Today, all global financial architecture decisions are produced by the active participation of states in all stages of the international division of labor rather than in the traditional IMF and IBRD formats or by creating additional financial institutions.
Economic regulation institutions always emerge in response to challenges of various crises, but in the course of each specific upheaval, they are tested for strength and efficiency. The International Monetary Fund (IMF) was established at the Bretton Woods Conference in 1944 to transform the world currency system, or rather to create a new system after World War II. On the whole, the task was resolved with active IMF participation.
Over the past 70 years, all major transformations in the global financial architecture were registered legally as amendments to the IMF Charter. One of them was the final break of credit national currencies from the gold standard at the Jamaica International Conference in 1973. Likewise, the BRICS countries are now attempting to seal in the Charter the decision to redistribute funds in IMF capital. An increase in their share will not have tremendous practical significance, but will primarily symbolize the growth of the importance of leading developing markets in resolving international economic issues.
The development of modern global financial markets that was active since the 1980s and 1990s has drastically changed the role of the IMF and the World Bank (International Bank for Reconstruction and Development). They have ceased acting as leading institutional regulators in the global financial system. That said, the annual meetings of their members remain a major forum for intergovernmental consultations on global financial issues. Expert conclusions by IMF and IBRD experts enjoy the highest authority and respect of the international community. The IMF’s “soft power” now exceeds its “hard power” – financial levers.
How has this happened and why?
First, their own financial resources are simply inadequate for resolving more or less important financial issues. Obviously, the financial aid required for the restructuring and recovery of the Ukrainian economy should exceed several times the $17 billion that the IMF can afford to allocate for these purposes. At the same time, no other state creditor (probably with the exception of the Russian government) will agree to loan money to the government of Ukraine unless its fiscal policy follows the roadmap drawn up by its authorities with the participation of IMF experts. Ukraine’s failure to follow such programs has led to the suspension of financial assistance several times over in the past few decades.
Second, there exist several other venues for talks between leading economic powers on global financial issues in addition to the IMF and IBRD. The G20 summits played a major role during the acute global financial crisis of 2007 and 2009. They made it possible to prevent the heavy crisis from developing into a new Great Depression.
Heads of state and government agreed with the participation of central bank governors to coordinate urgent measures on saving markets and preventing the cascade bankruptcy of major financial institutions. They also managed to prevent the disintegration of the world’s commodity and financial markets into isolated protectionist blocs. Today, they are holding successful talks on the standards for the operation and regulation of these markets. The G20 has acquired its own infrastructure in the format of expert groups on the entire range of economic issues – B20, F20, and S20. IMF and IBRD experts occupy a place of honor in these agencies, but are not in the lead.
Finally, the globalization of the world’s economy has paradoxically returned the real financial and economic power to national governments and central banks. International institutions operate strictly upon the mandates of the national authorities of leading economic powers. This fully applies to the IMF and IBRD. The EU offers even a brighter example. Even in the Eurozone with its uniform currency and common European Central Bank, all of the basic decisions are adopted only with the approval of the national authorities. During the disastrous credit contraction in November-December 2008, global bodies simply failed to promptly react to crisis developments. National “rescue teams” had to save sinking banks, funds and financial companies. They allocated money from their budgets or as loans guaranteed by the governments and central banks of individual countries.
However, given the calmer atmosphere of the subsequent recession in 2009-2014, the powers of inter-state bodies, primarily the European Central Bank, were reaffirmed and expanded. It became abundantly clear that all of the major areas of operation, as well as the methods and instruments of regulating financial markets, can only be efficient if they were approved by the EU’s leading economy – Germany. Other EU members had to tacitly accept the conversion of the euro into the German national currency.
Presently, the rules of the game – the standards of operation of global financial markets – are determined by inter-state agreements and the unilateral legal decisions of the more powerful and competitive states. Therefore, the rules for derivatives markets, the scale of transactions of which exceeds the world’s GNP many times over, were rewritten during the post-crisis period by a series of laws adopted by the US Congress and Senate. This primarily applies to the Dodd-Frank Act, which includes the Volcker Rule according to which taxation issues and relations with offshore territories were resolved on the basis of US tax laws. These initiatives were supported by a group of the more advanced countries in the OECD. Every state wants to get money into its national budget.
Consequently, a strategy for building influence by an individual country or a group of major states, including the BRICS, is predetermined by trends in global economic development in the 21st century. They should first develop an efficient national economy able to compete on global commodity and financial markets and then take part in forming the rules of their operation on this basis. Today, all global financial architecture decisions are produced by the active participation of states in all stages of the international division of labor rather than in the traditional IMF and IBRD formats or by creating additional financial institutions. As for national companies and banks, they cannot gain the lead on world markets without competition and cooperation. Global financial institutions like the BRICS New Development Bank will not exert much influence on the world financial system if they are isolated from established agencies.