto decisions. This can be changed by lowering the maximum
share of votes which a member country may own, or the lowering the
percentage of the required majority. Thirdly, in the Executive Board
of the Fund – one of the main management bodies – developed countries
are dominating. In this case a reallocation of constituencies will
benefit developing countries. Fourth, the Managing Director of the
IMF is, by tradition, always a European – compared to an American
for the World Bank. The Managing Director should be chosen for his
capabilities, not for his region of origin. A better option is to
have member countries choose the Managing Director directly. The
fifth criticism relates to the fact that many IMF officials start
working for the private banking sector. This allows the banks to
get valuable information from former IMF employees.
At the UN Conference on Financing for Development in Monterrey
world leaders advocated a reform of the IMF. In a reaction, the
Fund has, among others, set up an Independent Evaluation Office,
and made an attempt to enhance transparency and disclosure.
The third speaker also gave a critique on the IMF. In particular,
his presentation dealt with proposals of the Fund on how to deal
with international insolvency of countries and with alternatives
to the approach of the IMF. International insolvency refers to a
situation where a sovereign state is not able to meet its debt obligations.
In such cases, sovereign debt workout arrangements will allow countries
to deal with the problem of insolvency. The IMF has proposed a scheme
which is similar to Chapter 11 of the US Bankruptcy code for corporate
insolvency. Through the Chapter 11 approach as proposed by the IMF,
creditors and debtors are able to renegotiate the debt under supervision
of the Fund. The speaker criticised the proposal of the IMF since
the proposal allows the Fund to be a judge over cases in which the
IMF is itself a creditor. In this way the IMF cannot be objective.
Pushing for transparency through Chapter 11 can therefore be attributed
to institutional self-interest.
The speaker advocated as an alternative the Chapter 9 of the US
Bankruptcy code, which is applied in case of municipal insolvency.
According to the speaker, Chapter 9 allows a more equal treatment
of all creditors through objective arbitration. In addition, it
provides the opportunity for nationals in debtor’s countries to
voice their concerns, to include measures to protect the poor (social
minimum standards) and to allow regulatory changes in a debtor’s
country.
With the Chapter 9 approach, there is a need for a, what the speaker
called, Fair Transparent Arbitration Process (FTAP). A FTAP guarantees
a fair treatment between public and private actors and includes
clauses for debtor protection. Within FTAP there should be an ad
hoc arbitration panel and therefore a new institution is not necessary
(one of the IMF’s considerations is to establish a special, IMF-linked
institution dealing with the issue). Ad hoc arbitration will help
to speed up debt workout processes, which is highly recommended
to prevent crises.
The fourth speaker extended the previous issue on insolvency to
the much broader issue of international financial standards in maintaining
international financial stability. Introducing new standards will
contribute to financial stability, but there may be problems if
the system becomes too inflexible, in particular if it does not
take into account differences in the state of economic development
and governance of countries.
Problems of introducing international financial standards are related
to defining Standards and Codes (S&C), implementing, and monitoring
them. For developing countries, it is important that they are actively
involved in the process of setting S&C. It is also crucial that
they receive positive incentives for implementation instead of negative
ones (e.g. sanctions). Another related question is whether to make
the standards voluntary or not. In this respect, it is important
to take into account that developing countries are limited in their
actions through lack of appropriate institutions and resources.
However, the problem of lacking resources can be solved in the long
term through technical assistance. Given these constraints, there
will be a need for a transition period.
In the conclusion the speaker restated the importance of S&C
as a global issue despite problems of incentives, monitoring and
resources. S&C should be part of a voluntary process and not
of a process with conditionalities. This will ensure ownership of
S&C by developing countries. Diversity among countries supports
the view of working with principles rather than fixed rules and
the need for transition periods.
The discussant commented on the presentations on Argentina and
the sovereign debt workout arrangements. The current crisis in Argentina
stems from external and internal factors. The speaker believes that
the external factors were at play, but they alone cannot sufficiently
explain why the crisis of 2001 has had such a negative impact on
the economy. Internally, lack of quality in implementing reforms
and a lack of enforcement capacity have played an important role
in the evolvement of the crisis. Only building formal institutions
is therefore not a solution, because it is the enforcement and dealing
with vested interests which matter most. Regarding this internal
issue, there is very little international donors can do. Rather
than interfering in national institution building, the discussant
suggested that the support of international donors should focus
on the strengthening of regional support structures, e.g. through
peer reviews.
In reference to the sovereign debt workout arrangements the discussant
noted that curing problems of solvency would not automatically stop
a crisis such as the 2001 crisis in Argentina. Liquidity crises,
terms of trade shocks, and political arrangements can be just as
disturbing for an economy. There should be more attention for regulation
in the banking/financial sectors. It was also stressed that the
IMF is one of the few lenders of last resort for a number of LDCs.
When talking about financial architecture, the role of the private
sector (speculation) is another issue which needs to be kept in
mind. Participation of poor countries in standard-setting bodies,
which was also stressed by the fourth speaker, should also not to
be forgotten.
During
the discussion a variety of issues were raised including vested
interest of influential groups and the lack of proper institutions.
Some participants mentioned that the IMF is not a lender of last
resort. One speaker saw the IMF’s role to be an inter-mediator between
debtors and creditors. Another participant agreed with the presumptions
of some speakers that the IMF should not be blamed for certain problems,
e.g. difficulties after the Asian crisis. Nevertheless, there was
also criticism on the fact that there has been too much focus on
monetary and fiscal policies, whereas social aspects have been ignored.
Others referred to possibilities to improve international financial
governance within a regional framework such as the Chiang Mai Initiative
of 2001. This initiative includes agreements among the ASEAN member
countries, Japan, South Korea and China on currency swaps in the
event of a potential crisis in the region. There seem to be some
good prospects for further co-operation in this field.
Session 1.1 - Speakers
Chair: Ulrich Hiemenz
Speakers: Luis Rappoport (University of Bologna
- Buenos Aires), Chantavarn Sucharitkul (Bank of Thailand), Kunibert
Raffer (University of Vienna), Benu Schneider (UNCTAD)
Discussant: Marion Eeckhout (Ministry of Foreign
Affairs, The Netherlands)
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