Innovations in Global Financial Governance - the Role of Emerging Economies

Buenos Aires, March 20, 2018

G20 Finance Ministers and Central Bank Governors and the B20 are gathering in Buenos Aires under the G20 Argentine Presidency at a time when international institutions that govern globalisation and facilitate economic collaboration are under increasing pressure. The world is actively searching for a new global financial architecture with institutions and governance mechanisms that go beyond those created in the wake of the Second World War. The gravity of power is gradually shifting towards emerging economies. The momentum of multilateral cooperation is moving from global to regional arrangements. Some governments are intent to step back from multilateral cooperation, while others seek a more prominent global role. Non-governmental actors are becoming increasingly important. Meanwhile, the global challenges from pandemics or climate change are becoming ever more urgent.

What should a new global system look like and how to engineer a smooth transition to it?

Our conference considered innovations in global financial governance and how they can be brought about. What have been the key innovations in terms of structures, instruments, processes and incentives? What has worked and what has not, and why? We analyzed the role and governance of international financial institutions (IFIs) as critical sources of policy advice; development finance; global financial safety nets and standard/rule setting. What are the lessons from the two most important global level innovations since the financial crisis: the G20 and the recently established IFIs sponsored by emerging economies?

The event was hosted by the Banco Hipotecario of Argentina and co-organised by the LSE Institute of Global Affairs (IGA) and its constituent Latin American and Caribbean Centre (LACC) and the Reinventing Bretton Woods Committee (RBWC).

Agenda

Conference notes

by Ousmène Mandeng

The conference included speakers and participants from G20 member countries, academia and financial markets. It was divided into four sessions: Innovations in the global financial architecture, capital flow management, Engaging the private sector in global governance, development and infrastructure finance, governance and political economy.

Participants focused on shortcomings of the global financial safety net. The lack of automaticity to external balance of payments support was highlighted as a significant drawback that unduly exposes countries to liquidity runs. While the IMF was recognised for being at the centre of the global financial safety net, the facilities of the IMF were seen as inadequate and too concentrated. The IMF’s Flexible Credit Line (FCL) was criticised as too difficult to obtain, of too few countries using it and implying an implicit risk of disqualification under the facility. At the same time, the relative proliferation of lenders and facilities risks obfuscating actual availability of external access and may pose coordination problems. One participant stressed that there needs to be a continuum of facilities weighted towards precautionary facilities. Facilities also should not only address tail risks but also to support more moderate shocks. While the overall amount of IMF resources of about US$1 trillion was regarded as adequate, the persistent large proportion of borrowed resources was seen as problematic and further quota increases had been called for to restore the bulk of resources through quota resources also amid expiration of bilateral agreements by 2020. Participants discussed the need for further quota adjustment to better reflect emerging markets’ voice and strengthen legitimacy where the main quota formula criterion should be GDP. One participant indicated that emerging markets are increasingly showing ownership of the IMF stressing that the IMF no longer represents advanced economies’ interests.

The macroeconomic impact of adverse market liquidity shocks was discussed. One participant indicated that where foreign exchange markets are used as proxy for investor sentiment, it can greatly complicate monetary policy. The notion of putting one’s house in order was not seen as sufficient to reach overall stability amid adverse spill-overs from national policies stressing the need for greater policy coordination. One participant underscored that advanced economies also have an interest to coordinate with emerging markets.

The changes in investment behaviour of official institution was highlighted. Environmental, Social and Governance (ESG) were seen as increasingly important for determining official institutions asset allocations amid alignment between investments and broader public policy objectives. At the same time, greater transparency of central bank reserve allocation was seen as critical to help orderly price formation in asset markets.

The role of Multilateral Development Banks (MDBs) in infrastructure financing was seen as insufficient. Participants discussed the possibility to resort to securitisation to enhance lending, possibilities to leverage MDBs’ balance sheets more through more specialist lending and consolidation of balance sheets. The importance of local currency financing for infrastructure was stressed while the importance of stable macroeconomic conditions was underscored as a necessary condition for local currency finance access. The introduction of inflation-indexed local currency financing as based on the Chilean system of UF was cited as a possible approach. One participant emphasised the importance of rethinking the business model of MDBs amid vast resources needs and importance of private sector involvement citing the successes of the mobile phone sector in Africa as a possible approach. Other participants contested the applicability of the mobile phone sector to other infrastructure types. One participant indicated that there is market failure in infrastructure finance highlighting its public good character and urging for the need to mobilise patient capital.

Cryptocurrencies were underlined as a “big discussion” in the G20. One participant stressed that there is recognition among the G20 of the possible benefits of cryptocurrencies and concern of not unduly stifling associated innovations. At the same time, one participant indicated that the G20 is concerned about the risks although cryptocurrencies are not considered to pose a systemic risk as of today.