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United Nations as a Forum for Reform of Global Institutions

The current global crisis has revealed, if indeed evidence was needed, that the governance of international financial institutions is badly in need of overhaul. However, the G-20 meeting on 15 November is not the forum for any quick-fix solutions. The United Nations review in Doha, Qatar, of the Financing for Development process, scheduled for early December, provides a more meaningful opportunity to begin the process for an inclusive and substantive reform. The world cannot afford to lose yet another opportunity for overhaul, which must proceed in a step-by-step manner.

COMMENTARYEconomic & Political Weekly EPW November 8, 200815United Nations as a Forum for Reform of Global InstitutionsBarry HermanThe current global crisis has revealed, if indeed evidence was needed, that the governance of international financial institutions is badly in need of overhaul. However, theG-20 meeting on 15 November is not the forum for any quick-fix solutions. The United Nations review in Doha, Qatar, of the Financing for Development process, scheduled for early December, provides a more meaningful opportunity to begin the process for an inclusive and substantive reform. The world cannot afford to lose yet another opportunity for overhaul,which must proceed in a step-by-step manner.Aset of distinct global institutions governs the international eco- nomic system: the World Trade Organisation (WTO), the International Monetary Fund (IMF), and the World Bank. Eachhasits specialty, and they are comple-mentedby a number of even more special-isedinstitutions with more restricted mem-bership, such as the Bank for International Settlements and the Organisation for Eco-nomic Cooperation and Development. Each institution is aware of the others, but none is responsible for the overall coherence of their various policies, let alone the achievement of overarching in-ternational objectives. One might think the United Nations (UN) should play that role,but it does not. Yet, evidence from theUN-led discussions that produced the “Monterrey Consensus” at the Financing for Development (FFD) conference in 2002 suggests it could. Sometimes the UN convokes treaty negotiations on economic affairs on matters not already within the mandate of the other institutions, such as the Law of the Sea and the Convention against Corruption. On most international economic and financial issues, however, the UN serves at best as a discussion forum. Mostly, it spins diplo-matic wheels to adopt mild resolutions on international policy norms to which national and international decision-makers pay no attention. For a brief moment, Monterrey was something different. It showed what is possible. Yet, the moment slipped away in ensuing years and would have to be recreated almost anew. It is worth trying.Another forum, the Group of 7 or the G-7 (comprising Canada, France, Germany, Italy, Japan, the United Kingdom and United States), has provided the main means to bring whatever measure of coherence there is among the international institu-tions dealing with trade and financial policy. Since 1976, the G-7 countries have met annually at summit level, and semi-annually (or as needed) at finance minister level. When the G-7 reaches a consensus, it is generally adopted and implemented by one or more of the relevant global insti-tutions, which the club has been able to control. Today, this is breaking down.While the G-7 has been the standing forum for decision-making on global eco-nomic policy reform, it has been somewhat flexible in its membership. After the break-up of the Soviet Union, the G-7 began to hold post-summit meetings with the Russian Federation, and then Russia was invited into the club in 1997, creating theG-8. Similarly, the heads of state of the G-8 have invited groups of developing country leaders to meet with them on the fringes of their summits. In 2007, the G-8 formulated a more permanent outreach project, the Heiligendamm Process. Under Germany’s leadership, they brought the governments of Brazil, China, India, Mexico, and South Africa closer to their fold as the “Outreach 5” (O-5), at least for a two-year trial period of discussions on economic policy matters of mutual concern: investment, research and innovation, development (particularly Africa), and energy efficiency to combat CO2 emissions. And yet, on 15 November, the United States will host a summit meeting, not of the G-7, G-8 orG-13 (G-8+O-5), but the “G-20”. This grouping adds Argentina, Australia, Indonesia, South Korea, Saudi Arabia and Turkey to the G-13 (representa-tion of the European Union (EU) brings the number of leaders to 20). The G-20 has existed as a discussion body for the selected finance ministers and central bank governors since 1999, when after experimenting with different configurations of countries, the G-7 settled on these 20. Although the former prime minister of Canada, Paul Martin, had proposed some years ago that the G-20 meet at “leaders” level, that idea did not gain any political traction, until just now.What happened? The answer seems to lie in intra-G-7 politics. President Nicolas Sarkozy of France had proposed at the UN on 23 September that theG-8 become the G-13 orG-14 at its 2009 summit in Italy. But he was not willing to wait that long for An earlier version of the article appeared in Policy Innovations, Carnegie Council for Ethics in International Affairs, 6 May 2008.Barry Herman (hermanb@newschool.edu) is visiting senior fellow, The New School, New York.

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COMMENTARYNovember 8, 2008 EPW Economic & Political Weekly18Microsoft repeat of April 12
COMMENTARYEconomic & Political Weekly EPW November 8, 200819Ghosts in the CorridorK SubramanianThe Liquidity Adjustment Facility (LAF), otherwise known as the liquidity corridor, has thus far pro-vided safe passage for growth and finan-cial stability of the Indian economy. It has evolved over the years and the latest version has been in place since 2004.The LAF has received global acclaim. Y V Reddy, the previous governor of the Reserve Bank of India (RBI), has eloquently and persuasively set out in several of his speeches and articles how theLAF was calibrated over the years. He has explained how it reconciles conflicting objectives even when confronting the “Impossible Trinity”. Even a year after the financial turmoil broke out, the LAF was managed deftly and guarded against “tail risks”. The concerns of the RBI have been macro-economic and it has kept in view the needto withstand tightening financing conditions abroad.TheRBI’s record of monetary manage-ment has led to false comfort among many. Politicians and ministers repeat ad nauseam the cliché how our banks are safe and insulated from the crisis. The banks are indeed safe; but, unwittingly, the real economy is feeling the pain. Banks are safe as foreign capital was kept out of them as a measure of policy and no credit is given to the Left partners who had re-sisted the efforts of the “reformers”. Sadly, foreign capital has entered other sectors through other ways in high volumes. With the onset of the crisis, especially since January this year, the economy is grap-pling with the second and third order effects of those flows, especially when they have begun to flee from the country.October has been the cruellest month when the ripples have been the most pow-erful. The Governor of the RBI, D Subba Rao, has described it as “an inferno”. There was a sudden liquidity collapse threatening to run the economy aground.The RBI took extraordinary measures such as to reduce the cash reserve ratio (CRR) by 1.5% in less than a week, a step it had not done any time in its history. It pro-vided liquidity of the order of Rs 135,000 crore. It relaxed norms for the external commercial borrowings (ECBs). Again, un-expectedly, on 20 October, it reduced the repo rate by 1% even though the mid-term review was due four days late. In making these efforts, theRBI seems to mimic the United States Federal Reserve.These measures did suggest panic and theRBI going out of the way to assuage the markets. The mid-term review narrated, rather blandly, the circumstances attached to those steps. One of the triggers was the precipitous fall in the stock values which took the BSE index well below 10,000; and the other was the call rate crossing 23%. The stock market responded with ferocity and beat the World Bank, and WTO, plus representa-tives ofUN agencies, members of civil society, and private sector organisations. It would provide the opportunity for a holistic and serious cross-ministerial, cross-institutional, public and private sector discussion of global economic and financial concerns. A form of the Galvez idea was endorsed by the Rio Group of 20 Latin American countries, although in a proposal that was too elaborate and precise to win consen-sus support. The question now, as time is short, is to figure out if a working group somehow convoked by the UN with the collaboration of IMF, the World Bank and WTO, and in consultation with official and non-governmental stakeholders, could be charged to draft a proposal for considera-tion in early 2009. In fact, the draft text of the Doha outcome document prepared by the Norwegian and EgyptianUN ambassadors as co-chairs of the prepara-tory discussions for Doha included the beginnings of such a proposal for a new international process. They did not speci-fy who would develop it, but proposed that it be discussed in the nextFFD meet-ing of the UN Economic and Social Coun-cil with the major international financial and trade institutions, due to take place in April 2009. As October ended, the views of govern-ments were far apart on the follow-up pro-posal and it is not clear how close they can come to a consensus in the time remain-ing before going to Doha. If they can come to an agreement, the world body can cre-ate a forum that allows all relevant stake-holders to make inputs, that allows small countries access to the discussions as well as big countries, that brings the leadership of the major international institutions into dialogue with their shareholders and cus-tomers in a way not possible in their own institutions when money or trade conces-sions may be held in the balance. I think they should try for it.K Subramanian (subrabhama@gmail.com) is a former official of the government of India who retired from the finance ministry.The shadow of foreign capital, which in recent years has driven the stock market, investment in the private corporate sector and the financial sector in general in India, now hangs over the economy. The exit of foreign capital and the drying up of external funds for the corporate sector have created a turbulence the Indian economy is not usedto.

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