The central problem in fostering global economic dialogue is that it is currently a “dialogue of the deaf”.
Unfortunately, global problems are mounting, and the problems are not just financial. The availability and pricing of resources is, as we have realized in recent years, of critical importance. Ideally, such resources would be produced and allocated by a free market to which everyone has access. Unfortunately, government action distorts the market. Decisions by small groups of countries on issues ranging from promoting biofuels to restricting investment in, or production of oil, have enormous impact. As other countries try and adopt strategies that shield them from shocks, everyone’s access to resources is impaired.
Similarly, even though the world may have learnt the dangers of beggar-thy-neighbour strategies in trade, echoes are still seen in cross-border investment. More barriers are being contemplated in industrial countries to investment from emerging markets. Old barriers, under the guise of promoting domestic stability and security, also exist—all this while emerging markets have historically been exhorted to reduce their barriers to investment, and in some cases are doing so. It is important that we start a global dialogue on the admissible rules of the game in cross-border investment.
Finally, global financial integration, while helpful, has increased the size of the shocks that countries are subject to, especially when private capital seizes up. The size of resources available to institutions such as the International Monetary Fund (IMF) has not kept pace with the size of potential shocks and the needs of large emerging markets.
Governance and the availability of emergency finance are key issues and progress on these, which may be initiated by the international conference on Saturday, would be very beneficial.
There is clearly a need for better international dialogue, facilitated by an impartial secretariat that lays the issues on the table. There is merit in having only a few key participants so that there is dialogue and not a formulaic restatement of positions.
—The Group of Seven is probably too small?and unrepresentative;
—The Group of Twenty (G-20) is probably at the limit of what might work but, unfortunately, is still unrepresentative.
One change that would help make such a group feasible is to have a single seat for the European Union (EU). The non-EU countries in the G-20 plus the EU would make 16, to which could be added four countries on a rotating basis, or based on topic. Let us call this the G-20+ in what follows.
The obvious secretariat is IMF. Unfortunately, IMF suffers the burden of history, and its objectives and governance are still not sufficiently transparent so as to make it widely trusted by emerging markets. Important reforms are needed at IMF, including: 1) Broadening its mandate beyond exchange rate surveillance, which tends to put only emerging markets under scrutiny. 2) Making the Fund self-financing so that it does not have to keep going back to key shareholders (which effectively gives them a veto over IMF activities). 3) Eliminating any country’s official veto power over major decisions. 4) Making the choice of management transparent and nationality-neutral, and 5) Allowing IMF’s agenda to be set by the more representative G-20+.
Even while these changes are in train, there is merit in beefing up IMF’s global surveillance unit, and perhaps allowing it to report directly to the G-20+, and to the IMFC (International Monetary and Financial Committee), without its opinions being heavily edited and filtered by IMF’s board of governors. IMF’s multilateral surveillance should focus more sharply on emerging risks—this involves strengthening macrofinancial analysis and early warning systems. Also the G-20+ should focus on the identification of remedies when serious risks are diagnosed—here early coordination with other policymaking and advisory agencies would help.
IMF has an aggregate lending capacity of about $250 billion, probably sufficient if a number of small countries are in trouble, but insufficient if a couple of large countries face problems. If the multilateral system does not have adequate firepower, countries will have to rely on bilateral arrangements, with all the difficulties that it entails.
The resources at IMF’s command, disbursable through light-conditionality facilities such as the new short-term liquidity facility should be multiplied by an order of magnitude. One possibility is to expand IMF’s arrangements to borrow from countries with large reserves, or from financial markets. In order to limit the liability of member countries, while at the same time bringing transparency to the process, the current quotas of member countries could be treated as the equity capital backing the borrowing. This is simply a formalization of the loss-sharing arrangement that currently exists.
At normal, financial institution leverage ratios of 10:1, IMF could borrow up to 10 times member quotas of $340 billion. Even if it maintains leverage at more conservative levels of 5 or 6:1, this will be a sizeable expansion of potential fund resources to about $2 trillion, enough to deal with most eventualities. Ideally, this capacity would never be tapped, but it is important to create it.
The author is Eric J Gleacher distinguished service professor of finance at the University of Chicago’s Graduate School of Business
Edited excerpts. Published with permission from VoxEU.org. Comments are welcome at email@example.com