International financial architecture: renovation or irrelevance?

October 11, 2014

International financial architecture: renovation or irrelevance?
The AIV advocates rapid and thorough restructuring

The Hague, 11 September 2014

The international economic and financial architecture is not functioning properly and is in dire need of reform. In its most recent advisory report, ‘Improving Global Financial Cohesion’, the Advisory Council on International Affairs (AIV) concludes that the current system will become hopelessly outdated without rapid intervention. The AIV notes that the decision-making process is misaligned with the current geopolitical situation, that poor counties are barely represented, and that an adequate response is needed to the ever increasing intertwining of financial markets and international wealth accumulation.

The AIV argues that while the world needs financial and economic stability, the current international architecture, which is rooted in the Bretton Woods Agreement, will not allow it. Pressure on the system is increasing due to the combined effects of the aftermath of the crisis of 2008, the dynamics between financial markets and financial institutions, and growing global inequality. Further complicating the task of managing the system is an opaque accumulation of – partly overlapping – treaties and regulations.

A well-functioning financial system benefits not only the West, but also low-income countries. Because of their limited integration into the global economy, low-income countries were only partly affected by the crisis of 2008 and capital flows remained fairly constant. The continuation of the crisis has resulted in more volatile capital flows, which will have negative effects on their economic growth.

The AIV views the absence of a united approach to improving global financial and economic stability as the main problem. Despite international agreements, national interests continue to predominate, and arrangements within the G20 sometimes do more harm than good. Other reasons for concern are inadequate management structures and supervision.

In the AIV’s opinion there is no need for a new system, but the current one is in urgent need of being reworked. Once this has been completed, rightful expressions of discontent – such as the establishment of the new Development Bank by the BRICs– and a further breakdown and erosion of the system can be avoided.

The AIV recommends that more attention should be devoted to global governance and representativeness. This could be achieved by means of a new treaty body under the auspices of the UN (Global Economic Co-ordination Council) and reforms within the IMF, the World Bank and the Financial Stability Board. Furthermore, the AIV calls for an explicit focus on the financing of the post-2015 development agenda, for an active Dutch contribution to increase global financial stability and for the strengthening of financial sectors in low-income countries.

The changes that the AIV advocates are radical and in some cases time consuming. But opportunities also exist under the current system to enhance the position of low-income countries in the short term, including making better use of existing facilities such as funds aimed at negating the effects of financial instability.