World Council of Churches

A worldwide fellowship of churches seeking unity, a common witness and Christian service

R. Mshana on current financial system

09 January 2004

R. Mshana, WCC programme executive for Economic Justice
9 January 2004

The World Council of Churches and the overall ecumenical family is concerned with the current global financial system which has continued to throw many people into poverty while concentrating profound wealth and power to a few corporations and countries in the world (the UNDP Human Development Report 1998 and Social Watch Report of 2001 are helpful documents with statistics that show this wealth concentration in which only 20% of the world population owns more than 83% of the global wealth). This scenario leads to violence and a threat to world peace if no serious measures are taken.

In this short presentation an attempt is made to define the global financial system and its shortcomings that contribute to the current global financial crises, social injustice and marginalization. The crises are viewed as signs of unjust financial system which can not be addressed by only applying short term measures as has been the case today. This contention does not, however mean that a financial system without crises symbolizes a just system. Any just system must incorporate equity and ethics.

The crises that accentuate the current global financial system (debt crisis, currency crisis, banking crisis and capital market crashes) have been particularly severe in developing countries and Eastern Europe than in Western industrial countries. This problem has resulted into a variety of inconclusive debates on how to bring about an international financial reform. The industrial countries seem to manage these crisis giving an impression that even poor countries could do so. But Soros observes, "While the periphery (meaning developing countries) went from crisis to crisis, the center (meaning industrial countries)" remained remarkably stable and prosperous. Economists differ regarding the causes but it is a fact that history is punctuated by financial crises while the evolution of the international regulatory framework has not kept pace with the globalization of financial markets. In other words, the fact that the center is secure should neither deter efforts for drawing a global regulatory framework nor give an impression that the center will always remain secure while global financial inequality is ignored and left to be solved by markets alone.

One of the many tasks of dealing with unstable financial systems is to control the huge growth of international capital movements. In Countries of the South privatization is the result of IMF ‘inspired' SAPs. Privatization plus the deregulation of domestic capital markets plus increasing mobility and growth of international capital has contributed to growing foreign control over domestic assets and markets of countries in the South. Lack of financial resources in the IMF has led to a growing role of bilateral and private lending to developing countries and Eastern Europe resulting into wealth heaemorage from these countries and deepening poverty. There is another great concern of de-linking finance from the production of goods and services. Every business day over USD1.5 trillion worth of currencies are traded on international money markets. Only a small amount of this activity finances trade in goods and services. "Finance is no longer just a means of facilitating the exchange of goods and services. It has become a dominant force shaping people's destinies. Every day, the transactions of stocks, bonds, and commodity futures, mostly speculative, total some US $ 4 trillion. Speculators grow very wealthy doing nothing more tangible than rearranging zeroes and ones on computer chips… Meanwhile, much of what is truly valuable, that which sustains human life and natural ecosystems, is treated as worthless unless it can be bought and sold."

At another level there are inadequate actions by financial institutions dealing with financial volatility as well as refraining from designing guidelines for a just and stable system for all countries and people. Soros observed correctly that "markets are amoral: they allow people to act in accordance with their interests but they pass no moral judgment on the interests themselves. Yet society cannot function without some distinction between right and wrong. Soros put it this way " financial markets do not tend towards equilibrium: Financial markets need a visible hand to guide them and keep them from going off the rails." The World Council of Churches is concerned with this moral aspect of the financial system.

What is a financial system?

In simple terms, a financial system is the group of institutions in the economy that help to match one person's savings with another person's investment. Financial markets which are part of the financial system are financial institutions through which savers can directly provide funds to borrowers. Another component which is part of the financial system include financial intermediaries. These are institutions through which savers can indirectly provide funds to borrowers. The global financial system is however more complex than these simple definitions. It has to be viewed from the perspective of the political economy within which financial Capital at global level is managed from the center as mentioned by Soros while the periphery falls deep into crises. From this perspective, management of the global financial Capital is a system of an interplay of major global financial actors which include private institutions notably large transnational banks, national governments of developed and developing countries, International financial institutions particularly the World Bank, the IMF and the regional development banks. Through financial transactions, these three sets of institutions are responsible for most domestic and global movement of financial capital. We have mentioned that history is marked by a number of financial crises indicating that this system has to be transformed in order to resolve the following problems:

Financial volatility

The deregulation of global finance has led to financial volatility which in turn creates poverty as happened in East Asia. In the 1990s, the IMF and World Bank backed the opening up of financial markets in developing countries as the latest prescription for economic growth. As country after obedient country did as it was told, there was an explosion of currency transactions aided by electronic communications. In 1980, the daily average of foreign exchange trades was USD 18 billion; today, USD 1,500 billion changes hands every day. Virtually none of this has to do with producing goods and services. Money chasing money in short-term speculation has replaced productive enterprise as the global economic motor. Capital is moved instantly from one market to another, to take advantage of interest-rate differentials, unstable currency values and other virtual margins. The effect is artificial confidence, debt, volatility-and crash. Such a fate befell the Asian ‘tiger economies' of East Asia in 1997. Money that has surged in, surged out. Financial crisis led to economic crisis, in which because of both the capital flight and IMF rescue conditions- those clinging to the tiger's tail were discarded. Around 13 million people lost their jobs and thousand of small businesses went to the wall. By 1998, 75 million more Indonesians lived in poverty than in 1996 . Many have yet to recover. They are not alone: in the global casino, Mexicans, Russians and Argentineans have also faced similar problems. This problem should not be viewed as isolated cases and considered country specific but rather should be linked to the failure to regulate financial markets both domestically and internationally.

Money laundering and speculation

Money laundering - disguising the origin of criminal's cash and then transforming it into apparently legitimate investments - is another big issue. In 1997, annual turnover from the global trade in illicit drugs alone was estimated to have reached $400 billion. Add to this the proceeds from financial fraud, prostitution and other crimes, and the amount flowing into the pockets of criminals each year (the GCP - gross criminal product) is even bigger. An IMF working paper published back in 1996 estimated a figure of $500 billion per year. In 2001, 417 cases of money laundering for a total of CHF 2.7 billion. have been reported in Switzerland Some think that the GCP is now so big that it could pose a threat to national economies and even to the stability of the international financial system. If only for this reason, it is high time that the world's financial community set minimum standards covering anti-laundering rules. Countries which refuse to abide by them would face punitive taxes on capital channelled through their financial centres and would have international recognition denied to financial transactions taking place on their soil. As for the major financial speculation ,a proposed currency Transaction Tax (CTT) such as the Tobin Tax could be instituted. Only a small proportion of the global population benefits from speculation. The people who benefit from speculative financial movements are, for the most part, better educated and wealthier than the vast majority of fellow citizens. They are the elites, whatever the country. As noted above, they have fewer connections to the real economy of production and exchange than most people. And their purpose in trading financial assets, again for the most part, is to make a profit quickly rather than wait for an investment project to mature.

People who do not participate directly in the buying and selling of short-term financial instruments are nonetheless influenced indirectly by the macroeconomic instability and contagion that often accompany interruptions in financial market flows. This is true for people both in developed and developing countries. In developed countries, the voracious appetite of financial markets for more and more resources saps the vitality of the real economy -- the economy that most people depend upon for their livelihood. It has been shown that real interest rates rise as a result of the expansion of speculative financial markets. This rise in real interest rates, in turn, dampens real investment and economic growth while serving to concentrate wealth and political power within a growing worldwide rentier group (people who depend for their income on interest, dividends, and rents). Rather, the long-term health of the economy depends upon directing investable funds into productive investments rather than into speculation.

The Network Women in Development (WIDE) point out that ordinary people, particularly women, take on the burden of excessive financial risk-taking and financial instability even though the main decision-makers in the financial world are men =) More specifically, when financial crises occur, it is the care economy that compensates, i.e. women are called upon to provide non-market substitutes for marketed goods and services that are no longer affordable. Studies show that during the Asian crisis, women had to work longer hours both in terms of paid and unpaid work in the case of the Philippines and Indonesia, among other countries, because women were willing to accept low-paying jobs and work longer hours to support their families. Meanwhile, in the case of South Korea, women were the first to lose their jobs (per the WB, 1998, 86% of job losses in the banking and financial sector were women's jobs). In short, financial crises hurt women more than men.

Debt trap for both poor countries and so-called emerging markets

Despite pledges made at the Earth Summit in Rio in 1992, the total debt burden in developing countries has climbed by 34 per cent reaching USD 2.5 trillion in 2000 . As the burden on poor countries grew and balance-of-payments crisis multiplied, and the IMF and World Bank began to impose stringent conditions on debtor nations in return for rescue packages. "Structural Adjustment" became the new route to economic health. But the prescription was steeped in the new orthodoxies of deregulated markets, dismantling trade barriers, privatization, the shrinkage of government, and cutbacks in social expenditures that gained ascendancy in the Reagan-Thatcher era. There were massive layoffs in the public sector, unemployment spiraled, and budgets for health, education and social safety nets were reduced. Exports to earn foreign exchange were preferred to investment in basic necessities and domestic food production.

Structural adjustment may have helped salvage the international banking system, but it did little for struggling local economies and released few countries from debt. So both debt and measures imposed for its redemption served to push poor communities living in the cracks of the tottering modern economy into deeper trouble. As the national cake shrank or its product melted away in debt repayments, poor people's claim on a slice of it declined proportionately. If services and livelihood incentives barely reached them in the past, now they were positively discriminated against. Their vulnerability became acute. The global financial system is, therefore working against people in poverty. The Current efforts of the G7 to resolve the debt problem through the Heavily Indebted Poor Countries Initiative has resulted into very insignificant assistance so far. Up to now financial resources still flow from poor countries to rich ones through debt servicing. In 1997, the debtor countries paid the North USD 270 billion in debt service, up from USD160 billion in 1990; in net terms, African countries paid USD 162 billion more than they received in new loans in 1997, up from USD 60 billion in 1990. As for the net transfer of funds from Latin America to the North see Joe Hanlon's study on "Defining Illegitimate Debt.

Negative capital flows to developing countries

In recent years, private investments have become the main source of financial supply to countries of the South. They grew by more than five times during the 1990s, from USD 209 billion to USD 1,118 billion. Private finance is often compared favorably with aid, but it is a different creature. The source of development finance is entirely profit-based. It mainly goes to economically attractive markets and often to resource extractive sectors. The poorest countries receive next to nothing: in 1998, they received 0.5 percent of financial flows. For instance in the case of Africa, its share of FDI fell from 25% of all multinational corporate investments during the 1970s to less than 5% during the late 1990s. And even the tiny amounts of FDI in Sub-Saharan Africa in recent years can be attributed in large part to oil company investments in Angola (USD 1.8billion) and Nigeria (USD1.4 billion) The only substantive FDI flows into Sub-Sahara Africa unrelated to extractive minerals by 1999 were into South Africa (USD1.4 billion). The bulk of FDI into South Africa was based on mergers and acquisitions. Many thousand of jobs were lost in the process, and inappropriate technology transfer made in South Africa all the more dependent and vulnerable. FDI exacerbated Africa's vulnerabilities. One could say, this scenario is an FDI caused poverty in Africa.

Financial stabilization institutions: Are they adequate?

Undemocratic IFIs

First and foremost, powerful global financial institutions are predominantly controlled by industrial countries and are undemoctratic in their forms of governance. Although the voting system in the IMF and the World Bank was adjusted in the course of time, rich countries still account for over 60% of the voting strength at the IMF and the World Bank, compared with just 17% in various United Nations bodies (roughly proportional to their share of the world's population). Major decisions have to be taken with a majority of two-thirds of the membership and 85% of the votes, effectively giving veto power to the United States. The logic is that the World Bank and the IMF are lending institutions and that lender governments can be expected to demand some degree of control over the use of their funds. Nevertheless, the decision-making process would be less undemocratic if the voting system would reflect the distribution of population among nations. Furthermore, research by the IMF has shown that the GDP figures on the basis of which votes are allocated seriously underestimate the true GDP of Southern countries. A calculation based on "purchasing power parity" rather than the official exchange rates with the US dollar, corrected for currency fluctuations and different costs of living, would be more in tune with reality. However, challenges to change the voting structure in favor of poorer countries are met with the reply that this would reduce the two institutions' access to capital.

In 1968, the Articles of Agreement of the IMF were amended to allow for the provision of SDRs (in addition to the facilities of the general account). These SDRs are allocated to countries in proportion to their quota. The main difference between the IMF general account and the SDRs lies in the fact that in the general account the IMF does not engage in new asset creation, while it does so in the case of SDRs. The idea behind the creation of SDRs is that when international liquidity is needed, it should be created by public institutions rather than the private financial system. However, the issue is not only to be able to create extra international liquidity, through SDRs, when necessary, but also for more relevant SDRs. Therefore, it has been argued that a ‘link' should be established between SDR creation and financing for development. Such an approach would be ‘needs-based' rather than ‘power-based' (as in the present system). In addition, the ‘link' could be seen as a way in which wealthy countries can engage in ‘reparation payments' to the South. So far, this idea has systematically been rejected by the powerful countries, even if it was linked directly to reducing official debt. It is obvious that SDR creation would undermine the role of the US dollar as the world's key reserve currency. The link is however essential and necessary for creating liquidity needed for development.

Lack of effective democratic global institutions for financial stability

There are no effective measures at the global level for dealing with financial instability. The quest for financial market control dates back to the Great Depression in 1930 leading to financial stabilization instruments such as the International Monetary Fund set to provide a framework for facilitating the exchange of capital among countries as stipulated in its Articles of Agreement VIII and XIX. The World Bank has no direct responsibility for governance of international financial system though it participated as a source of financing for the international bailouts in response to the recent financial crises.

The planning for the post-war world during World War II envisaged a set of organizations which would deal with currency stability and international payments, economic reconstruction and advancement of less developed economies, international trade and investments (IMF, The World Bank and GATT now WTO) were formed). But there are more than 300 international organizations currently dealing with economic matters at global and regional levels. The main players in the context of the liberalization of international capital flows are, however, the OECD, the EEC/EU and the BIS while the self-appointed G7/8 sets the main parameters. These institutions are mainly dominated by and benefiting to a great extent the industrial countries. The responsibility for international capital movements is not neatly assigned under this institutional structure because originally it did not include a global regime for capital movements and no regime has yet emerged. At the global level there is a patchwork of rules and agreements bearing directly or indirectly on several aspects of international investment and other financial flows but one, which still accommodates a considerable measure of national policy autonomy for the majority of countries. The only regime applying to cross-border monetary transactions is that of the IMF but according to its articles relate to current and not capital transactions. It proved inadequate in resolving the recent financial crises.

There has been no agreement in the IMF Board on the use of capital controls, for instance, as displayed by Malaysia to manage her recent crisis. The IMF Progress Report states, " Executive Board reached agreement on broad principles but differences remain on operational questions about the use and effectiveness of capital controls," and they put stronger emphasis than was previously placed on the need for a case by case approach and on the adoption of prudential policies to manage the risks from international capital flows. The WTO under articles XII-XV and section B of Article XVII of the Agreement permit the use of quantitative restrictions on imports by countries facing balance- of- payments problems but in this context the judgment of the IMF is sought as to the validity of the reasons advanced to support the imposition and maintenance of these restrictions. Through GATS, WTO affects financial markets, because the sectors covered by GATS include financial services. Both the pace and the nature of expansion of global network will henceforth be affected by commitments as to market access and national treatment made in WTO negotiations.

The OECD and EEC/EU have limited memberships but they have established regimes for capital flows. The OECD Code of Liberalization of Capital movements dates from 1961 and reflects the generally favorable view of its member states concerning the free movements of capital. The Code discriminates between two sets or lists of capital movements. One of the two lists covers transactions generally regarded as more sensitive owing, for example to their short-term and potentially more speculative character, and is consequently subject to greater flexibility as to the right to enter reservations. In the EEC/EU a 1988 directive abolished restrictions on capital movements between residents of EEC/EU countries subject only to provisos concerning the right to control short term movements during periods of financial strain and to take the measures necessary for the proper functioning of the systems of taxation, prudential supervision etc. Among other directives, the EEC/EU also made available to member countries various types of external payments support both for the purpose enabling participants in its exchange-rate mechanism (ERM) to keep their currencies within prescribed fluctuation limits and for other circumstances threatening orderly conditions in the market for a member country's currency. The introduction of a single currency has restricted the application of these arrangements.

Another institution called the Bank of International Settlements (BIS) was formed in 1930 " To promote the cooperation of central banks and to provide additional facilities for international financial operations". The BIS provided secretariat since 1970 for bodies established to reduce or manage risks in cross-border banking transactions. Basle Committee on banking Supervision was one of those bodies established to promote banking stability through the promotion of strengthened regulation and improved cooperation between national supervisors. Others include the Committee on the Global Financial System (until 1999 known as Euro-Currency Standing Committee) established to monitor international banking developments and to disseminate data on the subject from national creditor sources concerning dangers of increased short-term borrowings e.g. East Asian countries, payments of large financial transfers and paying attention to the implications of electronic money. The Basle bodies are not designed to set rules for international capital movements but to strengthen the defenses of financial firms both individually and in the aggregate against destabilization due to cross-border transactions and risk exposures. This body collaborates with the International Organization of Securities Commission (IOSCO), which has a membership consisting of securities regulators and exchanges. It has extended its remit from sharing information to setting and promulgation of standards for the functions of exchanges and securities firms and for surveillance of cross border securities transactions.

Another established body is the Financial Stability Forum with a secretariat in Basle and chaired by the General manager of BIS. There are emerging similar bodies Asia such as the Executive meeting of East Asia and Pacific Central banks (AMEAP) which inter alia monitors foreign exchange markets in the region, swap mechanisms among ASEAN countries, and a web of bilateral repurchase agreements between monetary authorities of the region under which an authority may exchange its United States Treasury securities for dollars needed to support its currency.

What can be deduced from these institutional arrangements is the notion that they work to protect the most powerful economies of the world while the developing countries are left on their own. In fact huge economies seem to do what they want in the global economy without following fiscal discipline as imposed to poor countries by the World Bank and the IMF. Virtually IMF can not enforce its fiscal policies on the US. This economy destabilises other economies in the world due to the ever growing deficits. The enormous advantage of the US to run deficits and print dollars to finance its debt currently due to its plan to wage war with Iraq is not matched by any other country on earth, let alone poor countries. The value of the US dollar is propped up not by the strength of US exports, but by vast imports of capital. The US, a country already rich in capital, has to borrow from abroad almost $2 billion net every working day to cover a current-account deficit forecast to reach almost $500 billion in 2002. This is a tremendous drain on world savings!

The dollar is not only a matter for the US because it happens to be that country's currency. Over half of all dollar bills in circulation are held outside the borders of the US, and almost half of the US Treasury bonds are held as reserves by foreign central banks. The Euro cannot yet rival this global reach. International financiers borrow and lend in dollars, and international traders use dollars even if Americans are at neither end of the deal. No asset since gold has enjoyed such widespread acceptance as a medium of exchange and sore of value. It can be argued that the world is on a de facto dollar standard, akin to the 19th-century gold standard.

Double standards for North and South

It seems that the markets enforce a sort of double standard. Floating exchange rates work rather well for Northern countries because markets are prepared to give those countries the benefit of the doubt. But since 1994, one Southern country after the other discovered that it cannot expect the same treatment. Again and again, attempts to engage in moderate devaluations led to a drastic collapse in confidence. This double standard, resulting from fear and greed, make it extremely difficult for many countries in the South to follow sensible policies and actually force them to apply measures which would normally be considered perverse. The IMF applied double standards as well when dealing with countries in financial difficulties. Goudzwaard and Van Drimmelen noted that a casual glance at the IMF's attitude towards exchange rate systems produces a confusing picture. In 1997 the IMF urged Asian countries to devalue or float their currencies. In 1998 it lent billions of dollars to Russia and Brazil to try to help them maintain their exchange rates. It praised Hong Kong for its super-strict currency board, and complemented Singapore for its flexible managed float. Given that exchange rate regimes are by definition central to currency crises, these different positions do not seem to make sense. They propose the need to appraise exchange rate systems.

Financial Instability and Crises

The following are major episodes of extreme instability in currency markets:

  • Banking and real estate crises in the United States lasting for 10 years from 1970.
  • Major slumps in the global stock market in 1987 and 1989.
  • European Monetary System (EMS) crisis in 1992.
  • Japanese financial markets instability early 1990s.
  • The Southern Cone crisis of the late 1970s and early 1980s.
  • The debt Crisis of the 1980s.
  • The Mexican crisis of 1994-1995.
  • The East Asian crisis beginning in 1997.
  • The Russian crisis of 1998
  • Turkey 2001
  • Argentina 2002  

There are important differences between industrial and developing countries in the nature and effects of financial stability and crises as mentioned. Experience shows that in developing countries reversal of capital flows and sharp declines in the currency often threaten domestic financial stability. Similarly, domestic financial crises usually translate into currency turmoil, payment difficulties and even external debts crises. By contrast currency turmoil in industrial countries since the advent of more flexible exchange rates in the 1970s has frequently involved large movements of rates concentrated into short periods. These movements, which result from buying and selling decisions by economic players in currency markets often taken with little regard for indicators of counties' fundamentals (such as relative price levels, microeconomic performance, and the stance of macroeconomic policies, generally impose costs on the real economy and leads to significant misalignments, that is to say levels of the exchange rate, which at reasonable full employment for the economy in question, are inconsistent with a sustainable external payment position. But such turmoil does not usually spill over into domestic financial markets, nor do financial disruptions necessarily lead to currency and payment crises.

These differences between developing and industrial countries stem from a number of factors. First the size of developing- country financial market is small, so that entry or exit of even medium size investors from industrial countries is capable of causing considerable price fluctuations, even though their placements in these markets account for a small percentage of total portfolios. Furthermore, differences in the foreign asset position and currency denomination of external debt play a crucial role. Here the vulnerability of developing countries is greater because of their typically higher net indebtedness and higher shares of their external debt denominated in foreign currencies. The vulnerability of the domestic financial system is increased further when the private sector rather than sovereign governments owe external debt. Financial crises in developing countries are all characterized by a rush of investors and creditors to exit and a consequent financial panic.

Views from the south on this problem described the situation thus," Under the new standards of the global free trade and deregulation; there are few controls upon massive movements of funds crossing borders. With technologies of global communication networks, currency speculators are able to move unimaginably huge amounts of money, instantaneously and invisibly, from one part of the glob to another by mere touch of a key, destabilizing currencies and countries." This is something that many Third World Countries are trying hard to prevent- Chile, Malaysia, China and Russia notably among them by means of techniques such as "speed bumps" that require foreign investors to leave their funds invested in these countries for a fixed period of time. This slows the opportunities for the speculative investment -withdrawal-investment cycles that have left third world currencies and economies in disarray leading to increased poverty. People leaving under poverty doubled to 40 million in Indonesia due to the East Asia financial crisis. In some countries more than 50% of the firms in Asia and Latin America were forced into bankruptcy. Some developing countries such as Malaysia want to be in control of financial capital movements. Are the current efforts solving this problem?

Reviewing the current proposals for reforms

A number of proposals have been made since the Asian crisis to resolve financial crises by governments, international organizations, private researchers and market participants. Many of the proposals have concentrated on marginal reform and incremental change rather than so called big ideas that emerged in the wake of East Asian Financial crisis. It is noted that attention has focused on standards and transparency and to a lesser extent, financial regulation and supervision. While efforts have been piecemeal or absent in more important areas addressing systemic instability and its consequences. Emphasis has shifted towards costly self-defense mechanisms and greater financial discipline in debtor countries. Developing countries are urged to adopt measures such as tight national prudential regulations to manage debt, higher stocks of international reserves and contingent credit lines as a safeguard against speculative attacks, and tight monetary and fiscal policies to secure market confidence, while maintaining open capital account. And convertibility. Big ideas for appropriate institutional arrangements at the international level for global regulation of capital flows, timely provision of adequate international liquidity with appropriate conditions, and internationally sanctioned arrangements for orderly debt workouts have not found favor among the powerful though these proposals are milder than those given by churches and social movements. Akyuz noted the following ideas considered too radical to deserve official attention: 

  • A proposal by George Soros to establish an International Credit Insurance Corporation designed to reduce the likelihood of excessive credit expansion;
  • A proposal by Henry Kaufman to establish a Board of overseers of major International Institutions and markets with wide-ranging powers for setting standards and for the oversight and regulation of commercial banking, securities business and insurance;
  • A similar proposal for the creation of a global mega-agency for financial regulation and supervision or World Financial Authority with responsibility for setting regulatory standards for all financial enterprises, offshore as well on shore entities;
  • The proposal to establish a genuine international lender-of-last resort with discretion to create its own liquidity;
  • The proposal to create an international bankruptcy court in order to apply an international version of chapter 11 of United States Bankruptcy Code for orderly debt workouts.
  • The proposal to manage the exchange rates of G3 currencies through arrangements such as target zones, supported by George Soros and Paul Volcker;
  • The Tobin Tax to curb short-term volatility of capital movements and exchange rates.

Political constraints and conflict of interest, rather than conceptual and technical problems, are the main reason why international community have not been able to achieve even a modest real progress in setting up effective global arrangements for prevention and management of financial crises. There are also differences within G7 members regarding the nature and direction of reforms. A number of proposals made by some G7 countries for regulation, control and intervention in financial and currency markets have not enjoyed consensus, in large part because of the opposition of the United States. Agreement among G7 has been much easier to attain in areas aiming at disciplining the debtor developing countries. What is evident today is that rules based global financial system with explicit responsibilities of creditors and debtors, and well defined roles for public and private sectors is opposed by major industrial powers which continue to favor a case-by-case approach because, inter alia, such an approach give them discretionary power due to their leverage in international financial institutions. This scenario is not fair because it reflects the interests of larger and richer countries. The role of the churches is to constantly raise this injustice inherent in this global financial system dominated by the North.

Proposals from churches and social movements

  • Debates on new financial architecture should include representatives of all developing countries and members from the civil society;
  • Deter excessive, destabilizing currency speculation;
  • Give national and regional central banks more control over monetary policy;
  • Develop a multilateral approach on common standards to define the tax base to minimize tax avoidance opportunities for both TNCs and international investors;
  • Establish a multilateral agreement to allow states to tax TNCs on a global unitary basis, with appropriate mechanisms to allocate tax revenues internationally;
  • Support for the proposal for an International Convention to facilitate the recovery and repatriation of funds illegally appropriated from national tresureries of poor countries;
  • Creatively with the civil society and religious society work out a novel system in which justice can be central in all global financial transactions.
  • Create an within the auspices of the UN an arbitration mechanism to resolve problems of debt.
  • Apply a Currency Transaction Tax to curb short-term volatility of capital movements and exchange rates.
  • Set a process of democratizing all global finance and trade institutions.

Conclusion

The search for international solutions for the unjust financial system could be complemented by national efforts to control financial markets. It is necessary to take seriously the danger of foreign financial dependence. During the earlier period of dramatic financial volatility, when banking crashes, Foreign World Debt defaults and stock market collapses were common, John Maynard Keynes responded:

I sympathise with those who would minimize, rather than those Who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel-these are things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all, let finance be primarily national.

Keynes, the leading economist of the 20st century, was not merely advocating nation-state control of finance because of concerns over volatility. At stake was nothing less than economic policy sovereignty. Implied to his statement was that the whole management of the domestic economy depends upon being free to have the appropriate interest rate without reference to the rate prevailing in the rest of the world. Capital controls is a corollary to this. These insights apply equally as well to low-and middle income countries today, as to Britain during the 1930s. Deglobalization of finance therefore represents a serious and laudable finance, instead of chaotic, destructive and self-contradictory international financial flows, in part by restoring national sovereignty via capital controls. Realistically, there must be a dramatic change in how domestic finances are raised, lent and spent which requires envisaging how international financial power relations can be radically and feasibly overhauled-simply so as to open the space for the reclamation of national financial sovereignty.

There are live examples of how to implement the above proposal. When after the Asian crisis Malaysia adopted its own system, the IMF experts and the pseudo-scientists of Harvard and Yale decried Mahathir Mohamed. And yet Malaysia performed better than Indonesia and Thailand that swallowed IMF's medicine. The current financial system requires serious analysis and alternatives. Sticking to orthodoxy approaches will not solve the current problems. This realization is noted by many economists around the world today. There is need to embark on more democratic financial reforms that involve religious organizations and social movements instead of only specialized financial stabilization bodies dominated by industrial countries. Our question has always been "how can the financial system be just for the benefit of all people?"

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