Applications and Proposals

The global decision-making framework we envision would consist of global and sub-global institutions and principles that define the division of labor between them. This framework is illustrated in Table 2 [ PDF 51.5KB | 1 page ] for the four functional areas considered in this study.

Since some institutions already exist in most cells of Table 2, we call attention to existing institutions that might be strengthened, as well as to new ones to be developed. The goal is a framework that supports decentralization and links sub-global decisions with global ones.

5.1 IMF Family

The role of the IMF in the context of the current global financial crisis makes reform especially urgent. As noted, this requires not only changes in the voting shares and management of the IMF, but also initiatives to resolve its deeper structural tensions. In 2009, for example, the IMF faces large demands for risky lending in Eastern Europe and the Baltic states, due to the region's indebtedness to foreign banks (mostly from Western Europe), while the emerging economies of East Asia have strong reserve positions and are generally reluctant to turn to the IMF for support.

The geographical tensions faced by the IMF reflect, in part, differential patterns of economic linkages. If regional macroeconomic or financial spillovers are intense relative to global ones, regions will have a large stake in resolving them. In such cases, regional institutions or facilities can be effective “first responders,” offering more timely interventions and greater accountability. Global interventions may also be necessary for global insurance. But these could be a second layer of response, complementing regional interventions.

A decentralized strategy could also minimize the possibility (and frequent charge) that the IMF will react too slowly in a crisis because it represents the interests of other regions, or because it is trying to contain moral hazard elsewhere. Regional interventions could rely on the region's ability to gather information and contain moral hazard with minimum conditionality. They would also create incentives for policy makers to assume greater responsibility for anticipating and averting cross-border risks within their regions.

Recent IMF innovations to involve outside stakeholders represent a sharp departure from earlier practice, where major lending decisions were made by the IMF alone, even when the World Bank was involved in parallel operations. Similarly, the CMIM represents an important “bottom up” initiative toward decentralization. The CMIM is an important experiment in the ability of regions to enhance stability while making interventions more palatable and effective.

Further decentralization could be achieved by:

• Institutionalizing the involvement of co-lenders in IMF programs. Such arrangements could be subject to limits (say, each participating stakeholder would have to commit to financing at least 20% of a loan), as well as to usual board approvals. But they should be designed to encourage cooperation between the IMF and other stakeholders, especially regional partners such as the ECB and the CMIM.
• Strengthening regional institutions that can underwrite macroeconomic stability as “first responders,” including, in particular, the CMIM, and welcoming them into the institutional framework of IMF support.
• Expanding cooperation between the IMF and other institutions in surveillance. The oversight of government policies, especially of influential members, is difficult for any official organization. This is an important reason for sharing the information they collect with official agencies such as the ECB, ASEAN, and the CMIM, and with the private sector. Differences in interpretation can then provide checks on analytical outputs.

Ideally, such a system would bring greater resources to the task of maintaining international macroeconomic stability, as well as provide more ways for collecting information and for organizing responses to crises that occur in different parts of the world.

5.2 World Bank Family

The challenge in development finance is to develop a flexible and coherent division of labor and appropriate connections among existing organizations. The Meltzer report (2000) notwithstanding, there is a rationale for a global development lending facility. Some types of development finance address explicitly global goals (in particular, global externalities and other global priorities) which would not be adequately financed or prioritized by regional institutions. These ought to be handled by the World Bank. But that leaves many other types of lending that could be more efficiently administered regionally, as the Meltzer report argued.

The World Bank's global mission would include lending for projects that address broad, global objectives, such as the United Nations' Millennium Development Goals. It would also include lending to alleviate negative global externalities, such as climate change, global energy and food shortages, and global epidemics. And the World Bank would also remain the logical site for activities with great economies-of-scale, such as providing an administrative infrastructure for development finance and serving as a “knowledge bank” to collect and disseminate research findings.³³

Regional development banks are best positioned to address sub-global development challenges, particularly for the provision of regional public goods to be shared by countries with common interests. Their lending could benefit from a region's pooled knowledge, expertise, and financial resources, complemented by global knowledge and expertise provided by the World Bank. An example would be investments for regional infrastructure or regional financial markets, which would require an institutional framework that permits a group of countries to join together to approve and manage activities. Regional development banks can function as trusted facilitators to make this happen, with the World Bank invited as a co-financier or a knowledge partner as needed.

A coherent framework for such activities would provide opportunities for global and regional lenders to pursue different policies, while applying guidelines and rules that ensure common operational practices, encourage collaboration (for example, on regional development projects that have poverty alleviating elements), and provide for frequent exchange of information and expertise, including personnel.

Further decentralization could be achieved by:

• Strengthening regional development banks by increasing their capital, permitting their missions to be set more independently by members, and providing greater voice to regional members in managing regional institutions.
• Drawing sharper distinctions between the global objectives of the World Bank—with a focus on global public goods—and the more region-focused missions of regional development banks.
• Expanding the capabilities of the World Bank to support regional banks, for example, via research, infrastructure, and possibly co-lending for regional initiatives.

Ideally, this structure will enable the World Bank to act not only as a guardian of global public goods, but also as a supporter of regional public goods provision through cooperation with regional development banks. The World Bank could aid regional efforts by augmenting regional knowledge, expertise, and resources (say, through funds dedicated for co-lending for regional projects).

5.3 WTO Family

Even if a successful outcome to the Doha Round is eventually achieved (at this writing, an unlikely outcome), global negotiations in the WTO are approaching limits. New rounds of negotiations are unlikely to be undertaken under the present system. At the same time, regional trade agreements continue to proliferate. As Baldwin (2006) has argued, there is much urgency in engaging the WTO in the regional arrangements that trade negotiations now increasingly follow.

Baldwin proposes reestablishing WTO control over the regional negotiations process. He suggests that the WTO: (i) generate analysis on the process of regional agreements, (ii) launch negotiations to consolidate regional agreements, and (iii) provide a forum for the “spoke” countries of hub-and-spoke systems in order to encourage broader agreements.

These are important goals, but we argue that the WTO could go a step further, and play a direct role in the administration of regional agreements. Such a role would make it more relevant to the international trade system and help it gain greater influence in the development and administration of international agreements. Such interactions could begin between the WTO and major regional trading arrangements (such as ASEAN, European Free Trade Association, and Mercado Comun del Cono Sur [Southern Cone Common Market] [MERCOSUR]) to directly address the challenge of aligning FTA practices with global rules. It would take innovative adjustments in the WTO and regional institutions to achieve collaboration. But there are important, symmetrical benefits from such cooperation: regional institutions could profit from the expertise, infrastructure, and credibility of the WTO, while the WTO could advance the broad interests of its membership by participating in the design and administration of regional initiatives.

Further decentralization could be achieved by:

• Establishing a new function within the WTO to support and integrate “limited trade liberalization,” i.e., agreements that cover limited sectors and countries. This function would support regional FTA negotiations and facilitate and monitor their implementation.
• Developing a realistic framework of rules for limited trade liberalization. This effort would expand and strengthen Article XXIV to permit a broader range of limited agreements, while ensuring that these avoid injuring non-members. Ideally, these rules will lead to new trade-creating agreements such as the 1996 Information Technology Agreement.
• Creating a framework to consolidate sectoral and regional agreements into global agreements.
• Encouraging regional groups to adopt multilateral-friendly approaches, including lower most-favored-nation tariffs, simple rules of origin (such as the 40% regional content rule adopted by ASEAN), and regular consultations with non-regional partners on trade and investment issues.

In the Asian context, these initiatives would target the consolidation of Asian trade agreements into a single Asia-wide FTA, and the connection of the resulting FTA with North American Free Trade Agreement (NAFTA), EU, MERCOSUR, and other regional agreements.³⁴ Through such initiatives, the WTO family would support new liberalization initiatives along with stronger efforts to streamline and consolidate past agreements that were negotiated independently from each other.

5.4 FSB Family

The global financial crisis has highlighted the lack of an international framework for monitoring, regulating, and supervising the cross-border activities of systemically important financial firms. The new FSB—a successor to the Financial Stability Forum—established by the 2009 London Summit is intended to create such an institutional framework.³⁵ The FSB has been charged with assessing the vulnerabilities affecting the global financial system, identifying and overseeing actions needed to address these, and promoting coordination and information exchange among authorities responsible for financial stability. In collaboration with the IMF, it is also charged with providing early warning of macroeconomic and financial risks and proposing actions to remedy them.

The effectiveness of the FSB will ultimately depend on the quality of supervision and regulation in national and regional financial systems. In the US, for example, new steps will be required to consolidate what is still a highly fragmented regulatory and supervisory system. In Europe too, a new, EU-wide supervisory framework will be needed. More generally, since the FSB includes a limited number of economies, its work will need to be extended across many other countries through parallel regional efforts.

A partially decentralized architecture for the FSB could be developed by organizing regional forums such as the Asian Financial Stability Dialogue around the FSB, as proposed by ADB (2008). Such institutions could play valuable roles by translating FSB initiatives into a regional context and then helping to implement them. They could also help to collect regional inputs for the FSB process and, more fundamentally, orchestrate efforts to integrate and deepen regional financial markets.

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