CGD policy experts are urging the International Monetary Fund to push for the inclusion of emerging market and developing countries in the re-write of bank supervision guidelines and other international financial rules that they say is likely to happen soon as a result of the global financial crisis.
“The IMF no longer has the financial heft to act as a lender of last resort,” said CGD president Nancy Birdsall. “But the IMF does have a key role to play in managing today’s crisis. Its leadership can help to restore confidence in the global financial system by insisting that China, Brazil, and other emerging market economies have a voice in rewriting international financial rules,” she said.
Birdsall said she welcomed World Bank president Robert Zoellick’s announcement Monday that he is creating a high-level commission to look into modernizing the governance of the World Bank Group, a step that a CGD working group on the future of the World Bank urged in 2005. She also voiced support for his call to replace the G7 with a new 14-member “Steering Group” that would include Brazil, China, India, Mexico, Russia, Saudi Arabia, and South Africa in addition to the current G7 members.
“Bob Zoellick seems to have taken advantage of the opportunity presented by the unsettled global economic situation and a lame duck U.S. president to open the way for overdue reform of the World Bank to give developing countries greater voice,” she said. “He’s right: more fully engaging rising Asia and other emerging markets at the bank will strengthen the bank’s role in solving urgent global problems. I hope that the leadership of the IMF will follow suit and find ways to ensure that China, India and other key countries are at the table during the re-write of global financial rules.”
Zoellick’s announcement came as the financial crisis that began with the sub-prime mortgage meltdown in the United States spread to Europe and rattled markets in Asia. CGD experts have warned that the crisis will have profound implications for developing countries.
The crisis will be topic number one when finance ministers from around the world convene in Washington this week for the annual meetings of the two Bretton Woods institutions, so-called because they were conceived at a conference in Bretton Woods, New Hampshire, in the waning days of World War II as collective means of avoiding a repeat of the Great Depression. A growing number of economists warn that the unfolding crisis could lead to the worst recession since the 1930s, yet analysts agree that neither institution has the means to avert a severe global downturn with harsh consequences for the world’s poor.
“Developing countries will be badly hurt by this crisis, yet they have had almost no role in shaping the global financial rules that fostered it,” said CGD senior fellow Liliana Rojas-Suarez, a financial economist who has held senior research positions on Wall Street and at the Inter-American Development Bank and the IMF.
Rojas-Suarez said that the IMF should push for developing countries to become active participants in the Financial Stability Forum, (FSF) which coordinates international standards and codes to strengthen financial systems. Membership is limited to a handful of high-income countries and to international financial institutions, including the IMF and the World Bank.
Another important body dominated by the high-income countries is the Basel Committee on Banking Supervision (BCBS), which issues recommendations on banks' capital adequacy requirements, most recently through the Basel II Accord. While the BCBS conducts consultations that include developing countries, rich countries make the decisions. Developing countries have long argued that these bodies fail to address their needs and concerns.
Rojas-Suarez said that she hoped that during the meetings this week IMF Managing Director Dominique Strauss-Kahn would “seize this opportunity to take leadership in the design of a system of global financial regulation that is strong yet flexible enough to meet the needs of countries with very different circumstances.”
Nora Lustig, a CGD board member and development economist who has written extensively on the poverty impacts of financial crises, and who has held senior positions in UNDP, the World Bank and the Inter-American Development Bank, said that both the IMF and the World Bank need to prepare to help developing countries cope with the effects of lower growth on their fiscal and balance of payments accounts, while the World Bank will need to focus on helping countries buffer the negative impact of the crisis on poor people.
“This may entail helping countries in designing and implementing safety net programs or expanding them where they already exist,” she said. “In the poorest countries, it may mean providing financial support to the safety net programs in the form of grants or low cost loans.”
If the global downturn proves to be deep and long lasting, the IMF and the World Bank “may have to go back to their 20th Century role of providing credit to countries that have no access to the international private capital markets,” Lustig said. “While this may not happen to middle-income countries as it did in the 1980s, the countries that are most vulnerable and least attractive to foreign investment will find it hard to access global capital markets.”
By Lawrence MacDonald, CGD director of communications and policy