The G7 proposals for strengthening the international financial architecture unveiled at the annual summit in Cologne reinforce the power of the world’s leading economies and are another nail in the coffin for the independence of national economic policy.
Twelve months ago when they met in Birmingham, the G7 was in a panic. Russia had defaulted on its foreign debt, Brazil was looking shaky and the IMF programmes in Asia seemed to be making things worse rather than better. There was talk about a world-wide recession, about globalisation having gone too far, and about the urgent need to "reform" the international financial architecture. For those of us concerned about the instability caused by unregulated hot money and the hardship caused by IMF austerity programmes, there was some optimism that financial markets would be tamed and that IMF policies and structures would be reviewed.
But, what a difference a year makes.
In 1998, the picture is completely different: Kosovo is the main story, Russia has rejoined the fold, Brazil didn’t collapse completely (although it now has an extra $40billion to pay back to the IMF) and, as the G7 noted with satisfaction, there has been an "improvement in market confidence and the prospects for growth of the world economy as a whole."
No more talk about reform
The international financial architecture is still on the agenda but these days no one is talking about reform. Apparently forgetting the social and human cost of the financial crises in Asia and Russia, the G7 report Strengthening the International Financial Architecture asserts that "the benefits and economic opportunities derived from open markets have lead to a significant improvement in living standards in industrialised and emerging economies." What we need, according to the finance ministers, is to "strengthen" the system to "maximise the benefits and minimise the risks of global economic and financial integration."
One year ago, there may have been some doubts about the benefits of liberalisation but now no one dares ask: whom benefits and who pays? Where is the Third World in this picture? Where are the countries beyond the computer screen of the international investors? Where are the countries who every year earn less – even though they export more — because commodities prices are plunging? Where are the hundreds of thousands who have lost their jobs, where are the millions who barely survive and the millions who don’t because they are excluded from an economic and political system that rewards the strong and ignores the weak?
What we have instead is a consolidation of the power of the leading economies, a reassertion of the dominance of finance, and a concentration of standard setting and policing powers with the International Monetary Fund. In short, the G7 is the keeper of the global good, the IMF its faithful enforcer, and the financial markets are free to do as they please with a mild exhortation to "self-regulate."
Many analysts agree that financial crises are caused by the behaviour of the financial market itself, yet the G7 proposals do nothing to regulate the activities of the finance markets, currency speculators and other highly leveraged institutions, which often have access to more capital than many developing countries.
Instead, the G7 proposes to "strengthen" the international financial architecture through transparency and standard setting, institutional reform, regulation and information disclosure. This approach is consistent with the view that the financial crises in Asia, Russia and Brazil were caused by corruption, poor investment decisions due to inadequate information, weak institutions and regulation, and lack of transparency. There is an assumption that more information will lead to better investment decisions, but as a senior analyst from Merril Lynch commented at an IMF seminar last year, people investing in Asia had plenty of information, they were just gambling on getting in and out before the bubble burst.
There are some positive aspects of the report. It does, for example, acknowledge that capital controls on inflows (but not outflows, which would stop capital flight) may be justified "for a transition period" even though there is no shift from the general assumption that capital account liberalisation is the ultimate goal. There are also some new institutional arrangements, such as an "informal" mechanism to bring "systemically important countries" into the discussion. On balance, though, developing and transition countries are under-represented or entirely excluded from the decision-making arrangements.
More power to the IMF
While the finance ministers place a lot of emphasis on responsibilities at the national level they give precious little space for governments to develop economic policies that do not conform to the standards set by the International Monetary Fund.
In the new configuration, the IMF is all-powerful. It has the mandate to set standards in all areas – macroeconomics, transparency, information disclosure and even in such vague matters as "good governance." It can decide whether a country is eligible for the new pre-emptive credit facility, the Contingency Credit Line. It has almost unlimited power to impose wide-ranging lending conditions. And now, as part of the G7’s stingy and ill-named "debt alleviation package" the IMF has the power to determine whether or not a country is entitled to debt write-downs or cancellation depending on their compliance with "structural reform and good governance" conditions. That is, governments must now comply with IMF standards and conditions at every stage — before, during and after borrowing. In effect, the IMF has become the international sovereign rating agency.
It should be a matter of grave concern that the Fund has unlimited scope to impose normative economic, institutional and governance standards. First, the Fund is not democratic. Although its articles of agreement require it to work for the prosperity of all members, the Fund is dominated by the interests of industrialised countries. The G7 alone controls 40 per cent of the votes on the Board while the US and the European Union between them carry more than 55 per cent of the votes. Second, the IMF is in the thrall of economic monotheism. For the past fifteen years the Fund has been imposing structural adjustment policies whose capacity to create poverty, destroy public goods and widen wealth gaps is well documented. The IMF’s failure in Asia is just the most recent chapter in a long history of economic proselytising where the market is the only god and liberalisation the only faith.
The G7 finance ministers proposals are a backward step for economic and social democracy. They reinforce the dominance of the market, they do not deal with the inequities and instability caused by unregulated financial flows, they give too much power to an unreformed (and probably unreformable) IMF, and they impose a Barbie doll view of the world where all countries – regardless of their actual shape, size and reality — are measured against an idealised, but improbable, fantasy.
* Nicola Bullard is a senior associate at Focus on the Global South, a policy research and analysis project associated with the Chulalongkorn University Social Research Institute. She was in Cologne for the G7 Summit.