CETRI
The UN and international finance
Many features of the international financial system – including multilateral arrangements developed over many decades – have been overtaken by new developments, sometimes resulting in multidimensional crises.
The month-long 1944 Bretton Woods gathering was convened as a UN conference to create conditions conducive to post-war recovery and post-colonial development. But the systemic concerns of John Maynard Keynes and others from developing countries were largely ignored.
The International Monetary Fund (IMF) was set up for post-war growth and stability following the pre-war ‘gold standard’ crisis. The International Bank for Reconstruction and Development – later, World Bank – would help with financing.
The Bretton Woods agreement set the gold price in US dollars, effectively making the greenback the world’s reserve currency. Thus, the US Federal Reserve Bank (Fed) has long financed Treasury bonds with newly minted dollars.
The French economy minister saw this giving the US an ‘exorbitant privilege’. As Europeans increasingly demanded gold for dollars abroad, President Richard Nixon unilaterally abandoned US Bretton Woods obligations in August 1971.
It thus repudiated its promise to deliver gold for the greenback upon demand by other central banks. Although the dollar has not been the world’s official reserve currency since, widespread acceptance has effectively extended the exorbitant privilege indefinitely.
UN potential ?
The inadequate institutions and processes in place over the last half century have exacerbated risks. Meanwhile, financial crises inadvertently highlight previously obscure gaps, weaknesses and vulnerabilities.
Proposals to reform economic governance should start with better efforts to address these problems. This should involve progressive reform of the UN system, including the IMF and World Bank.
The UN is well suited to lead because of its record with difficult reforms due to its more inclusive and responsive governance. Securing legitimacy requires all parties to feel they have stakes in the broader reform agenda.
Despite poor regulation, many believe new financial markets and instruments have ushered in a new golden era. Threats posed by international macro-financial imbalances are seen as far less dangerous than those due to budgetary deficits. Worse, false purported solutions to such dangers have exacerbated complacency.
Financing development
Major financing for development (FfD) innovations have long been initiated by the UN. Special drawing rights (SDRs), ‘0.7 per cent of national income’ for official development assistance (ODA) and debt relief were all conceived in the UN around half a century ago.
The financialization of recent decades has undermined the mobilization and deployment of adequate financial resources to accelerate sustainable development and address global warming.
During the 1990s, the UN warned against new threats to economic stability. Some were due to volatile private capital flows and speculation, encouraged by deregulated financial markets, enabled by the IMF despite its Articles of Agreement.
By contrast, the UN has insisted on ensuring policy space for more effective development strategies by Member States. It has also urged macroeconomic policies to support long-term growth, technological progress and economic diversification.
The UN Secretariat has also promoted orderly sovereign debt relief. But Member States have long complained IFIs were shirking their mandates to provide financial stability and adequate long-term development finance.
UN pro-active on finance again ?
The first UN FfD conference was held in Monterrey, Mexico, in 1992. It sought to ensure adequate development finance on reasonable terms after the 1980s’ debt crises, exacerbated by conditionalities imposed with emergency IFI credit.
Structural adjustment programmes ensured ‘lost decades’ for Sub-Saharan Africa and Latin America. The current situation may be even more dire. Government debt today is greater than ever, but also more diverse, and on much more commercial terms. This situation is even less conducive to debt restructuring, let alone relief.
For decades, the UN’s FfD Office has tried, largely in vain, to mobilize domestic and international resources for development and climate finance. But progress has been modest and grossly inadequate at best.
The SDGs were cursed at birth in September 2015 by rich nations blocking developing country efforts to improve international tax cooperation at the last FfD summit at Addis Ababa just months before.
The rich countries’ Organization for Economic Cooperation and Development (OECD) has since imposed its will on international corporate taxation. The OECD process largely consigned developing countries to observer status, offering paltry shares to reward compliance.
The UN has also highlighted links between financialization and food as well as energy crises, stressing justice and sustainability concerns. It has urged greater sensitivity to avoid, or at least alleviate ‘downside risks’ for the vulnerable.
Get real to progress
International tax cooperation has been blocked for decades by the rich nations’ OECD. The UN system, including the IMF, urgently needs a strong mandate to seek common solutions to increase tax revenue for all.
While private finance is needed for the SDGs, it is also part of the problem when not well regulated. Meanwhile, most developing countries still lack access to liquidity during financial crises except on onerous IMF terms.
Also, with the reversals of trade liberalization in recent decades, especially with new Cold War sanctions, UN resolutions need to be realistic in order to be broadly accepted and feasible.
The last decade has seen huge setbacks to progress on the SDGs, climate action and needed financing. Developing countries have received only a third of the IMF’s 2021 $650 billion SDR allocation.
Over the decades, ODA flows have declined as a share of commitments, with the loan-grant ratio falling, favouring financial globalization, particularly since the first Cold War ended.
This has constrained developing countries’ ability to respond to crises and meet long-term development financing and fast-growing climate adaptation requirements. Curbing illicit financial flows can also improve financing for needed ‘public goods’.
As most rich nations show little sign of meeting their ODA and climate finance obligations, annual issue of SDRs, within limits set by the US Congress, can quickly boost international liquidity ‘painlessly’.
