For release Wednesday, May 2, 2001, 1 p.m. EDT

Governing globalization: don’t wait for crisis before reforming key institutions, experts warn
Study urges overhaul of U.N., IMF, World Bank 

Contacts: UNU Center, Public Affairs Section: +81-3-5467-1243
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Study editor and co-author Deepak Nayyar is available for interviews.  Please call 416-538-8712 or 212-963-6346 to schedule a time.  Dr. Nayyar will make a seminar presentation at the Dag Hammarkjhold Library, U.N. Headquarters, on Weds. 2 May, 1:15 to 2:45 p.m.

New York — The U.N., World Bank and International Monetary Fund, created at the end of World War II, today operate on badly outdated political and economic foundations and need to be overhauled before a crisis induced by globalization forces the changes required, a major new study warns.

Prepared by the World Institute for Development Economics Research of U.N. University, with support from the U.N.'s Division for Social Policy and Development and the Ministry for Foreign Affairs, Finland, the study calls for repeal of the Security Council veto accorded the five major post-war powers in the 1940s and the addition of other countries as permanent members of that body.

“Historical experience suggests that crises are the catalysts of change. The last time around, it was the aftermath of a world war and a worldwide economic depression that led to the foundation of the United Nation systems and the creation of the Bretton Woods institutions (the World Bank and IMF),” according to the study, New Roles and Functions for the U.N. and the Bretton Woods Institutions, edited and co-authored by Deepak Nayyar, Vice-Chancellor of Delhi University, India.

“The world need not wait for another crisis of such proportions to contemplate and introduce the much needed changes in global governance,” the study says.

The U.N. suffers from a “democratic deficit” that was “an integral part of the original design” but needs to be remedied now, the study says, adding that the U.N.’s moral authority is “seriously undermined because its laws or principles are enforced selectively when it suits the interests of the rich and the powerful.”

Circumventing the veto granted more than 50 years ago to the five permanent Security Council members and enlarging the membership of that body are “imperative” for the U.N.’s continued credibility.

“The process of globalization has given rise to new problems and governance needs,” but the U.N. system has yet to adjust, the study says.  “The responsiveness of the United Nations to issues of our times has been limited to global meets such as the Earth Summit or the Social Summit,” useful fora for public concern but insufficient as solutions to the problems at stake.

It says the U.N. needs to become more representative, fostering the participation of global civil society to a greater degree, and more democratic in its decision-making, involving greater participation, transparency and accountability. 

According to the study, the subject of a presentation at the UN May 2, East-West distinctions have dissipated with communism’s collapse, while the North and South divide is more diffused, perceptions about development having been brought closer together.

“This represents a sea-change,” but reform of the U.N. has stalled as its legitimacy, effectiveness and the credibility erodes.  “The unipolar world has eliminated the erstwhile competition between systems,” the study says. “As competition has vanished, the urge for cooperation has diminished. This has reduced both the relevance and the role of the United Nations.”

In addition to Security Council reforms, the study proposes:

1)      Full or partial independent U.N. financing to “loosen the reins of political control now exercised by the powerful member-states” and “ease the pressures on the United Nations that have been attributable to resource constraints.”   The financing issue “is less about money and more about political control,” the study says, calling for “some version of the Tobin tax, say on international foreign exchange transactions or stock market transactions, and some charges on the use of the global commons, are possible means of such independent financing.”

2)      Establishment a Global Peoples Assembly, modeled on the European Parliament, to run parallel to the General Assembly but serve as “the voice of global civil society.”

3)      Creation of an Economic Security Council, “essential as a means of governing globalization. It would ensure that the United Nations provides an institutional mechanism for consultations on global economic policies and also, wherever necessary, the international regulatory authority.

4)      Establishment of a high quality Volunteer Peace Force to “de-politicize intervention by the United Nations” and enable it to provide a prompt collective security response wherever humanitarian emergencies arise.

“The number of humanitarian crises, with their legacy of death, displacement and destruction, has risen dramatically over the past decade,” the study says.

“The response of the international community and of the United Nations (in peace-keeping, helping refugees, de-mining, reconstruction and so on) has been ad hoc, inadequate or simply not forthcoming. There is still no system in place to take care of, let alone prevent, complex humanitarian emergencies. Some new problems are a direct consequence of globalization.”

IMF and World Bank: “It’s time to reform the reformers”

The IMF and World Bank (the Bretton Woods institutions [1] ) “have been the most ardent advocates of economic reforms in recent times. It is time to reform the reformers,” the study says.

Both institutions were created to manage the international payments system and assist in reconstructing Europe at a time “shaped by memories of the great depression. This conception also recognized the logic of international collective action in situations where markets did not work and there was a role for government intervention.

“The world has changed since then. So have the Bretton Woods institutions. But their concerns have become much narrower with the passage of time,” the study says.

“The orthodoxy of the Bretton Woods institutions . . . has not resolved the economic problems of borrowing countries. Indeed, the solution has often turned out to be worse than the problem.”

The study argues that the IMF and World Bank are incapable of exerting needed management influence on today’s international financial system – reducing the instability and volatility of exchange rates and capital flows, for example.

“The essence of the problem is international capital flows without any international controls. The failure in promoting development, which is reflected in persistent poverty and growing inequalities, is another. The crisis of development has, in fact, been accentuated in the era of globalization.

“These flaws are, in part, attributable to the virtual ideology of the Bretton Woods institutions, which does not recognize the importance of public action in coping with market failure. It would seem that the logic of international collective action, which was an integral part of their original design, is forgotten.”

Reform the International Monetary Fund

“The time has come to redefine the role of the IMF. In terms of governance, this means a constructive role in managing and stabilizing the international financial system, not only through crisis management but also through crisis prevention,” the study says.

It calls for greater transparency in the IMF. “Indeed, its operations and programmes are shrouded in secrecy. The absence of public scrutiny means that there are almost no checks and balances. It is high time that the IMF practices what it preaches about transparency. This calls for a disclosure of information and an independent evaluation of operations. The accountability of the IMF is limited, at best, to finance ministries and central banks, which, in turn, have close connections with the financial community.

“The IMF has almost no accountability to governments in totality, let alone people at large, when things go wrong. Accountability is an imperative without which the IMF could continue to pursue the interests of a subset of the international community, often to the detriment of the general interest of peoples and governments or the collective interest of the world economy.”

The IMF also needs to review its thinking in macroeconomics, the study says.

“There is now ample evidence to suggest that its stabilization programmes lead to adjustment through changes in output rather than through changes in prices. The outcome is beggar-thyself policies where . . . deficits are reduced or inflation is restrained through a contraction in output and employment.”

Redefine the World Bank

The World Bank “should cease to be a moneylender” and “transform itself into an institution more concerned with development,” focused on development activities in poor countries, the study says.

As with the IMF, greater representation and accountability are “imperative.”

“A very large proportion of the voting rights are vested in a very small number of industrialized countries  the principal shareholders in terms of paid-up capital. In contrast, a large number of developing countries and the transitional economies are vested with a small proportion of the voting rights even though they are the principal stakeholders, interest payments from which provide most of the income of the World Bank.

“The need to restructure such a voting system is obvious.”

The study says accountability at the World Bank is limited to finance ministries and central banks.  It calls for “independent evaluation” of World Bank supported projects and programmes as a way to begin improving accountability to governments and people.

“For the World Bank, it is perhaps just as important to re-orient its thinking about development,” the study says.  Simple prescriptions, which emphasize more openness and less intervention and which advocate a rapid integration into the world economy, combined with a minimalist state that simply vacates space for the market, are not validated by either theory or history,” according to the study.

Among other needed changes cited by the study: more flexible World Bank policies “simply because one size does not fit all.”

Missing Institutions:

New financial architecture needed to manage global macroeconomics

Since the Bretton Woods conference of 1944, fixed exchange rates have been replaced by floating rates; capital controls have given way to capital mobility.  International banking and the international market for financial assets have experienced explosive growth, there is a growing international market for government bonds and the size of international foreign exchange markets is “staggering.”

The study calls for new institutional arrangements to cope with the complexity of macroeconomic management, including inflation control, restoring full employment and stimulating investment.

“The G-7 does provide an institutional framework for consultation about, if not coordination of, macroeconomic policies. This is simply not enough (however), in part because it is driven largely by G-7 (if not just G-1) interests and in part because it needs much wider representation.”

Governance of international financial markets today requires new institutional architecture designed first of all to deal with crisis management and crisis prevention. “But it should also support the integration of developing countries into the world economy in a manner that promotes rather than hinders development,” the study says.

Among the recommended reforms:

• Institutional mechanisms that foster consultation, consistency and surveillance of national macroeconomic policies;
• A greater supply of emergency financing to assist in times of crisis (and available before rather than after international reserves are depleted);
• International agreement on standstill provisions, or orderly debt workout procedures, to play the same role as private sector bankruptcy procedures;
• Enabling countries to choose an exchange rate regime;
• Improving the institutional framework in which financial markets operate, including minimum standards in prudential regulations, supervision and accounting.

System of governance for transnational corporations

The study also calls for an international system of governance for transnational corporations. 

“The economic space of their activities extends way beyond the geographical space of nation states,” it says.  “International regimes of discipline should be concerned not only with the rights but also with the obligations of transnational corporations. There is a need for a discipline on restrictive business practices (and) . . . an international regime of anti-trust laws,” building on efforts by the UN Conference on Trade and Development, the experience of the European Union and initiatives by the OECD and the International Finance Corporation.

Cross-border movements of people

Globalization is creating demand for greater labour mobility across borders and institutions to help manage this development, the study says.

“There is a potential conflict between the laws of nations that restrict the movement of people across borders and the economics of globalization that induces the movement of people across borders.”

“The almost complete absence of international institutions, or rules, in this sphere is a cause for concern.”

The study calls for ratification of ILO conventions on labour standards to protect the rights of migrant workers, and protection for illegal migrants from exploitation and abuse.

“The plight of illegal immigrants everywhere is a cause for serious concern. The working conditions are exploitative and the living conditions are abysmal, while the risk of capture and repatriation is ever present.

“This is not simply a matter of enforcing the law. There is collusion between intermediaries and employers while governments turn a blind eye to this reality. Such tacit approval of illegal migration to meet labour shortages must be replaced by an explicit recognition of the need for labour imports which should be met through legal channels even if such imports are seasonal or temporary.”

At the same time, concerted action is needed to curb trafficking in people organized by international criminal and smuggling syndicates.  This represents a critical institutional role for the ILO and others, the study says. 

International 'public goods' and 'public bads'

Globalization has reduced the power of national governments in economics and politics “without a corresponding increase in effective international cooperation or supra-national government which could regulate this market driven process,” the study says.

“In a world where the pursuit of self-interest by nations means uncoordinated action or non-cooperative behaviour, sub-optimal solutions, which leave everybody worse off, are a likely outcome.”

Without effective international oversight, the study says international problems (such as international crime or trade in drugs, guns, people and organs) will increase while international public goods (world peace, sustainable development) will be undermined.

Needed are institutional mechanisms for cooperation between nation states which facilitate coordinated action and cooperative behaviour.

It is essential to create institutional mechanisms that give poor countries and their people a voice in the process of global governance, the study says.

“Even if they cannot shape decisions, they have a right to be heard. The concerns of poor countries and poor people should, therefore, constitute an integral part of any democratic design for global governance.”

Working papers on the study “New Roles and Functions for the U.N. and the Bretton Woods Institutions,”can be accessed online at http://www.wider.unu.edu/ (WP188.pdf; wp189.pdf; wp190.pdf; wp194.pdf; wp195.pdf)  

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