---

Financial Institutions

I, too, begin by thanking the noble Lord, Lord Bilimoria, for securing this debate and for introducing it with the insight and eloquence that we have come to expect from him. We all agree that there is a need for a genuine and radical reform in the world's financial architecture. There is no shortage of suggestions. The question that we should ask is: what are the principles that should guide how a new financial architecture should be set? Those principles, in turn, will be determined by the goal and objective that we want the institutions to realise. Is the reform intended to stabilise capitalism? Is it intended to save capitalism from the folly and mischief of capitalists? Is it intended to perpetuate existing global inequalities? What is our goal? There should be widespread consensus that our goal should be to create a just world in which globalisation works to the advantage of all. If that is our goal, certain principles follow from it. We should evaluate in the light of those principles whatever suggestions are offered. First, the institutions should increase our capacity to control the impersonal forces of the market and allow us to shape our economic destiny, rather than be governed by it. Secondly, the institutions should promote global well-being, as articulated, for example, in the millennium development goals, such as reduction in poverty, disease, hunger, and economic underdevelopment in general. Thirdly, the institutions should ensure democratic participation, so that all voices are heard and all legitimate interests are taken into account. The fourth and equally important principle that should guide our decision is that the institutions to be set up should be transparent and accountable. If we judge by those four criteria, which are crucial, the existing institutions turn out to be extremely disappointing. For example, in the IMF, developed countries have 72 per cent of the votes, whereas Africa has only 5.6 per cent, Asia 10.4 per cent and Latin America 7.7 per cent. As the noble Lord, Lord Bilimoria, pointed out, the managing director of the IMF is by convention European and the president of the World Bank is American. Those posts are not advertised; they do not even necessarily go to the best people; they are political gifts. The mischief that that can cause we have seen over the years. Those institutions have served the interests of developed societies rather than the rest of the world. The noble Lord, Lord Desai, rightly talked about the mischief that the IMF pursuing Washington consensus caused under Paul Wolfowitz. The IMF posed a neo-conservative agenda and gave money to those regimes of which it approved. In the 1990s, the IMF unleashed klepto-capitalism in the Soviet Union and its associates. The question is that if all these institutions are inadequate, what should we be doing? I want to end with four or five suggestions that I think are quite important. First, the posts of managing director of the IMF and president of the World Bank should be widely advertised and open to all, as is that of the secretary-general of the United Nations. I am even tempted to suggest, given that the World Bank is intended to help poor countries, that the president must always come from one of the low-income or developing nations. Secondly, the composition of the IMF and the World Bank should be adequately representative of all parts of the world. All kinds of criteria have been advocated and I shall not go into them for lack of time, but population, deposits, need and volatility of an economy are all criteria that can be taken into account. Thirdly, the policies followed by the IMF and the World Bank should be publicly debated and endorsed, and therefore both could do with a globally representative advisory committee. There should be a way to provide for regular consultation with those countries which have to turn to these institutions for help and consultation on their management. Fourthly, an imaginative way must be found to increase the funds that are available to the IMF and the World Bank. It is extraordinary that the IMF is going to have to depend on China for funds when that country has no effective say in the running of the fund. Imaginative ways of raising funds might be by raising taxes on global commons or a version of the Tobin tax. Finally, we must think in terms of regulated mechanisms to monitor cross-border capital flows, to keep an eye on the lending practices of the big banks and in general to ensure the confidence of the international financial institutions. If we think along these lines, perhaps a new version of the IMF rather than the institution as it is currently structured could take on these functions.