'Finance: The Achilles heel of the global economic system'
guyana the wider world by Dr Clive Thomas
February 11, 2001
In an encouraging departure from its usual publications CARICOM recently published a Trade and Investment Report 2000, which examines the dynamic interface of regionalism and globalisation. This Report observed that, "finance remains the Achilles heel of the global economic system".
This observation mirrors that made several times in this part of the series on globalisation which focuses on finance. In particular last week, when we examined Globalisation: from Crisis to Crisis. The question that should now be asked is: what are the mechanisms in place, if any, to prevent this disastrous outcome? The response leads directly to an examination of what is termed the 'architecture of global finance.'
The global financial system is made up of a myriad of players. From the small individual investor at the end of a computer terminal to huge multinational businesses, governments, and thousands of banks and financial institutions. It is regulated/supervised by the IMF and the World Bank (the Bretton Woods Institutions or Twins) and a number of global organizations mainly based in Basle, Switzerland.
The IMF, established in 1945, is directly charged with overseeing that countries adhere to the agreed upon rules of conduct in international trade and finance. The IMF itself helps to formulate these rules. It also provides borrowing facilities to the relevant Authorities in member countries to finance temporary problems in meeting their financial obligations. In pursuit of these basic aims the IMF has sought to foster international monetary cooperation and is responsible for supervising the global exchange rate and Payments system. Over the past three decades its role in developing countries has become very intrusive. It is now largely responsible for designing much of what passes for economic policy in these countries. This occurrence has been made possible because of the heavy resort these countries have made to the IMF, for direct and indirect financial support in meeting their international payments. The loans/credit provided by the Fund to these countries have 'conditionalities', attached to them, which makes this practice virtually unstoppable.
Although it does not seem that way to many, the IMF is a specialized agency of the United Nations. Its charter and structure of decision making and participation, however, does not follow the principle of one country - one vote, as practised in the General Assembly of the United Nations.
The World Bank, also established in 1945, is the other 'twin.' It is responsible for assisting the economic development of member countries. It does so by supplementing private capital in the form of longer term development loans at concessional rates. Generally, the World Bank operates as a complement to the IMF. The use of 'cross-conditionalities' by the two institutions is also widespread and, it is difficult if not impossible to treat them as distinct or unrelated entities.
The institutions located at the Basle, Switzerland perform very different roles. Five of these institutions are important for this series, because they provide the basic prudential norms and standards of practice to guide the global operation of the financial system. There is the Basle Committee on Banking Supervision, which has developed the basic principles that financial authorities are expected to follow worldwide, in order to ensure safe and sound banking supervision. The fear is that in the absence of this, fraud and dishonesty in private markets could destabilize the global economy. In similar manner the international Association of Insurance Supervisors (IAIS) provides oversight for the practices of insurance companies operating everywhere. The International Organisation of Securities Commissions (IOSC) provides a similar function for securities markets worldwide. There is also the International Accounting Standards Committee (IASC) providing these services for the accounting profession. Finally, the Bank for International Settlements also based in Basle, Switzerland assists national central banks in managing and investing their monetary reserves. It also promotes cooperation among central banks.
These organizations have played an important role in seeking to minimize the exposure of the global financial system to crises generated by fraud, dishonesty, and scandal. As we know from reading the press, this has not erased this scourge, since spectacular cases have arisen in recent times. Alongside such crises there is also the continued risk of systemic crises, occasioned by the nature of private financial markets and the leading roles that gambling and greed play in driving them. To cater for this, the Financial Stability Forum (FSF) has been created. This Forum came into existence in the wake of the South-East Asian crisis of 1997/98. That crisis spread rapidly around the world and led to the collapse of giant hedge funds and threatened also a global recession. The G7 countries created the Forum in direct response to this. Its membership comprises the organizations discussed above, the G7 countries themselves, and 'other' countries. The remit of the Forum is to oversee the functioning of the financial system with a view to preventing the eruption of systemic crises. It has so far focused on three major 'problem' areas. These are, the off-shore financial centres, the activities of hedge firms, some of which have collapsed in the past because in large measure they are highly leveraged, and short-term capital flows generally.
Last week we noted the action taken by this Forum against the Caribbean, in connection with its off-shore financial centres and tax havens, and the CARICOM response. The premise of this type of action is the perverse view that the inadequacy of regulation in the countries from which these funds emanate, in particular Europe and North America, is not responsible for the outcomes. The blame lies elsewhere, in the national jurisdiction of the countries to which the funds flow!
The impressive architecture described above contains one classic flaw. That is, ultimately it is built on the principle that the private agents who drive the global financial system, although largely motivated by greed and the desire to gamble, should be accommodated at all times. The regulatory institutions therefore, end up papering over the cracks they create in the system, rather than building a structure safe for all - not only the gambler and the greedy.
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