The issue of global imbalance is one that requires to be addressed in an urgent manner. Up to now, the IMF and the World Bank have tried their best to contain such an imbalance, but the prevailing global economic crisis has acted to reveal the extensive structural flaws that exist in the Breton-Wood institutions. The current financial crisis acted as an eye-opener as to why a balance is necessary. We all witnessed China floating its surplus cash in the ill-fated US economy. For this reason, there is a dire need to have the world’s countries redesign the global financial order if only to bring reforms to the global financial situation.
To start with, aggregate demand in the world economy requires being stimulated, via coordinated monetary and fiscal policies (Fleming 1962). Although there are attempts today by governments in such countries as the United States, Canada as well as Germany to bail out corporations through what has come to be referred to as the “stimulus package’, (Marshall, 2009), nevertheless this package is still quite a meager amount if intervention, in comparison with the prevailing financial need. China, along with the United States has committed themselves to the implementation of programs of massive spending.
On the other hand, other countries like France, Germany and Japan appear to be shirking their responsibilities. For this reason, a new global financial order would come in and try to act as a stimulating agent towards the attainment of global financial stability. There is also a need to augment the role played by the Breton-Woods institutions, so that we may have credit flowing once again. It is worthy of note here that the policies governing the Breton-Woods institutions were crafted years back when we did not have a financial crisis of this magnitude (Steelman, 2008). When the Bretton-Woods institutions were established, their main aim was to build a cooperative and stable monetary system, at an international level. It was anticipated that such a monetary system would aid in enhancing national sovereignty, while at the same time also averting financial crises, in the future.
The proposal for the establishment of a new global financial order wishes to have a system that is characterized by an exchange rate that is fixed. This is because the use of floating rates is not only a disaster to the development plans of individual countries, but they also tend to be inherently unstable. The current global financial order was established with the main aim of taking care of problems due to balance-of-payment, albeit temporarily. As such, the Bretton-Woods institutions as we know them today have their hands tied when it comes to controlling economic decisions affecting specific countries. In addition, these institutions also lack the mandate to intervene in a given country’s national economic policy (Karunaratne, 2002). The recent developments regarding the global financial crises have taught us that there is a need to harmonize the economic policies of various countries.
With globalization, the economic slump of one country could mean that another country shall also feel this impact, whether directly or indirectly. This is because cross-border trade restrictions have been relaxed. In addition, outsourcing of manpower has meant that corporations are now able to invest in cost-effective economies, thus creating jobs and revenues to their country of investment (Marshall, 2009). When inflation rates rise, foreign investors may relocate, resulting in lost jobs. In view of this, we need a new global financial order that shall regulate the movement of international capital.
Jeffrey Sachs, an economist at Harvard Business School has noted that close to 60 percent of the countries in the developing nations (Karunaratne 2002), with a total of 1.4 billion people, are under the economic policy dictated by the International Monetary Fund (IMF). This figure does not include India and China, the two most aggressive economies in the developing world. It is thus necessary to have a new world order that will incorporate both India and China.
The financial crisis that affected Asia, along with other economies in the early 1990s, is a clear illustration that we may expect an economic crisis in those fragile financial systems whose exchange rate regimes are dependent on open capital accounts. Those countries that suffer as a result of speculative attacks are also affected by economic disruptions, and end up spreading the ensuing financial crisis to the neighboring nations (Karunaratne, 2002). It is thus imperative that we redesign an international financial order. This way, we will come up with a robust system of international fiancé. Also by redesigning the current global financial order, we shall be in good stead to spare the various national currencies from excessive speculative attacks. Indeed, speculative attacks of national currencies have been noted for their role in elevating the rates of inflation of individual countries. In addition, a redesigning of a new global financial order shall also assist in containing the emergence of a financial crisis, at a regional level.
With regard to the issue of capital flow amongst the various nations, the new global financial order endeavor to implement policies that enhance the locomotive growth of the world economy. The embracing of sound financial and banking practices is with a view to ensuring that those nations that are the recipient of its funds are not subjected to speculative attacks and vulnerability. By initiating a program of capital management, the institution will be aiming at dissuading and monitoring the financial centers for offshore investments, as well as hedge funds. In this case, the new financial order shall endeavor to ensure that these do not engage themselves in speculative attacks, thus stabilizing the economy of individual countries.
It is not in doubt that both the World Bank and the IMF are already overwhelmed by the increase in the number of countries that are in need of financial aid from these institutions (Steelman, 2008). Alive to such a realization, this proposal wishes to point out the need to have more donor nations being included in the financing of the new global financial order. Such would include countries from developing nations like India, China and Brazil. With their financial contributions, the new financial order shall not only enjoy a boost of its resources, but the membership dues of these countries to the institution will also increase. The idea here is to somewhat neutralize the dominance of both Europe and the united states with regard to the current financial order. This way, a platform shall have been laid for addressing financial issues from the emerging economies as well.
It is imperative that the dividing up exercise that has traditionally been a characteristic of the leadership structure of both the IMF and the World Bank is reevaluated (Steelman, 2008). As such, a new global financial crisis would be in good stead to implement this undertaking. The new global financial order wishes to be governed by leaders who have been appointed on the basis of merit, and in an open and independent manner. This way, fairness, equity and tolerance shall have been ingrained into the system on this new institution. The desire is to have the interest of both the developing as well as the developed countries have taken care of.
In light of the prevailing global economic crisis, it is the intention of the new institution to establish a consolidated fund. This fund shall then seek financial assistance from countries like China who have not been greatly affected by the financial crisis. As a leveraging effect, the donor countries shall then have a say in determining the manner in which the funds should be utilized. In addition, the new financial order would also wish to initiate a public-private initiative, especially amongst the developing economies. This is for purposes of cushioning corporations in the future against being hit by a credit crisis. In this case, the private sector shall be required to provide the necessary funds to bail out government corporations that have been plagued by financial losses.
It is important to note that the credit crunch that has hit the United States and Europe came as a result of a failure by the lending institution to regulate their funds (Marshall, 2009). As such, control over financial institutions at an international level shall also be another concern for this institution. However, this does not in any way mean that such financial institutions shall have no say in the way they handle their lending activities. The idea is to instill accountability and transparency in these financial institutions.
Work cited
Fleming, Marcus. (1962) “Domestic Financial Policies under Fixed and under Floating Exchange Rates,” International Monetary Fund Staff Papers, 9: 369-379.
Karunaratne, Neil (2002). Globalization, crisis contagion and the reform of the International financial architecture. 1033, 4461.
Marshall, Andrew. (2009). The Financial New World Order: Towards a Global Currency and World Government.
Mundell, Robert. (1963), “Capital Mobility and Stabilizing Policy under Fixed and Flexible Exchange Rates,” Canadian Journal of Economics and Political Science, 29: 475-485.
Steelman, Jacob. (2008). A new world financial order.