Transparent hype
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The Group of Seven's statement on reforming the global financial system was long on waffle and short on substance <Picture>
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EVEN by the standards of Bill Clinton and Tony Blair, those masters of portentous vacuity, the joint statement of the G7 governments last weekend was impressive. Their statement was billed, and faithfully reported by the world's press, as no less than a plan for a “strengthened financial architecture for the global marketplace of the next millennium”. Discounting at the usual rate, something of substance was still to be expected, because this was after all an out-of-schedule announcement: why bother with such a thing if you have nothing to say? What innocence, with an American election in the offing, to ask that question.
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The statement was not a list of actions but yet another version of the agenda for ponderous deliberation that governments have been wheeling out since the peso crisis of 1995, if not before. A central theme in this endlessly recirculated list of talking-points, oddly enough, is the need for greater disclosure and “transparency”. A transparent rendering of this statement would read, in full, as follows: “We still haven't quite worked out what to do.”
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The only partial exception was the announcement of an intended new lending facility at the IMF—“partial” because one or two details (how much money it will include, where the money will come from, which governments might qualify, how it will be run, and so on) still remain to be worked out. This American idea was first sprung on the IMF during its annual meetings in Washington last month. Officials at the Fund are still very vague about it. One urgent question is whether this facility would be available to Brazil. American officials said it could be—but then again it might not be.
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Does the idea make sense in principle, at least? At first sight, it seems plausible. One of the problems with the present arrangements is that money from the Fund is often too little and too late to save the would-be borrower from an economic crisis. America's idea is that a big pot of cash, ready at short notice to be tapped by governments that have good policies and which have pre-qualified for access to it, may be enough to calm the markets and avoid capital flight. In the best case, the reserve would never in fact be drawn down; its mere existence would suffice.
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But this is surely wishful thinking. Countries will get into financial difficulties and seek help from the IMF, through one facility or another. Access to this new rapid-deployment cash will often be requested (even if, as suggested, the new facility charges more for its loans than other Fund programmes). The question then will be, is the country in question allowed to borrow? But what will be the criteria? Will the Fund maintain a public list of countries that have pre-qualified? That would be the transparent thing to do. But one foresees difficulties. What if the IMF takes a country off its pre-approved list, thereby precipitating capital flight—and obliging the country to seek assistance through one of the Fund's other facilities? That would never do. Better to keep the list private? So much for transparency.
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Details, details
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And whatever became of moral hazard? The central question in putting global finance to rights is how to strike the balance between, on the one hand, coping with financial distress once it has started and, on the other, improving incentives so that lenders and borrowers do not get into trouble in the first place. The G7 says very little about this. The new facility may worsen moral hazard, tempting lenders to take greater risks, unless the pre-qualification tests are demanding. On top of all this, the suspicion arises that political discretion (otherwise known as “American leadership”) will play an even bigger role in the operation of this new facility than in the Fund's other programmes. Again, this militates against transparency and better incentives.
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Half-baked ideas for new Fund programmes are not as helpful as would be concrete, albeit more modest-seeming, measures to help financial markets work better. A variety of ideas on this were put forward after the peso crisis; the same ideas are little further advanced three years on, and the G7 promises only to carry on discussing them.
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For example, notwithstanding the risk of frightening the markets with scary facts, the IMF should be more open about its views of countries' policies and prospects. This could be done right now. Everybody claims to agree in theory—but progress has been slow. The Fund is publishing more than before, but still keeps the most sensitive parts of its appraisals of countries' policies under wraps. What does the G7 have to say about that? “The IMF should adopt a presumption in favour of release of information, except where this might compromise confidentiality.” Orwell would have loved that.
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Another area where reform is still moving too slowly is in improving prudential and supervisory standards in banking. More than a year ago, for instance, countries adopted the voluntary “core principles” of the Basle standards on bank capital—but not all agreed to implement them, or even to set a date for it. The G7 should be pressing for countries that do not yet comply to set a date (even if, as in the case of many developing countries, it will be a long way off). Progress should then be monitored by the IMF. Failure to set a date, or to move briskly in the right direction, should be punished by denial of access to IMF money.
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There were disturbing signs of complacency, as well, in the G7's statement. It began with a list of all the fine things that governments had already done to contain the crisis (Japan's decisive steps to solve its banking problems, and so on), as if to imply that the world economy had turned the corner. If it has, it is no thanks to what governments (least of all Japan's) have done so far. Things are still likely to get worse before they get better. If governments would like to prevent that, they had better understand that actions speak louder than words.
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