G20 London 2009

The UN experts on reforming the monetary institutions

by Salil  Sarkar

Article published on the 2009-03-31 Latest update 2009-03-31 20:37 TU

Joseph Stigliz
(Photo: wikipedia)

The UN commission recommends the establishment of a Global Economic Coordinating Council, not only to co-ordinate economic policy, but to assess the economic situation, and propose solutions. It says there is a need for a Global Financial Regulatory Authority, keeping tabs and supervising adherence to rational rules.

Competition must be guaranteed in the global markets. Defaults in reimbursing debts and managing capital movements also require supervision from a global body in which all parts of the world are represented.

The commission also recommends creating a new global reserve system. The existing system, with the US dollar as reserve currency, is fraying. The dollar has been volatile. There are increasing worries about future inflationary risks.

Stiglitz writes that the current system “has the peculiar property that poor countries are lending trillions of dollars to the US, at essentially zero interest rate, while within their country there are so many needs to which the money could be put.”

The task is “to build a new financial architecture. If we flunk it, the pain will strike most cruelly in the world’s poorest countries”.

The current financial crisis began in America's sub-prime mortgage market. It’s now become a global recession and is shaping up to be the worst since the Great Depression of the 1940s. Many economists are pushing for a global response to what is global crisis.

A global response, according to many, must give priority to fighting protectionism. But insidious moves to put up barriers to trade and movements of population are happening.

Responses to the worldwide crisis are still being crafted by national governments, who quite naturally look after their own citizens' interest first. Particularly harmful are protectionist measures, such as the US "buy America" provision in its stimulus package.

In fact, the World Bank reports that 17 of the G20 group of countries have taken protectionist measures, after making a commitment not to do so in their meeting in Washington in November.

By focusing on national, as opposed to global impacts, the global stimulus will be less – and the global recovery weakened.

All agree that each country should adopt strong fiscal stimulus measures. But many developing countries do not have the resources. So a concerted approach for additional funding in poor countries is a must. The funds would be both for spending and liquidity for poor countries and companies in those countries, which are worse by the credit crunch.

The commission thus recommends that developed countries contribute 1 per cent of stimulus spending to the poorer lands.

But it underlines that any assistance be provided without the usual strings. Conditions forcing developing countries to reduce spending and raise interest rates are counterproductive.

Assistance should help them expand their economies, not make them shrink, thereby assisting the global recovery.

Since the usual IMF/World Bank combination has neither the wish nor the credibility to provide adequate aid, judging from their past actions, the UN commission urges the creation of a new credit facility, in which the voices of  both those who provide the funding and those who borrow those funds are better heard.