Towards a New Global Financial System (2001)

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Australia and other wealthy Western nations have blocked a proposal for an unprecedented international push for stronger capital flows to developing countries. This relates to a first draft proposal for a UN summit on financing development. The West is satisfied with market driven global distribution of capital - from which it benefits. The developing world wants to strengthen UN social and economic bodies like the IMF and World Bank, and double the amount of development aid provided. Australia rejected the proposal and a UN Development Aid official (and ex Labor MP) criticized this as rationalizing doing nothing. The problem is that global interdependence and wealth are increasing - while 1/5 of human population lives on < $2 per day, and 86% of global wealth is earned by 20% of the people. One measure of the problem is that the US receives 2/3 of foreign net capital flows of $400bn pa. Developing countries get little. Their agricultural and manufacturing exports are harmed by import barriers in developed countries. The agenda for conference on financing development involves: domestic financing, trade, international private finance, overseas development aid, debt and governance issues. UN Millennium Declaration pledged governments to work towards ending of extreme poverty. A detailed agenda, Towards a fully inclusive and equitable globalisation, was developed by a panel chaired by Zedillo of Mexico. Reaction to this from West and Japan opened a breach. The proposal recognized the importance of good domestic governance and the rule of law to combat corruption, but also called for greater help from rich countries. A doubling of overseas aid was sought, carbon and currency transaction (Tobin) taxes, reform of international  financial architecture, strengthening of UN social and economic roles, and an international tax organization. West and Japan rejected this - being unwilling to negotiate change to international system that serves too many countries well. Australian UN representative said draft was unbalanced. It didn't recognize the respective roles of the developing and developed countries, and was impractical. In trying to place main responsibility on donor countries, it gives too little attention to national policies. Developed countries suggest that main responsibility falls on developing countries to attract market-led investment by eliminating corruption and improving accountability and transparency. (Barker G. 'Money talks', Financial Review, 4/12/01)


CPDS Comments  [VERY preliminary]

The proposal, Towards a fully inclusive and equitable globalisation, was intended as a means to promote greater international equity through the establishment of reformed global institutions and increased flows of capital to developing countries. 

This goal is clearly important on the basis of (a) humanitarian concerns (b) the contagious problems associated with states that experience social, economic and political failures and (c) the international conflicts (such as World War I) which arose because of fundamental disagreements about the nature of the 19th century globalised  economic order.. 

However there is no easy answer. The following is an attempt to identify the complexities of the problem. It is certainly not a solution. 

  • there is disputation about whether or not global equality is increasing or decreasing (see Global equality). There are also political agendas in the advocacy of each side of this debate concerning the role of markets and of governments;
  • the proposal, Towards a fully inclusive and equitable globalisation, appears to conform to a social democratic scheme involving an increased role for global governance machinery. However: 
    • there has been, and remains, controversy about the effectiveness of 'social' action (ie government programs) as a means for achieving economic and social goals. This controversy is even greater in the international arena (eg concerning the effectiveness of the UN, and the World Bank /IMF) - so the proposal would presumably require substantial reform of of their governance and operational arrangements. 
    • this is made far more complex by the differences amongst the major (and numerous other) cultural traditions which can place quite different interpretations on institutions which have similar names. 
    • both the proposal, and the rebuttal, appear to be expressed in terms of 'Western' ideologies. Moreover Western societies appear to be the only ones who tend to generate significant new ideas (see Islam and the West). This presumably is a result of the traditional negative attitude to abstract ideas in East Asia and to modernity in Islam - however the results may not suit all cultures;
  • there is a strong cultural dimension in market economic success - with the leading position having been taken for two centuries by Western societies (see Competing Civilizations). Only East Asian countries demonstrating the ability to catch up (using quite different cultural techniques). 
  • Competing Civilizations also suggests that a contest for control of the global financial system is underway amongst the strongest economies. Japan (and China and other countries in East Asia) are part way towards the creation of an Asian Monetary Fund as an alternative to the US dominated IMF. Towards a fully inclusive and equitable globalisation must be seen as a third alternative way with significant implications, eg:
    • slowing the flow of global capital (with transaction taxes) would reduce instabilities which appear to arise under current arrangements. However it would also lead to cultural winners and losers - because Western societies tend to have advantages in dealing with abstracts such as money. 
    • increasing global 'social' action would be incompatible with Japan's traditional corporate state arrangements; 
  • market allocated capital flows appear at present to be highly distorted at present - with most net capital transfers to the USA reflecting (a) the strength of investment opportunities in the US (b) the $US's status as the world's reserve currency - which makes it easier for the US to borrow (c) loose approach to money supplies in the US which has stimulated an asset boom and consumption - but not resulted in inflation because of deflationary pressures elsewhere (d) the resulting large US current account deficit which has to be balanced by capital inflow (e) the strong savings tradition, and weak consumption tradition, in much of East Asia.
  • flows of capital to developing countries are not all that would be needed for their advancement. Arguably information is a critical prior requirement - embodied in educated people, in an effective system of governing, social and economic institutions and in the market and technological knowledge of enterprises.  Without this, experience suggests that capital flows are likely to be wasted. Certainly investment MIGHT stimulate access to required knowledge and institutions (as advocates of new growth theory believe) - but in reality this seems unlikely; 
  • the suggestion that it is mainly up to developing countries to attract market-led investment (eg by eliminating corruption) can not be sufficient because:
    • the reason that such countries are not developed is that they haven't the knowledge or the institutions required - and without these (which can NOT just be obtained with the stroke of a pen) then can not get far. Outside help is essential
    • local leaders can find it more profitable simply to play the games of external investors - rather than providing leadership to their communities.
  • Improved access to relevant information and institutions in developing countries is most unlikely to flow through the national governments of developed countries (because of the political (ie context for power) dimension which this introduces). Thus other arrangements that might enable economic and governance development to accelerate in developing countries is probably required. One way in which progress might be made is suggested in  Foreign and Regional Aid via the Internet