As the G20’s April summit approaches, the debate on reform options needs to focus on the key issues that will be before the national leaders. At the invitation of Vox’s editors, I use this column to take stock of the proposals contributed so far to Vox’s Global Crisis Debate on how to reform international institutions to strengthen global financial governance. I hope not to do too much injustice to the many views expressed, and I apologise to the authors for inadvertent misrepresentations or neglect. I will organise the various contributions around three main issue areas:

1. How to shape a more legitimate system of global financial governance;
2. How to make international financial institutions more effective; and
3. How to make them more relevant.

Whereas most contributors take the G20 as a fact of life, or salute its creation as a step in the direction of a more participatory system of global governance, others question the very legitimacy of the G20 as the emerging global decision-making body.

Charles Wyplosz believes that the creation of the G20 reflects a bad instinct of politicians. Wanting to show an immediate reaction to the global crisis, world leaders thought that putting together the big countries would give the right signal; yet the nature of the crisis called for joint action of the financially significant countries, not necessarily the big ones. Tackling different global problems may in fact require the involvement of different groups of countries, but it would be difficult to come up with a new ‘G’ at each turn – the G20 will then have to deal with the ‘original sin’ of its own creation.

Katharina Pistor fears that this new “core” of ruling countries may decide to govern outside the established multilateral institutions and aggravate the fate of the “periphery”. The new core comprises countries and entities that share a common interest in the survival of their financial institutions and system. Pistor notes that this may help stabilise financial relations at the core, but at the price of freezing out the periphery.

José Antonio Ocampo criticises the ad hoc nature of the G20 and holds that global governance should be based on representative institutions. He calls for involving the United Nations as the most global institution, and supports creating a Global Economic and Social (Security) Council in the United Nations, with effective powers of international policy coordination.

My own commentary on this topic places me in the critical camp, denouncing the distance separating today’s model of global governance, based on limited, non-representative and top-down-decided participation, from the principles of economic and financial multilateralism laid out at Bretton Woods in 1944, which promote universal representation of all countries wishing to join in international cooperation. For this reason, I favour giving the IMF ministerial committee (the IMFC) – with its (nearly) universal representation – the central role in international financial policy coordination that the ‘G’ countries have given to themselves. Considering the proposals for a UN Council and for a reformed IMFC, it would be useful to gauge how they would hypothetically compare in terms of legitimate and effective global governance.

In spite of their different tastes for the G20, contributors generally concur that its leaders should endorse an IMF governance reform that would:

• Reduce the voting power of the developed countries,
• Acknowledge the greater influence of the emerging market economies, and
• Grant more voice to the least developed nations.

Wyplosz, Peter Drysdale, Ted Truman, John Williamson, and I argue for a consolidation of the representation of the European countries in one or two seats at the Executive Board. Truman and Williamson are for ruling out any veto power from individual members.      

Legitimacy and effectiveness may be complements, as noted by Sergei Guriev, who argues that involving developing countries in the design and enforcement of new rules for the global financial system is in the interest of global investors.

Guriev notes that developing countries make massive use of the insurance and intermediation services supplied by western advanced financial institutions. Such countries, therefore, have a large stake not only in the smooth functioning of global financial markets, but also in ensuring that regulatory reforms do not stifle their innovative capacity from which their economies benefit hugely. Allowing developing countries to be part of the international regulatory reform process and be the watchdog of global financial markets would thus serve a global collective purpose.

Numerous ideas have been flagged about specific measures to strengthen the effectiveness of international financial institutions. Truman, Wyplosz, and Williamson call for a smaller Executive Board of the IMF and for revamping its role from one of day-to-day engagement with IMF operations to one of broad oversight of management decisions. Wyplosz is even in favour of a board made up of powerful Executive Directors, who would be high-level and influential civil servants, or even political appointees, travelling periodically to Washington to review decisions and to set policy direction, and leaving the IMF management in charge of implementing policy. In addition to improving managerial effectiveness, this would lessen the importance attributed to voting rights. I, too, have expressed my support for much more influential Executive Directors, but I submit that directors should act independently of individual country interests and owe (by statute) their loyalty to the institution and its membership as a whole. Analysis of IMF corporate governance indicates that a board that is not at arm’s length from member countries (especially the largest) delivers ineffective oversight and weak policy direction.

Unlike today’s arrangements, an independent and influential board should be able to hold management fully to account for its performance. This would require resolving the conflict of interest inherent in the dual responsibility of the Managing Director (and his deputies) as chief executive of the organisation and as chair of the board. The two roles should be separated – the board should be chaired by an eminent person selected by member governments and the organisation should respond to a CEO selected by the board. Finally, an independent and powerful board should be accountable to IMF members. This should become a precise responsibility of the reformed IMFC and demands transparent board procedures.

From a different angle, Luigi Spaventa proposes that the G20 agree on an international financial charter that would set principle-based guidelines, which would evolve into rules at a later stage. Walking the fine line between impossible objectives (creating a global financial regulator) and irrelevant solutions (exhorting greater coordination among national regulatory authorities), Spaventa suggests extending the membership of the Financial Stability Forum and transforming it into a Financial Stability Organisation with a stronger institutional foundation. The FSO could be either a standard-setting body that would assess its members’ compliance with shared principles or a WTO-like institution with powers to enforce binding rules and a settlement dispute mechanism to deal with alleged violations.

With regards to governance, it would be interesting to clarify whether, and how, the FSO should relate to the IMFC (or the proposed UN Council, or the G20 ministers and governors) – would it be an independent agency or should it be accountable to any other entity? Moreover, shouldn’t there ultimately be one single international entity responsible for a coherent system of global financial governance? Which one entity should it be? Could such entity be anything less than a political body with universal representation and a governance structure capable to balance the different relative weight of countries with their equal right to have a voice?

Finally, Pistor argues against standardising financial regulations on the most successful model at the time. That practice arguably ignores the need for adapting domestic institutions to local conditions and future changes, creates the illusion that given markets are institutionally sound while disguising problems that may trigger future crises, and tends to ignore volatility and other risk factors. A new strategy for financial regulation would: experiment with alternative regulatory approaches, focus on systemic risk management, emphasise continuous adaptation of regulatory responses to market changes, and solicit market participation to regulatory design while mitigating the risk of capture.

International institutions may be run effectively and yet not relevant to their members if they lack adequate means to address their critical needs.

Angel Ubide and Ben Carliner warn that ignoring emerging country demands for IMF financial insurance will push them to further accumulate foreign exchange reserves to buffer against crises, creating the basis for protracted global macroeconomic imbalances and falling world aggregate demand. They call for enhancing the IMF’s lending capacity. Carliner and Williamson suggest that countries following good policies should qualify for unconditional access to IMF precautionary resources, whereas those that do not conform to sound policy standards should be granted access under conditionality. Truman, Williamson, and Wyplosz agree on the need to increase IMF resources. Truman recommends an immediate doubling of quotas and a special allocation of SDRs that would boost international confidence and provide unconditional liquidity to countries with potential resource needs. Truman also proposes that quotas be increased periodically in line with the expansion of the global economy, he considers expanding the IMF investment powers and allowing for IMF gold sales and urges for starting annual substantial allocations of SDRs – an opinion that Williamson shares but judges unlikely to be acceptable to creditor countries. Williamson thinks of alternative possible expedients to expand IMF resources, like borrowing from governments under the General Arrangements to Borrow or the New Arrangements to Borrow, or borrowing from the markets.

Finally, IMF relevance depends on the extent to which the institution succeeds in providing adequate policy advice to its members. Truman recommends more vigorous surveillance of exchange rate policies and, although the IMF should not compel countries to liberalise their capital accounts, he calls on the IMF to guide progress toward that goal, including by advising on judicious use of capital flow restrictions.

Concluding remark

I wish to close this short stocktaking without pretension to draw conclusions, but hoping that it may help focus the debate on ideas and proposals that deserve further consideration, and solicit new contributions that could enlighten us as to how to address the difficult trade-offs that are one inevitably encounters when trying to design governance mechanisms that aim to combine legitimacy and effectiveness.