Today, the world media are awash with talk about reform of the global financial architecture. However, the published reports focus mainly on discussions taking place within the Group of 7 or the larger Group of 22, particularly on the debate between the finance authorities of the United States and those of Europe and Japan. Sometimes, there are reports that come out on proposals from the United Nations Conference on Trade and Development (UNCTAD) or from some government in the South. But little weight is attached to the latter by media commentators, even when substantively these views merit consideration.

     Of course, if one is a Jeffrey Sachs or a Paul Krugman, one’s views are given some currency. But if you are not a neoclassical economist, forget it. And if you come from the world of NGOs, your views don’t count at all.
This is interesting because when it comes to global trade, Bill Clinton, Charlene Barshefsky (US Trade Representative), and Renato Ruggiero (WTO Director General) talk about consulting civil society and about actively and democratically involving all of us in the globalization process. But when it comes to the world of high finance, these are matters of allegedly great complexity that are best left to the experts and the managers of the world economy like the experts’ group of the Group of 22 countries handpicked by Washington. Or better yet, leave everything to Alan Greenspan, Robert Rubin, and Larry Summers, whom Time has anointed as the “Committee of Three to Save the World”. Though if you ask me, they may be better described as the Four Horsemen of the Apocalypse if you include Stanley Fischer, their man at the International Monetary Fund.


Gatecrashing the party

     We need to gatecrash this exclusive party talking about the financial order of the world for several reasons.

     First, because those who are actively debating this issue are, for the most part, still arguing within a paradigm of neoliberal economics that has been central to generating this crisis.

     Second, because devising a global financial order is not simply a matter of technical economics but one that must be informed by values, and the main values and priorities of those who are managing this process are different from those of you and me.

     Third, because this process is, first and foremost, a question of power, and unless we do our best to gatecrash this gathering, what will emerge will simply be a global architecture that will benefit a very small global elite and continue to marginalize the vast majority of the world’s peoples.

     There are now a thousand and one proposals for world financial reform, ranging from suggestions for preemptive crisis mechanisms to recommendations for the reforms of the International Monetary Fund to several proposals for establishment of a “World Financial Authority”. Rather than reviewing them in technical fashion, let me instead group the most important recommendations into the following three different perspectives.


It’s the Wiring, Not the Architecture

     One might say that this is basically the US position – thought it is shared to some degree by many of the G-7 members, with probably the notable exception of Japan. The basic idea is that the current architecture is sound, there is no need for major reforms, and it’s simply a question of improving the wiring of the system.

    This school assigns primacy to “reforming” the financial sectors of the crisis economies along the lines of more transparency, tougher bankruptcy laws to eliminate moral hazard, prudential regulation using the “Core Principles” drafted by the Basle Committee on Banking Supervision, and greater inflow of foreign capital not only to recapitalize shattered banks but also to “stabilize” the local financial system by making foreign interests integral to it.
When it comes to the supply-side actors in the North, this perspective would lead them to voluntarily comply with the Basle Principles, though government intervention might be needed periodically to catch freefalling “casino players” whose collapse might bring down the whole global financial structure, as was the case last year when the US Federal Reserve organized a rescue of the hedge fund Long Term Capital Management after the latter was unravelled by Russia’s financial crisis.

     Finally, when it comes to the existing multilateral structure, this view supports the expansion of the powers of the IMF, proposing not only greater funding but also new credit lines, such as the “precautionary credit line” that would be made available to countries that are about to be subjected to speculative attack. Access to these funds would, however, be dependent on a country’s track record in terms of observing good macroeconomic fundamentals, as traditionally stipulated by the IMF.

     In sum, it seems fairly obvious that, especially given its priority of transforming developing country financial systems using Northern standards, one of the key objectives of this approach is to extend the reach and deepen the global hold of Northern finance capital in developing economies under the guise of reforming the global financial architecture and stabilizing global financial flows.


Back to the Bretton Woods System

     The second school of thought would put tougher controls at the global level, in the form of the Tobin tax or variants of it. In addition to controls at the national and international level, regional controls are also seen by proponents of this view as desirable and feasible. The Asian Monetary Fund (AMF) is regarded as an attractive, workable proposal that must be revived. The AMF was proposed by Japan at the height of the Asian financial crisis to serve as a pool of foreign exchange reserves of the reserve-rich Asian countries that would repell speculative attacks on Asian currencies. It was, not surprisingly, vetoed by Washington.

     The theme of these international, national and regional controls is partly to prevent destabilizing waves of capital entry and exit and to move investment inflow from short-term portfolio investment and short-term loans to long-term direct investment and long-term loans.

     When it comes to the World Bank, the IMF, and the WTO (World Trade Organization), the thrust of this school is to reform these institutions along the lines of greater accountability, less doctrinal push for free trade and capital account liberalization, and greater voting power for developing countries. Advocates of this approach view the IMF as a mechanism to infuse greater liquidity into economies in crisis, but unlike the G-7, they would have the IMF do this without the tight conditionalities that now accompany its emergency lending. Some people in this school accompany their proposals to reform the Bank and IMF with a recommendation to establish a “World Financial Authority” whose main task would be to develop and impose regulations on global capital flows.

     In other words, the IMF, World Bank and WTO continue to be seen as central institutions of a world regulatory regime, but they must be made to move away from imposing one common model of trade and investment on all countries. Instead, they must provide a framework for more discriminate global integration, that would allow greater trade and investment flows but also allow space for national differences in the organization of global capitalism.
Not surprisingly, this “Global Keynesian” perspective has resonated well with economists and technocrats from developing countries, the devastated Asian economies, and the UN system – which is well known as a refuge of Keynesians who fled the neoliberal revolution at the World Bank and academic institutions.


It’s the Development Model, Stupid

     Those belonging to this school regard the IMF and WTO, in particular, as Jurassic institutions that would be impossible to reform both owing to their deep neoliberal indoctrination and the hegemonic influence within them of the United States. Indeed, the world would be better off without them since they serve as the lynchpin of a hegemonic international system that systematically marginalizes the South.

    The same skepticism marks their view on the possibility of imposing global capital controls or prudential regulations on hedge funds and other big casino players, again because of the strength of neoliberal ideology and financial interests.

     National capital controls are seen as much more promising, and the experiences of China and India in avoiding the financial crisis, of Chile in regulating capital flows, and Malaysia in stabilizing its economy have convinced proponents of this view that this is the way to go. Like the Global Keynesians, this school would also see regional arrangements such as the Asian Monetary Fund as feasible and workable.

     Where the proponents of this view differ from the Global Keynesians is the fact that their advocacy of capital controls is accompanied by a more fundamental and thorough critique of the process of globalization that goes beyond its blasting away legitimate differences among national capitalisms. Buffering an economy from the volatility of speculative capital is an important rationale for capital controls, but even more critical is the consideration that such measures would be a sine qua non for a fundamental reorientation of an economy toward a more inner-directed pattern of growth that would entail a reversal – though limited – of the globalization process.

     The main problem, from this viewpoint, lies not in the volatility of speculative capital, but in the way that the export sector and foreign capital have been institutionalized as the engines of these economies. The problem is the indiscriminate integration of the developing into the global economy and the overreliance on foreign investment, whether direct investment or portfolio investment, for development. Thus while the current crisis is wreaking havoc on peoples’ lives throughout the South, it also gives us the best opportunity in years to fundamentally revise our model and strategy of development.

In this process, it would be ideal to have a more congenial international financial architecture, but since that is not going to happen in the short and medium term, there are two overriding tasks in the area of international finance. The first is preventing the current efforts to reform the global financial architecture from becoming a project to more thoroughly surveil, penetrate and integrate the financial sectors of developing country economies into the global financial system controlled by the North. The second is to devise a set of effective capital control, trade controls, and regional cooperative arrangements that would “hold the ring” as it were to allow a process of internal economic transformation to take place with minimal disruption from external forces.


De-globalizing the Domestic Economy

     What are some of the priorities of what we might call a model of limited de-globalization of the domestic economy?

     While foreign investment of the right kind is important, growth must be financed principally from domestic savings and investment. This means good, progressive taxation systems. One of the key reasons for reliance on foreign credit and foreign investment was the elites of East Asia did not want to tax themselves to produce the needed investment capital to pursue their fast-track development strategies. Even in the depths of today’s crisis, conspicuous consumption continues to mark the behaviour of Asia’s elites, who also send so much of their wealth abroad to safe havens in Geneva, Tokyo, or New York. Regressive taxations systems are the norm in the region, where income taxpayers are but a handful and indirect taxes that cut into the resources of lower-income groups are the principal source of government expenditure.

     While export markets are important, they are too volatile to serve as reliable engines of growth. Development must be reoriented around the domestic market as the principal locomotive of growth. Along with the pitfalls of excessive reliance on foreign capital, the lessons of the crisis include the consequences of tremendous dependence of the region’s economies on export markets. This has led to extreme vulnerability to the vagaries of the global market and sparked the current self-defeating race to “export one’s way out of the crisis” through competitive devaluation of the currency. This move is but the latest and most desperate manifestation of the panacea of export-oriented development.

     Making the export market the engine of development, to use a distinctly unfashionable but unavoidable term, brings up the linkage between sustained growth and equity, for a Keynesian strategy of enlarging the local market to stimulate growth means increasing effective demand or bringing more consumers into the market via a comprehensive program of asset and income distribution, including land reform.

There is the unfinished social justice agenda of the progressive movement in Asia – an agenda that was marginalized by the regnant ideology of growth during the “miracle years”. Vast numbers of people remain marginalized because of grinding poverty, particularly in the countryside. Land and asset reform would simultaneously bring them into the market, empower them economically and politically, and create the conditions for social and political stability. Achieving economic sustainability based on a dynamic domestic market can no longer be divorced from issues of equity.

     Regionalism can become an invaluable adjunct to such a process of domestic market-driven growth, but only if both processes are guided not by a perspective of neoliberal integration that will only serve to swamp the region’s industries and agriculture by so-called “more efficient” third party producers, but by a vision of regional import-substitution and protected market-integration that gives the region’s producers the first opportunity to serving the region’s consumers.

     While there are other elements in the alternative development thinking taking place in the region, one universal theme is sustainable development. The centrality of ecological sustainability is said to be one of the hard lessons of the crisis. For the model of foreign-capital fuelled high-speed growth for foreign markets is leaving behind little that is of positive value.

     In place of 8-10% growth rates, many environmentalists are now talking of rates of 3-4% or even lower. This links the social agenda with the environmental agenda, for one reason for the push for high growth rates was so that the elites could corner a significant part of the growth while still allowing some growth to trickle down to the lower classes for the sake of social peace. The alternative – redistribution of social wealth - is clearly less acceptable to the ruling groups, but it is the key to a pattern of development that will eventually combine economic growth, political stability, and ecological sustainability.

     These and similar ideas are already being discussed actively throughout the region. What is still unclear, though, is how these elements will hang together. The new political economy may be embedded in religious or secular discourse and language. And its ultimate coherence is likely to rest less on considerations of narrow efficiency than on a stated ethical priority given to community solidarity and security. Moreover, the new economic order is unlikely to be imposed from above in Keynesian technocratic style, but is likely to be forged in social and political struggles.

     If this project of limited de-globalization of national financial structures is one that we find desirable, then the relevant task for those of us who are grappling with issues of international financial reform is twofold. The first is a defensive one of repelling attempts to more fully subjugate and integrate domestic financial systems into the global system under the guise of improving the global financial architecture. The other is devising a set of capital and border trade controls at both the regional and national level to allow this process of domestic economic reorientation to take place with minimum disruption from the forces that will be always waiting in the wings to suffocate such a project.



Walden Bello is Professor of Sociology and Public Administration at the University of the Philippines and co-director of Focus on the Global South, a research, analysis, and advocacy program of the Chulalongkorn University Social Research Institute in Bangkok.
Fax: 662-255-9976
Email: walden@csi.com.ph