Financial Architecture of the Post-Crisis World: Efficiency of Solutions
Paulo Roberto de Almeida
Post-Crisis World Institute Foundation
(http://eng.postcrisisworld.org/)
Research Director - Tatyana Overina
Coordinator - Michael Mizhinski
QUESTIONS TO EXPERT
Personal Information:
Full Name
Paulo Roberto de Almeida
Country
Brazil
Organization
Ministry of Foreign Affairs and University Center of Brasilia (UniCeub)
Position
Diplomat and Professor
1. How would you assess the results of the G-20 Summit that took place in London on April 1-2?
1.1. Were there any decisions made at G-20 Summit that can get the world economy out of crisis? Please specify if any.
The Global Plan for Recovery and Reform, signed by the G20 (financial) leaders in London, April 2nd, 2009, offers no recovery, and no reform at all. It’s just a political piece of rhetoric and wishful thinking.
The only and sole measure with practical effects was the raise in IMF’s resources to tackle emergency financial needs from some countries, which is, in fact, a post-crisis remedy, not a recovery structured plan. So much for the photo op.
1.2. What decisions taken at G-20 Summit can serve the interests of the new developing economies?
The most needed decision was not taken: resume multilateral trade negotiations and finish the Doha Round with real market access, and effective trade liberalization. Instead, we just had a vague promise of not increasing the already growing protectionism.
IMF extended resources do not serve developing countries interests: it’s just a support for moral hazard.
1.3. Would the decisions taken at G-20 Summit make the world financial system more transparent?
Not exactly: the promise to work on financial re-regulation has to be achieved through technical discussion at the appropriate forum or level: Financial Stability Forum and proper work by BIS committees.
Transparency is surely needed, but most probable is the creation of new bureaucratic regulations that will constrain the financial industry, diminishing opportunities for ‘good speculation’, so reducing prospects for growth and investment.
1.4 Would the decisions taken at G-20 Summit give the financial system a common clear set of rules?
No yet. Perhaps, this would come as a result from work in the appropriate fora, as stated above, but it’s unlikely that multilateral financial rules should emerge from that. Most probably, there will be only recommendations at international level, and implementation at national level by willing countries. In short, there will be no real progress on that chapter.
1.5. Are there any other results of the London Summit you would like to comment on?
The communiqué, in itself, is what the French would call a “voeux pieux”, that is, an ineffective wishful thinking. The tangible reality is the process of de-concentration of the world economy, with a consequent redistribution of power from the center towards emerging economies, but that is a reality that was already gaining ground without any crisis in perspective. Perhaps, the crisis will accelerate the trend, moving more financial muscles in the direction of the new actors. Already, among the top ten banks, are four big Chinese banks, which is new in the scenario.
2. How effective are the existing world institutions?
2.1. Today the world institutions evaluate various approaches in order to get the economy out of crisis. How would you assess the effectiveness of international institutions and discussion platforms where it concerns developing new approaches and ideas that may help to overcome the crisis and form a new world financial architecture (on the scale from 1 to 5):
UN 1
Davos Forum 2
G8 3
G20 3
EU 2
Other: OECD 2
2.2 How would you assess the possible contributions to overcoming the crisis and designing the future world system by some of the following institutions (on the scale from 1 to 5):
IMF 3
World Bank 2
Financial Stability Forum (FSF) 4
Bank for International Settlements (BIS) 4
Organization for Economic Co-operation and Development (OECD) 4
Other: Independent economic thin tanks in US and Europe 2
2.3. Can the IMF effectively dispose of the resources made available by G-20 (around USD 750 billions)?
Yes, she can, but that is a unwanted contribution to moral hazard. Even if she can’t, the central question is not availability of resources, but correction of unbalances and disequilibria, which should be assessed and tackled on market basis.
3. Please describe the current decision-making mechanism in the world financial system?
3.1. What [sic] countries have real means to promote their initiatives to change the global financial system?
Of course, the biggest economies, but the question, nowadays, is that small economies – let us say, like Belgium or Netherlands – have disproportionate decision making powers in IMF and World bank, and larger economies, emerging countries, have little. It is of course difficult to devise a new, more balanced approach to this matter, as world economy is a very dynamic system, with rapid changes in a five years time.
3.2. Please make a rating of three countries that have come up with interesting financial solutions? Are there any post Soviet countries that offer such solutions?
More flexible systems are desirable, and even if the USA has caused all this mess, I think that the American and British financial systems are most adapted to a modern economy. Crises are inevitable, and banks should be allowed to go bankrupt sometimes, to clear the mess and prepare the way for new entrants, more dynamic and innovative.
I don’t know enough about post Soviet countries to express an opinion on that.
3.3. Do you think that it is possible to come to breakthrough decisions in the world economy within G-20 format or such decisions will be developed and taken in some other formats?
Not really. Of course, G20 countries made up 80 per cent, or more, of the world economy, but it is unlikely that event those 20 countries could agree on a common platform to reform the current state of affairs, as this endeavor involves redistribution of power, and none of the leading countries would agree to their own rabaissement. Most probable, facts themselves should force the changes upon them.
3.4. Is there any need (by analogy with Breton-Wood where 45 countries have participated) to convene a new multi-state international conference that will have the authority to make key decisions?
No. Big conferences like Bretton Woods are only possible in moments of real and grave crises, with total disruption of existing mechanisms, like the depression of the 1930s and the WWII. There are no such events today, as the system continues to perform almost ‘normally’, with only a bigger crisis than the ‘usual’ crises of the system.
3.5. Please suggest some formats for designing a new financial architecture?
An ‘architecture’ is only possible if all players live and work under the same rules and patterns of financial activity, which is unlikely today. Multilateral financial institutions should only propose common standards for voluntary and gradual adherence by participants, like freedom for capital flows, absence of aggressive devaluations, fiscal responsibility and sound monetary policies. That will only be possible with growing integration of national economies. So the most reasonable recommendation should be an active promotion of globalization, in every sector of the world economy, but that is of course impossible, due to the huge unbalances and differing income levels among countries.
So, again, most developed partner should contribute to the elevation of standards of life of poor countries, not through development assistance as usual, but by trade liberalization, technical cooperation for educational investments, and some sanitation and health improvements in those countries. Of course, good governance is needed, and dictatorships and corrupt governments should be isolated and punished.
4. How do you see the world financial architecture of the future?
4.1. Is there a chance for the rise of the new financial centers in the world? What would be their scale? What are their regional, country and other niche specifics?
Of course, new financial center will emerge, of all kinds and geographical scopes. Some would be huge, as for instance in Sao Paulo, Brazil, in the future, some others will remain small in scope and trade, as in most African countries, but with the integration of the world economy, new centers will emerge to serve new peripheries, as the lore about the concentration in only a few markets is not tenable and realistic.
4.2. In your opinion, can the Russian Federation become one of those new financial centers? What is the potential for the Ruble’s international influence?
Perhaps, but it depends on the development of capitalism in Russia, as Lenin would say sometime ago. Nowadays, there is only a restricted and corrupted form of capitalism, with a strong, dirigiste, State, tending to autocratic or cesaristic leadership, which is of course a return to very old times. Russia has still to develop real capitalism and a proper functioning democratic system, not a façade of them. Ruble depends on a sound financial system, which is still wanting.
4.3. What other post soviet countries along with the Russian Federation can aspire to the financial center of the future status?
I’m not able to respond this question.
4.4. Please make a rating of three developing non-BRIC (Brazil, Russia, India, and China) countries that will have a bigger role in the world financial system. Are there any post soviet countries among them?
Perhaps Ukraine, but that will depend on its further integration into Europe and the world economy. Most probable Mexico, if it reforms itself, South Africa, and Indonesia, again with huge reforms in its financial and monetary policies. Among small countries, with limited impact on world economy, some of them already developed, I would count on Chile, Singapore, Taiwan and Abu Dabhi. South Korea is already a developed country.
5. Will there be any cardinal changes in the world currency system?
5.1. What are the perspectives of USD as the world reserve currency?
USD should continue to have an important role in the foreseeable future, but will have to share some role whit euro, yuan (already pound and yen), and perhaps the real, from Brazil. But that will take decades to unfold, more than fifty years…
5.2. What do you think would be the consequences of Yuan currency expansion in the world trade as China makes a move towards it?
Yuan will surely grow in strength and value itself vis-à-vis the USD, euro and other currencies. It will probably gain more value than the ruble, the rupie and the real, many times more. That is inevitable. With more power come more responsibilities: it should be made convertible, and China will be a lender to other countries, which it is already in a moderate way.
5.3. Kazakhstan, China, Russia and South Korea have called for the establishment of the new world currency. What do you think about such an idea?
Not easy, or simpler said than done. A new world currency has to respond to the traditional roles of a national currency – measure of value, exchange and reserve functions – and enjoy trust and credibility. That is not easy for any national currency to perform, it depends on the success of a responsible economy, and none of current players are capable of that nowadays, not even the US (well, we act on the basis of the USD more for custom and inexistence of an alternative, than for the fact that US policies are responsible, which they are not).
A world currency – let us say, a SDR reformed – depends on the credibility of its issuer. The IMF has no real power to enforce a real currency, so the bigger countries should act with converging policies and objectives, which is very difficult to attain. Even the current financial G20 is not appropriate: it has to many countries, and some of them are not really monetary responsible. Perhaps a new G10 or G12 (at maximum) should embark on the future issuance of a new liquidity, but the precondition of this is total financial liberalization among them, convergent macroeconomic policies, and total trade liberalization (short of people free flows) among them and towards third countries. That is really difficult to attain, but it should a desirable outcome of a new financial architecture.
5.4. You forecast which course of development the world currency system will embark on:
• USD dominance;
• Emergence of regional currencies on the base of euro, Yuan and others;
• Emergence of a new type world reserve currency;
• Other scenarios (which ones)
A diminishing USD dominance (in the long run), a growing role for alternate reserve currencies (and Yuan is not yet of the club, but should embark in this adventure), a reformed SDR but with very limited functions (in redressing imbalances, for instance) and, of course, greater financial globalization, with free flow of capitals, and absence of restrictions in current transactions. As regards total freedom for capital flows, this will depend on the correction of the huge disparities in the world economy, and that will take some decades, if not more than a century to be achieved. Gradually, bigger economies should move towards greater macroeconomic convergence, but this, also, will take long to be attained (perhaps a half a century more).
6. Do you think that there is a need for renewal of the elites in the light of the world crisis?
Surely, current leaders are very mediocre, to say the least, with some notable exceptions.
Will there be any new names with the serious potential to become the world elite? Please name some candidates in the field of:
6.1. Economics
Some innovative economists, but I cannot name a single one, not the old Keynesians for sure. Perhaps some new ‘Austrian’ economists, who should combine humanities and philosophy with theoretical economics.
6.2. Politics (Prime-Ministers and Ministers level)
I cannot think about one single distinguished politician, who should combine a brilliant mind and a good technical preparation: perhaps Mr Obama grows in the role, but he has to learn a lot yet. As for the Europeans, we are in a real short supply. The Chinese are a special bunch of apparatchik technocrats, disposing of the Communist monopoly of power, and they cannot count as examples, even some are very capable on technical grounds. But China is a world in itself, and cannot offer any viable solution for the lack of leadership at world level nowadays. Some small countries could have very capable people, but they have no clout to play a bigger role on world stage. In Latin America, for instance, perhaps Chile could offer some positive examples on how running a country in a responsible manner, but for the rest of Latin America the scenario is very poor in capabilities and human resources, at least at political level. In fact, this continent is reversing course, going towards populist leaders who are destroying the possibility of having modern economies in the region: think about Bolivarian leaders, who area dismantling a market system in their own countries…
6.3. Other
Scientists, working on health and environmental issues, with political sensibilities, could offer new possibilities, but it is difficult to name some.
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