International Workshop: “The global economy after the crisis: macroeconomic and geopolitical implications” Castello del Buonconsiglio, Trento - Italy June 2009 The Economic Logic Behind the Major Proposals of the Commission of Experts of the President of the UN General Assembly on Reform of the International Monetary and Financial System Jan Kregel, Levy Economics Institute of Bard College

Differences from Bretton Woods BW: Objective was fair, multilateral trade system – Exchange rate stability to avoid beggar my neighbour policy – Limit capital flows to keep imbalances and debt accumulations to a minimum Today: Objective is a financial system that – Avoids financial crisis, – Produces sustainable development – Supports developing countries’ national development strategies

Premise: Crisis is Global – Requires Global Solution International system suffers from lack of demand Asymmetry produces international imbalances Only offset by excessive creation of debt to finance demand – US consumer financed by housing bubble Crisis started in developed country financial markets Liquidity freeze spread crisis to real Sector Capital losses for households Lack of financing for firms International liquidity freeze spread crisis to emerging market developing countries Decline in demand in developed countries and lack of trade finance led to falling world trade International trading system spread to crisis to real sector in Developing countries

Premise: Cause of Crisis: Developed Countries’ Financial Markets Due to 1980s Deregulation, 1990s Liberalisation Belief in self-regulating nature of markets Failure of risk management Innovations These policies were at the basis of globalization These policies were the basis for recommendations for re form of developing country financial systems through BIS, IMF, FSF

Implications: Need Reform of Financial Market Policies: In BOTH Developed and Developing Countries Need Reform of the International Financial System How should the Reform be Done: – Example of Bretton Woods – All (44) countries represented – In globalised trade and financial system need full representation of Developing Countries – G-7/8 can’t do it; G-20 can’t do it, BRICs can’t do it – only G-192 can do it Need credible representation to determine the process of reform – It need not take place with 192 representatives, but on the basis of democratic determination of the reform process

Where to Start? First, respond to the Recession/Depression – Diagnosing the causes suggests solutions – Solutions must be both immediate and structural: A return to “normalcy” is not an option – The short-term measures should provide the building blocks for the new international system – International Financial System has to support the response to the Crisis – Response has to be global since problem is global

First Response: Stimulus Government Expenditure Plans Have to be efficient: – in supporting demand (big bang for buck) – in creating the building blocks of the new system Have to be globally coordinated: – avoid leakage in a global system (increases the multiplier) – avoid financial protectionism -- beggar my neighbour Should be by surplus countries –China, Japan, EU To ensure they don’t aggravate international imbalances Developing Countries Need to Participate BUT: Most Need Financing for their domestic stimulus – Official sources, and international financial institutions may impose restrictive fiscal conditions – Countries may try to build up protective liquidity cushion in the form of foreign reserves

Coordinated Stimulus thus needs new finance Developing Countries require sources of finance – to participate in global stimulus to make it more efficient and not offset it Developed countries to use 1 % of their stimulus for direct expenditure support in developing countries additional to existing ODA commitments care must be taken to avoid increasing/creating unsustainable debt burdens Conclusion: New Financing Facility Required

Major Institutional Recommendations New Financing Facility – within or outside IFIs – new, more representative governance structure – to provide a pattern for Voice and Representation Reform in IFIs New International Reserve Currency – – reserve accumulation offsets stimulus – to provide a symmetrical adjustment to international imbalances Global Economic Coordination Council – to provide a democratically representative G-20 – to include UN system chief executives and Heads of Government – to coordinate international adjustment of imbalances International Expert Panel Patterned after Intergovernmental Panel on Climate Change Provide Independent advice on international policy issues

A New Credit Facility The current system does not provide an efficient mechanism for mobilizing the funds available in countries that have accumulated large reserves. With regard to the utilisation of the funds there are different (complementary) options. First, there is an urgent need for balance-of-payment and budget financing, with the objective to increase developing countries’ capacities for anti-cyclical fiscal expenditures. Secondly, the funds could be used for key investments, where some of the emerging markets have a particular interest, such as developing agriculture in Africa and their capacity to export, thus contributing to food security in other regions such as in Asian and Arab countries. Another possibility is to use those funds to help developing countries finance guarantees for trade credit or for the debt of their corporations, forestalling the risk of a run on these corporations. Such facilities would require a different governance structure from existing global financial institutions, reflecting the new sources of global financing and the necessity of giving a greater voice to emerging markets and countries providing the funds, but also by giving voice to recipient countries. They could be located under the umbrella of existing institutions – such as the World Bank or Regional Development Banks, where developing countries are already strongly represented – or established as a new institution. Funds could be organised on a regional basis

A New Global Reserve System The global imbalances which played an important role in this crisis can only be addressed if there is a better way of dealing with international economic risks facing countries than the current system of accumulating international reserves. The magnitude of this crisis and the inadequacy of international responses may motivate even further accumulations, contributing to the deflationary bias in the global system and impairing prospects for a robust recovery. The difficulties associated with a single national currency as the international reserve currency are well known Solutions have been proposed in the form of a Global Reserve System. Such a system could be based on an expanded role for the SDR, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations. S

A Global Economic Coordination Council. At a level equivalent with the General Assembly and the Security Council, Global Economic Council should meet annually at the Heads of Government level to assess developments and provide leadership in economic, social and ecologic issues. Promote development, secure consistency and coherence in the policy goals of the major international organisations Support consensus building among governments on efficient and effective solutions for issues of global economic, governance. Council could also promote accountability of all international economic organizations, identify gaps that need to be filled to ensure the efficient operation of the global economic and financial system, and help set the agenda for global economic and financial reforms. Supported intellectually by the work of an International Panel Representation would be based on the constituency system, and designed to ensure that all continents and all major economies are represented. Important global institutions, such as the World Bank, IMF, WTO, ILO and members of the UN Secretariat dealing with economic and social issues would provide supporting information and participate in the Council. It could thus provide a democratically representative alternative to the G-20.

Independent Expert Panel There should be an appropriate mechanism within the United Nations System for independent international analysis on questions of global economic policy, including its social and environmental dimensions. Follow the example of the Intergovernmental Panel on Climate Change (IPCC). To offer advice to the General Assembly and ECOSOC, as well as to relevant international organizations, to enhance their capacity for sound decision- making in these areas, to identify gaps and deficiencies in the global economic architecture, and to assess progress and problems in the functioning of the global economic and social system. Contribute to foster a constructive dialogue in a regular venue for fruitful exchange between policy makers, the academic world and key international organisations. Panel should comprise well-respected academics from all over the world, representing all continents, and international social movements. Should follow, analyse and assess long-term trends, key developments and major dynamics for global change affecting all people around the globe, identify problems in the global economic and financial architecture, and jointly provide options for coherent international action and recommendations for political decision-making processes.

Other Proposed Institutions International Debt Restructuring Court Independent of IMF (SDRM proposal) Replace World Bank’s ICSID Intergovernmental Commission on Tax Cooperation International Tax Compact Global Financial Authority New Policy Surveillance Mechanism – Independent of IMF – Support national capital account management