Thursday, November 27, 2014

Global Institutions after the Crisis

OXFORD – When Lehman Brothers collapsed and the global financial crisis erupted five years ago, many glimpsed a silver lining: the promise of more effective global economic governance. But, despite a flurry of early initiatives, the world remains as far from that goal as ever.

The Financial Stability Board (FSB), established after the G-20 summit in London in April 2009, has no legal mandate or enforcement powers, nor formal processes for including all countries. The International Monetary Fund still awaits the doubling of its capital (another early vow), while its existing resources are heavily tied up in Europe and its governance reforms are stalled. The World Bank has received a modest increase in resources, but it has yet to build capacity to lend rapidly and globally beyond existing borrowers and loan arrangements, and its income trajectory is diminishing.

Yet the need for effective global economic governance remains more urgent than ever. Banks and other financial firms roam internationally, greatly assisted by market-opening rules embedded in trade and investment treaties, but with no legally enforceable responsibility to provision adequately for their own losses when things go wrong. Instead, massive risks have supposedly been held at bay by voluntary standards promulgated by a patchwork of public and private “standard-setting” organizations.

The crisis proved that this was inadequate. The titans of Wall Street and the City of London were exposed as hugely over-leveraged. Extraordinary profits when their bets paid off increased their financial and political power – which they still enjoy – with taxpayers left to bail them out when their bets turned bad.

The G-20 promised stronger global institutions to prevent this from recurring. But the FSB is not a treaty-based global regulator with enforcement powers. It continues to be a “standard setter” in a world with strong incentives to evade standards and negligible sanctions for doing so. Furthermore, although the FSB’s standards are ostensibly “universal,” it does not represent all countries or have formal mechanisms to inform and consult them.

Regulators face a Sisyphean task, owing to the absence of strong and consistent political support for reining in the financial titans. A well-resourced financial sector intensively lobbies the most influential governments in global finance. The reforms of the IMF, another pillar of global financial management, cannot be implemented until the US Congress approves them – and there is no sign of that. Even the new Basel 3 banking standards have been diluted and postponed.

For Brazil, Russia, India, and China, the delay in reforming the IMF is a serious annoyance. They became major contributors to the Fund’s emergency loan pool (the New Arrangements to Borrow) immediately after the crisis and now provide 15.5% of the NAB’s resources. But the greater voice and voting power that they were promised – commensurate with their status as four of the IMF’s top ten shareholders – has not been delivered. Even the selection of the organization’s managing director remains a European droit du seigneur.

More seriously, an astounding 89.2% of the IMF’s General Resources Account is outstanding to European countries, with just three countries (Greece, Portugal, and Ireland) accounting for 68%. The IMF’s resources are neither adequate nor available to respond to a crisis elsewhere.

Similarly, the G-20’s pledge in 2009 to protect the poorest and most fragile countries and communities from the effects of the crisis remains unfulfilled. The World Bank is at the heart of these efforts, because it can pool risks globally and offset the capriciousness of official and private-sector aid flows, which create “donor darlings” (like Rwanda) and “donor orphans.” But, while the Bank has more than doubled its lending relative to the four years prior to 2008, this was achieved mostly by front-loading existing loans. Crisis-hit countries that were not already borrowers were largely left out.

The Bank’s failure to lend to new clients partly reflects its slowness. Even after its loan cycle had been speeded up, the Bank took an average of 13.5 months to approve credits – a long time for a country to await “emergency” help.

But the Bank is also hampered by worsening resource constraints, as the biggest post-crisis capital infusions went to regional development banks. The African Development Bank’s capital was increased by 200%, as was the Asian Development Bank’s. The Inter-American Development Bank got a 70% increase. Meanwhile, the World Bank received an increase of 30%, while its lending arm for the poorest countries, the International Development Association, received an increase of only 18%. Crucially, it is not obvious that the Bank has “buy-in” from emerging economies, with Brazil, Russia, India, and China, which pledged significant resources to the IMF, pledging only about 1% of IDA funding.

Further exacerbating the Bank’s financial woes, its powerful creditors have opted to “pull back” its lending in order to protect its resources. As a result, compared to the regional development banks, the Bank will be lending less to fee-paying clients, who provide income, and engaging in more “concessional lending,” which does not.

The 2008 crisis highlighted the need for international cooperation to regulate finance and mitigate the effects of a crisis. Yet the global resources and instruments needed to manage (if not avert) the next crisis have not been secured. Instead, regions and countries are quietly finding their own ways to manage finance, create pooled emergency funds, and strengthen development finance – an outcome that heralds a more fragmented and decentralized set of regulatory regimes and a modest de-globalization of finance and aid.

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    1. CommentedZsolt Hermann

      I agree that there is a serious and urgent need for global economic governance.
      But as the failing experiment in Europe is showing, simply creating financial or economic collaboration does not guarantee success.
      The institutions cannot solve the problem since the root problem causing the crisis is much deeper.
      We are incapable of building true global cooperation due to our inherent human nature that is self-centered, and egoistic and as a result we are incapable of making any calculations for any other reason but for self-benefit.
      And today this inherent human nature is in direct opposition with the surrounding global conditions.
      Since we evolved into an interconnected and interdependent human system the usual self-calculationg, egoistic decision making and action has become self-destructive.
      Thus before we would like to build new institutions, and create global cooperations we need to "reprogram" the human being, the user of the system.
      And this reprograming obviously have to flow in a willing manner without any coercion or trickery, thus people would need to see a positive motivation for such fundamental self-change.
      And such positive motivation for change can only be provided by a new, global education program for all social layers, genders, ages, with any cultural, national backgrounds using the already available, transparent scientific information about the global world and how human beings could adapt to it.

        CommentedStamatis Kavvadias

        Globalization is increasing inequality, so it is only right and appropriate for people to be very "self-centered". All actions around poverty and inequality are in relative terms and based on not affecting the doctrine of perpetual growth (which is built-in the monetary system itself).

        We do not need "educational programs", reprogramming, or brainwashing. We need reduction of inequality and reduction of the absolute numbers of poor people (not percentages). This cannot happen with financing and lending at interest. It requires redistribution of wealth, which is incompatible with the debt-based monetary system and financing practices of capitalism. It needs political action, and there is no global political institution. This is not by lack, since it is contrary to commercial practices and interests, and the economics of optimizing capital preferences instead of societies preferences.

        The only way forward is by introducing social preference to the basis of the financial system, by limiting bank lending according to the preferences of depositors. This preserves the banking establishment and monetary system that is hard to bypass, but accepts, by definition, that economic agents do not act on the basis of self-interest only. This has a chance of working better for inequality.