How real are reforms to the 'international financial architecture'?
Since the world economic crisis of 1997-98, the leaders of the world's most powerful nations have been working furiously on plans to "strengthen the architecture of the international financial system". But after their latest meeting, the Group of Seven plus Russia summit in Okinawa from July 21-23, they were keeping their cards close to their chests.
Even though the G7 finance ministers submitted their latest report and recommendations on the subject on July 8, the G8 heads of state chose not to reveal their new decisions on the matter in their July 23 official communique.
The G7 governments (the US, Germany, Japan, France, Britain, Canada and Italy) will likely unveil their further reforms of the international financial architecture at the annual meetings of the International Monetary Fund (IMF) and the World Bank in Prague in September or at the Group of 20s October summit in Montreal.
In a effort to improve their image, the imperialist powers have stepped up propaganda efforts to make their institutions and policies seem more people-friendly.
But the "reforms" are also a response to their own very real fears about the instability of their system. Proposals so far have sought to fine tune the world economic engine, while simultaneously reinforcing its gross inequalities.
Tools galore
The main G7 reaction to the latest round of economic crisis has been to reshuffle the institutions currently charged with policing the international financial system, and to multiply their number considerably.
In April 1998, shortly before the economic crisis spread from Asia to Russia and Brazil, a new grouping of 22 countries was formed, under the apparently unilateral initiative of US President Bill Clinton, with the aim of reviewing the international financial architecture. Australia and 14 Third World countries were handpicked to join the G7 countries as members but the grouping has done little to date.
Then, in February 1999, the G7 itself created the Financial Stability Forum (FSF), with the express responsibility to take a long, hard look at the international financial system.
The FSF is a high-level technical body, comprising representatives of the IMF, World Bank, the International Organisation of Securities Commissions (IOSCO) and all the other international financial regulatory bodies.
It quickly formed working groups to devise potential new rules on highly leveraged institutions, capital controls and offshore financial centres — the key weak spots of the international system. Since March 1999, the FSF has put forward proposals for new rules for these three areas, as well as for the area of deposit insurance.
The G7 has welcomed its key proposals, some of which are expected to be implemented by the IMF and other multilateral financial institutions in the coming months.
Then, in September, the G7 formed another group, the G20, "as a new mechanism for informal dialogue in the framework of the Bretton Woods institutional system [which comprises the IMF, World Bank and World Trade Organisation], to broaden the dialogue on key economic and financial policy issues among systematically significant economies and to promote cooperation to achieve stable and sustainable world growth that benefits all".
The G20 "systematically significant economies", which together account for 87% of the world gross domestic product, are the G7, Argentina, Australia, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey. Two seats remained unfilled but are possibly being kept for Indonesia, Malaysia or Thailand.
The G20 held its first summit in Berlin in December, with representatives of the European Union, the IMF and World Bank present as special invitees. How much the non-G7 countries will be able to push their agenda within the G20 remains unclear but it has been suggested that the G20 will deal with policy issues and help co-ordinate the activities of other international bodies, such as the FSF.
Previous panics
The last wave of forming new bodies to "regulate" the international financial system took place in the early 1970s. The post-war global currency order was dealt a blow in 1971 when the US withdrew its guarantee to back its dollar with gold on demand, reinforcing the dollar's role as the prime currency of international payment, trade and reserves. Overcapacity, meanwhile, pulled most economies into a recession in 1973.
The G7's own formation in 1975 was part of that wave, which also included the formation of the Basle Committee on Banking Regulations and Supervisory Practices and the Inter-American Association of Securities Commissions and Similar Organizations (which expanded into the IOSCO in 1984). They joined the existing Bank of International Settlements (BIS, the "central bank of central banks") and the G10 Central Bank Governors.
Nearly all these institutions are based substantially, if not entirely, in Basle, Switzerland. The Swiss city has since become the home to even more international financial watchdog bodies, including BIS Committee on Payment and Settlement Systems and the International Association of Insurance Supervisors.
New financial watchdogs kept being formed, as the complexity of the capitalist system increased and, more importantly, as economies ran into trouble.
For most of the last 30 years, all these bodies mainly stuck to their own particular patch of concerns, securities for instance. Lately that's changed: now they're being asked to serve as advisors on the economic stability of the entire system. All hands are on deck to save the sinking system.
Apart from being core members of the FSF, these Basle bodies are now at the active service of the World Bank and the IMF, who seem to need all the help they can get. Both have long accumulated notoriety for forcing poor countries to swallow suicidal austerity and "market opening" measures in exchange for much-needed loans but they have never been as challenged as are now.
While there are no signs that these two institutions will be scrapped, they have been subjected to unprecedented scrutiny, including a humiliating audit of the IMF by an external party in 1999.
Their primary roles — officially to maintain macro-economic stability (the IMF) and reduce poverty (World Bank) — have also been put under formal review. While affirming that they should retain their prime (nominal) "operational areas", the G7 urged the IMF in an April 15 statement to "integrate" its efforts with those of the World Bank to reduce poverty.
Tightening the noose
The extensive scrutiny of IMF operations since the 1997-98 crisis has resulted in new measures. A myriad of new guidelines, standards and internal procedures have been drawn up, with the promise of real reforms to the international financial architecture.
Rather than helping to reduce global injustice between the poor and rich countries, however, the measures revealed so far will only tighten the noose around the neck of the Third World.
For example, the IMF is now required to reveal the specific basis on which its regular assessments of member economies are made. In the interests of greater "transparency", members are also "encouraged" to "voluntarily" make such assessments public.
Member countries' financial sectors will thus come under extensive and regular scrutiny to test their vulnerability — the IMF formed a Financial Sector Liaison Committee with the World Bank in April 1999 to perform this task.
Such assessments are still in the pilot stage but member countries have been asked to submit a far more detailed profile of key, hitherto sensitive information about their economies (in particular, their external debt and reserve levels).
There is no doubt at all what a "timely" release of such data would do to a vulnerable economy. While this information helps the IMF's monitoring, it also helps the speculators, who are increasingly active in cornering one currency after another.
The fact that the external positions of many Third World economies are often precarious is not news. Victims of centuries of colonial and imperialist plunder, many have been left with devastated and lopsided economies.
Often with not much more than a few cash crops, natural resources or labour to sell for essential imports, many such countries face a near-perpetual deficit in international payments which, in the face of shrinking reserves, is plugged by external borrowing.
But this deep and common problem — of the Third World's structural dependence on the imperialist centres — is not the "instability" that the IMF is being tooled up to fix.
The aim of the present reforms to the IMF is rather to help it eradicate "temporary imbalances" in debtor countries' international payments. Under this glossy excuse, the IMF will continue to impose structural adjustment policies which lock the Third World ever more firmly into the margins of the global order — the very opposite of the policies the poor countries need.
Wake-up call
Apart from the 1989 formation of a task force to deal with money laundering, the G7 had not concerned itself with such financial matters until the 1994-95 crisis of the Mexican peso. It stressed initially little more than the need for an early warning system but after the 1997-98 economic explosion it swung into more emergency action.
Its motivations were not simply financial; they were also political.
At the same time, the G77 grouping of Third World countries, which began in the 1960s and whose membership is now more than 100, started putting forward its own proposed restructuring of the global financial architecture, proposals which would favour its interests, including the outright cancellation of the unsustainable debt of Third World countries.
Though it met regularly by piggybacking on UN gatherings, the G77 had never called its own summit until its April meeting in Havana. Despite some of its members also being members of the G20, the G77 has agreed to find new means to defend Third World interests and to function as a stronger, more united body.
The G7's hurry is also prompted by the growing people's movement in many parts of the world, which is targeting the various burning problems which arise from imperialism.
The imperialist powers' planned reforms, however, are doomed to fail. No amount of tinkering with the "international financial architecture" will stabilise an economic system which is inherently crisis-prone, nor will it bring lasting benefits to the Third World and the mass of the world's people. Such goals await the total replacement of the capitalist production system.
BY EVA CHENG