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International Monetary Reform – A G 20 perspective By Sudhanshu Neema

The recent financial crisis has demonstrated to us the vulnerability of the international financial systems and the extent to which it may damage a particular nation’s economy. The crisis has led to a sense of financial insecurity both in the Western world as well as the emerging markets of Asia. As manifested by the crisis, the current international finance system has not been able to cater to the needs of increasing globalized world where the slightest economic turmoil in one part of the world might lead to a complete breakdown of financial and monetary systems elsewhere. The International Monetary Fund and the World Bank, the institutions designed 6 decades ago have proved their ineffectiveness in the wake of the crisis. While the global markets have integrated much closer, yet the integration of the international financial system has not taken place. Further, the global trade imbalances have constantly escalated there has been no efforts from the international institutions to bring them down to a manageable level. The origin of the financial meltdown of 2007–2008, the greatest economic crisis since the great depression is a matter of intense debate, however, most policymakers agree that the effects of the crisis could have been limited if the international financial system has not been so fragile and unstructured. Further, it has been pointed out that the national monetary and financial systems promoted excessive risk-taking among the market players and were instrumental in fueling asset bubbles. Another key factor in deepening the crisis has been the strong demand from the emerging market economies for foreign currencies; Brazil, Russia, India, China, South Africa, Indonesia, Bangladesh and other similar economies are increasingly opening up their markets

The reforms must take place at the earliest possible opportunity as the financial crisis has crippled the growth of world economy and if not taken care immediately millions will be pushed to poverty. Any reform of the international financial system would require extensive discussion and deliberation and must keep up with the changing face of the world economy. i. to restore liquidity and to provide necessary support to the national central banks . must take the lead and become the ‘premier forum for international economic cooperation'. the crisis may soon take the form of a political breakdown. the emerging world must take active role in ensuring a stable financial system in which the international capital flows are strategically adjusted to suit the needs of all participant nations.and also collecting huge amounts of foreign reserves. Further. The focus on the reform of the international financial system should be based upon the following objectives as highlighted by the current and previous financial turmoil. To offer emergency support in time of crisis to different nations. To regulate the capital and financial markets in all countries and cross-border transactions to avoid excessive risk accumulation and ii. as observed in Greece. The G 20 should take precaution and not become a dead forum like that of SAARC. As an emerging global institution. Cyprus. The G 20. to be relevant to an ever-changing world it must focus on specific agenda. Spain and Italy. even after noticing the effects similar policies had in the South Asian region in 1997-98. as declared in Pittsburg in 2009. the G 20 must lead the world towards an adequate international financial system and ensure minimal damage from any future financial crisis and that the banking and financial institutions of the world are able to provide capital to be invested in sustainable development and growth.

iii. The said institution must be empowered to make international regulation for banks and financial institutions and must also be able to observe cross border financial transactions. such mechanism will also help in reducing funding of terrorist organizations across the world. To guarantee a fair and legitimate international monetary and financial institution which does not become a pawn in maintenance of foreign policies of a few nations For achieving the aforementioned objectives the author of this essay suggest two policy proposals for the G 20. To provide adequate mechanism to avoid excessive debt taking by national governments. The first and the foremost being the establishment of a new non-political international monetary authority based on equitable representation of the G20 member states. The institution should also be powered to make direct inquiries into dubious financial transactions so as to keep financial crime and tax evasion in check. To agree on a mechanism of national macroeconomic policies in such a manner that the internal policies of one nation would not adversely affect others v. It should also be given adequate powers to enforce regulations and punish offenders. an institutionalized and binding international agreement outlining the debt limits of each individual nation state (for example 40% of GDP). In addition to maintaining international financial stability. The new international monetary institution would be based on the International Monetary Fund with a structure which does not allow it to be politicized and gives equitable voice to both developing and developed countries. to ensure that the situation like that of Greece of Cyprus does not occur again iv. The new international financial institution should offer emergency support in time of crisis and must be able to restore liquidity and provide complimentary policy review for national central . Secondly.

The policy suggestions could work along the lines of OECD. The institution should also make policy suggestions to further integrate the international financial system and make sure that capital is available to businesses across the world when needed. which provides non-binding policies which are then adopted by almost every member state. The institution should also be able to provide a stable platform for nations to discuss and formulate similar financial policies to avoid confusion and have prudent fiscal planning. As G 20 comprises of 80% of the world GDP and 67% of its population. The institution could follow the same structure as that of Ching Mai Initiative of ASEAN+3. primarily to ensure international monetary stability. with a stronger institutional structure with binding and enforceable agreements. The institutional mechanism should also be able to avoid excessive debt taking by national governments. the institution should also be seen to be legitimate by nations other than G 20. The author also supports the idea of creating a binding international institutionalized agreement which would compel countries to adhere to a fixed debt limit and stop the treasuries of the . however. any efforts taken by it to reform international financial system. It could also agree on currency swaps and different units of currencies to be used in international trade and finance. would not be a set-back for non-participant nations as South Africa and India already represent the perspective of the poorer Asian and African economies. Further. adequate financing for poorer nations and to ensure that economic and financial disturbances do not lead to government bankruptcies.banks. The structure should be such that it will provide for national policymakers to share their ideas and concerns and provide consultation. the developing nations must not see this institution as western imperialism.

The agreement will also leave less room for governments to raise money for foreign invasions. countries may be allowed to reduce their national debt to 40% or less of their GDP within 20 years. Economic sanctions could be envisaged for non-adherence to the terms of the agreement. However.national governments to issue bonds above a certain limit. Given the enormous economic strength of the G 20 such an agreement does have a potential to become international customary law. A few nations could also be given more time to do the same. thus becoming an instrument of international peace and security. The agreement. For example. Such an agreement would be extremely hard to negotiate but will provide enormous stability to the international financial system. The author is of the view that only such an agreement would be able to stop the recurring catastrophes of governments going bankrupt and in the absence of the same national governments would keep burdening the future generation with more and more debt. It will also ascertain wise policymaking by local governments. . as referred to above. which ultimately will never be repaid. cannot be made mandatory at once as the economic situation of different nations would not allow it. The agreement should also have provisions for the maintenance of debts by local governments so as to provide financial stability to provincial and municipal governments. the author is of the view that the G 20 could agree to enforce the same by strategically reducing the national debt within a fixed time frame. which will force nations to follow prudent fiscal and monetary policies. The agreement will also make sure that the future generations do not have to pay for providing today’s generation. It will also make sure that no government goes bankrupt again while restraining national leaders to provide for their specific vote banks with goodies.

B. Also.While following such an agreement. India +91 88 88 49 30 96 sudhanshuneema@gmail. This will give the institution more legitimacy and would establish a powerful international institution capable of stabilizing and controlling the world economic system for greater good. the author would also like to suggest that the time has come for the G 20 to establish a formal secretariat with required staff and an equitable structure based on the needs of the day.com . Failing which the G 20 may lose its ability to become a meaningful international forum for economic cooperation and development. Lastly. 5th year Symbiosis Law School. LL. the mistakes made by the European Union during the formulation of most European policies and Euro should be avoided at all costs. Pune. the international institution should not become a political pawn like that of the European Central Bank which is a little too inadequate to calm the financial markets.A. Sudhanshu Neema B.