Even if the recent measures taken by the rich countries to save their financial institutions succeed, the effects of the financial crisis are likely to continue reverberating around the world for some time to come. One important but relatively unnoticed consequence is that the crisis has exposed the serious deficiencies in global financial governance and the problems this creates.
The signs of breakdown in global financial governance have been accumulating for a number of years. This can be seen most clearly in the case of the international organisation that was created to oversee the international monetary and financial order — the International Monetary Fund (IMF). In the current crisis it has been reduced to a passive bystander, ignored by all but the most committed IMF watchers.
The Asian countries, motivated by their dissatisfaction with the IMF’s response to the mid-1990s Asian financial crisis, have built huge reserves and new regional arrangements to make sure that they never have to ask for outside help again. Almost all the IMF’s other major debtor countries have pre-paid their IMF obligations so that they could escape from its heavy-handed oversight. The shortcomings in the IMF’s efforts in Africa have been well known for many years. The IMF’s efforts to reform itself and give under-represented members a greater say in its affairs have been slow and unsatisfactory. (One indication: the Chinese declined the opportunity to serve on a high-level IMF advisory committee chaired by Trevor Manuel.)
There are other symptoms of breakdown in global financial governance. The G7 is no longer either representative of the major economic powers or an effective manager of the global economy. The existing mechanisms for coordinating financial regulation around the world, such as the Financial Stability Forum, failed their most important assignment: helping the world develop an adequate regulatory framework for its complex financial system.
The efforts of banking regulators to coordinate financial regulation through such measures as capital adequacy requirements rely, in part, on self-regulation — the same strategy that has contributed to the problems. In addition, financial market regulators have learned little about the risks of over-leveraged investors from the dramatic collapse, in the wake of the 1998 Russian debt crisis, of Long Term Capital Management, a US-based investment fund, or from the problems created for Société Générale by the actions of one rogue trader.
While these examples demonstrate that the deficiencies in global financial governance are contributing to the present financial situation and adversely affecting people who have limited direct interaction with international finance, it is not surprising that they have received little attention. First, the most urgent need has been to prevent a complete financial meltdown in the major economies. Second, no one is sure how to construct a coherent, effective and politically feasible global financial governance regime.
Thanks to technology, trade and human migratory patterns, and the severity of the environmental challenges that the international community faces, we will continue living in an integrated world after this crisis is over. Consequently, the global financial governance problem will eventually have to be addressed. Any sustainable solution will require rules, mechanisms, and institutions that together can support financial systems that meet the needs of countries as different as the United States, China, South Africa, and Togo; and borrowers as diverse as Google, Mexico, Anglo American, medium-sized producers of solar energy and the providers of low-income housing and microcredit.
Negotiations on such a governance regime will be complicated, contentious, and time-consuming. Yet for Africa, which has never received fair treatment from global-governance arrangements, these negotiations are an opportunity. If the continent begins preparing now, it can use these negotiations to advance African interests by building elements into a new ÂÂglobal financial governance regime that are more responsive to the developmental needs of all African countries.
While we do not yet know when these negotiations will begin or the form they will take, African governments and continental and regional institutions should now begin preparing for them. The first and most urgent task is to understand exactly how the current arrangements are failing Africa and to clarify what Africa needs from a new global-governance regime — at the global, continental, regional and national level. To develop this understanding and to begin formulating negotiating positions, African governments and continental and regional institutions should formulate a set of ÂÂprinciples to guide them in developing their positions.
These principles should address three points. First, given the difficulties in creating new international organisations, we should exploit the potential for reform and adaptation in existing global and regional institutions and should only propose the creation of new institutional arrangements when it is clear that there is no other way to meet Africa’s needs at either an international or regional level.
Second, both the scope of and limitations on the responsibilities and authority of all global financial governance arrangements should be clearly defined so that they respect both the sovereignty of participating states and the areas of responsibility of all other global and regional organisations. This is necessary to check the invasive and ever-expanding scope of operations of organisations such as the IMF and World Bank. Third, these governance arrangements must be supportive of international efforts to deal with other key challenges, such as poverty, inequality, global warming, human rights and public health.
A second and related task is for African governments to engage their existing human resources in this task. This includes encouraging staff at African think-tanks and universities to develop background papers and options assessments on global financial governance for African policy-makers and other key actors. These universities and think-tanks can also convene meetings at which experts, government officials and representatives of all elements of civil society can meet to discuss these issues. Finally, they can help educate the public. Without an educated and supportive public, Africa is unlikely to be an effective participant in these negotiations.
Daniel Bradlow is the Sarchi professor of international development law and African economic relations, University of Pretoria, and professor of law, American University, Washington DC