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Reforming the International Financial System for Development

Reforming the International Financial System for Development

Edited by Jomo Kwame Sundaram
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  • Book Info
    Reforming the International Financial System for Development
    Book Description:

    The 1944 Bretton Woods conference created new institutions for international economic governance. Though flawed, the system led to a golden age in postwar reconstruction, sustained economic growth, job creation, and postcolonial development. Yet financial liberalization since the 1970s has involved deregulation and globalization, which have exacerbated instability, rather than sustained growth. In addition, the failure of Bretton Woods to provide a reserve currency enabled the dollar to fill the void, which has contributed to periodic, massive U.S. trade deficits.

    Our latest global financial crisis, in which all these weaknesses played a part, underscores how urgently we must reform the international financial system. Prepared for the G24 research program, a consortium of developing countries focused on financial issues, this volume argues that such reforms must be developmental. Chapters review historical trends in global liquidity, financial flows to emerging markets, and the food crisis, identifying the systemic flaws that contributed to the recent downturn. They challenge the effectiveness of recent policy and suggest criteria for regulatory reform, keeping in mind the different circumstances, capacities, and capabilities of various economies. Essays follow ongoing revisions in international banking standards, the improved management of international capital flows, the critical role of the World Trade Organization in liberalizing and globalizing financial services, and the need for international tax cooperation. They also propose new global banking and reserve currency arrangements.

    eISBN: 978-0-231-52727-9
    Subjects: Business, Economics, Political Science, Sociology

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Tables
    (pp. ix-ix)
  4. List of Figures
    (pp. x-x)
  5. Acknowledgements
    (pp. xi-xi)
    Jomo Kwame Sundaram
  6. Contributors
    (pp. xii-xiv)
  7. Foreword
    (pp. xv-xxx)

    The current financial and economic crisis came as no surprise to those who had been warning of the likely repercussions for international finance and the world economy of the bursting of the US housing market bubble and the unsustainability of the massive global imbalances of recent times. In a world of weakly regulated, but closely interconnected financial markets and persistent global macroeconomic imbalances, the resulting adjustments have undermined growth, and continue to damage development prospects in the world economy, especially in developing countries and transition economies which have all become much more integrated into the world economy.

    The US current...

  8. 1 Contemporary Reform of Global Financial Governance: Implications of and lessons from the past
    (pp. 1-24)
    Eric Helleiner

    As the world experiences its worst financial crisis since the 1930s, there is a widespread sentiment that bold innovations in global financial governance are needed. Reflecting this mood, many analysts have begun to call for a Bretton Woods II, invoking the 1944 conference that established the postwar international financial order. Even some leaders took up the banner during the lead-up to the first G20 leaders’ summit in November 2008 that was called to draw lessons from the crisis and set an agenda for global financial reform. The global financial reforms endorsed by the G20 process so far, however, have not...

  9. 2 Global Liquidity and Financial Flows to Developing Countries: New trends in emerging markets and their implications
    (pp. 25-54)
    C.P. Chandrasekhar

    After a slump in cross-border flows of capital in the years following the East Asian financial crisis, international financial flows have seen a robust revival in recent years. The magnitude of cross-border transactions has grown exponentially during the current decade. Further, qualitative changes that accompanied this quantitative expansion have transformed the nature of the financial integration of developing countries with their developed country counterparts.

    This chapter examines: (i) the factors responsible for this surge in capital flows into developing countries; (ii) the qualitative changes in financial integration accompanying this surge; and (iii) the impact that this surge is having on...

  10. 3 The Global Financial and Economic Crisis and Its Impact on Development
    (pp. 55-83)
    Jomo Kwame Sundaram

    The world was plunged from late 2008 into its worst recession since the 1930s. The global financial and economic crisis has severely disrupted economic growth worldwide, and it is feared that much of the progress towards the achievement of development goals is being reversed. The United Nations’ (UN) late 2009 global forecast estimates that world income per capita could drop by 2.2 percent in 2009.¹ Although there are some signs of recovery, thanks to fiscal, monetary, financial and regulatory measures taken by some major economies, significant uncertainty remains regarding its sustainability and robustness. There is also the risk of premature...

  11. 4 The Unnatural Coupling: Food and global finance
    (pp. 84-104)
    Jayati Ghosh

    It has been clear for some months now that the global food crisis, which has been simmering for some time even if it first attracted international attention only around a year ago, is not something that can be treated as discrete and separate from the global financial crisis. On the contrary it has been intimately connected with it, particularly through the impact of financial speculation on world trade prices of food.

    This is not to deny the undoubted role of other real economy factors in affecting the global food situation. While demand-supply imbalances have been touted as reasons, this is...

  12. 5 Policy Responses to the Global Financial Crisis: Key issues for developing countries
    (pp. 105-142)
    Yilmaz Akyüz

    The global financial crisis, triggered by widespread speculative lending and investment in major international financial centers, poses two sets of policy challenges. First, it calls for an immediate policy response in order to stabilize financial markets and international capital flows, halt economic decline and initiate recovery. So far, major industrial countries have taken a range of measures for these purposes, including bailout operations through infusion of capital into weakened financial institutions and industrial firms and government guarantees for impaired financial assets and bank deposits; significant easing of monetary conditions and speedy and sharp reductions in interest rates; and large fiscal...

  13. 6 Reforming Financial Regulation: What needs to be done
    (pp. 143-168)
    Jane D’Arista and Stephany Griffith-Jones

    A short look at history indicates that, unless governed by appropriate regulation, financial markets tend to cause costly and damaging crises. This does not imply that financial crises are inevitable; they can, in fact, be prevented, or ameliorated, by appropriate public policy and, especially, by regulation.

    After the Great Depression, the financial sector—particularly, but not only in the US—was re-regulated for soundness by adopting such measures as the US Glass Steagall Act of 1933. During the next forty years, with the global financial sector highly regulated and capital accounts fairly closed, there were practically no financial crises. In...

  14. 7 The Basel 2 Agenda for 2009: Progress so far
    (pp. 169-193)
    Andrew Cornford

    The revisions of Basel 2, the international standards for banks’ regulatory capital developed by the Basel Committee on Banking Supervision (BCBS) to replace the 1988 Basel Capital Accord (Basel 1), are now beginning to take shape. The 2006 text of Basel 2, which was the culmination of a drafting process which began at the end of the 1990s, had been considered closed before the credit crisis which began in mid-2007.¹ This crisis has indicated major shortcomings in the regulatory framework for financial institutions which are now the subject of an agenda of wide-ranging reform.² Strengthening Basel 2 is an important...

  15. 8 Should Financial Flows Be Regulated? Yes
    (pp. 194-217)
    Gerald Epstein

    Prior to the First World War—in the late 19th and early 20th centuries—the industrialized economies of Europe and the United States were characterized by a high degree of global financial integration, a relatively large role for markets, and a philosophy based on limited government regulation (laissez-faire). Capital could flow freely with very light regulation both within and between countries, and there were relatively low barriers to trade in goods and services. Many countries’ monetary systems were based on a gold standard, which fixed countries’ exchange rates relative to one another. The Bank of England “orchestrated” the system with...

  16. 9 Financial Services, the WTO and Initiatives for Global Financial Reform
    (pp. 218-242)
    Chakravarthi Raghavan

    The financial crisis that began in 2007, and has now spread globally affecting the real economy has evoked considerable discussions and views on its origins and nature, and proposals for rethinking and reforming national and international governance and regulation of the financial sector. For lack of a better term, all these are referred to here as Bretton Woods II.

    There is now a general consensus that the reform of the financial sector, and a new global financial architecture, must include strong regulatory measures and their enforcement—though it is not at all certain that the final outcome will be in...

  17. 10 Cross-Border Tax Evasion and Bretton Woods II
    (pp. 243-270)
    David Spencer

    The problem of tax evasion and its cost to the community, and to development in developing countries, has a higher profile than ever. This has been given extra impetus by two recent events. One is the coming to light of Union Bank of Switzerland (UBS) employing practices that facilitated tax evasion by high wealth United States clients. These UBS practices included maintaining—for an estimated 19,000 US clients—“undeclared” accounts in Switzerland with allegedly US$17.9 billion in assets that were not disclosed to US tax authorities; assisting US clients in structuring their accounts to avoid US reporting requirements; and...

  18. 11 Learning from the Crisis: Is there a model for global banking?
    (pp. 271-295)
    C.P. Chandrasekhar

    One of the many noteworthy features of the evolving financial and economic crisis in the world economy is the belated recognition that the financial crisis is not restricted just to Wall Street or the mortgage-periphery of the financial system, but afflicts its core: the banking sector. When the sub-prime crisis broke, this was seen as confined to mortgage markets and to institutions holding mortgage-backed securities. Reasons that were implicitly contradictory were offered to justify this presupposition. It was on occasion argued that since banks were more regulated than players in other segments of the financial system they had stayed out...

  19. 12 The Report of the Commission of Experts on Reform of the International Monetary and Financial System and Its Economic Rationale
    (pp. 296-313)
    Jan Kregel

    In the autumn of 2008, as the sub-prime mortgage crisis, that had begun a year earlier in the United States, turned into a global financial and economic crisis quickly spreading to other countries, the President of the United Nations General Assembly convened a panel of experts to discuss the crisis’ implications for developing countries in an interactive dialogue with the General Assembly. As a result of this dialogue, he decided to appoint an independent Commission of Experts² on Reform of the International Monetary and Financial System, with the mandate to analyze the causes of the crisis, to assess its impacts...

  20. 13 Special Drawing Rights and the Reform of the Global Reserve System
    (pp. 314-342)
    José Antonio Ocampo

    The debate surrounding the international monetary system has heated up in recent years through three different channels. Prior to the current crisis, attention was focused on the large global imbalances that the world economy had accumulated, as well as on the rationale for the massive accumulation of foreign exchange reserves by developing countries, which were part of that process. When the crisis erupted, attention shifted to the generation of international liquidity and countercyclical macroeconomic policies. The revitalization of the International Monetary Fund was an essential part of this process. This led to the decision of the Group of 20 (G20)...

  21. Index
    (pp. 343-356)
  22. Back Matter
    (pp. 357-358)