Reforming the international financial architecture: UN Secretary-General suggests comprehensive reform package


On the Road to FfD4 - GPF blog series #2
Blogserie FFD4 #2
Blogserie FFD4 #2

By Bodo Ellmers

A fundamental reform of the international financial architecture is crucial for effective development financing and the fight against climate change. This is one of the greatest challenges of multilateralism.

Almost 80 years after the Bretton Woods system emerged from the catastrophe of World War II, the United Nations (UN) Secretary-General has taken up the issue and made a wide range of reform proposals in a recent policy brief. These include the modernization of existing institutions, such as the World Bank and the International Monetary Fund (IMF), but also the creation of entirely new institutions for the management of debt crises or the negotiation of international tax agreements.

The UN Secretary-Generalʹs policy brief is part of the broader UN reform process, “Our Common Agenda”, which defined reform of the international financial architecture as one of the most important tasks that the UN must address. The policy brief should be seen as an input into preparations for both the Summit of the Future and the Fourth International Conference on Financing for Development (FfD4), scheduled for 2024 and 2025, respectively. It has benefited from the expertise of numerous institutions in the UN system.

On the one hand, the proposed reform package reflects the current state of debate in expert circles, but it also contains some innovative proposals that are either completely new or have not received much attention so far. The level of ambition make a welcome change from the more moderate and incremental proposals coming from the ranks of the G20 or from the international financial institutions themselves, such as the World Bankʹs “Evolution Roadmap” that is currently under discussion. The package is also broader in scope than the so-called Bridgetown Initiative to reform the international financial architecture, which is currently receiving much attention in the run-up to the Paris Summit for a new Global Financial Pact.

The Secretary-General is critical of the current financial architecture, saying in the introductory chapters that it is completely outdated, does not meet current needs, and, through unfair treatment of different groups of states, promotes inequality and cements underdevelopment instead of helping to overcome it.

Just one example is the allocation of Special Drawing Rights (SDRs) by the IMF during the COVID-19 crisis. Here, a good half of the allocation went to the rich countries of the global North, which did not need any additional liquidity at all. Meanwhile only a token amount went to the least developed countries (LDCs) and the Small Island Development States (SIDS), which faced urgent needs.  

What’s in the Secretary-General’s brief?

All in all, the Secretary-General’s briefing contains about 50 policy recommendations, which can be grouped into six broad areas. These are:

  1. Global economic governance
  2. Debt relief and the financing costs of sovereign debt
  3. International public finance
  4. The global financial safety net
  5. Regulation of private capital markets
  6. The international tax architecture

Among the particularly interesting and more innovative recommendations is the proposal for governance reform of the IMF and World Bank. It recommends that the much-criticized one-dollar-one-vote system – in which the distribution of voting rights is determined primarily by the quota and thus by the economic power of the countries – should be supplemented by a population factor. This would allow Asian countries in particular to gain voting rights. The paper leaves open whether this arrangement would lead to an abolition of the de facto US veto over decisions by international financial institutions. It also suggests there should be increased use of double-majority voting. This means that, in addition to a majority of votes, a majority of member states must agree. The executive boards are to be supplemented with additional executive directors in order to make sure more voices from the global South are heard. 

New institutions proposed to resolve debt crises

The proposals for new institutions for resolving debt crises are a highlight of the policy brief. The absence of effective institutions is perhaps the most glaring gap in the international financial architecture at present, especially given that many countries are trapped in debt, and have failed to escape with the help of existing institutions. The UN Secretary-General supports the establishment of a new Global Debt Authority, designed to operate in an inclusive manner, independent of creditors or debtors, and to develop the long-sought international legal framework for sovereign insolvency.

A trust fund could be established, attached to but still independent from a Multilateral Development Bank, with support from bilateral donors. Creditors would swap debt to that mechanism, and an expert body would oversee the restructuring. This proposal has been borrowed from academia, and is not uncontested. Until now, the IMF was considered the favourite to take over these functions in debt workouts, while non-governmental organisations (NGOs) had a clear preference for the UN. Moreover, there remains a question over whether the holdouts among the private creditors deserve carrots, or whether sticks such as the legally binding process would be better to enforce participation.  

Tackling tax reforms

In the area of taxation, the paper attempts to strike a balance between developing the Organisation for Economic Co-operation and Development (OECD)’s already adopted “Two Pillar Agreement” on the one hand, and filling governance gaps on the other. In the former area, the UN Secretary-General’s policy brief calls for an increase in the minimum tax rate for transnational corporations, as the current low rate of 15 percent would further fuel harmful tax competition.

The paper also calls for increased taxation at the source, rather than at the company’s headquarters, which would generate additional revenue in the global South. At the same time, however, the brief calls for more inclusive global institutions to negotiate international tax agreements, in line with the UN General Assembly. The introduction of international taxes – for example, on financial transactions on shipping and aviation – is also to be part of the reform programme.     

A whole series of proposals deal with how capital for investment in the global South can be made cheaper on the one hand, and better aligned with the goals of sustainable development on the other. Or how to reduce the volatility of international capital flows and better regulate financial markets to avoid financial crises and their devastating consequences.

What the briefing does not do, however, is prioritize or operationalize the reforms in any way. Only the chapter on IMF reform points out that the ongoing review process of IMF quotas offers an opportunity for reform. The next step would be to translate key reform proposals into effective policy-making processes. The preparatory processes for the Summit of the Future and the FfD4-conference offer the best opportunity for this.