*{Globalization and Politics 
Global Finance Needs New Framework for
Global Economic Governance 
By G.K. Helleiner 
Third World Resurgence 
December 1997}

The past half-century has seen tumultuous change, much of it the product of 
'spontaneous' influences, in the world economy. In no sphere has this change 
been greater, particularly in the last quarter-century, than in international 
finance. In very large part, the emergence of globalised financial markets was 
the product of technical change in information processing, telecommunications 
and transport. But conscious governmental actions - in the general direction 
of market liberalisation - have also played some role. 

Whatever the cause, private capital now dominates the total net (long-term) 
financial flows to the developing world - as much as 85% of the total in 1996 
- compared with around 45% in 1990 and much less in the 1950s and 1960s. 
Portfolio flows make up over 40% of current private flows to the developing 
world. Pension funds, mutual funds and life insurance companies, investing in 
bonds and equities, are now considerably more significant sources of 
development finance than banks - whose activities peaked, to disastrous 
effect, in the late 1970s and early 1980s. Foreign direct investment is also 
rapidly rising again - now accounting for about 45% of total private flows 
compared to 55% in 1990 and much larger percentages in the 1950s and 1960s. At 
the same time the world has been experiencing the so-called 'crisis of aid': 
official flows are stagnant or declining except from a small number of donor 
countries (the Nordics and the Dutch). 

Unfortunately, the private flows are highly concentrated in a relatively few 
countries - with 95% going in 1996 to just 26 countries, while 140 countries 
shared the remaining 5%. Worse still, private capital has proven highly fickle 
and volatile in its behaviour: portfolio managers have proven just as nervous 
in the 1990s as banks were in the 1970s and 1980s. And TNCs managing their own 
portfolios have emerged as major movers of short-term funds. It is not 
necessary to demonise George Soros or other money managers, who are merely 
trying to protect their shareholders' interests in a highly uncertain world. 
It is simply in the nature of financial markets that they are susceptible to 
panics, crises and volatility. 

*partie=titre The Role of National Governments *partie=nil  
Governments can and do play some role both in the evolution of the global 
financial system and in the determination of its effects upon development in 
individual countries. At the national level, all governments have a particular 
responsibility for the stability and security of the domestic monetary, 
banking and financial systems - critically important to the functioning of any 
economy. The vulnerability of banking and financial systems to crises, 
instability and market failure has virtually everywhere produced central banks 
and regulatory authorities to protect the social interest and, usually, to 
mediate national interactions with global financial markets. Effective 
functioning and stability of the monetary and financial system is now 
universally seen as a fundamental requisite for development, and it can only 
be achieved through effective state action. The ultimate responsibility for 
national-level development policy - including macroeconomic management, the 
encouragement and effective deployment of savings and investment, and modes of 
interaction with the global economy - always rests with national governments. 
But who plays the role of the development-oriented state in the global 
economy? Effective global macroeconomic and financial management is far more 
important to overall output, employment, and development than any individual 
national-level actions or, for that matter, any changes in the trade regime. 
Exchange rate changes and misalignments can and do easily swamp trade policies 
in the short- to medium-run. Financial crises and surges in private capital 
markets can disrupt the global economy far more quickly and to far greater 
effect than any trade phenomena. It is therefore critically important to get 
the central macroeconomic financial institutions for the newly globalised 
economy broadly right. 

Today's global financial world, the world in which governmental policymakers 
seek to promote development, at both the national and international levels is 
utterly different from that facing the original architects of the Bretton 
Woods system in 1944, a time when international financial markets had, in 
effect, been closed down. The central governmental institutions in today's 
global economy are those of the major industrial powers and, 
inter-governmentally, the meetings of the G-7, realistically the G-3, (Finance 
Ministers or Heads of State), the IMF, the World Bank, and the Bank for 
International Settlements (BIS), and all of their committees. All have been 
attempting to come to terms with some of the monumental changes in the global 
financial system of the past couple of decades. Finance ministers and central 
bankers, in pursuit of safety and stability (not development per se), have 
been trying valiantly to develop appropriate governance arrangements to 'catch 
up' with global financial market forces. 

Unfortunately, the process through which the current international monetary 
and financial system is attempting to respond to the challenges thrown up by 
the new global economy is severely flawed. It is tortuously slow, 
insufficiently participatory, overly influenced by powerful lobbies from the 
financial sector, and constrained by jurisdictional ambiguities and turf 
struggles. It is difficult at present to be very sanguine about the early 
prospects for appropriate changes - particularly those likely to assist 
processes of development in the developing world - that emanate from the 
current efforts of such bodies as the G-7, the BIS, the IMF, the World Bank, 
the various regional development banks, or, for that matter, the WTO, the OECD 
or such non-governmental organisations as the International Chamber of 
Commerce. 

*partie=titre Non-G7 Members *partie=nil  
Above all, the process is flawed because of its failure to take adequately 
into account another element of major change within the global economy and the 
global financial system, a change which has been of fundamental importance - 
and is much less remarked upon in the dominant financial institutions. That is 
the rapidly growing importance of non-G-7 members in the world economy, and 
therefore the growing importance of these economies to G-7 and global welfare. 
In purchasing power parity terms, developing countries alone already account 
for nearly half of world output. According to the World Bank, by the year 2010 
they will account for 56% of global consumption and 57% of global capital 
formation. And developing countries as a group are still generally projected 
to grow at roughly double the rate of the industrial world during the coming 
decade. 

We have recently been reminded, first in Mexico and now in South-East Asia, 
that there is another important dimension to increasing developing-country 
participation in the global economy and global financial markets. Developing 
countries' economic performance is subject to much greater volatility than 
that of the more industrialised countries. The closer integration of the 
developing and transition countries into the world economy and their greater 
importance to it pose increased risks - not only to themselves but also to the 
entire global system. There are bound to be many more Mexican-style and 
South-East Asian-style crises in the years to come. Developing countries have 
also recently proven more prone to disasters of climate, civil disturbance and 
war. Apart from the fact that the G7 countries represent a small and declining 
proportion of the world's population, their own economic and political 
security now rests significantly and increasingly upon events in the rest of 
the world. 

From these facts flows an inescapable conclusion: the world must find a way 
not only towards improved management of a newly globalised economic system - a 
difficult enough task - but also toward more politically and economically 
representative, and therefore more legitimate and more effective, means of 
global economic governance. And the search for such reformed arrangements must 
begin in the world of global finance, where the risks are highest and the 
potential gains from improved arrangements are greatest.
 
*partie=titre All of a Single Piece *partie=nil  
The problems of the international financial system and its interaction with 
the agreed objective of global development are all of a single piece. It would 
be nonsensical to attempt to address the issues surrounding the future of the 
financing of development in isolation from the many influences upon the now 
dominant private flows of capital. Such influences include the macroeconomic 
policies of the major industrial countries, particularly as they affect 
interest rates, the provision of adequate liquidity and appropriate responses 
to periodic crises, the backstopping and supervisory roles of the major 
international financial institutions - not only the IMF and World Bank group 
but also the regional development banks, the BIS and related institutions. If 
there is to be a useful conference on the financing of development, it must 
therefore address the workings of the entire international monetary and 
financial system as it impacts upon development. A conference, if there is to 
be one, should be about 'the international monetary and financial system and 
development'. No less will do. 

The developmental focus is essential, if only to discourage endless further 
debate on the appropriate exchange rate arrangements among the US dollar, the 
emerging Euro and the yen - the issue which, under Northern influences, ran 
away with far too much of the discussion on the occasion of the 50th 
anniversary of the Bretton Woods institutions. 

Some urge the United Nations to stay out of monetary and financial affairs. 
One can certainly make a case that, in the interest of an efficient 
international division of labour, monetary and financial issues should be 
raised and addressed in the appropriate multilateral fora - presumably, at 
present, the IMF and the World Bank group. Most Finance Ministers and Central 
Banks do not regard the UN as an appropriate forum for discussion of these 
matters. Most probably do not know or, if they know, do not much care that the 
Second Committee is debating these issues in New York. From their standpoint, 
the only meetings that truly mattered were those in Hong Kong a month ago, 
meetings that they all attended. 

The IMF and the World Bank group have done much of their work extremely well, 
better than quite a lot of the work undertaken by other specialised agencies 
of the UN, and one must never minimise the difficulty of achieving effective 
international governmental cooperation in any sphere, let alone in the complex 
world of international money and finance. We can and should celebrate the 
remarkable successes of the IMF, the World Bank Group, the regional 
development banks and the rest - and many of us have done so. But let us also 
be clear that they have done their work relatively well principally because 
they were financially supported to do it well. The administrative budgets of 
the IMF and World Bank - totalling roughly $2 billion per year - are 
considerably larger than the combined administrative budget of all of the rest 
of the UN system with all of its other responsibilities. The question of the 
cost-effectiveness of these expenditures in the Bretton Woods institutions, in 
support of multilateral economic and financial governance, is rarely raised. 
To take a small current example, the World Bank's World Development Report is 
reliably estimated to have cost roughly $4 million, far more than the UN 
system spent upon its World Economic Survey, the (UNCTAD) Trade and 
Development Report and the (UNDP) Human Development Report. The question is: 
are the current international financial institutions likely to be able to 
transform themselves, spontaneously and without prodding and in a reasonable 
time frame, into what will be required for the emerging world of the 21st 
century?
 
*partie=titre Whose Priorities? *partie=nil  
The primary concerns of the majority of the world's countries have repeatedly 
been raised within the existing multilateral monetary and financial 
institutions: in particular, the effective introduction of global 
considerations into G-7 macroeconomic management fora; the provision of 
liquidity in true accordance with global need; more effective response to 
sovereign bankruptcy, and debt and financial crises; the regularisation of 
development finance, more effective and representative governance in these 
institutions themselves; and developing country representation in financial 
supervisory and regulatory provisions for the global financial community. 
Perhaps the developing (and transition) countries have not tried hard enough 
within the existing institutional machinery. Perhaps their spokesmen and 
women, and their representatives on the relevant boards, have been too junior 
in their levels, or too timid in their efforts. Perhaps developing-country 
Finance Ministers should assign higher priority than they now do to these 
multilateral economic governance issues (although their frequent inability 
and/or unwillingness to do so is perfectly understandable for smaller and 
poorer countries). Perhaps the G-24 could run its affairs much more 
effectively. All of these could be done. But would it, under current 
arrangements, make much difference? I suspect not much. 

Consider some of the recent evidence. Recent efforts to amend the articles of 
the IMF centred on (i) an 'equity' allocation of SDRS, rather than an 
allocation to meet global needs as perceived by the majority of its members, 
and (ii) an expanded mandate to permit it to push the liberalisation of 
private international capital flows with greater vigour - hardly the top 
priority reform for the majority of IMF members either. Whose priorities were 
these? At the same time, the recent expansion of IMF quotas made virtually 
zero concession to the growing importance and needs of developing countries. 
The most that the Managing Director could do was to offer, in return for 
developing-country support for the much-needed current quota expansion, to 
look at these matters next time. These are not signs of an organisation able 
easily to recast itself in the interest of the majority of its members. They 
are, rather, stark reminders of who still really runs the principal global 
monetary institution. 

*partie=titre Dominance *partie=nil  
Again, without casting any aspersions on the qualities of the current 
office-holders, it is worth asking - in the context of all of the current 
'buzz' about governance in their institutions' boards - how the positions of 
President of the World Bank and Managing Director of the IMF, with all of 
their considerable attendant powers, are at present filled. What exactly are 
the transparent and participatory and rules-based procedures, which the World 
Bank recommends for all, through which these major multilateral leaders of the 
financial community are selected? The bizarre and hilarious manner in which 
the next-to-last President of the World Bank was appointed is recounted in the 
brilliant, newly-released history of the World Bank by Devesh Kapur, John 
Lewis and Richard Webb (The World Bank, the First Half-Century, Volume I. 
History, Brookings Institution, Washington DC, 1997, page 1199). Who can take 
seriously the World Bank's strictures on others' governance when its own 
governance is so severely flawed? 

The reforms being pursued in the sphere of international banking supervision 
by the BIS and the regulation of international securities markets by IOSCO 
are, of course, welcome and overdue. But the BIS, a central bank for G-10 
central bankers, is even less representative of global interests than the IMF, 
and IOSCO is even less so. Both deserve credit for recently consulting with 
developing countries. But is this enough? Incidentally, neither are answerable 
to elected representatives in their own countries. 

*partie=titre Need to Reconstitute IMF/World Bank Governance *partie=nil  
There is an overwhelming intellectual case for a strengthened multilateral 
framework both for the conduct of international/global finance and for sound 
global macroeconomic governance in the interest of both stability and 
development. But one cannot, in good conscience, continue to recommend the 
strengthening of the roles of the IMF and World Bank in global macroeconomic 
management and the management of the international financial system (as I have 
myself done in the past) as long as their own governance has not been 
reconstituted so as to reflect more accurately and fairly their global 
membership. Much as they try to convey a more attractive image to the world, 
they still disproportionately reflect in their actions and policies the views 
and interests of a few major industrial countries. 

Developed countries have utterly different voting powers and the provisions 
for special majorities for particular categories of decision vary enormously 
from one international economic organisation to another. Comparing the 
governance structures of a large number of multilateral organisations, the IMF 
and World Bank place last in their representativeness of the majority of the 
world's countries and peoples. Developed countries (as defined by the World 
Bank) account for 17% of overall votes in the Global Environmental Facility 
(the same as in the UN itself), 24% in the WTO, 34% in the IFAD, 48% in the 
IDB, 60% in the ADB, and 61-62% in the World Bank and IMF. 

Financial strength should not grant the degree of across-the-board 
institutional and political power currently enjoyed in the international 
financial institutions by the G-7 governmental oligopoly. No doubt financial 
contributions bring some extra rights. They also bring extra responsibilities. 
Political democracy and the rule of law have been based, however, on quite 
different principles (granted that they have frequently been abused in 
practice). 

Let me be more direct and extend the argument: brain power and technical 
insight have never been correlated strongly with the amount of money people 
bring to the table. Not the least of the changes in the global village of the 
past few decades has been the ascendancy of a whole new generation of Southern 
technocrats and academics with an interest in and capacity for sophisticated 
analysis of global issues, particularly as they affect development. There is 
simply no remaining rational basis for the continuing degree of reliance, on 
the part of the IMF and World Bank, upon North American and European scholars 
and consultants. For instance, in a recent conference on the future of the 
SDR, I counted only nine developing- or transition-country speakers out of a 
total of 36 on the programme. Of eight more participants listed in the 
subsequent publication as having participated in the general discussion, only 
one was from a developing country. These proportions are fairly typical. 
There are now more staff-members from developing countries within these 
institutions than there once were. Staff-members of such organisations are 
always severely constrained, however, in their activities. In-house analyses 
and evaluations can rarely generate much self-criticism or results that stray 
seriously from the current 'policy line'. Bureaucratic incentives simply do 
not encourage such independence of mind. Change and fresh thinking is 
sometimes pushed 'from the top', as once again at present in the World Bank, 
but rarely to very much long-term effect. 

*partie=titre 'Fresh Air' *partie=nil  
Pressure for more significant change usually comes from elsewhere, from bad 
experience or - but this may be more difficult - from truly independent 
external assessments and recommendations, particularly when buttressed by some 
significant political or intellectual authority. Further bad experience will 
surely assist the process of change, but one can hardly recommend further 
financial crises. On the other hand, one can and should try to breathe more 
'fresh air' into the currently somewhat inbred discussions of global money, 
finance, and development in the Bretton Woods institutions. 

I hope I have made it clear that, because the needs of the entire global 
community are at stake, and because the existing international financial 
institutions are so unrepresentative and show so little sign of making 
necessary changes in the near future, I believe that the Second Committee of 
the United Nations General Assembly now has little alternative but to take a 
keen interest in the current state of multilateral governance in monetary and 
financial matters, particularly as they affect development. But how can it 
move events forward? How do we all get from here to there? There are many 
possible options, only one of which is a global conference. There should 
certainly be no expectation that, as at Bretton Woods, one extended meeting 
can deal with all of the problems. One should instead be thinking in terms of 
a more effective process of change - change which is urgently needed but seems 
very slow in coming. 

The aims are both to improve the final product and to speed the progress 
toward it. However one proceeds, a useful starting point - or a point quite 
early in a new process - would be a global conference. It could serve an 
important educative and galvanising purpose. It must not serve, as conferences 
sometimes do, as a de facto substitute for action. What realistic options for 
an improved process might be considered? There are four - and they are not 
necessarily mutually exclusive. 

The Secretary-General of the UN might appoint a panel of independent and 
representative experts to address the major questions, and to make 
recommendations. To do this, he would no doubt want to consult with the 
Bretton Woods institutions. But he must not be dependent upon them. Such 
commissions may not seem to change the world so much. But they can be 
important elements in a process of review, popularisation of important ideas, 
and change. In retrospect, the Pearson, Brandt and Brundtland Commissions were 
important signals of such change in the second half of the 20th century. 
As earlier recommended by the Group of 24, one could seek to re-initiate an 
intergovernmental process like that of the Committee of Twenty (the 20 were 
equally divided between industrial and developing countries), created by the 
Bretton Woods institutions themselves in the 1970s, to reconsider their 
functioning in the new financial world of that decade.. In the absence of 
IMF/Bank response to this request, such a prospect would have to be initiated 
from elsewhere, and might be more difficult to launch. It might usefully be 
discussed in the Second Committee. 

*partie=titre Separate Reviews *partie=nil  
Separate reviews might be initiated at the regional level, perhaps by the 
regional economic commissions of the United Nations (or perhaps by the 
regional development banks), and perhaps all under the Secretary-General's or 
ECOSOC's umbrella authority. Proposals from Japan and Australia for regional 
IMF-style funds and improved arrangements for increased regional monetary 
cooperation in Asia suggest that some such thinking is already under way, and 
it needs to be placed appropriately into a more global context.
 
Some developing countries and/or some industrial 'middle powers' might 
initiate their own independent or intergovernmental review with 
recommendations, as has previously been done in other dimensions of UN 
activity. These possibilities might be actively explored in the forthcoming 
Extraordinary Meeting of G-24 Ministers of Finance. 

No doubt there are many other possibilities. I hope you will consider many 
such possible avenues for broader progress in the sphere of global economic 
governance as you debate the merits of the proposed conference on the 
financing of development. On behalf of all of those with a concern for 
effective global economic governance and for development, let me wish you 
every success in your deliberations. 

*{G.K.Helleiner, Professor of Economics at Toronto University, Canada, is one of 
the world's outstanding developmental economists and directs the UNCTAD/G-24 
technical support project on International Monetary and Financial Issues. The 
above is based on his presentation, on invitation, at the UN General 
Assembly's Second Committee on 15 October.}