Calls for international financial reform fall flat due to lack of will

Jamaica Accords

Then came the Jamaica Accords at the beginning of 1976, which put a formal and final end to fixed dollar exchange rates and the US currency's tie to gold. This acknowledged that world currencies were once again floating freely on the market. But the dollar remained the currency used to price commodities, most importantly oil.

The changes did not bring an end to the financial and monetary crisis. Since 1945, there have been 36 to date, and the interdependence of financial markets and their deeper integration has made some more dangerous.

Against this backdrop, nations have formed groups to help them cope or coordinate their responses during turbulent times. The length of the list reveals the tenacious nature of the need for a new form of global governance.

G7, G8, G10, G20, G24, the BRICS, the Committee on Reform of the International Monetary System, the International Monetary and Financial Committee (IMFC), the Economic and Social Commission for Western Asia (ESCWA), the Bank for International Settlements in its renewed form, the International Organisation of Securities Commissions (IOSCO), the Financial Stability Board, the global creditworthiness assessment agencies, the International Accounting Standards Board, creditor groups dealing with sovereign debt issues such as the Paris and London Clubs, and other groupings.

The inadequacies of the financial and monetary system risk splitting the globe into two worlds: one for the rich and one for the poor. This brings myriad dangers, from sparking revolutions to stoking security trouble spots.

Ultimately, it will generate massive waves of migration to the West.

More and more voices are calling for a move back toward the days of a multi-polar financial and monetary world to limit the dominance of the dollar and curtail the use of the system by the US and the West to impose sanctions on their opponents.

Much research has been done on reforming international financial architecture to serve more of the world better.

One of the most important reports – on the causes of the financial crisis that broke out in 2008, its aftermath, which included massive monetary expansion globally, and ways to avoid a repeat of it – was prepared by an international panel of experts headed by Professor Joseph Stiglitz at the request of the United Nations.

Stiglitz's thinking is outlined in his book Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis. The recommendations from the panel that went to the UN will be presented at the Summit of the Future, which is set to convene later this year.

Stiglitz has argued that the focus should be on more than providing more money by increasing or broadening the capital base or borrowing levels. Revenues for emerging markets and developing countries can also be boosted by requiring rich companies to pay their fair share of taxes in the countries where they operate.

The summit will aim to develop multilateral solutions that strengthen global governance. Some key suggestions are as follows:

Ending dollar hegemony

This ambition began at the last meeting of BRICS, which decided to work on the creation of a common currency for the group that counters the dollar dominance.

Read more: Don't expect currency wars to dethrone the dollar yet

This is an attractive project as it could boost the investment appeal of bonds and financial instruments in various currencies. However, it faces many obstacles: the Chinese economy must be liberalised, and BRICS countries must adopt conversion standards similar to those of the Maastricht Treaty, which helped open the way for the euro to align their economies in preparation for a shared currency.

The euro took three decades to come into being, and there's still no single European treasury bond to compete with its US counterpart.

This suggests that the BRICS are likely, at first, to reach more limited agreements. Perhaps they would cover using national currencies in bilateral and joint exchanges and expanding two instruments, digital currencies and non-dollar-based payment systems.

How the Bretton Woods institutions are set up to make decisions must be democratised to better reflect how the global landscape has changed since they were designed.

Back in 1945, 44 countries took part in the conference. The World Bank and the IMF now have around 190 members. The governments of developing countries don't have veto rights.

The boards of both institutions need to be expanded to better represent developing countries. To ensure consensus, policies should be backed by a double majority – 85% of voting rights and 60% of member states – this would give its decisions weight. 

Transparency and accountability should also be introduced. Material used in the decision-making process should be publicly available, as should the discussions around it. That would help enhance confidence in the system, showing that it is truly multilateral.

The financing arrangements in place to define contributions to the organisations' budgets – based on the size of the contributor's economy – should also be freed from the political negotiations that currently define them and can take years. The procedures should be made automatic.

The lending capacity of the IMF should be expanded via strengthened finances. Restrictions on the allocations of one of its main lending means – via so-called Special Drawing Rights – should not be applied by its shareholders.

Reducing borrowing costs

The issue of sovereign debt among poorer and developing countries is important, and a durable solution will involve lowering the cost.

Sovereign borrowing can be used to deal with crises. However, it is usually a tool to pump investments in infrastructure and productive projects to spur growth. This can increase tax revenues, making it easier to sustainably source and service sovereign debt.

However, irresponsible management of sovereign debt has taken it to critical levels in some countries. Nations have defaulted on debt payments, prompting the international community to seek a fair and effective way to address the problem of high indebtedness.

It is seen as a joint responsibility of debtor and creditor nations. That consensus was reached at the 2002 Monterrey International Conference on Financing for Development. In 2015, the Addis Ababa Plan of Action called for responsible debt spending and management by the borrowing state, transparency with the lender state, and due diligence in good risk management.

There is also a role for the international credit rating agencies in working with the IMF and the World Bank to assess sovereign creditworthiness, although they should be accountable for failures, such as their role in missing the dangers of the US subprime mortgage lending crisis, which led to the 2008 financial crisis. 

Proper, transparent international debt management also needs better, more up-to-date data. That would make the comparison of repayment capacities easier. Creditors should always ensure that debt contracts include provisions for future circumstances so that the mechanism for reducing debt service works automatically in the event of external shocks.

All of this should be supported by restructuring of the rules. This would require restructuring the so-called "common framework" established by the Paris Club and the G20 and based on UN General Assembly Resolution 69/319 of 2015, issued under the title Basic Principles on Sovereign Debt Restructuring Processes.

Fostering development

Public and multilateral development banks currently handle this effort.

During its presidency of the G20 last year, India proposed a focus on the reforms of multilateral development banks, and the World Bank itself drew a roadmap for that, beginning with an increase in the number of these banks' shareholders and the size of their paid-up capital base in line with the growing size of the world economy or the increasing investment needs for sustainable development.

In 2015, the World Bank recommended that its lending could impact sustainable development and climate response more by moving "from billions to trillions of dollars". It also pointed to new ways of working.

Lending conditions should also be improved, including in national currencies. That would cut exchange rate risks governments face and help domestic markets provide finance. In turn, that would help those markets develop.

Transparency is once again important. Development banks should work to prepare and disseminate clear reports on what is achieved. Financing should not be limited to bankable investment projects but should be aimed at maximising sustainable development.

The IMF recently set up a Resilience and Sustainability Trust, highlighting the importance of such moves. Its loans are meant to be less expensive. They mature much later than those provided by traditional funds – 20 years after a grace period of 10 years – and are designed to benefit the low- and middle-income countries most at risk from climate change.

During recent IMF and World Bank meetings in Marrakech, the IMF's Poverty Reduction and Growth Trust received $17bn in resources for interest-free loans to poor countries.

Before that meeting was held, there was an international effort to set priorities for the meeting. A range of conferences was held to do so, including the Summit for a New Global Financing Pact in Paris, the UN Climate Change Conference in Sharm El-Sheikh, and the G20 summit in New Delhi.

They drew up the following principles:

First: no country should be made to choose between fighting extreme poverty and fighting climate change

Second: each country should have the right to chart its own course according to its national circumstances in development and climate treatment strategies

Third: a revolution in concessional financing is needed

Fourth: private investment must help boost progress towards strategic development goals

Special Drawing Rights

One of the IMF's main tools needs an overhaul to provide effective help in financing the modern world's need to offset the dangers of climate change.

Special Drawing Rights were designed as a reserve asset in the global monetary system once it became clear that using fixed dollar exchange rates and a peg to gold was anachronistic. SDRs, allowing their holders to access IMF currency reserves, were supposed to close a gap in the world's financial safety net. They were not expected to be issued regularly.

The distribution of SDRs among members is defined by the size of their shareholding in the IMF.  The last issuance was the biggest ever, made in August 2021. The SDRs were worth about $650bn. Developing countries received only about a third of these 456.5bn SDR units. And the most vulnerable countries received even fewer.

That prompted the G7 to call for the G20 to voluntarily announce the redirection of $100bn in SDRs in favour of the least developed countries, to be converted into loans or investment grants in development projects and plans addressing climate change.

But only a third of that amount was actually redirected.

This shows how Bretton Woods institutions can no longer meet the acute financial needs of a fast-changing world.

To become fitter for purpose as one of the main reserve assets in a complex system, SDRs should be shared out based on need and more flexibly when disasters strike and funds are needed, freed from the fixed schedule currently in place.

During the 2008 financial crisis, it took 11 months to agree on the issuance of SDRs and 17 months during the 2020 COVID-19 crisis. As the climate crisis hits, the world cannot wait that long.

Speeding this process up would be a good first step on a long pathway to much-needed modernisation.

Major financial crises since the Great Depression

1929-1939: The Great Depression

This was the worst financial and economic disaster of the 20th century. Many believe that the Great Depression, which lasted almost ten years, was triggered by the Wall Street crash of 1929 and later exacerbated by the poor policy decisions of the US government. 

1956: The Suez Crisis

After Egypt nationalised the Suez Canal Company in 1956, France, Israel, and the United Kingdom initiated joint military action. Amid the turmoil and uncertainty, a financial crisis erupted. All four countries were soon seeking IMF financial assistance.

1973: OPEC Oil Embargo

This crisis began when OPEC member countries declared an oil embargo, abruptly halting oil exports to the United States and its allies in response to its sending arms supplies to Israel during the Fourth Arab–Israeli War. This caused a severe spike in oil prices and led to an economic crisis.

1980s and 1990s: US Savings and Loan Crisis

The savings and loan crisis of the 1980s and 1990s was the failure of almost a third of retail banks known as savings and loan associations (S&Ls) in the United States from 1986 to 1995, resulting in up to $124bn in costs to taxpayers.

1987: Black Monday

Black Monday was a stock market crash. It was global, severe and totally unexpected, striking on 19 October. Worldwide losses were estimated at $1.71tn. The severity of the crash sparked fears of extended economic instability or even a reprise of the Great Depression.

1992: Black Wednesday

Black Wednesday, or the 1992 sterling crisis, occurred when the UK government was forced to withdraw the pound following a failed attempt to synch exchange rates between countries before the euro was set up as a shared currency. It proved too expensive for the UK to keep the pound's exchange rate above the lower limit required.

1994: Mexican Peso Crisis

In a surprise move in December 1994, Mexico devalued its currency, the peso, after the country's current account deficit grew and its international reserves declined. The country got external financial support from the IMF and a $50bn bailout from the United States.

1997: The Asian Crisis

This crisis originated in Thailand in 1997 and quickly spread to the rest of East Asia and its trading partners. The Thai government had

to abandon its fixed exchange rate against the dollar, citing a lack of foreign currency resources, which started a wave of panic across Asian financial markets.

1998–2002: Argentine Great Depression

The economic depression followed 15 years of stagnation and a brief period of free-market reforms. The depression — which began after the Russian and Brazilian financial crises — caused widespread unemployment, a default on the country's foreign debt, and the end of the peso's fixed exchange rate to the dollar.

2000s: Energy Crisis

In 2003, the price of a barrel of crude oil, which was generally under $25/barrel, rose above $30, reached $60 by 11 August 2005, and peaked at $147.30 in July 2008. These price increases were attributed to many factors, including Middle East tension, soaring demand from China, and the falling value of the US dollar.

2000: Dotcom Bubble Burst

New technology start-ups emerged after the World Wide Web began in the 1990s. Investors flocked to them despite their deficiencies in traditional fundamentals, including making profits. Starting in March 2000, the NASDAQ Composite Index dropped by 75% over two and a half years from its peak, erasing trillions of dollars' worth of investors' money.

2007: Subprime Mortgage Crisis

The US subprime mortgage crisis was a multinational financial shock that sparked the 2007–2008 global financial crisis. It led to a severe economic recession, with millions losing their jobs and many businesses going bankrupt.

2007-2008: The Great Recession

In the most severe financial crisis since the Great Depression, there was havoc on global markets. There was huge uncertainty on how far liability to bad debts from the Subprime Mortgage Crisis had spread in the entire global system.

The crisis peaked with the collapse of Lehman Brothers — one of the biggest investment banks in the world.

2009-2010: European Debt Crisis

The European debt crisis resulted from several heavily indebted eurozone member states – Greece, Portugal, Ireland, Spain, and Cyprus – grappling with high debt burdens to the point of selective default just as the region's banks required government support. It raised fears that countries, especially Greece, might have to leave the euro, although that was avoided.

2015–2016: Chinese stock market turbulence

This began with the bursting of a stock market bubble in June 2015. By July, the Shanghai Stock Market had fallen 30% over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an attempt to prevent further losses.

2019-Ongoing: Lebanese Liquidity Crisis

According to the World Bank, this ranks among the worst since the mid-nineteenth century. It led to the collapse of the banking sector, more than 90% devaluation of the currency and triple-digit inflation.

2020: Stock Markets Crash

On 20 February 2020, stock markets worldwide suddenly crashed after growing instability due to the COVID-19 pandemic. It ended on 7 April 2020.