Challenges for the G20: The IMF and regulation

March 26, 2009

StephanyGriffith-Jones– Stephany Griffith-Jones is executive director of the Initiative for Policy Dialogue at Columbia University. The views expressed are her own. –

There are many important challenges facing G20 leaders when they meet in London in early April.

The first is to coordinate sufficiently large fiscal and other measures to ensure that world aggregate demand recovers, and a major recession is avoided.

It is also crucial that concrete measures are taken that will allow developing countries, especially those that may become foreign-exchange constrained, to sustain growth. This will not only be key for avoiding a large slowdown in growth and increase in poverty in those countries, but also to guarantee important demand for developed country exports. It is estimated that around 200 million people could be pushed into poverty, mainly in developing countries, if rapid action is not taken to soften the impact of the crisis on those countries.

QUICKLY REFORM THE IMF’s COMPENSATORY FINANCING

The calls for significantly expanding the resources of the International Monetary Fund (IMF) by several G20 leaders are welcome. One effective way of doing this would be through a counter-cyclical expansion of official liquidity, by a one-off, large issue of IMF Special Drawing Rights (SDRs). This would compensate for the large contraction of private liquidity, which has resulted in a sharp fall in private capital flows to developing countries. Once the situation normalizes, the SDRs could be reabsorbed by the IMF. The major objection to SDR issues in the past has been the threat of inflation. It has no validity at present. The dominant threat is of deflation and recession.

A complementary or alternative measure is for the IMF to modify its facilities so it can lend rapidly, at sufficient scale, and without overburdening borrowers with the heavy conditionalities of the past, especially when the sources of crises are exogenous.

Thus, there should be a major and quick reform of IMF compensatory financing .This has become urgent, given recent very sharp falls in commodity prices, with highly negative effects, especially on low income countries. Existing facilities for those countries are clearly insufficient, especially as regards the scale of their lending. It is therefore urgent to scale up these facilities.

The recent creation of a new IMF Short-Term Lending Facility (SLF) for countries with good policies facing short-term liquidity constraints is welcome. As yet, no country has used it. It may need modifying to extend its very short maturity and to make it accessible to a larger group of countries.

It is also important that aid to low-income countries is increased. Furthermore, multilateral and regional development banks need to rapidly and greatly expand their lending.

CORRECT THE REGULATORY DEFICIT OF GLOBAL FINANCE

The magnitude of the current crisis is clearly associated with inadequate regulation of banks and financial markets.

The new regulatory governance should be based on a well-functioning network of national authorities and include truly international regulation of global financial institutions . A global financial regulator needs to be created, building on institutions like the Bank for International Settlements.

This new institutional structure should have real power to influence decisions of national regulators, especially in the largest countries, including industrial countries. Secondly, it should take macro-prudential concerns clearly into account. Finally, it should consider the potential costs of financial instability on the real economy.

The current deep crisis and numerous previous ones that hit developing countries seem to demonstrate that crises are inevitable in deregulated financial systems. There is, therefore, ever-growing consensus that more complete and more effective financial regulation is required.

There are two broad principles on which future financial regulation needs to be built. The first is counter-cyclicality, in order to correct the main market failure of banking and financial markets — their boom-bust nature. The key idea is that provisions and/or capital required should increase as risks are incurred, that is, when loans are disbursed. In this way, provisions and capital requirements should increase during periods of rapid credit growth and decrease when lending expands at slower rates. This would strengthen banks in boom times and discourage them then from excessive lending. It would also make it easier for them to continue lending in difficult times. It is encouraging that the Basle banking Committee has recognized this principle in broad terms.

The second key principle for modern, effective regulation should be comprehensiveness. Economic theory tells us that for regulation to be effective, the domain of the regulator has to be the same as the domain of the market to be regulated. There is need for comprehensive and equivalent transparency, as well as regulation of all financial activities, instruments, and actors. Both minimum liquidity and solvency requirements need to be regulated.

Ensuring enough demand globally and in developing countries is crucial to avoid a large recession in the near future. Appropriate regulation of the financial sector is key to avoid future costly crises. Both tasks are difficult, but essential.

9 comments

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Absolutely the sooneer that IMF, World Bank, etc is closed down the better. All these lending organization do is to keep proping up corrupt governments, as the evidence has fully proven such, yes living and operating more and more on borrowed time. With the USA the top crook of all of them, while not borrowing perhaps from these organization, but borrowing and actually proping up more and more the Communist Government that of China, and ending up financing one of America’s most formidable military thread as a “bonus” for the USA. Even right now America is on its knees begging Communist China to keep lending to America for the purpose to pull America out of the deepest and corrupt pit ever. I would not mind hearing from you? These words to support my contention:
“The principle of spending money to be paid by posteritty
in the name of funding, is but swindling futurity on a large scale”. By Thomas Jefferson. Yes, these organizations of which IMF is one of them, all they are doing, is providing for more and more misery the world over. Again, is the evidence not there? Now over a billion people in the world go hungry and millions die a year of hunger and disease.

Posted by H. D. Schmidt | Report as abusive

What is now happening in the financial world fronts the ridiculous! People with common sense are outraged by the action of some Governments. What happens simply defies logic but it also shows that corruption can reign freely at the highest levels of our societies. Capitalist greed has stumbled upon itself and most Governments from the Western world are all running to pick it up, again. They would all love to see the return of the “Growth King”. No one seems to pay much attention to the coming destruction of people’s savings due to the rampant inflation to come in countries like US, UK, etc… And all this happens in the name of saving the biggest crooks of all time.

The current global crisis is only a year or so old as told by economic pundits. The crisis has been unfolding for forty years for the poor and underdeveloped regions of the world. With no fixed exchange rate on currencies, debt issued through IMF or the World Bank is nothing less than oppression. For decades the poor of the world have not been fairly paid for that which they provide the wealthy. We have undermined the prospects for future employment at home for our children in exchange for these under priced goods.

There are always consequences to our actions. Humans don’t consider future consequences to present actions very well. This is probably our greatest failing. As economic collapse appears to be imminent, maybe this leveling of the playing field through suffering by all will create some much needed empathy for our brothers and sisters around the world. Perhaps then humanity will awaken.

Posted by Anubis | Report as abusive

It is time the G20 stop negotiating international economic rules to benefit themselves. The wealthy nations of the world have only sought to enrich them selves by stealing from the poor nations. Financial arrangements imposed upon those who have no say amounts to colonialism without occupation.

Empire is self defeating. History is replete with examples. The last global economic collapse lead to World War Two. This is the fate of Empires. Unfortunately it is all of humanity and not political leaders who pay the cost for these man made catastrophes.

Posted by A | Report as abusive

Jesus of Nazereth asks “Is it not better to teach a man to fish than give him one?”. Unfortunately the fish are gone. The rivers and land are drying up. How does any kind of lending or trade arrangement dictated by the G20 mitigate or help to avert famine and drought?

Posted by Anubis | Report as abusive

Editor, Please use this corrected version:

A helping hand is necessary to most developing nations, during this time of distress-but what about Countries that are corrupt, lack adequate data standards, transparency and use of funds for quasi military purposes?

Case in point is Sri Lanka.

Just last year Human Rights Watch condemned the attack on Transparency International Director of Sri Lanka who was working on several Sri Lanka graft related matters. Sri Lanka is in the midst of a ‘genocidal war’, uprooting Tamil civilians from their habitat and moving them into ‘internment camps’. IMF need not be funding a country such as Sri Lanka, who has been pursuing a military solution for a political matter and thereby exacerbated the economic crisis situation.

Any funding to Sri Lanka could be just earmarked as for China, Iran and Pakistan, as they are the sources of Sri Lanka’s military procurements.

Posted by No to corrupt states | Report as abusive

The post by no to corrupt states above is right on the money (pun intended). IMF is in Srilanka negotiating $1.9B loan to the government. Note that the government kicked out IMF out of the country not so long ago. Srilankan government spends a very large percentage of its GDP on killing its minorities and suppressing free press. After wasting its money buying war planes and cluster bombs to kills its own citizens, the Srilankan government wants IMF to bail them out so they can continue war crimes. This time, the money is not going to end up back in the pockets of the arms dealers in the western countries, it will be in the hands of China, Iran and Pakistan. Since we are borrowing from the Chinese, I guess the money will indeed make its way back to US. When are we going to stop bailing out corrupt organizations and governments?

Posted by Milthi | Report as abusive

Why Sri Lankan government is ragging the war?? Because war is a money making business for sri lankan politician, for an example current president’s brother Gotabaya was a IT professional in U.S, quit his job and went Sri Lanka to take a job as sri lankan secretary of defense why? Money making opportunity knocked his door and took that chance (before he was in military couldn’t make a good life and went to US for better life then he return to Sri Lanka for to support the war make more wealth for him)
Where is Sri Lanka buying their Arms? Pakistan, China, Iran, Russia and India and
Using all the arms for genocidal” war against the Tamils.
Because No Democracy or Justice in the Island of Sri Lanka. No Media Freedom Killing Reporters attacks against TV Radio Stations Abducting people who make voice against Government action also blocking the international independent watch group to enter the War torn area Condemning UN reports against the S.L government.

The last IMF facility was a 567-million-dollar loan given in April 2003 to support the government’s 2003-2006 economic program. The first trance of 81 million dollars was immediately received but the loan was suspended in November 2003 (Where did they spend?)
Where is the Tsunami Funds and Development?
When the IMF I going to give us USD 1.9 billion
These are not my word out of my mouth all came from President Melinda’s mouth

Sri Lanka will not accept any conditions on a loan from the International Monetary Fund (IMF), the island\’s president has said (BBC Tuesday, 17 March 2009)
In Sri Lanka Famous for bribery corruption for an example if you want to get birth certificate of passport you need to birbe the officeial get done fast

Sinhala Governments in Sri Lanka is running a (little North Korea and Iran) Bully Kingdom, and looking for help from the Western World and refuse to listen the regulation by the World such as UN, World Bank and IMF

That\’s the way we want it. Simple answer; No media freedom in Sri Lanka – SBS Australia
http://vodpod.com/watch/1462325-sri-lank as-war-on-tamils-hunting-the-tigers-by-s bs-
You can see Gotapaya;s words

It’s funny the G20 today has decided to give the IMF some $1 trillion. I guarantee all that money will be used to repress small developing countries. They also want to eliminate all bank secrecy. Sounds like a power grab and something straight from the NWO conspiracy theory.

Posted by Eldon Lopes | Report as abusive