The financial crisis, which originated in the developed
countries starting with the United States, has by now
engulfed both emerging economies as well as LDCs.
While emerging economies are likely to withstand the
crisis better and emerge earlier, the outlook for low
income countries is less rosy although most
developing countries had, in place, what were widely
touted as ‘responsible’ fiscal and monetary policies.

Increasing openness of the capital account and
liberalization of domestic financial markets have resulted in
both deeper financial integration and increased episodes of
contagious turmoil in the exchange rate and other financial
markets. The ongoing financial crisis provides an example
of the potentially disruptive consequences of the build-up
of large leveraged speculative positions by individual
investors leading to economy-wide and global systemic
risk. Financial turmoil may spread across economies and
within domestic financial systems, via the exchange rate
channel.

The international monetary framework which emerged after
the collapse of the Bretton Woods system in the 1970s has
proved volatile, damaging and prone to crises. It is time for
a fundamental redesign and the introduction of a global
reserve currency to help stabilise international exchange
rates, smooth commodity prices, promote international
economic cooperation, and prevent future financial crises.

With the counter-revolution against Keynesian and
development economics in the early 1980s, budget deficits
have become taboo although fiscal deficits have played a
leading role since the Great Depression of the 1930s in
maintaining full-employment in developed countries.

The Need for Reform
The IMF’s economically weighted voting system gives
rise to a serious asymmetry of political power in the
institution, between developed and developing
countries, both directly and through four indirect
mechanisms:
• the constituency system and representation on
the Executive Board;
• differences in the accountability of appointed
and elected Executive Directors;
• Directors’ workloads; and
• the potential for effective coordination.
It gives rise to systemic inertia, giving overrepresented
countries the opportunity as well as the
incentive to block any redistribution of voting power
unfavourable to them.

At the London summit on 2 April 2009, the leaders of
the G20 agreed that the IMF will be the major
instrument to respond to the financial and economic
crisis, and agreed to quadruple the Fund’s resources
from $250bn to $1trillion.

In April 2009, the G20 group of leaders committed $1.1
trillion to combat the financial crisis, with the bulk of this
being channelled through the International Monetary
Fund (IMF). However, this substantial amount of
resources may never be provided, and, if it is, may not
have the intended positive effect on developing countries.
Experience so far demonstrates that the IMF is still
imposing damaging pro-cyclical conditions on some
borrowers, and that the finance provided to low-income
countries will be too small.

The G20 London Summit issued an Official
Communiqué on April 2, 2009, with two
annexes: (1) Declaration on Delivering Resources
through the International Financial Institutions;
and (2) Declaration on Strengthening the
Financial System. This Second Declaration
includes an important section on Tax Havens
and Non-Cooperative Jurisdictions, raising at
least four major issues.