Rationale for Redesigning the Global Financial Architecture
July 15, 2021
Reforms in the GFA Needed for Financial Stability, with Balanced Recovery and Inclusive Growth. — Prof. Bhagwati Prakash Sharma & Dr. Jaya Sharma
The present day Global Financial Architecture has begun to take its shape since 1940s, when the International Monetary Fund and World Bank, popularly called as Bretton Woods Institutes were established in 1944 by 44 countries. The two need complete restructuring and revamp with the change of global economic scenario since then and especially in the post Covid-19 era of reverse globalisation. The World Trade Organisation (WTO) is in doldrums since 1999 and is marred by disputes and discords. Consensus is eluding on most of the issues ever since its establishment in 1995. The US has even brought the WTO’s Dispute Settlement Body in complete disarray since 2019. It has enabled many countries to regain some degree of internal autonomy from the influence of GATT, TRIMS AOA and many other multilateral trade agreements (MTAs) of the WTO. The basic premise of its creation, the most favored nation (MFN) clause too has become almost redundant in the wake of several hundred free trade agreements signed so far and in vogue. The Basel iii recommendations are also lacking support of nations and the Financial Stability Board too needs to be made effective to take due cognizance of the post pandemic global needs of revival and balanced recovery from the ongoing economic plight.
Need to Redesign the GFA
So, redesign of major components of Global Financial Architecture (GFA) including the IMF, World Bank, WTO etc. has become imperative, when most of the economies across the world have been experiencing unprecedented contraction, job losses, decline in incomes of individuals and firms, along with the plummeting public revenues. Balanced economic recovery across the globe with inclusive growth is need of the hour. So, the global financial architecture needs to take care of and create a right kind of ecosystem.
In the pursuit of redesign of the GFA following thrust areas need immediate attention:
1. Restructuring and Redefining the Role of Bretton Woods Institutes for Restoring Growth with Inclusion
2. Revisiting Trade IPR, Investments Regime AOA and all other Multilateral Trade Agreements (MTAs) of the WTO.
3. Policy and Institutional Interventions for Balanced Economic Recovery Across the Globe with Revisiting Financial Stability Board, Basel and all other components of the GFA.
4. Economic Self Reliance and Reasonable Technological self Sufficiency.
Since, the present day GFA has evolved out of early initiatives of 44 countries in 1944 followed by spate of multilateral and plurilateral endeavours of 200+ countries. The world has been changing rapidly with and interplay of 200 countries and several economic organisations in the economic arena. It would not be out of place to mention that India had been among the five largest quota (share) holders of the IMF and the World Bank (WB), ever since their inception and also had one permanent director on board of each, among the five permanent directors of the two. It was due to the myopic decision of the Jawahar Lal Nehru Government in 1949 to seek World Bank loan, for which the country had to devalue the Indian Rupee. At the time of independence one US dollar was equal to 3.50 Indian Rupees. This devaluation of Rupee since 1949, had depreciated the value to quota partly held in Indian Rupee by India. So, India lost its position and permanent directorship in 1960s. Now, India can partly gain some re-enhancement in its position. But, China may be the biggest gainer to capture third place among the top stakeholders. Had India negotiated firmly more in the 14th general review of quotas, it could regain better place among top five as it ranks third in the world economy in terms of its GDP, based on purchasing power parity.
But India is at 8th place in its quota holding. India’s quota is 2.76 per cent China’s is 6.41 percent and that of the US is 17.46 per cent, which translates to a vote share of 16.52 percent, giving the US a unique veto power over all crucial decisions at the IMF, many of which require a super majority of 85%.
The main parameters of the post-war world currency and financial systems were defined and the decision to create the International Monetary Fund and World Bank was made by mere 43 countries. The erstwhile system is almost redundant now. At that time, it was decided to have fixed exchange rates for the currencies of participant countries, along with the pegging of all currencies to gold (gold parity). Free convertibility of dollars to gold was also assured by the US Treasury to the monetary authorities of other countries. All of these are no more in practice now. The Fund’s main function was then defined as extending credit to member countries at the time of a deficit balance of payments where it could endanger the deviation of exchange rate of that currency from the established fixed rate and from gold parity. India was among the 5 top stockholders of the IMF as well as World Bank, with one permanent director till 60s in each of them.
The IMF is now an international organization of 190 member countries, was formed by 44 countries in 1944 and which also constitute the major component of the global economy, with its explicit objectives to foster global monetary cooperation, secure financial stability, facilitate international trade & payments, promote high employment with sustainable economic growth, and reduce poverty around the world. Of late, its resources are proving too inadequate to take care of the emerging crisis worldwide, especially those erupted recently in the developed countries.
The IMF had already faced a more serious crisis to its existence in the 1970s, when the original structure of the Bretton-Woods system collapsed, especially because on August 15, 1971, the U.S. President R. Nixon announced a retrograde decision that, the U.S. Treasury was terminating the convertibility of dollars to gold. The final dismantling of that erstwhile system was affected at the Jamaica Conference in 1976, when amendments were made to the IMF Charter. Thereafter, floating exchange rates were enacted and the pegging of the dollar and other currencies to gold was terminated.
Though the IMF, which had the role of the world’s financial firefighter for last 7 decades should have been taken out of the clutches of the G-7 in the 1970s itself, when the President R. Nixon announced the termination of convertibility of dollars to gold. But, now as well, it is not too late. It needs to be made a truly international organization capable to reflect a balanced approach.
India Needs to take the Lead
Indian economy is the 3rd largest economy of the world on the basis of purchasing power parity, as per the latest rankings announced by the World Bank, besides being the second most populous country. This necessitates India to have one permanent directorship. Therefore, India should now endeavor to get the IMF fully revamped along with endeavoring to completely redesign the global financial architecture. Indeed, restructuring of the IMF and World Bank as well as the Economic stability board. As part of redesigning of the global financial architecture is most imminent to make them more responsive, meaningful democratic and representative, as well as to make them truly effective and independent from the captivity of the erstwhile G7 nations. The MTAs of the WTO need total redrafting to incorporate aspirations of global humanity vis-as-vis the monopolies of multinational companies over industry, commerce and national economies. So, a global debate followed by urgent initiatives to redesign the GFA is need of the hour, to rebuild domestic economies of all countries for balanced recovery and inclusive growth in the post pandemic era of reverse globalisation, underway in the global economy.