Dec 09, 2008
The
international financial crisis has shaken the self-confidence of the
managers of the international financial system. Their frantic efforts
to prop up the global financial system and stimulate national economies
are noteworthy, not only for the magnitude of the funds they are
throwing at the problem but also for demonstrating they don't seem to
fully understand the system that they created. Their confusion is
producing the best opportunity in 60 years to create a more socially
and environmentally responsible international financial order.
The unfolding of the crisis so far demonstrates the balance of power
has shifted enough that the richest countries have recognized they
can't solve the current global problems on their own and need to
involve the G-20 in efforts to deal with the crisis. However, it hasn't
shifted so much that they have surrendered their control over the
global economic and financial agenda, or that they can be forced to
accept deals that they oppose.
This means that in the short term, global financial institutions
will focus on financial regulation as the primary arena for global
financial negotiations, rather than broader issues of global governance
or justice. It also means that the opportunity for progressive change,
while significant, is limited. This can be seen in the declaration from the November 15 G-20's summit, which contained few firm commitments outside the regulatory area and in the meager outcomes
of the recently concluded Financing for Development conference in Doha,
which leaders of rich countries essentially ignored - although they did
make sure its final statement didn't impose any significant new
obligations on them.
Exploiting the current opportunity requires governments in
developing countries and progressive civil society groups, in the
Global North and South alike, to be realistic in their assessment of
the situation. If progressive forces want to take advantage of this
opportunity, they must develop a program of regulatory reforms that
promote more environmentally and socially responsible financial
institutions, broader access for poor people and communities to
financial services, and more creative funding for poverty alleviation
and development. Successful implementation of this program will change
some of the incentives for financial institutions, set a precedent for
more participatory and transparent international regulatory efforts in
other areas, and create new chances to democratize global financial
governance.
In fact, progressive forces have begun to take advantage of this
opportunity. Last month, hundreds of organizations and thousands of
individuals signed a declaration
calling for a more people-focused, equitable, and socially and
environmentally responsible strategy for dealing with the crisis. The
declaration also called for more responsible and comprehensive
regulation of the global financial system.
The challenge, of course, is that subjects like fair value
accounting, capital adequacy, tax policy, and counterparty risk are not
the sexiest of topics, and it's not immediately obvious how they affect
poverty, financing sustainable and equitable development, energy,
climate change, and food. But if negotiations over international
financial regulation take place without governments in developing
countries and progressive organizations, we're likely to end up with
international financial regulations that are no more responsive to the
interests of the poor than the current regulatory regime and whose
incentives continue to prioritize profit over people, sustainability
and equity. In addition, the process that produces the regulatory
changes, while it may involve more governments than before, won't be
transparent and will be closed to most stakeholders in the financial
system.
A Progressive Regulatory Reform Agenda
As the declaration
issued last month indicates, a progressive international financial
regulatory regime is concerned with solving social and environmental
problems while being prudent, efficient, and profitable. It can do this
by inserting enough friction in the international financial system to
encourage all actors to think about the consequences of their actions
before they act. This means that while the regulatory framework should
encourage profitable transactions, it should also reward financial
transactions that deal directly with poverty, environmental
degradation, and the creation of jobs and opportunities for poor
people. In addition, it should promote financial innovation that meets
two sets of criteria, both of which have equal weight: First, the
transaction's sponsors must demonstrate how it facilitates financing
for environmentally and socially sustainable activities. Second, they
must show how it will enhance market efficiencies, create new financing
opportunities or mitigate risk.
Progressive regulations should promote responsible financial
institutions. This means that they should not only encourage financial
actors to submit to market discipline, but they should also should push
them to use "triple bottom line" reporting, and adhere to industry best
practices as embodied in such documents as the Equator Principles, the IFC Performance Standards, and the UN Global Compact.
The mechanisms for global financial governance must also enable all
stakeholders to raise concerns and hold financial institutions
accountable for their actions. This means that they should encourage
corporate governance reforms. In addition, all forums in which
financial regulations are considered should be transparent and
participatory. Consequently, the procedures used by bodies like the
Financial Stability Forum and the G-20 should include meaningful
opportunities for all interested parties to submit information, and to
have that information considered by decisionmakers.
While all items on the international financial regulatory agenda
merit progressive attention, there are five items that belong at the
top of the progressive agenda for international financial regulatory
reform.
First, there should be an international community reinvestment
process. This means that all financial institutions - banks, private
equity funds, mutual funds - that receive funds from investors in poor
countries and emerging market economies should invest a portion of
these assets back into projects and instruments from these countries.
Consequently, the regulatory regime should require the financial
institutions to demonstrate that they reinvested a stipulated portion
of these assets in projects in poor countries and emerging markets that
target poverty alleviation and meet certain social and environmental
indicators. They should show that they aren't only investing in the
largest and most profitable projects in the developing world - which
also often generate the most intense environmental and social concerns.
If they aren't willing to invest in smaller, more targeted poverty
alleviating projects, they should invest the funds in intermediaries
that specialize in these sorts of projects.
Second, the international regulatory regime should encourage
financial institutions, particularly commercial banks and insurance
companies, to undertake measures that promote the access of poor people
to financial services. This can take the form of accounts with easy
admission requirements and no fees or insurance products with low
premiums. It should also include establishing easier and cheaper
channels for transmission of remittances from richer to poorer
countries. If financial institutions find it difficult to provide these
services directly, they can invest in institutions that specialize in
providing financial services to the poor.
Third, the international regulatory regime should encourage
governments around the world to establish licensing requirements for
all hedge funds, private equity funds and sovereign wealth funds. These
licenses would allow them to operate in that countries' capital markets
in return for either investing a stipulated annual portion of their
total resources in investments in that country that are targeted at
environmentally responsible poverty alleviation. Alternatively they can
contribute the stipulated portion to an institution that specializes in
these qualifying investments.
Fourth, international financial regulators should learn a lesson
from environmental regulators. They should require sponsors of all new
financial products to conduct impact assessments that show how they
will be used, their risk profiles, the financial costs and benefits
that are expected to be derived from these instruments, and their
likely social and environmental impacts.
Fifth, progressive forces should insist that all efforts at
international financial coordination meet certain procedural
requirements. This means, at a minimum, that the decision-making
processes used in these efforts should be easily understandable to all
stakeholders, should include predictable opportunities for
participation by these stakeholders and should include opportunities
for holding decision-makers accountable for their decisions.
The current crisis has made it possible to begin changing the
dynamic of a system which has clearly demonstrated its enormous
destructive potential and bending it in a more equitable and
sustainable direction. For this to happen, progressive forces need to
prepare and adopt an international financial reform agenda that can be
presented in all regional and international meetings on the financial
crisis, including the next G-20 summit, which is slated
to occur on April 2, 2009 in London. Effective advocacy for this agenda
will help create a more socially and environmentally responsible
international financial system, with additional opportunities for
reform.
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© 2023 Foreign Policy In Focus
Daniel Bradlow
Daniel D.
Bradlow is a professor of law and director of the International Legal
Studies Program at American University's Washington College of Law, and
the SARCHI Professor of International Development Law and African
Economic Relations at the University of Pretoria. He is also a Foreign Policy In Focus contributor.
The
international financial crisis has shaken the self-confidence of the
managers of the international financial system. Their frantic efforts
to prop up the global financial system and stimulate national economies
are noteworthy, not only for the magnitude of the funds they are
throwing at the problem but also for demonstrating they don't seem to
fully understand the system that they created. Their confusion is
producing the best opportunity in 60 years to create a more socially
and environmentally responsible international financial order.
The unfolding of the crisis so far demonstrates the balance of power
has shifted enough that the richest countries have recognized they
can't solve the current global problems on their own and need to
involve the G-20 in efforts to deal with the crisis. However, it hasn't
shifted so much that they have surrendered their control over the
global economic and financial agenda, or that they can be forced to
accept deals that they oppose.
This means that in the short term, global financial institutions
will focus on financial regulation as the primary arena for global
financial negotiations, rather than broader issues of global governance
or justice. It also means that the opportunity for progressive change,
while significant, is limited. This can be seen in the declaration from the November 15 G-20's summit, which contained few firm commitments outside the regulatory area and in the meager outcomes
of the recently concluded Financing for Development conference in Doha,
which leaders of rich countries essentially ignored - although they did
make sure its final statement didn't impose any significant new
obligations on them.
Exploiting the current opportunity requires governments in
developing countries and progressive civil society groups, in the
Global North and South alike, to be realistic in their assessment of
the situation. If progressive forces want to take advantage of this
opportunity, they must develop a program of regulatory reforms that
promote more environmentally and socially responsible financial
institutions, broader access for poor people and communities to
financial services, and more creative funding for poverty alleviation
and development. Successful implementation of this program will change
some of the incentives for financial institutions, set a precedent for
more participatory and transparent international regulatory efforts in
other areas, and create new chances to democratize global financial
governance.
In fact, progressive forces have begun to take advantage of this
opportunity. Last month, hundreds of organizations and thousands of
individuals signed a declaration
calling for a more people-focused, equitable, and socially and
environmentally responsible strategy for dealing with the crisis. The
declaration also called for more responsible and comprehensive
regulation of the global financial system.
The challenge, of course, is that subjects like fair value
accounting, capital adequacy, tax policy, and counterparty risk are not
the sexiest of topics, and it's not immediately obvious how they affect
poverty, financing sustainable and equitable development, energy,
climate change, and food. But if negotiations over international
financial regulation take place without governments in developing
countries and progressive organizations, we're likely to end up with
international financial regulations that are no more responsive to the
interests of the poor than the current regulatory regime and whose
incentives continue to prioritize profit over people, sustainability
and equity. In addition, the process that produces the regulatory
changes, while it may involve more governments than before, won't be
transparent and will be closed to most stakeholders in the financial
system.
A Progressive Regulatory Reform Agenda
As the declaration
issued last month indicates, a progressive international financial
regulatory regime is concerned with solving social and environmental
problems while being prudent, efficient, and profitable. It can do this
by inserting enough friction in the international financial system to
encourage all actors to think about the consequences of their actions
before they act. This means that while the regulatory framework should
encourage profitable transactions, it should also reward financial
transactions that deal directly with poverty, environmental
degradation, and the creation of jobs and opportunities for poor
people. In addition, it should promote financial innovation that meets
two sets of criteria, both of which have equal weight: First, the
transaction's sponsors must demonstrate how it facilitates financing
for environmentally and socially sustainable activities. Second, they
must show how it will enhance market efficiencies, create new financing
opportunities or mitigate risk.
Progressive regulations should promote responsible financial
institutions. This means that they should not only encourage financial
actors to submit to market discipline, but they should also should push
them to use "triple bottom line" reporting, and adhere to industry best
practices as embodied in such documents as the Equator Principles, the IFC Performance Standards, and the UN Global Compact.
The mechanisms for global financial governance must also enable all
stakeholders to raise concerns and hold financial institutions
accountable for their actions. This means that they should encourage
corporate governance reforms. In addition, all forums in which
financial regulations are considered should be transparent and
participatory. Consequently, the procedures used by bodies like the
Financial Stability Forum and the G-20 should include meaningful
opportunities for all interested parties to submit information, and to
have that information considered by decisionmakers.
While all items on the international financial regulatory agenda
merit progressive attention, there are five items that belong at the
top of the progressive agenda for international financial regulatory
reform.
First, there should be an international community reinvestment
process. This means that all financial institutions - banks, private
equity funds, mutual funds - that receive funds from investors in poor
countries and emerging market economies should invest a portion of
these assets back into projects and instruments from these countries.
Consequently, the regulatory regime should require the financial
institutions to demonstrate that they reinvested a stipulated portion
of these assets in projects in poor countries and emerging markets that
target poverty alleviation and meet certain social and environmental
indicators. They should show that they aren't only investing in the
largest and most profitable projects in the developing world - which
also often generate the most intense environmental and social concerns.
If they aren't willing to invest in smaller, more targeted poverty
alleviating projects, they should invest the funds in intermediaries
that specialize in these sorts of projects.
Second, the international regulatory regime should encourage
financial institutions, particularly commercial banks and insurance
companies, to undertake measures that promote the access of poor people
to financial services. This can take the form of accounts with easy
admission requirements and no fees or insurance products with low
premiums. It should also include establishing easier and cheaper
channels for transmission of remittances from richer to poorer
countries. If financial institutions find it difficult to provide these
services directly, they can invest in institutions that specialize in
providing financial services to the poor.
Third, the international regulatory regime should encourage
governments around the world to establish licensing requirements for
all hedge funds, private equity funds and sovereign wealth funds. These
licenses would allow them to operate in that countries' capital markets
in return for either investing a stipulated annual portion of their
total resources in investments in that country that are targeted at
environmentally responsible poverty alleviation. Alternatively they can
contribute the stipulated portion to an institution that specializes in
these qualifying investments.
Fourth, international financial regulators should learn a lesson
from environmental regulators. They should require sponsors of all new
financial products to conduct impact assessments that show how they
will be used, their risk profiles, the financial costs and benefits
that are expected to be derived from these instruments, and their
likely social and environmental impacts.
Fifth, progressive forces should insist that all efforts at
international financial coordination meet certain procedural
requirements. This means, at a minimum, that the decision-making
processes used in these efforts should be easily understandable to all
stakeholders, should include predictable opportunities for
participation by these stakeholders and should include opportunities
for holding decision-makers accountable for their decisions.
The current crisis has made it possible to begin changing the
dynamic of a system which has clearly demonstrated its enormous
destructive potential and bending it in a more equitable and
sustainable direction. For this to happen, progressive forces need to
prepare and adopt an international financial reform agenda that can be
presented in all regional and international meetings on the financial
crisis, including the next G-20 summit, which is slated
to occur on April 2, 2009 in London. Effective advocacy for this agenda
will help create a more socially and environmentally responsible
international financial system, with additional opportunities for
reform.
Daniel Bradlow
Daniel D.
Bradlow is a professor of law and director of the International Legal
Studies Program at American University's Washington College of Law, and
the SARCHI Professor of International Development Law and African
Economic Relations at the University of Pretoria. He is also a Foreign Policy In Focus contributor.
The
international financial crisis has shaken the self-confidence of the
managers of the international financial system. Their frantic efforts
to prop up the global financial system and stimulate national economies
are noteworthy, not only for the magnitude of the funds they are
throwing at the problem but also for demonstrating they don't seem to
fully understand the system that they created. Their confusion is
producing the best opportunity in 60 years to create a more socially
and environmentally responsible international financial order.
The unfolding of the crisis so far demonstrates the balance of power
has shifted enough that the richest countries have recognized they
can't solve the current global problems on their own and need to
involve the G-20 in efforts to deal with the crisis. However, it hasn't
shifted so much that they have surrendered their control over the
global economic and financial agenda, or that they can be forced to
accept deals that they oppose.
This means that in the short term, global financial institutions
will focus on financial regulation as the primary arena for global
financial negotiations, rather than broader issues of global governance
or justice. It also means that the opportunity for progressive change,
while significant, is limited. This can be seen in the declaration from the November 15 G-20's summit, which contained few firm commitments outside the regulatory area and in the meager outcomes
of the recently concluded Financing for Development conference in Doha,
which leaders of rich countries essentially ignored - although they did
make sure its final statement didn't impose any significant new
obligations on them.
Exploiting the current opportunity requires governments in
developing countries and progressive civil society groups, in the
Global North and South alike, to be realistic in their assessment of
the situation. If progressive forces want to take advantage of this
opportunity, they must develop a program of regulatory reforms that
promote more environmentally and socially responsible financial
institutions, broader access for poor people and communities to
financial services, and more creative funding for poverty alleviation
and development. Successful implementation of this program will change
some of the incentives for financial institutions, set a precedent for
more participatory and transparent international regulatory efforts in
other areas, and create new chances to democratize global financial
governance.
In fact, progressive forces have begun to take advantage of this
opportunity. Last month, hundreds of organizations and thousands of
individuals signed a declaration
calling for a more people-focused, equitable, and socially and
environmentally responsible strategy for dealing with the crisis. The
declaration also called for more responsible and comprehensive
regulation of the global financial system.
The challenge, of course, is that subjects like fair value
accounting, capital adequacy, tax policy, and counterparty risk are not
the sexiest of topics, and it's not immediately obvious how they affect
poverty, financing sustainable and equitable development, energy,
climate change, and food. But if negotiations over international
financial regulation take place without governments in developing
countries and progressive organizations, we're likely to end up with
international financial regulations that are no more responsive to the
interests of the poor than the current regulatory regime and whose
incentives continue to prioritize profit over people, sustainability
and equity. In addition, the process that produces the regulatory
changes, while it may involve more governments than before, won't be
transparent and will be closed to most stakeholders in the financial
system.
A Progressive Regulatory Reform Agenda
As the declaration
issued last month indicates, a progressive international financial
regulatory regime is concerned with solving social and environmental
problems while being prudent, efficient, and profitable. It can do this
by inserting enough friction in the international financial system to
encourage all actors to think about the consequences of their actions
before they act. This means that while the regulatory framework should
encourage profitable transactions, it should also reward financial
transactions that deal directly with poverty, environmental
degradation, and the creation of jobs and opportunities for poor
people. In addition, it should promote financial innovation that meets
two sets of criteria, both of which have equal weight: First, the
transaction's sponsors must demonstrate how it facilitates financing
for environmentally and socially sustainable activities. Second, they
must show how it will enhance market efficiencies, create new financing
opportunities or mitigate risk.
Progressive regulations should promote responsible financial
institutions. This means that they should not only encourage financial
actors to submit to market discipline, but they should also should push
them to use "triple bottom line" reporting, and adhere to industry best
practices as embodied in such documents as the Equator Principles, the IFC Performance Standards, and the UN Global Compact.
The mechanisms for global financial governance must also enable all
stakeholders to raise concerns and hold financial institutions
accountable for their actions. This means that they should encourage
corporate governance reforms. In addition, all forums in which
financial regulations are considered should be transparent and
participatory. Consequently, the procedures used by bodies like the
Financial Stability Forum and the G-20 should include meaningful
opportunities for all interested parties to submit information, and to
have that information considered by decisionmakers.
While all items on the international financial regulatory agenda
merit progressive attention, there are five items that belong at the
top of the progressive agenda for international financial regulatory
reform.
First, there should be an international community reinvestment
process. This means that all financial institutions - banks, private
equity funds, mutual funds - that receive funds from investors in poor
countries and emerging market economies should invest a portion of
these assets back into projects and instruments from these countries.
Consequently, the regulatory regime should require the financial
institutions to demonstrate that they reinvested a stipulated portion
of these assets in projects in poor countries and emerging markets that
target poverty alleviation and meet certain social and environmental
indicators. They should show that they aren't only investing in the
largest and most profitable projects in the developing world - which
also often generate the most intense environmental and social concerns.
If they aren't willing to invest in smaller, more targeted poverty
alleviating projects, they should invest the funds in intermediaries
that specialize in these sorts of projects.
Second, the international regulatory regime should encourage
financial institutions, particularly commercial banks and insurance
companies, to undertake measures that promote the access of poor people
to financial services. This can take the form of accounts with easy
admission requirements and no fees or insurance products with low
premiums. It should also include establishing easier and cheaper
channels for transmission of remittances from richer to poorer
countries. If financial institutions find it difficult to provide these
services directly, they can invest in institutions that specialize in
providing financial services to the poor.
Third, the international regulatory regime should encourage
governments around the world to establish licensing requirements for
all hedge funds, private equity funds and sovereign wealth funds. These
licenses would allow them to operate in that countries' capital markets
in return for either investing a stipulated annual portion of their
total resources in investments in that country that are targeted at
environmentally responsible poverty alleviation. Alternatively they can
contribute the stipulated portion to an institution that specializes in
these qualifying investments.
Fourth, international financial regulators should learn a lesson
from environmental regulators. They should require sponsors of all new
financial products to conduct impact assessments that show how they
will be used, their risk profiles, the financial costs and benefits
that are expected to be derived from these instruments, and their
likely social and environmental impacts.
Fifth, progressive forces should insist that all efforts at
international financial coordination meet certain procedural
requirements. This means, at a minimum, that the decision-making
processes used in these efforts should be easily understandable to all
stakeholders, should include predictable opportunities for
participation by these stakeholders and should include opportunities
for holding decision-makers accountable for their decisions.
The current crisis has made it possible to begin changing the
dynamic of a system which has clearly demonstrated its enormous
destructive potential and bending it in a more equitable and
sustainable direction. For this to happen, progressive forces need to
prepare and adopt an international financial reform agenda that can be
presented in all regional and international meetings on the financial
crisis, including the next G-20 summit, which is slated
to occur on April 2, 2009 in London. Effective advocacy for this agenda
will help create a more socially and environmentally responsible
international financial system, with additional opportunities for
reform.
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