Wednesday, October 29, 2008

How do we solve the global financial crisis?

With more global administration, according to the leaders of European and Asian States.

The International Monetary Fund (IMF) in particular is at the forefront of these issues, with loan agreements already in place for Iceland and Hungary, and with others requested by States such as Turkey, South Africa and Brazil (according to The Guardian at least; although see here for the suggestion that Brazil has been wrongly included in that group). In a sign of the shifting contours of global economic power, China and Russia have been approached as potential donors to these loan funds.

The central question, however, remains: will we see, in conjunction with this increased scope and reach of global administration, a comparable increase in the - until now sadly lacking - accountability measures? These seem particularly important given the fact that the IMF is sticking to its guns regarding loan conditionality - a fact that some have suggested is dissuading other States in trouble from seeking help there. In Iceland, the consequence of accepting IMF assistance has been a 6% interest rate hike, to 18%; in Hungary, it has been a commitment to introduce austerity measures, and to significantly curtail public spending.

The key thing to realise here is that this is not merely technocratic governance - apolitical decision making based upon the uncontested consensus among experts - but rather highly contested political choices that are being forced upon those States that accept these loans (it has not escaped The Guardian's attention, for example, that the IMF is demanding cuts in public spending while the US and the UK are proposing, at a domestic level, to take precisely the opposite path and attempt to spend their way out of recession). Of course, even ostensibly technocratic governance can fail (I wonder, for example, if the Basel Committee might be tempted to revisit its capital adequacy requirements in the wake of recent events in the world of banking...), raising questions about the accountability for expert error, and, indeed, giving the lie to the suggestion that any governance is ever purely "technocratic". However, when such overtly political questions are in play, the issues of accountability, participation and legitimacy more generally are brought even more dramatically to the fore.

The problem is that the IMF does not seem to have much in the way of administrative law type mechanisms ensuring participation or accountability to anyone other than the dominant (western) States among its membership. The Global Governance Watch website provides one fairly technical example of this, in which the IMF and the World bank have failed to incoporate benchmarks set within the context fo the Extractive Industries Transparency Initiative, which provide global standards for corporations and governments to disclose fully what has been paid and received for the right to extract natural resources. More generally, Aaron Shaw has noted that

The U.S. and Europe still retain a ridiculous share of the voting power within the IMF, World Bank, and the WTO, virtually guaranteeing that they will strong arm through whatever solutions they deem fit. While Ambassadors, Trade Representatives, and their ilk may talk a good game about promoting equality through increased multilateral liberalization, the bottom line is that truly equitable trade will not come about without a substantial sacrifice by the traditional “Great Powers” of the West. The recent trend of the U.S. and E.U. pursuing absurd schemes to evade accountability and transparency by undermining global forums also belies any rhetoric of good will.

It is encouraging to see, then, that with the call for increased global administration, we are also witnessing from many different sources calls for global administrative laws to regulate this. Whether or not these will be sucessful depends in large part on the willingness of major western States to accept some measure of control over their influence and activities within global financial institutions. If they do, it will represent another hugely significant step forward in the emergence of global administrative law; in any event, however, the fact that the debate alone is so prominent is testament to the extent to which the logic of administrative law is being increasingly applied to the institutions of global governance. Further evidence, I suggest, that we are moving towards an measure of GAL as part of a global regulatory "common sense".


Anonymous said...

First things first: its wrong to club the WTO with the BW institutions for one simple reason: the organisation is democratic when it comes to decision-making and does not have voting 'shares' the way it is with the IMF and the WB. Secondly, the WTO is only very remotely concerned with the present financial turmoil: in fact, nothing in WTO law directly affects or will affect global finance. If people chose to securitize bad home loans, and then buy them from one another across banking counters, all going down together, where was the WTO in the picture? Its hardly possible to link up credit availability and the WTO: the credit crunch is a direct outcome of the psychological effects of an approaching recession. So let us leave the WTO aside for the purposes of 'reforming' the international FINANCIAL system. As for the IMF, I equally think the organisation is a big failure! There is hardly any pervasive regulation from up there in forex markets, currency valuation (remember China!!) or for that matter things like cross-border flow of capital! IMF routing policy changes through states, to let the effects trickle down to private markets is a long shot, it has not happened, nor will it happen. On the other hand, the Basel banking norms, a central GAL candidate, seems to be impacting banking policy much more incisively than the IMF. I agree with the views in the main post that no drastic reform is coming: somehow much of international law seems (atleast to the mind) to have been institutionalized somewhere or the other and to shake up existing organisations is going to take a real lot of political will power, which is clearly absent! So lets hope the leaders have a good time in Washington and come up with nicely worded communiques that will help markets do better.

Euan MacDonald said...

Thanks for your comment. Your point about the differences between the WTO and the IFIs is well taken.

It will be interesting indeed to see how the Washington meeting will go. Brown, it seems, is still talking up the "new Bretton Woods" angle, and arguing for radical restructuring of the IMF. He does have some political capital at the moment, having been seen to be one the leaders who responded best to the financial crisis when it broke. The presidential situation in the US is another interesting factor.

Calvin Brock said...

What a blog post!! Very informative and also easy to understand. Looking for more such comments!! Do you have a facebook? I recommended it on digg. The only thing that it’s missing is a bit of new design. Sharon

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