Deep reforms of global financial system inevitable response to protacted crisis

The UN General Assembly held an Interactive dialogue on the World Financial and Economic Crisis and Its Impact on Development from 25-27 March in New York. A representative of Social Watch said those institutions that should have warned about the crisis had the power to control small and developing countries’ economies. But they lacked the courage to tell the rulers of the world’s most powerful economies what was going wrong.

Sixty-third General AssemblyThematic Dialogue on World Financial Crisis (AM)


Expert Commission Chief Says Both Immediate Economic Stimulus, RedesignedFinancial Regulatory Schemes Needed, as Three-Day Run-Up to June Event Concludes

Fundamental reforms in the global financial system were inevitable given how deep and prolonged the economic crisis facing the world community would be, the General Assembly was told today as it concluded its three-day interactive dialogue on the World Financial and Economic Crisis and Its Impact on Development.

“These reforms will occur and the only question is whether they will occur in a random and ad hoc way or if they will be orderly,” Nobel Laureate Joseph Stiglitz said in his capacity as Chairman of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System. He said the Commission believed the more proactive approach of a top-down global strategy was preferable.

The interactive dialogue was intended to help Member States define a common position for taking stock of the crisis, evaluating alternative short-term emergency measures and shaping an effective approach for longer-term efforts to restore dynamism, revive employment and enhance equity in the world economy. Its deliberations centred around a set of draft recommendations made by the “Stiglitz Commission”, which will provide a final set of prescriptions before the high-level United Nations conference on the economic crisis scheduled from 1 to 3 June.

In his closing comments, Mr. Stiglitz said a dichotomy had surfaced in the Assembly’s discussions between immediate economic stimulus or a redesign of financial regulatory regimes, but it was a false dichotomy, as both actions were needed. Moreover, while it was prudent to make use of existing institutions, it was important both to reform them and create new ones.

Among the new institutions, the Commission was calling for a global economic coordination council at the level of the General Assembly or Security Council; a global reserve system; a new credit facility to provide developing countries with greater resources; a financial products safety commission; a global financial regulatory authority; a global competition authority; and an international bankruptcy court.

Mr. Stiglitz argued that the critical difference between the current crisis and past ones, like the Asian crisis when talk of reform had been mere words, was the developed world’s position at the epicentre. “This is not a downturn that happened on the periphery. It began in the centre and has gone to the rest of the world with devastating effects on the periphery.”

In that way, the crisis had exposed flaws in the global economic system and in globalization, making a return to the world of the past impossible, he said. It was, therefore, in the interest of every country -- rich and poor, debtor and creditor alike -- to create the kind of strong institutions the Commission had proposed. Indeed, since instability in the international economic structures affected each country, global action would be critical.

He acknowledged that the Commission’s goal had been ambitious of diagnosing the problem, prescribing immediate remedies and instigating long-term structural reform to prevent the problem’s recurrence through a list of 20 recommendations. But something as complex as what to do in the current crisis could not be summarized in 20 points. Nor could the task of reforming the global economic institutions be accomplished in a month, six months or even a year. But the Commission intended for its recommendations to serve as a framework to guide thinking for the long-term undertaking ahead.

In this, the most difficult part would be political -– and it would be the work of Member States to reach the necessary compromises and make the tough choices. While it might be a long, unpredictable journey, he said “there is no certainty except the certainty that we can and must do better than we have”.

Echoing that sentiment, Assembly President Miguel D’Escoto Brockmann said the urgency of the unfolding economic and financial crises was unmistakable and made clear just how critical the reform of the financial infrastructure was.

It was time, he emphasized, for the General Assembly to rise to that challenge, giving adequate weight to its collective responsibility to be the voice of “we the peoples…” and to ensure that the common good was paramount over petty self-interest. The rights of the world’s most vulnerable to full participation in the global economy must be defended. They could no longer be seen as scapegoats or victims, but as legitimate stakeholders.

He said that, for growth, prosperity and progress to benefit everyone, they could not be based on patterns of insatiable greed and consumption, but on sound internationally-regulated financial and monetary institutions. Those institutions should enable inclusive and people-centred development policies; fair and equitable trade regimes; ecological and sustainable food systems; and labour regimes that addressed the special needs of women.

During the wide-ranging panel discussion on the Commission’s recommendations earlier this morning, several speakers debated how the mix of responses should be appropriately divided on the national, regional and international levels. Getting the balance right was necessary to properly mitigate the especially dire impact on the developing countries, many said.

As they had the day before, a few speakers focused on the Commission’s call for a new global reserve system. Pointing out that there was no reference to an international reserve currency in the Commission’s report, one delegate wondered if the Commission would consider that in the framework of a global reserve system.

One Commission member, who is the former chief economist for the United States Senate Banking Committee, explained that the Commission had recommended a new global reserve currency on grounds that it would relieve deflationary pressures. He also underlined the “mutual stake” the United States and creditor countries -- which included Japan, China and the oil producers -- had in price stability, suggesting the timing of any evolution in the “international store of value” would be determined by the United States and large creditor nations, the foremost of which was China.

Another Commission member, who is also the Director of the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, speaking in his personal capacity, noted that the Governor of the People’s Bank of China had recently called for the creation of a new reserve currency to replace the dollar. Its base, he said, should be broadened to include all major currencies.


The panel today dealt with macroeconomic measures in response to the crisis, the international financial architecture and re-regulating the financial system. It was moderated by Claude Heller (Mexico) and featured presentations by Jean-Paul Fitoussi, Professeur des Universités, IEP de Paris; Robert Johnson, head economist of the United States Banking Committee; Yu Yongding, Director, Institute of World Economics and Politics, Chinese Academy ofSocial Sciences; and Benno Ndulo, Governor of the Bank of the United Republic of Tanzania.

In opening remarks, Mr. HELLER said that, when it came to the global financial architecture, international consensus had emerged on the need for reform. “We are all aware it will be a complex process,” he said, although it seemed clear that an international financial and economic system that could promote development was imperative. There also appeared to be broad consensus in acknowledging that a root cause lay with the flaws of the regulatory system, particularly in developed countries. It was important to move forward swiftly and decisively.

Speaking first on macroeconomic measures in response to the crisis, Mr. FITOUSSI discussed the reasoning behind the recommendations presented yesterday. There were three components to today’s crisis: financial, economic and intellectual, and the interplay among them had had disastroussocial consequences on the most vulnerable populations. The intellectual component would be the most difficult to remedy, given the dominance of the intellectual doctrine that had existed before the crisis.

Addressing aggregate demand, he said all economic strategies developed in the last three decades had eventually led to insufficient aggregate demand. Excess savings was hidden by bubbles, a course run for capital gain rather than earnings from work. Also, confidence had been lost in the international system and labour markets. It would be difficult to prove any relationship between a Chief Executive Officer’s salary and his or her productivity, which was the basis of market equilibrium. It began with fiscal andsocial competition, whose pretext was globalization. There was an urgent need to improve coordination, as solutions would be unlikely without it.

On fiscal policy, he said there was an assumption that responsible Governments, properly coordinated, could use fiscal stimulus intelligently. However, some economists did not believe in Governments’ ability to reverse tax cuts or spending increases. Inflation would increase, and that would lead to currency depreciation. They argued against using discretionary fiscal policy. The Commission did not share that view. “We have to remind ourselves that democracy is the only self-correcting institution that we know,” he said. It repaired its own mistakes. Regarding the “stability pact”, he said, “we are not advocating tax cuts, but for the poorest part of the population, as a means to decrease inequality. We favour the building of new capital -– of human capital, assets, environment and fighting climate change.”

Regarding monetary policies, he said policymakers must not only look at price stability, but at real stability, including people’s security. It was a multidimensional construct, and could not be summarized by a single statistic, like the consumer price index. He urged re-evaluating inflation targeting, which was based on such a statistic. On solidarity andsocial protection, he said belief in the superiority of market outcomes had decreased both those phenomena. Social protection was a stabilization tool in times of crisis. There must be understanding that the system was comprised of the market principle and the democratic principle. If States were unable to mix those principles, the crisis would not be solved.

Mr. JOHNSON said that, in the years leading up to the current crisis, the perspective of most economists had been far from scientific. Rather, it had merely reinforced the position of those in power. Now, the externalities, or side effects, of the actions and failures of the financial sector had spread around the planet. To say that was unforeseeable, like a hurricane or a tornado, was intellectually dishonest. The financial sector had been cheered by the media, given the go-ahead by lax regulatory regimes and justified by the academy. But unfortunately, when financial sectors failed, it was nearly impossible to make guarantees to bail them out or to restructure them. Citizens were now outraged because the people who received the benefits of the boom years were now being bailed out at the expense of those people whose lives had already been restructured many times by the crisis.

Turning to the Commission’s recommendations, he said the Commission had specifically looked at ways to alleviate the scenario whereby the United States’ consumer was the “buyer of last resort”. As Joseph Stiglitz had suggested yesterday, credit innovation in the United States had allowed ever greater consumption even though wages had not kept pace with productivity, and that innovation had to be incorporated in future reform. The Commission’s recommendations also focused on macroeconomic policy that advocated spending rather than tax cuts -– the fallback policy in the United States -- to provide stimulus. It further emphasized that because impacts from stimulus packages would be felt in any given country engaged in international trade, awareness of those externalities would allow for more open and effective trade. He had been encouraged by recent steps in China that appeared to be in line with the Commission’s recommendation for Keynesian deficit-spending stimulus.

The danger of poorly designed bailouts of the financial sector was that there was not an infinite ability to borrow, he said. Faulty bailouts would cost too much, leading to a diminished appetite for the stimulus of aggregate demand. That process was well under way in the United States, where people were daunted by the size of the bailouts and were cutting back on programmes that could actually contribute to stimulus. Market fundamentalism was always invoked to relieve constraints and regulations and maximize the freedom of those in the financial sector. But in reality, anyone who had worked in that sector knew that, in the case of a catastrophe, they would be bailed out. That created a moral hazard in which financiers felt freer to take dangerous risks. In the United States, consumer protection schemes had been designed to protect those who might be persuaded to invest in situations that were less than ideal.

Noting the Commission’s recommendation for the establishment of a global coordinating authority, he said its guidelines would hopefully reduce resistance by some to arbitrage. The Commission had also stressed that, in its current arrangement, the Financial Stability Forum’s representation was not adequate. Further, so-called “innovations”, such as credit-default swaps, were in too many cases off-balance-sheet mechanisms or were designed to skirt regulations. OTCs [over-the-counter derivative instruments] should be traded on exchanges, thereby forcing them to have real prices. Where that did not happen, the Commission was recommending that the risks should be evaluated and capital charges applied.

He said “democratic capitalism” was challenged in the realm of finance by the ability to buy and sell the rules. In the United States, the remedy for such a situation was most clearly defined as campaign finance reform. On the issue of expertise, too many vulnerable citizens were told they should not tamper with the system, but should defer to the experts. “I believe the experts have failed the democracy profoundly,” he said, encouraging citizens around the world to “stiffen their spine and not defer”.

Mr. YONGDING fully endorsed the Commission. Clarifying that he was not speaking on behalf of the Chinese Government, he said the crisis had hit the Chinese economy severely. The Government’s response had been swift; after two months, it had introduced a stimulus plan. The Government was targeting 8 per cent growth in gross domestic product. While there were doubts about that, he was confident it could be achieved. China was in a good position. The budget deficit was very low, and last year had seen a surplus. The banking system, after fundamental reform, was also good. The country had not suffered from a liquidity shortage or credit crunch. The domestic market was big, and demand for consumer goods was strong. Also, the Government had paid attention to structural reform. China must use domestic demand to replace external demand, as dependency on external demand had been too high. China would try to increase imports and reduce its trade surplus to contribute to the global economy.

He said the international financial architecture had been characterized by the United States dollar as the single currency. As such, the United States had run account deficits for more than two decades. The fact that it borrowed from the world’s poorest countries was both “ridiculous” and “unacceptable”. While he believed assurances that there would be no dramatic fall in the dollar in the future, he also was nervous. Citing a Chinese adage that “you should not give up trying to kill a dead horse”, he said that, in that spirit, the international financial architecture must be reformed. The Governor of the People’s Bank of China had called for the creation of a new reserve currency -– a kind of special drawing right (SDR) -– to replace the dollar. Its base should be broadened to include all major currencies. There were options for China in the reform process. China would continue to engage in creation of a regional financial architecture -– the Chiang Mai Initiative. China also could speed the renminbi’s nationalization. Everybody was in trouble, including China, and there would be a unique opportunity to more constructively reform the international financial architecture.

Mr. NDULO said that, during yesterday’s discussion, one key question had been whether the existing financial institutions could be strengthened so as to engage in their own reform. Two short articles had appeared in the Financial Times earlier this week by the German Economic Minister and by Sir Nicholas Stern, both talking about those issues and both remarkably close to the Commission’s proposal to create new institutions rather than remaking existing ones.

For his part, he said there were actually two major conditions that tended to favour setting up new institutions: they would be less prone to political “capture” and more likely to promote even-handed censure. There should be separation between lending and policy functions. As Sir Stern had written, “The institution making the analysis and judgments must not have anything other than its own reputation riding on its assessment; in particular, its own policies or lending should not be shaped in any way by its judgment”; it must be democratically governed and free of restrictions to make assessments and issue early warnings, without peer pressure. Its governance must also be free of dominance by systemically significant countries.

If those conditions were taken as important criteria, it would seem that the proposals for setting up the economic coordination council, the global regulatory authority and the global competition authority would meet them, he said. The option of having the global fund under the World Bank would present a conflict of interest. Indeed, he believed a separation was important. He had served in those institutions and knew the problems of disclosure.


In the ensuing discussion, the representative of the Dominican Republic asked Mr. Johnson for information on corrective measures to address poverty.

The representative of Bangladesh asked about the implications of bailout programmes. Also, to what extent were externalities being considered in stimulus packages? Regarding alternative reserve currencies, he said that idea merited consideration. There was no reference to an international reserve currency in the Commission’s report, and he asked if the Commission would consider it in the framework of a new global reserve system. United States Treasury Secretary Timothy Geithner was stubbornly against the idea, so how then would it proceed?

The representative of Pakistan quoting the United States Treasury Secretary, who said that the system had failed in fundamental ways and that addressing it would require fundamental reform, asked if the Commission’s recommendations had been able to propose that kind of reform.

The representative of Brazil said that, in addition to short-term measures, major reforms might be needed to address the root causes of the crisis. On the regulation of the financial system, he said re-regulation was a tendency, but he wondered whether the locus of reform should originate at the local level or be coordinated internationally. Also, how urgent was it to implement such reforms?

The representative of Benin said the role of international institutions in managing external debt was problematic. He asked for more information on debt management and how to reform management mechanisms to give poor countries a chance in the international system.

Commission member PEDRO PAEZ, former Minister for Economic Coordination for Ecuador, said the world was facing just another case of market failures or floors. There were many mechanisms that could change the current situation, but they did not exist. One of the political decisions that could result from meetings such as this one, where 192 countries were represented, was to find something viable to ensure that the markets finally worked in textbook fashion. Specifically, a mechanism was needed to generate rates that would allow all the Third World debt to be recouped. That would generate better fiscal conditions, not only in the poorest countries, but in middle-income ones, and allow for the implementation of counter-cyclical measures. That would also allow for the achievement of the Millennium Development Goals, and provide the developing world the opportunity to catch up to the developed world. But that would only be possible if there was political will that went beyond the hypocrisy that reigned in certain circles and made the human cost the main concern.

Emphasizing that the current crisis had not been caused by the poorest developing countries, he said reform was primarily needed in the political arena. Poor and middle-income countries needed to be given the room to manoeuvre so they could defend themselves against the crisis. A global reserve system would make that possible. Progress was also being made towards a new financial architecture in the South, where contacts with Asia were growing. Stressing the need for greater accountability mechanisms, since matters of governance and due diligence would be crucial in recovering a civilized economic order, he particularly underlined the role of regional mechanisms.

FRANCOIS HOUTART of Belgium said he had doubts about the concept of capitalist democracy. It was important to distinguish between capitalism and real capitalism. He was chair of the Permanent People’s Tribunal, and there were 44 claims against European multinationals that dealt with the destruction of nature and human rights. Some 43 claims had to be accepted, as the behaviour of those institutions had violated human rights, in full contradiction of democracy. If capitalism excluded the calculation of externalities –- the destruction of nature, for example -– the logic of the capitalist system must be discussed. That was related to the definition of the economy. If “economy” was defined simply as human activity that created the basis for people’s lives, then thinking beyond capitalism was needed to restore democracy.

The representative of the United Republic of Tanzania questioned the validity and practicality of bailing out businesses that were no longer viable. He asked the panellists, particularly Mr. Johnson, to comment on that.

Responding to the questions, Mr. JOHNSON referred to how to protect smaller countries during economic crises. Capital flight from developing countries occurred during periods of shock, instability and recession. The Bretton Woods institutions had set up a system in which multilateral institutions put money back into developing countries when rich nations pulled their money out. Capital in developing countries was counter-cyclical. Developing countries had little or no representation in the current voting structures of the Bretton Woods institutions, but they were subjected to many conditionalities that did not reflect the externalities –- or positive benefit of having such peripheral countries remain buoyant. Giving developing nations a greater voice in international institutions was at the core of the reform process.

The Turner report, which advocated greater banking regulation in the United Kingdom and a move away from riskier practices, had made a strong call for regulation, he said. While remaining critical of the United States’ financial bailout structures, he lauded the proposals by United States Treasury Secretary Timothy Geithner for greater regulation.

In terms of whether financial regulatory reform should begin at the local level or be coordinated internationally, he said there must be international agreement and standards. The world was organized as nations and it needed a mix of primarily national regulations that were harmonized and consistent. It was better to get the reform process right than to hastily enact the wrong changes. But “analysis paralysis” should not be allowed either.

There was a need to foster fair competition and continued liberalization, not in the ideological sense, but in a way that took into account countries’ constraints. Too often, capital liberalization had disadvantaged developing countries. Countries must coordinate their stimulus packages. Debates on that were under way between the European Union and the United States, but they were focused on accounting rather than substance. The problem, however, was that accounting was not the issue. There should not be a debate over whether to impose regulation or stimulus packages because both were needed. Good and efficient regulation at home was essential. It was very difficult to devise a good regulation system, but some basic principles must be inherent in any system. He asked why countries still had tax havens, since it would really be better for the global economy as a whole to eliminate them.

He said reform must be radical because the crisis was radical. Major reform was needed since the financial system was not an end in itself but a means to an end. Inequalities had been redistributed in reverse and had created agricultural deficiencies. The crisis would recur if those imbalances were not addressed. He asked if one could imagine a system that favoured productivity rather than lower taxes or a system that would avoid tax competition. Large environmental problems must be addressed through energy efficiency. There was a need to spend properly. The world had a real opportunity to make decisions that reaped both short- and long-term gains. Economic reforms should foster democracy, or they should not be implemented.

A representative of Social Watch, a coalition of civil society organizations monitoring poverty eradication and gender equality worldwide, pointed to comments yesterday by the Governor of the Bank of the Republic of Tanzania about the mandate and surveillance role of international financial institutions to avoid crisis. He said those institutions that should have warned about the crisis had the power to control small and developing countries’ economies. But they lacked the courage to tell the rulers of the world’s most powerful economies what was going wrong. That was what had led to the current crisis. It was important to look at oversight mechanisms. A system was needed whereby the tide lifted all boats. The world had been led to believe that globalization would do that. But it was now experiencing a “titanic” in which only the big boats and the women and children travelling in first class survived, while those in steerage did not. Many big reforms must be implemented to correct that.

The “trickle down” economic philosophy had its origin in the kind of thinking that opening capital accounts and liberalizing the economy was like joining the mafia, he said. If the philosophy did not work, no one got a resignation letter. That was what was happening now during the financial crisis. Developing countries were being taken hostage, but what they really needed was a witness protection programme where capital controls were created to shield them from harm.

The representative of China said an unregulated financial system would have serious consequences. Hedge funds were the cause of the Asian financial crisis and were not subjected to regulation. Overlooking the risk factor had led to today’s crisis. She asked about the insufficiency of measures taken at the national level and what could be done at the international level to improve them.

The representative of Thailand, regarding the reference to the Asian Monetary Fund, asked Mr. Yu about the path that had led to the Asian financial crisis. She also wondered about early warning systems, specifically how the panellists viewed them, and whether a regional context could help.

The representative of Qatar said the report contained useful recommendations, and agreed that solutions were needed to contain the crisis. Creating a just, sustainable world order was important. At the follow-up International Conference on Financing for Development, an appeal had been launched to elaborate a new world order that would include all countries. As the United Nations had been the appropriate forum for creating the international financial order, it was logical that it foster reform, and the high-level conference organized by the General Assembly President would enable the Organization to contribute to improved governance.

Responding to the query on the international reserve system, Mr. JOHNSON said the Commission had recommended the new global reserve currency on grounds that it would relieve deflationary pressures. It was propitious that the Chinese delegate had brought that question to bear. The United States and creditor countries -- which included Japan, China and the oil producers -- had a mutual stake in price stability. The timing of the evolution of the “international store of value” would be determined by the United States and large creditor nations, the foremost of which was China.

Regarding the regulatory environment and hedge funds, he said creditor nations had a very strong stake in the financial integrity of the United States. In the United States, the “too-big-to-fail institutions” had disproportionate political power, and could exact excessively costly influence on the bailout. The integrity of the financial resolution process in major countries was intertwined with the “store of value” internationally. Creditor countries had an important role to play in the future integrity of the system.

Mr. YU noted that, while theoretically there were problems between regional and global cooperation, in reality in East Asia, cooperation among countries in building a regional financial architecture would foster that at the global level. There were no conflicts at this stage. Asians were eager to cooperate, as they were disappointed at the International Monetary Fund’s performance. China would seek to further the Chiang Mai Initiative. Countries in the region were pooling funds, an important contribution to the creation of the global financial architecture.

Regarding early warning systems, he said economists could not give early warnings. He urged not listening to the doctrine to completely liberalize the financial sector. It was important to concentrate on further reform of the regulatory system and cross-border capital flows, rather than pin hopes on the brilliance of economists.

Taking the floor to comment, Commission member YAGA VENUGOPAL REDDY, former Governor of the Reserve Bank of India, said capital account management involved external debt management. The existing institutional structure lacked governance and people’s confidence. “Can we afford to use the same institutions,” he wondered. There was an “angered necessity” to consider alternative arrangements. There was also an urgent need to reform banking regulations, he added.

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