Policy Briefs, November, 2008
History can repeat itself. The last two decades have seen monetary policy as dominant policy while fiscal policy has taken a back seat. The ongoing financial crisis may well sow the seeds of a return to fiscal dominance. In addition, there are renewed calls for greater international policy coordination. While cooperation is desirable, coordination often breaks down, as it did with the Bretton Woods regime some politicians are hoping to revive in a form that has yet to be determined. There are considerable risks that accompany both developments based on the historical experience and the tendency for countries to defend their sovereignty over financial and monetary matters.
This policy brief explains various aspects of an issue that will be at the centre of the agenda at the upcoming G20 summit in Washington: the reform of the regulation of international financial markets.
The world economy is presently characterized by very large payments imbalances whose management and resolution is a central issue in the agenda of international financial reform. To tackle this issue effectively, innovations in global governance would be helpful because of three unique features of the current situation: the distinct geography of contemporary imbalances, the dollar's changing position as world currency, and the growing influence of sovereign wealth funds. Some suggested innovations include: widening the G8; creating an IMF or ECB substitution account to ease the shift away from a dollar-centred international monetary order; fostering a greater recognition of the role of regions in global financial governance; and negotiating new multilateral rules for investment flows.
The financial crisis has highlighted gaps in global governance of international finance and capital. The world is interdependent in financial markets, trade, infectious diseases, climate change, terrorism, product safety, food supply and water tables. Our collective capacity to manage interdependence through coordinated policy responses is inadequate. There is a gap between the distribution of authority and of power, between legitimacy and efficiency. A new forum upgrading the existing G20 finance ministers' group to the level of prime ministers and presidents could effectively resolve key global issues.