Making the global financial system work for all
We are at a critical juncture. Our fundamental challenge is to build a cooperative international order suited to the 21st century: one that delivers win-win outcomes for nations in a multipolar world. It is within our reach to do so. We otherwise face the prospect of fragmentation, and the steady weakening of our capacity to respond to the much larger national and collective challenges of the future.
Why the need for reform?
The G20 Eminent Persons Group on Global Financial Governance was asked by the G20 Finance Ministers and Central Bank Governors in April 2017 to recommend reforms to the global financial architecture and governance of the system of International Financial Institutions (IFIs), so as to promote economic stability and sustainable growth in a new global era; and to consider how the G20 could better provide continued leadership and support for these goals.
At the heart of the review is the future of the open and competitive world order that has brought a large part of humanity out of poverty, raised living standards across nations, and provided the foundation for unprecedented global peace over the last 70 years. That open order remains critical to every nation’s future. But the system of international governance and cooperation that underpins it is fraying. Left on its own, there is a real risk of drift into a fragmented world, with policies in different parts of the world working at odds with rather than reinforcing each other, and with all nations ending up losing.
We cannot return to the past. Our central challenge is to create a cooperative international order for a world that has changed irreversibly: one that is more multipolar and decentralized in decisions, yet more interconnected, and with challenges ahead that are much larger and more pressing than we have seen in decades.
Getting national policies right is at the core of achieving inclusive societies and mutual prosperity. But international and national initiatives should reinforce each other in a way that creates a stronger future for all. An open, competitive and well-coordinated international order will enable win-win outcomes for nations. Its weakening will lead to lose-lose outcomes, as global growth and opportunities for new jobs are eroded over time, and as financial stability and the global commons become more fragile. Equally, cooperative internationalism will survive only if it helps the broad base of nations achieve inclusive growth.
The reforms proposed in this report strengthen and add resilience to global financial governance for this new, cooperative international order. The present system lacks the coherence, joint capacity and effectiveness to support its most fundamental goals in global development and financial stability. It must be brought up to date with the realities of a new era.
We can achieve this by implementing decisive reforms to make the system work as a system. These reforms are within our reach.
They do not require new international bodies. They instead require that we take bold and defined steps to ensure that today’s institutions – global, regional and bilateral – work together as a system. They require that we build trust and transparency among these different institutions, and leverage their combined strengths, so that the system as a whole delivers greater and more lasting development impact and reduces the frequency and damage of crises.
The next decade is critical. We need substantially greater impact in helping countries achieve sustainable development and inclusive growth, and in managing the growing pressures in the global commons. The current pace of change will not get us there.
We need bolder reforms to harness complementarities and synergies in the development system:
Refocus IFIs’ efforts to help countries strengthen governance capacity and human capital, as the foundation for an attractive investment climate, job creation, and social stability.
Exploit the largely untapped potential for collaboration among the IFIs as well as with other development partners to maximize their contributions as a group, including by convergence around core standards.
Embark on system-wide insurance and diversification of risk, to create a large-scale asset class and mobilize significantly greater private sector participation.
Strengthen joint capacity to tackle the challenges of the commons. We must also leverage more actively on the work of the non-official sector, including NGOs and philanthropies.
A decade after the global financial crisis, further reforms are needed to reduce the bouts of instability that set back growth, to keep countries on the path toward openness and to avert another major crisis.
First, to get the full benefits of cross-border capital flows by strengthening support for countries in building deeper domestic financial markets; and developing and evolving a framework of policy guidance that:
Enables countries to utilize international capital flows without risks arising from excessive market volatility.
Enables domestic objectives to be achieved in sending countries while avoiding major spillovers.
Second, to create a more robust, integrated system of risk surveillance of a complex, interconnected global financial system, and systematically incorporate contrarian views.
Third, to create a strong and more reliable global financial safety net by stitching together its fragmented layers.
The role of the G20 in the global financial architecture should be reset. It should focus on developing political consensus on key strategic issues and crisis response. This requires freeing up space from its current crowded agenda and devolving work to the IFIs.
We need governance to ensure that the system works as a system:
Implementing the system-wide reorientation in development finance. A G20-led group, including key non-G20 stakeholders, should steer these shifts over the next three years, before handing the coordinating role to the IFI Heads. This should include achieving complementarity among multiple institutions (multilateral, regional and bilateral), and establishing a clear system of metrics to track impact and value for money.
Addressing development challenges early. A biennial strategic dialogue, building on existing IFI fora, should bring together the IFIs and other key stakeholders to identify future development risks before they create lasting damage, and assess the adequacy of collective responses.
The governance reforms to foster global financial resilience require the IMF to play a key role, in interactions with other institutions integral to the international monetary and financial system, and with regular updates to the IMFC.
Governance reforms within the IFIs themselves should cut back on today’s significant overlap between Board and Management responsibilities. They should enable Boards to focus more on strategic priorities, and empower and hold Management accountable for outcomes.