Proposals For New Financial Architecture Disappoint

By Dipankar De Sarkar, IPS, 15 May 1998

BIRMINGHAM, England, May 15 (IPS) - The 'Group of Seven' leading industrial powers Friday recommended a series of steps to strengthen the global financial system - but a leading Third World critic dismissed them as hypocritical.

The 'G7', comprising Britain, Canada, France, Germany, Italy, Japan and the United States, pinned its hopes for a sound global financial system on international financial institutions - including the International Monetary Fund (IMF) and World Bank - despite intense recent criticism of the IMF's role in Asia's economic and social turmoil.

We confirm the central role we see for the IFIs (international financial institutions) in promoting...sound policies, in helping to prevent failures in future and in responding when crises occur, the G7 said in a communique at the end of the opening day of its 24th summit, being held in this central English city.

Their response has been crucial in addressing recent problems and we must find ways to strengthen their role in the future, the communique said.

In a separate statement on the 'architecture of the global financial system', G7 leaders sought action in five key areas. They called for:

• Enhanced transparency;
• Freer global capital flows and help to countries preparing for integration into the global economy;
• Strengthened national financial systems;
• Private-sector responsibility for its lending decisions; and
• Enhanced roles for and cooperation among the IFIs.

Risk inevitably involves the possibility of failure. We could not and should not seek to eliminate failure entirely, rather large financial systems need to be robust enough to accommodate the occasional failure and to contain risks which might threaten the whole financial system, the leaders said.

Their comments came amid increasing criticism by non- governmental organisations (NGOs) of the role the IMF has played in the Asian financial crisis and the Fund's efforts to promote rapid capital account liberalisation in the so-called East Asian 'tiger' economies.

In a critique of the IMF, Nicolla Bullard of the East Asian NGO Focus on the Global South accused the Fund of prescribing wrong and socially disastrous medicine for the region's ills.

It grossly exceeded its mandate, as laid out in its Articles of Agreement, and has shown itself both arrogant and far too close to the interests of its principal shareholder, the USA, she said in a recent study.

Bullard and other campaigners say fast-track liberalisation - where countries and their financial institutions are encouraged to borrow heavily on the international market while at the same time opening their banking and financial systems to outside investment and ownership - is incompatible with sustainable and equitable development.

The G7's recommendation for countries to move toward free global capital flows was criticised Friday by Martin Khor of the Malaysia-based Third World Network.

In spite of the corruption in many East Asian countries, it is hypocritical for the West to back the IMF because the IMF also contributed to the crisis, he told IPS.

Khor, who is in Birmingham attending a parallel 'People's Summit' set up as a counterpoint to the market-oriented approach to global finance and governance espoused by G8 members.