The Hindu Business Line : Global financial reforms

The cataclysmic developments in the financial and banking sectors in the US and other industrial countries would not have sprung an ugly surprise on the world had the countries woken up sufficiently early to the plenty of alarm signals that showed that a devastating crisis was in the making.

The collapse, and in many cases disappearance without trace, of many companies, beginning from Enron, which were household names, should have alerted the governments, economists and financial analysts round the world that boundless greed, unscrupulous top brass, pliant boards and reckless abandon in handling public funds on the corporate side and lack of any control, regulation and supervision on the side of governments were taking a heavy toll. And still, governments turned the other way.

It is to the credit of Finance Minister, Mr P. Chidambaram, and the Chancellor of the British Exchequer, Mr Alistair Darling, that, on August 12, at New Delhi, well before the onset of the turbulence, they were the first to urge international financial institutions such as the International Monetary Fund (IMF) to work towards developing ‘an early warning system of the threats from the international financial system to financial and economic stability.’ They were also prescient in stressing the importance of reforming the international financial institutions and supporting an effective multilateral response to global challenges and opportunities.

Unfortunately, their Economic and Financial Dialogue, and the launching of the International Centre for Financial Regulation in London with the active participation of business and industry, went unnoticed at the time. If only the world community had paid heed to the fervent call by India and the UK to evolve guidelines for observance by private equity, hedge funds and investment banks so as to ensure that they exercise their ‘exponentially rising’ clout along healthy lines much of the chaos could have been averted.

Good augury

There is now a rising crescendo of worldwide demand for a thorough and comprehensive overhauling of the international monetary and financial system. The conclave of heads of 40 European and Asian countries has pledged collectively to draw up a blueprint in what has been termed a second Bretton Woods.

The blueprint has not taken concrete shape. It is merely a declaration of the determination not to let the unprecedented chaos occur again, and a promise to put in place a system that will maintain stability and promote growth. Only the German Chancellor, Ms Angela Merkel, has come anywhere near listing specific goals of absolute transparency and firm safeguards.

In this background, it is a good augury that the United Nations has constituted a Task Force chaired by Dr Joseph Stiglitz, Nobel Laureate in Economics, to make recommendations on the structural reforms of international financial institutions, and to identify longer-term measures that go beyond protection of banks, stabilisation of credit markets and reassurances for big investors.

The effort is best undertaken under the auspices of a forum like the UN, in view of the need to harmonise the approaches and proposals of the various governments, particularly those of developing countries which bear the brunt of financial disasters.

The reform process should be genuinely participative and multilateral, instead of being the preserve of a privileged few among industrial countries. This was the mistake made by the Bretton Woods Conference soon after the War, resulting in a dispensation under the domination of the rich imposing their judgment on the rest of the world. The new system must guarantee that the poor have better access to financial services, so that the new financial architecture helps reduce poverty as well.

B. S. RAGHAVAN

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