The brave new regulatory world?

Although the precise details of the new regulatory framework are still being worked out, initial steps can be seen in the establishment of the Financial Stability Board at the April London Summit, and there has been broad agreement that there should be some increase in the ratios of Banks' capital reserves as against the amounts they lend or invest, as well as an acceptance in principle of the need to increase the voting rights of developing and transition countries in the IMF and World Bank governance structures.⁵ Still, it remains to be seen if – some ten years after the Asian financial crisis and five years after the crashes in South American economies – the heady days of "hot money" flowing in and out of economies at (literally) electric speed are really to be curtailed, or if instead, global capital will quickly return to business as usual.

Received wisdom has it that Wall Street must be saved in order to save Main Street; and that the City of London must be saved to save the cities of the developing world. Money – the lifeblood of the economy – is first being pumped into the global financial system by the only solvent bankers left standing, reserve banks, fulfilling their ultimate roles as lenders of last resort. The regulatory "pound of flesh" that states will demand for such extraordinary measures will certainly be that the system must subject itself to greater government intervention generally, and increased levels of transparency and accountability, more specifically.

Whatever the exact format of the new architecture of global finance, it will certainly have to be different from the last major effort to restructure the rules. Just over ten years ago, in the face of widespread and fierce criticism, the plug was finally pulled on the OECD's Multilateral Agreement on Investments (MAI). The MAI had sought to liberalise international investment flows such that states – especially developing states – would no longer be able to place restrictions or conditions on foreign investments intended to insulate themselves against the extremes of capital flight. It was an initiative that indisputably, and knowingly (it was negotiated in secret), greatly favoured rich-state financial institutions.

With the benefit of hindsight afforded by the global financial crisis, the episode was a close shave for both poor and rich states, as the impacts of what George Soros has labelled the "unleashed and unhinged" financial industry, would surely have been magnified. The thought hardly bears contemplation.

The sobering message that bears repeating is that the na?ve belief that unregulated capital markets will always deliver desirable results, even for their most powerful participants, has now been categorically refuted. This is not just a matter of accepting that markets fail, no one seriously denies that. Rather, it is to see the Emperor's nakedness for what it really is. The market is not a self-regulating mechanism, but one that ultimately requires exogenous intervention to right itself. The "invisible hand" is not somehow subliminally guiding the economy to nirvana, but is operating randomly, driven by whims and just as likely to lose the jackpot as to win it. Economic historian Karl Polanyi said all of this more than 60 years ago (when reflecting on the lessons learnt from the banking crisis of 1907 and Great Depression in the 1920s), but his caveats about the massive social and economic dislocations that are the inexorable consequences of free market capitalism have been slowly buried over the intervening years; at least until now. It is no surprise that in the past year; much more has been heard of the champions of state interventionist, supply-side economics, Polanyi and John Maynard Keynes, than of their neoliberal opposites, Fredrick Hayek and Milton Freidman.

A multitude of political, social and economic claims have been, and will continue to be, made during this design phase of the new architecture of global finance. To be sure, the golden economic goose of the established economies must be resuscitated, cared for and better supervised to ensure that it keeps laying its golden eggs. Nonetheless the plight of those living in the developing, and even the emerging, economies (the vast majority of whom have so far not shared in the golden global wealth to any significant degree), must comprise a key part of that process of renewal.

Change or 'Back to the Future' again?

Over the past year a number of measures have been put into place. Initially, stop-gap measures were instigated by international organisations. In response to the global food crisis in May 2008, the World Bank established a $1.2 billion rapid financing facility for poor countries to help them combat rising food and fuel prices. In October 2008, the International Finance Corporation, the Multilateral Investments Guarantee Agency (both part of the World Bank Group), and the WTO pronounced their intentions to promote their support for foreign direct investments and trade financing.⁶ In early 2009, as part of its response to the global financial crisis, the IFC established the Global Trade Liquidity Pool Program, a funded trade finance program of up to $8 billion. More promises were made at the G20 Summit in London, at which leaders pledged, among other things, an additional $500 billion in funding for the IMF, $250 billion in IMF Special Drawing Rights available to all IMF members and at least $100 billion of additional lending by the multilateral development banks, including to Low Income Countries.⁷ In July 2009, heads of states, and of international and regional organisations launched the L'Aquila Food Security Initiative. Each of these measures was endorsed, though not always backed by specific financial commitments, at the most recent G20 Summit in Pittsburgh.

What is essential, however, is that beyond these bandaid responses, there is a concerted effort to recognise and respond to the economic and social needs of the poor on a sustainable long-term basis. In the case of individuals these needs are expressed as human rights in international (and domestic) laws, laws which also stipulate the obligations of public authorities (and through them, of private entities, including corporations and financial institutions) to respect, protect and promote such rights. Economics may typically view human rights concerns as externalities, unamenable to meaningful calculation, and therefore irrelevant to any endeavour to design the regulatory framework within which an economy is to function. But that is to view human rights through the wrong set of glasses. Human rights, whether or not they are legally framed, are ultimately political constructs, and as such can – and indeed must – be used to achieve political ends.

Securing the most basic human rights of the poor, be they in wealthy or impoverished states, are what, above all, any fair, rational economy should be about, even if it is deemed that the best way to achieve that is to allow the rich to get richer. The creation and especially the distribution of wealth cannot, if it ever could, be justifiably unconditional. It is these conditions that must now be the focus of the brave new world of global finance that will emerge over the months and years ahead. But it will take courage and great political fortitude. The scale of this challenge, at least in the West, can hardly be underestimated, as is so clearly illustrated by the fact that even when the US Government owns 80% of AIG after pumping nearly $180 billion of taxpayer's money into the ailing insurance giant, it was still apparently powerless to stop the AIG executives awarding themselves $165 million in bonuses earlier this year. And this against the backdrop of the jobless statistics in the US hitting a generational high of 9.84% as of September 2009.⁸

The increasing prominence of corporate social responsibility (CSR), in both its mandatory and voluntary forms, may well provide something of a guide. CSR has in fact already reached the banking sector albeit only in respect of development project financing. The Equator Principles require banks to monitor the social and especially environmental impacts of the projects for which finance is sought. More than 60 financial institutions world-wide have signed up to the initiative and the scheme, though still only a few years old, has been broadly welcomed by banks and by civil society organisations.

The Equator Principles are hardly a template for fulfilling the redesigning task that confronts the global capital markets today, but they are a step in the right direction. In his 2009 Report to the Human Rights Council, the UN Secretary-General's Special Representative on Human rights and Transnational Corporations, John Ruggie, recognised the important role his good offices can play in this mighty task. "Companies have had to acknowledge that business as usual is not good enough for anybody, including business itself, and that they must better integrate societal concerns into their long-term strategic goals," he noted. The Report concludes that it will seek to find the opportunities presented by the crisis in operational zing the much telegraphed three-pronged policy framework: to consider the duties of states to protect against human rights abuses; corporate responsibilities to respect human rights; and the matter of access to effective remedies when human rights violations occur. The considerable goodwill capital that Ruggie has amassed from all sides of the CSR debate thus far in his mandate, could be well used in the wide-ranging policy debates that have already begun.

In truth, there will be few institutions of global or domestic governance that will not seek input into, or be in some way affected by, the process of devising the new global financial order. It is that big, its import that great and its reach that far. Even one year on from the tipping point of the crisis, good will, clear heads, a sound appreciation of the lessons learnt from past and present financial crises and, above all, a keen sense of global economic justice, will certainly be high-price commodities in what lies ahead.