International Workshop:

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International Workshop The global economy
after the crisis macroeconomic and geopolitical
implications Castello del Buonconsiglio, Trento
- Italy 25-27 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

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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

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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

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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

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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 cant do it G-20 cant do it, BRICs cant
  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

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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

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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 dont 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

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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

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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

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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

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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

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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.

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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.

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Other Proposed Institutions

• International Debt Restructuring Court
• Independent of IMF (SDRM proposal)
• Replace World Banks ICSID
• Intergovernmental Commission on Tax Cooperation
• International Tax Compact
• Global Financial Authority
• New Policy Surveillance Mechanism
• Independent of IMF
• Support national capital account management