Global financial architecture, legitimacy, and representation: voice for emerging markets

IThe absence of a major financial crisis over the last 2-3 years has meant that global financial architecture (GFA) as a policy issue has been less prominent in the news.Yet little has changed in terms of the underlying conditions which led to earlier outbreaks of crisis and, in this sense, the risk remains high.Policy is based on the economic theory that efficient market allocation of capital is beneficial for developing countries, corrected by the idea that the system must be underpinned by functioning institutions of governance and sound macroeconomic policies.Contemporary GFA thus still focuses on facilitating the free flow of capital across borders, preserving the same market-based characteristics which emerged in the 1980s and 1990s that were common to the rapid succession of crises from 1994 into the new millennium.Official policy has failed to ask whether net capital flows in such a system are stable and positive for a diverse group of developing economies.In other words, is there evidence to support the theory, and if not should we change the theory or try to change the facts?IFIs, in particular the IMF, have continued to focus on this policy mix despite the pressure it puts on domestic political systems, including social expenditure (Nooruddin and Simmons 2006), especially where the democratic preferences of electorates directly confront the preferences of international investors and, eventually, conditionality.This was etched in the drama of the Argentinean debt workout.Meanwhile, the post-crisis period obscures some developments which are nothing short of alarming for the future of global multilateral financial governance.The major Asian and Latin American debtors of the IMF have all but paid off their loans and many are on their way to building an impregnable reserve fortress against future crises, and they question a range of IFI policies.A series of electoral outcomes in Latin America indicate considerable dissatisfaction with ongoing global economic integration and the policies promulgated to deal with it.Debtors are turning to regional development banks where developing country influence over policy is greater.National or regional solutions to future crises are the clear preference, avoiding what was seen as intrusive and inappropriate IMF and other IFI policy advice and conditionality.These countries are effectively 'checking out' of the Hotel Capital Mobility built by the global financial architects While they do want capital inflows, they are determined never again to submit to the humiliation and intrusion of the conditionality of the Bretton Woods institutions (BWIs).The Fund's programmes are now limited to a chronically-indebted sub-Saharan African clientele, where there is little evidence that forty-plus years of IMF policies have been particularly favourable for development growth prospects either (Vreeland 2003).Nor is the rapid growth of international capital flows associated with the GFA closely correlated to economic growth in non-industrial countries, as the chief economist of the IMF among others recently concluded (Prasad, Rajan, and Subramanian 2006).This seismic shift bodes ill for international co-operation and tells us that the current financial architecture lacks both effectiveness and political legitimacy in a wide range of countries, and that effectiveness and legitimacy are linked. This policy brief analyses what this emerging situation means for effective global financial governance, and what can be done about it.The focus is largely the BWIs, and the IMF in particular, as the lynchpins of the GFA.

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