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Reinaldo
Gonçalves is Full Professor of International Economics, Federal University of
Rio de Janeiro; Member of PACS – Institute of Alternatives Policies for the
Southern Cone; Economist, Development Bank of Parana, Brazil, 1973-1974;
Economist, United Nations Conference on Trade and Development, UNCTAD, Geneva,
1983-87.
The aim of this note is to examine
some basic issues related to the functioning of the international monetary and
financial systems. Also, it puts forward some few proposals related to these
systems. Issues and proposals are dealt with from the viewpoint of the South.
More specifically, one takes the perspective of a developing country with a
deep and wide insertion in the world financial system and a high degree of
dependency on the performance of the international monetary system. Besides,
the underlying approach of the analysis is the international political economy.
This note
is divided into three sections. The first one (Regulatory System) examines some
operational issues such as transparency, standards and surveillance, as well as
financial regulation and supervision. A key policy issue for developing
countries – capital and exchange controls -- is also discussed in this section.
The second section (International Money) presents analyses and proposals
related to the three basic functions of the international monetary system, that
is, international liquidity, exchange rate stability and balance-of-payments
adjustment. The last section
(Development Finance) focus on central issues like the external debt of
developing countries, development lending and institutional changes at the
international level.
There is a
consensus regarding the development of standards for improving the quality of
information on international capital flows, the balance sheet of firms, banks
and financial institutions, and macroeconomic variables of the countries. On
the other hand, there is a fear that the greater public disclosure of
information may increase further the instability of the international financial
system.
Regardless
of this perception, greater transparency of banks, financial institutions,
multilateral organisations (IMF and IBRD) and countries (central banks
accounts, government budgets, external accounts, loans contracts, clauses of
securities, performance indicators, etc) should be a basic guideline for the
international financial and monetary systems. Governments should giver high
priority to the works of the standard-setting bodies regarding accounting,
auditing, bankruptcy, corporate governance, payment and settlements systems and
market regulations.
The idea
that the IMF and other institutions should have privileged access to
“confidential” information on the situation of a country (for instance, level
of international reserves) should be rejected for, at least, two reasons.
First, there is no guarantee that the information given to, say the IMF or the
BIS (Bank for International Settlements), is not transmitted to other
governments and financial institutions. Second, it is unthinkable that a
national government (a minister of Finance or a governor of Central Bank) may
give privileged information to non-residents (even a multilateral organisation)
at the expense of citizens (including the Congress) of the country in question.
Thus, all documents delivered by national governments to the Board of the IMF
or other institutions should be immediately available to citizens of the
country.
The Basle
Capital Accord has standards that are not sufficient to capture the credit
risks associated with financial globalisation. Also, there is a strong feeling
that private rating agencies are not efficient regarding the evaluation of
country-specific risks and firm-specific risk. There are highly-leveraged
financial institutions (for instance, hedge funds), as well as the off-shore
centres (fiscal heavens), that are outside the capital requirements of the
Basle Accord.
As a
result, there is an urgent need to develop new mechanisms for further
regulation of the international operations of banks and to extend and develop stronger
regulations to funds. Besides, the World Social Forum, which took place in
Porto Alegre, Brazil, by the end of January 2001, has reached a basic consensus
with respect to the proposal to make illegal the off-shore centres.
1.3.
Capital and exchange controls
One of the
fundamental problems of the international economy is that liberalisation of the
capital account is a basic guideline of the IMF and a component of foreign
policy of developed country governments. However, the problems caused by financial
globalisation require a standstill and a rollback of the present process of
financial liberalisation. Greater restrictions on international capital inflows
and outflows would tend to reduce the volatility of the international financial
system. Even though developed countries will loose the profits and rents
related to international financial operations, the reduction of the instability
and volatility of the international economy will bring about benefits on a
world scale.
As far as
developing countries are concerned, besides capital controls, exchange
restrictions should be applied to limit the conversion between domestic
currency and foreign currencies. Here, it is not only stricter controls on the
capital account the balance of payments (foreign direct investment, portfolio
investments and loans). It is also necessary greater restrictions on the
factor-services account (remittance of profits and payment of interests) and on
the trade account (for instance, imports of superfluous goods and services, payments
for technology). In developing
countries, marked by great external vulnerability and a high social cost of
foreign currency, capital controls and foreign restrictions should be related
to both outflows and inflows.
More than half of the transactions
in the world trading system and in the global security markets are denominated
in North-American dollars. As a matter of fact, the most important financial
asset of the world is the U.S. Treasury bond, whereas the most important
monetary asset is the U.S. dollar. In this regard, international liquidity is,
to large extent, determined by the deficit of the U.S. balance of payments,
which has reached record levels in the last few years. Of course, the size of
the domestic capital markets and the strength of the firms in the United States
are powerful determinants of the monetary hegemony of this country. The U.S.
economy has huge benefits derived from the privilege to issue the currency
mostly acceptable in the world. As result, there is an asymmetry in the world
economy.
To prevent
this asymmetry the alternative is a truly global monetary institution, with the
power to issue money and create credit. This global monetary authority would
behave in way to control the level of international liquidity. Nevertheless,
the creation of this kind of institution is much closer to the Kant's dream of
a "perpetual peace" than to reality. In this regard, a proposal would
be the U.S. government to share with other countries the benefit derived from
seigneuriage. Inflation in the North-American economy implies a loss of
purchasing power of the U.S. currency in the hands of non-residents. As a
result, the U.S. Treasury could contribute to a global fund (International Development
Fund) on the basis of this seigneuriage. This fund could be used for
development finance in the South.
The creation of mechanisms to
finance countries with temporary balance-of-payments difficulties is seen as a
function of the international monetary system.
More specifically, the IMF has played the role of lender of last resort.
There are two basic problems related to this function of the IMF: the system of
negative conditionality and the creation of moral hazard. Basically, the IMF
has failed because its conditionality system creates more problems than it
solves. After all is said and done, the historical experience shows that
IMF-supported programs tend to put developing countries in a path of
instability and crises. By and large, crises transcend the economic dimension
and cause social unrest and bring about political and institutional ruptures in
developing countries.
With
respect to the creation of moral hazard, the basic point is that the bailout
mechanism provided by the IMF, in the form of credit facilities, tends to be an
incentive to governments to behave in an irresponsible way. In developing countries,
the promotion of deregulation and liberalisation, required by the IMF, tends to
involve degrees of openness which are not compatible with the real economy. In
this regard, if it is not possible to eliminate the liberalisation requirements
of the IMF and control the behaviour of governments, it seems that financing
facilities at the IMF are a problem, not a solution. In this regard, the idea
is not to strengthen the IMF, but to weaken or, better, to abolish its role as
a lender of last resort.
The proposal to create a tax on
international capital flows may also contribute to reduce the volatility of the
international monetary system and the instability of the world financial
system. Regardless of the operational problems, this tax requires to make illegal
the off-shore centres. Also, this tax may provide funding for development
projects in the South.
After the rupture of the Bretton
Woods system in 1971 exchange rates became more volatile. Major reserve
currencies remain highly unstable and exchange rates depend on the moods market
as well as the intervention of the key players of system (U.S., Europe and
Japan). This combination of market forces (usually, under speculative attacks)
and discretionary mechanisms (via the G-3) shows that the IMF has no word to
say regarding this key aspect of the international monetary system. IMF lost
the function of stabilising the exchange rate system.
With
respect to developing countries, the basic guideline should be to avoid the
trap put forward in the recent past regarding the choice of exchange rte
regimes. The conventional wisdom is oriented to recommend fixed exchange rate
regimes (for instance, currency boards) or flexible exchange rates. The managed
floating regime does provide a greater degree of manoeuvre for developing
countries. Of foremost importance is to keep control of key policy variables
such as exchange rate, capital flows, money base and interest rates. Only a system of managed floating allows
developing countries this flexibility. External vulnerability tends to increase
with both fixed exchange rates and purely flexible exchange rates. Developing
countries should reject the new conventional wisdom regarding exchange rate
regimes.
External debt is a major constraint
for development in the South. It implies a stock disequilibrium, which involves
the outflow of huge resources. Besides, it increases external vulnerability
insofar as developing countries have to orient all main economic policies to
solve the balance-of-payments problems created by the service of external debt.
This debt is an unbearable burden on many developing countries and a critical
uncertainty for most of them. Mechanisms for debt relief and debt work-out have
to be created or developed further. This is a key priority for developing
countries. Developed countries governments should be persuaded to carry out
bilateral and multilateral debt reduction.
At the same
time, the National Plebiscite on the External Debt in Brazil, which involved
more than 6 million people, has clearly showed the need to raise social
consciousness regarding the issue. A world campaign has to be carried out to
put definitively the external debt of developing countries in the political
agenda of international institutions and developed-country governments. The
international Jubilee South campaign has to have a world-wide support: Life
before debt!
Developing
countries have to become less vulnerable with respect to the international
monetary and financial systems. Besides the reversal of financial
liberalisation, these countries have to promote strategies aimed at rooting
capital locally. In this regard, there should be the creation of local credit
unions, cooperatives and other mechanisms.
As regards
international financial institutions, development finance should not involve
conditionality, except those related to the economic and financial feasibility
of the projects. Another set of criteria should be the environmental and social
impact of the projects. Structural adjustment lending, related to the promotion
of liberal reforms, should be abolished from the work programs of the
international institutions.
The IMF and
the World Bank are powerful instruments of foreign policy of developed
countries, mostly, the United States. In this regard, these institutions create
more problems for developing countries than they are supposed to solve. Even in
the developed countries there is an increasing perception that these
instruments are quite inefficient. The immediate consequence is to abolish the
IMF and the World Bank.
The capital
of both institutions could be used to the creation of an International
Development Fund oriented to finance social, economic and environmental
projects in developing countries. Governments, from developed and developing
countries alike, should not participate in the decision-making process of this
Fund. The Board of this Fund should be composed by representatives of the
international civil society chosen by a voting and democratic process on a
world scale.