• Global institutions

Global institutions

The financial crisis that originated in the United States (US) a year ago has become a global financial crisis unprecedented since the great depression. The credit freeze has severely hit developing countries through increasing risk premia and a severe cut in financing. Capital outflows from developing countries have generated a collapse of stock markets and exchange rates and a loss of reserves. Commodity prices have plunged and export orders are being cut worldwide. Even developing countries that were seen as relatively invulnerable to a recession in the industrial world are now feeling the strain.

The call to engage in a reform of the current governance and convene a Bretton Woods II conference is welcome. The south centre wants to join its voice in the call for revamping global finance, based on six lines of action:

• the process and institutional design that it develops must be inclusive. The governance system that it designs must be based on representative institutions, not on any one ad hoc grouping of countries, be it the G-7, a G-13 or a G-20 
•  the regulatory deficit of global finance must be corrected. The magnitude of the current crisis is clearly associated with inadequate regulation and supervision of financial activities. Financial liberalisation must be accompanied by stronger prudential regulation and supervision 
• the IMF should be revamped. There is a need for a creation of a meaningful and truly global reserve currency, which could be based on the IMF special drawing rights (SDRs). The IMF must be placed at the centre of global macroeconomic policy coordination, not the G-7 or in fact any group. There is the need for the IMF to lend during balance of payments crises without overburdening conditionalities. The reform effort should encourage the IMF not only to tolerate but actually to encourage and advise countries on what regulations to impose under given circumstances 
• a coordinated global macroeconomic policy package must be urgently adopted. The global recession now under way calls for a strong policy response. This means clear expansionary monetary and credit policies in all industrial countries (which is still missing in Europe) as well as expansionary fiscal policies 
• an international debt court must be created to serve as mediator and eventually arbitrate both public and private sector international loans 
• the system must rely more broadly on regional institutions. The IMF should make more active use of regional institutions, such as the chiang mai initiative or the Latin American reserve fund, and support their creation in other parts of the developing world
  

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