nstructions:

• Summary: what is a main concept in the case or article? A perspective on the globalization of financial markets and institutions
• Situations that arise in the case or article.
• Possible solutions to such situations (applying the lesson of the day).
• Select one possible solution to the case. Explanation for how you select this solution (the best alternative is not always feasible to resolve the central or primary situation presented in the case or article).
• Reflexive analysis on developments in the case or article. You can use other references that approach the situation raised in this case or article from other perspectives.
• Conclusion or recommendation.
• Ifthecasehasquestions,answerthem.

Report needs to be in APA style.

Third World Quarterly, Vol 23, No 4, pp 607-620, 2002 On the contradictions of the New International Financial Architecture: another procrustean bed for emerging markets? SUSANNE SOEDERBERG ABSTRACT The New International Financial Architecture (NIFA) was created by powerful G-7 countries in response to the growing volatility in the developing world. Some key components of the NIFA include: the G-20, the Financial Stability Forum and the Reports on Observance of Standards and Codes, the latter involving areas such as corporate governance. The aim of this article is to address some important yet largely neglected questions. Why the new building? Who benefits from this construction? Unlike most accounts of the NIFA , the following analysis does not remain focused on its institutio nal terrain; but instead draws linkages between these structures and the paradoxes inherent in global capitalism. One such contradiction is the constant promotion of financial liberalisation in emerging markets by US-led international financial institution s (IFIs), on the one hand, and the frequency of financial crises in the developing world, on the other. The article suggests that the NIFA is an attempt to strengthen (stabilise and legitimate) the scaffolding of the existing imperative of free capital mobility. Eager to defend the feasibility, indeed desirability, of continued mobility of crossborder financial flows, especially after the advent of the Asian crisis (1997-98), the G-7 countries established a series of institutions and networks, encompassing both state and non-state actors, in the hope of strengthening the internationa l financial system. This strategy has been referred to as the New International Financial Architecture (NIFA). While there are many dimensions to the NIFA, we can identify at least three important features: the Group of Twenty (G-20), the Financial Stability Forum (FSF), and 11 standards and codes which are collectively known as the Reports on Observances of Standards and Codes (ROSCs). Briefly, the G-20 brings together, for the first time, finance ministers and central bank governors not only of the G-7 and the European Union, but also their counterparts of 'systematically important' emerging market economies. The FSF, on the other hand, seeks to provide regular scheduled meetings involving important national authorities from G-7 countries in order to enhance discussion s Susanne Soederberg is in the Department of Political Science, University of Alberta, Edmonton, Alberta, T6G 2H4 Canada. E-mail: soederberg@ualberta.ca . ISSN 0143-6597 print/ISSN 1360-2241 online/02/040607-1 4 q DOI: 10.1080/014365902200000529 2 2002 Third World Quarterly 607 SUSANNE SOEDERBERG about financial supervision and surveillance. The main objective of these three interventions, discussed in detail later in the article, is to achieve systematic stability in the global financial system by ensuring that emerging markets play by the rules dictated by powerful transnational financial capitals. Largely because of the NIFA 's clandestine institutio nal webs and the predominance of technical language that is used to describe its inner functions, its capitalist nature has been neglected. Why the new building? Who benefits from this project? This article critically examines the NIFA by linking its institutiona l components to the larger contradictions of the capitalist inter-state system. One such contradiction is the constant promotion of financial liberalisation in emerging markets by US-led international financial institutions (IFIs), on the one hand, and the frequency of financial crises in the developing world, on the other. The article suggests that the NIFA is an attempt to strengthen (stabilise and legitimate) the scaffolding of the existing imperative of free capital mobility. Before turning to the three components which comprise the NIFA, the discussion begins with an examination of the power structures of the global political economy by focusing on the continued dominance of the USA. In particular, the contradictory relations between the USA and global finance, which are expressed in the US government's attempt to universalise the imperative of free capital mobility, will be explored so as to shed more critical light on the NIFA. The contradictions of the power of the USA in the era of financial capitalism The structural power of the USA and the Washington Consensus Although many countries have prospered from ongoing financial liberalisation , the Dollar-Wall Street nexus is clearly the largest beneficiary and the most dominant centre of financial activity in the world. The vested interest of the USA in promoting financial liberalisation lies in its low level of domestic savings and therefore the need to obtain a constant stream of funds from abroad to feed its ever-growing trade and budget deficits. 1 Thanks to its ability freely to decide the price of the world's trading and reserve currency, the USA has been able to exercise structural power (not behavioural power) over other states by influencing the international monetary and financial arrangements in the global economy.2 In the absence of an inter-state consensus, the USA has flexed its powerful muscles to pursue unilaterally, inter alia, a development agenda for the Third World that has been to promote its own interests. 3 Generally speaking, this development agenda is known as the Washington Consensus. The Consensus holds that the three keys to prosperity are to be found in macro-stability, liberalisation (lowering tariff barriers and market deregulation) and privatisation. 4 Largely through the means of 'conditionality 'policy reforms in exchange for the money that the IMF and World Bank lendthis development philosophy is transmitted to debtor countries in Latin America, Asia and Africa by strongly encouraging governments to lift barriers to imports and exports to both outside investment and foreign currency transitions if full economic expansion is to be achieved. 608 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE The Washington Consensus is an important feature of US structural power, not only because of the role it played in expanding markets for US goods, but also because it assisted in stabilising and universalising norms and values of global financial capital, which in turn strengthens the position of the USA in the global economy. The orthodoxy of the Consensus is based on the assumption that progress will be brought about via free trade, free capital mobility and a noninterventionist state. The political and ideological complement to this has been the neoliberal supposition that globalisation is not only an inevitable and natural progression that emanates from external forces, but also that governments and societies are required to embrace globalisation if they wish to share in increased prosperity.5 These assumptions assist in reproducing the power of both finance and those states (markets and governments) who benefit the most from relegitimating free capital mobility and free trade as conditions arising from the market, while drawing attention away from the active role states are playing in ensuring that these conditions are not only met but also reproduced.6 Within the wider context of financialisation, the Washington Consensus has had at least two important consequences for the developing world. First, through its policies the Consensus has assisted in increasing the dependence of emerging market economies on short-term flows as their primary source of credit. In 1981, for example, bank loans made up 77% of the foreign investment in such emerging markets as Mexico, Brazil, Chile, Argentina and Sri Lanka. After the debt crisis in 1982, and moves towards disintermediation, 74% of private foreign investment in Mexico, Brazil, Chile, Argentina and Sri Lanka came from mutual funds, hedge funds and pension funds by 1993.7 Second, this move has led to the concentration of power in an increasingly small number of institutional investors (pension and mutual funds), which, in effect, has led to a situation where decisions relating to capital allocation have become more and more centralised.8 Paradoxes of global capitalism based on US structural power There are some inherent contradictions in the seeming win-win relationship between Wall Street and the global financial markets. For instance, the viability of international financial markets has becomes increasingly dependent on the health and stability of the financial markets regardless of their location. As the former Secretary of the Treasury department, Robin Rubin, stated in reaction to Indonesia's economic woes in 1997, 'financial stability around the world is critical to the national security and economic interest of the United States'.9 Thus, with each debacle in the emerging markets, the neoclassical premises upon which the Washington Consensus restsespecially the equation between free capital mobility and sustained prosperitybecome gradually more and more difficult to legitimate. To illustrate, the Mexico peso crash of 1994-95 not only brought down what was widely regarded as the IMF's Golden Boy, but its contagion (the so-called 'Tequila effect') was also felt throughout the world economy. According to some observers, during the financial liberalisation that took place over the six years of President Salinas' rule, international speculators increased the nominal value of their portfolios by some US$100 billion by buying and selling the shares of privatised firms on the Mexican Stock Exchange (the Bolsa). 609 SUSANNE SOEDERBERG As I have argued elsewhere,10 this foreign portfolio investment (FPI) has not led to any improvement in economic growth (productive sphere), but instead largely serves to fuel 'jobless growth', primarily based on transfer of ownership.11 In fact, the International Labour Office has recently noted that more than 80% of new jobs created in Latin America have been in the informal economy.12 John Dillon argues that, while Mexico's downfall included corruption and mismanagement in both public and private spheres, its financial liberalisation strategies, which were encouraged through its dependency on IMF loans particularly since the 1982 debt crisis, not to mention the legal framework of the North American Free Trade Agreement (NAFTA), especially its guarantees against any form of capital controls, also played a contributing factor. The timing of the crisis could not have come at a worse time. The US electorate was deeply divided over whether their country should be entering into a legal trade agreement with a developing country such as Mexico. Luckily for the US institutional investors tied up with the debacle, and for the Mexican government, the Clinton administration was not only determined to go through with the NAFTA negotiations, but also willing to demonstrate the viability of such a project. Thus, failing to get Congressional approval for a $20 billion loan from the Exchange Stabilization Fund, President Clinton used his executive powers and extended a line of credit to Mexico, which was used not only to bail out wealthy investors but also to allow the US government to earn a healthy interestmore than it would have collected had it lent the money to its own citizens. 13 Alongside high profile financial crises such as the 1992-93 Exchange Rate Mechanism (ERM) breakdown, the Mexican peso crisis fuelled concern over the stability of the international financial system. In 1995 policy makers and pundits began to discuss how they should reform the international financial system at the G-7 summit in Halifax. However, it was not re-regulation of global financial flows that was on the table, but how policy makers could strike a balance between continued financial deregulation and stability. Blind faith in the power of market rationality came to rule the day. The question was, however, for how long? A few short years after this meeting, and before the Asian crash, the Interim Committee of the IMF, under the auspices of its largest shareholderthe US governmentattempted to revise the Fund's charter by imposing a legal obligation of open capital accounts on its members.14 As Benjamin J Cohen notes, this was the high-water mark of the attempt to consecrate 'free market mobility as a universal norm'. 15 The Asian crisis of 1997 placed this strategy in serious question, however. Unsurprisingly the US Congress baulked when the Clinton administration attempted to contribute $57 billion to the IMF for a bail out for South Korea, $17 billion for Thailand and $34 billion for Indonesia. The following year (1998) Russia was to receive $16 billion and Brazil $42 billion. The Asian crisis and its contagion constituted a turning point regarding the unabashed acceptance of many policy makers and pundits of the neoliberal assumptions driving the Washington Consensus.1 6 For instance, government regulation over cross-border financial flows would become a serious issue in the face of the growing demands for reform of the international financial system. It is to this debate that the discussion now turns. 610 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE Cracks in the norm of free capital mobility The Asian crash The Asian crisis shook the foundations upon which neoclassicism rested. In 1996 a publication arising from a conference sponsored by the IMF gave high praise to the region's strong macroeconomic fundamentals in the Association of Southeast Asian Nations (ASEAN ). These same paragons were quickly transformed into pariahs as the IFIs and the US government blamed the crisis on Asian crony capitalism, 17 as opposed to the reckless and excessive behaviour of speculators. The IMF 'made reforms of corporate governance and related institutions a condition for its bail-outs in the region'.18 There is far from a consensus on this issue, however. High-profile US policy makers and economic pundits, such as former Federal Reserve Chairman Paul Volcker and former Chief Economist of the World Bank, Joseph Stiglitz,19 have begun to question not only the wealthcreating properties of free capital mobility, but also the lack of structural coherence for continued capital accumulation. The events in the so-called IMF-3 (South Korea, Indonesia and Thailand) made painfully clear that the underlying tenets of the Washington Consensus were more than faulty. Some writers have argued that liberalised financial markets will not 'consistently price capital assets correctly in line with future supply and demand trends, and that the correct asset pricing of liberated capital markets will, in turn, provide a continually reliable guide to saving and investment decisions ... and to the efficient allocation of their economic resources'.20 Other organic intellectuals tend to agree with this position. The highly reputed MIT economist Paul Krugman, for example, has stated that 'most economists today believe foreign exchange markets behave more like the unstable and irrational asset markets described by Keynes than the efficient markets described by modern finance theory'. 21 Jagdish Bhagwati, an eminent defender of free trade, reinforced the above claim by stating that the dominance of short-term, speculative capital flows is not productive, but rather is characterised by panics and manias, which will continue to be 'a source of considerable economic difficulty'.22 The significance of these debates lies in the fact that they represent an ideological renewal of capital controls as a necessary mechanism to reduce market volatility by seeking to curb short-term speculation. One popular way of achieving this is by imposing a steep tax on short-term inflows, such as the Tobin tax.23 The tax, ranging anywhere from 0.1% to 0.5%, would be applied to all foreign exchange transactions as a way of reducing currency speculation. In the process, enhancing the efficacy of macroeconomic policy, while encouraging longer-term investment and raising some tax as a by-product, could circumvent the unholy trinity.24 Nevertheless, to be effective it must be implemented both uniformly and universally in conjunction with other reforms to deter speculation, such as a domestic financial transaction tax,25 and, more fundamentally, within a new international system of stable relationships between major currencies, or what some have called a new Bretton Woods system.26 This solution drives a stake through the heart of the Washington Consensus, for a new Bretton Woods system necessitates an inter-state system based on serious political and economic compro611 SUSANNE SOEDERBERG mises, which could serve to weaken the position of the USA by limiting the immense flows of finance, which act to buoy up its ever-increasing twin deficits. To be sure, those opposed to the implementation of universal controls have argued that the Tobin tax is infeasible because of technical and administrative barriers. Yet Tobin himself has countered this claim by arguing as follows: while the implementation of the tax may appear complex, it is not any more complicated, probably much less so, than the detailed provisions of many existing taxes ... Indeed if the standards of what is feasible employed here had been used before imposing income tax or VAT they would never have been introduced! The dominant feature in the introduction of new taxation has always been the political will rather than administrative feasibility.27 As Benjamin J Cohen observes, of the possible reasons why governments may hesitate to implement capital controls, the political oppositio n of the USA appears to be the most decisive.28 Despite the fact that the burden of proof has shifted from those advocating capital controls to those in favour of capital mobility, this debate has not received much attention. However, it has not, as some writers have observed, been ignored. The transnational bourgeoisie and the caretakers of the global economy have been painfully aware of the concerns raised by these organic intellectuals, as well as of the general sustainability of global capitalism in the developing world. The USA, and the G-7 countries, faced some serious problems. On the one hand, there was a need to convince the electorate that the continuation of free capital mobility was both viable and desirable. On the other hand, the G-7 had to gain the co-operation of the political elites in emerging markets, which were important investment sites for their powerful capitalist interests. Gaining universal acceptance of free capital mobility based on the principles dictated by the USA was becoming increasingly difficult, especially in the East Asian region. This was particularly true after the IMF stormed, some have argued wrongly, into these countries with a long list of demands, including the shutting down of private banks. The reaction to the US government and the IMF in the region has been far from co-operative. Indeed, the growing popularity in the East Asian region for increased policy autonomy via closing off capital accounts posed a serious threat to the Washington Consensus. Japan's attempt to revive the older notion of an Asian Monetary Fund (AMF) at the height of the crisis is a case in point. The AMF was 'to serve as a pool for the foreign exchange reserves of the reserve-rich Asian countries that would repel speculative attacks on Asian currencies'.29 Unsurprisingly, Washington categorically rejected this, largely on the grounds that it could nurture policy choices, such as regional controls, that would be contrary to free capital mobility. The NIFA should be seen as a political reaction to these manifestations of the underlying paradoxes of global capital accumulation based on free capital mobility. In short, the NIFA was an attempt to revise the rules and standards so as to reproduce, as oppose to radically alter, the nature of the Washington Consensus. The next section takes a closer look at some of the key components of the NIFA: the G-20, the FSF, and the ROSCs. 612 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE The NIFA: a procrustean bed for emerging markets? the bourgeoisie can and will exercise its function of continuous expansionary movement; indeed, it enforces bourgeois laws as if there is only one class and only one society. Antonio Gramsci The G-20 and the FSF The USA, acting through the G-7, unilaterally pushed through an agenda that would officially link 'systematically important' emerging markets with the IMF and the World Bank. The objectives of this project were clearly mapped out by the primary directive of the G-7 Summit meeting in Cologne in 1999: to integrate emerging market economies more fully and flexibly into the global financial system by getting the IMF and its member states to increase their 'transparency' through publishing economic data, especially on short-term indebtedness and the state of their foreign exchange reserves. The G-7 also 'urged the IMF to coordinate surveillance of the degree to which countries comply with international standards and codes of conduct. In addition, the G-7 demands greater disclosur e of the degree to which private sector financial institutions are exposed to hedge funds and other highly leveraged institutions. '30 After hearing provisional reports from various ad hoc committeeswhose membership was selected under the watchful eye of the USAthe G-7 leaders created the G-20, or Group of 20, in Washington, DC on 25 September 1999. The G-20 includes the G-7, a representative from the European Union, the IMF, the Fund's new International Monetary and Financial Committee ( IMFC), the World Bank, as well as the Bank's Development Committee, and the following 'systematically important' emerging market countries: Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea and Turkey. Taken together the G-20 is an attempt to lock these important countries into the highly exclusive G-7 or, more bluntly, to co-opt them into the rules and standards of the advanced industrialised countries by involving them in official, and thus more tightly integrated, relations with the IMF and World Bank, such as the ROSCs which will be discussed shortly. This has never been attempted before. The mission of this esoteric community of IFIs, emerging markets and core states is to fulfil the primary objectives listed at the Cologne Summit.31 Through its annual meetings the G-20 seeks to promote consistency and coherence in the various efforts aimed at reforming and strengthening the international financial system as defined by the IMF and World Bank.32 The G-7 finance ministers also created the Financial Stability Forum. The FSF or Forum is a political body that reports to and is supervised jointly by the G-7 leaders. Unlike the G-20, however, the membership of the FSF is confined to a total of 40 members from G-7 countries. The FSF, which was first convened in April 1999, was established to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance. In its own words, 'the Forum brings together on a regular basis national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international 613 SUSANNE SOEDERBERG groupings of regulators and supervisors, and committees of central bank experts'.33 The FSF seeks to co-ordinate the efforts of these various bodies in order to promote international financial stability, improve the functioning of markets, and reduce systemic risk. Crucially, the initial Chairman of the FSF was drawn not from a 'strategically important' emerging market economy but was the General Manager of the Bank for International Settlements (BIS). Moreover, the Forum is also housed in the BIS in Basel, Switzerland as opposed to an emerging market. Both these transnational forms of political authority emerged as a response to financial capital by establishing a regulatory regime to assist in the continued expansion of global capital accumulation in an inter-state system characterised by increasing forms of competition for and dependence on private, short-term financial inflows. Likewise, both institutions are characterised as closed policy communities of industrialised countries 'wherein an elite group works out the management of its own vital interests without wider public involvement'.34 Stephen Gill's term of 'new constitutionalism ' captures this attempt to remove or substantially insulate the new economic institutions from democratic accountability or popular scrutiny in order to increase and centralise bourgeois power and authority to guarantee the freedom of entry and exit of internationally mobile capital in different socioeconomic spaces.35 The ideological role of the NIFA needs to be highlighted here, since it serves to reinforce the commitment of governments of emerging market economies to continue to comply with the tenets of free trade and capital mobility, in three overlapping ways. First, it reinforces the view that increased volatility in the international financial system is the result of home-grown policy errors in emerging marketsnot so much those of profligate governments, which have been largely 'corrected' by SAP s, but those resulting from bad structures of corporate governance. Relatedly, this presupposes that the regulatory structures of the advanced industrialised countries, especially those of the USA, do not need reform. This is indeed ironic in the face of the current wave of corporate scandals in the USA, e.g. Enron, WorldCom, Global Crossing, etc. Second, it shifts the blame for the crises onto the emerging markets and absolves the internationa l financial markets, which thus need not be subject to reform. Third, it induces the governments of emerging market countries to endorse the status quo by means of inclusionary politics. As the G-7 made clear during the Cologne summit, the key objective of this inter-state initiative was to integrate emerging market economies more fully and flexibly into the world economy. This move is not an attempt to shift the balance of power between the developing and developed world but to strengthen the existing system through collective surveillance. Yet as Geoffrey Underhill notes, these closed transnational communities provide only ad hoc and patchy regulation and supervision of the markets, which in turn greatly facilitate the growth of capital volatility and mobility.36 At the same time, the technical orientation of these institutions tends to depoliticise the activities of powerful financial players, such as hedge funds, capital flows, and offshore financial centres. The next section looks more closely at roles played by the IMF and World Bank in NIFA. Specifically it explores how the international financial institutions are not only moving towards the political construction of international norms and rules 614 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE but also how they are building networks with such non-state actors as credit agencies, to further discipline emerging markets. The ROSCs One of the manifold strategies underpinning the NIFA has been the restructuring of the IFIs. Specifically there has been a concerted effort to reinforce the technical assistance provided for in the IMF's Article IV consultations, whereby the Fund is able to scrutinise the degree to which the terms of conditionalit y have been adhered to by the debtor nation. To this end, both the World Bank and IMF have recently systematised 'eleven areas where standards are important for the institutional underpinning of macroeconomic and financial stability, and hence useful for the operational work of the two institution s'. 37 Specifically there are 11 modules which constitute what the IFIs refer to as the Reports on the Observance of Standards and Codes (ROSCs): data dissemination, fiscal practices, monetary and financial policy transparency, banking supervision, insurance supervision, securities market regulation, payments systems, corporate governance, accounting, auditing, insolvency regimes, and creditor rights.38 Each unit represents an 'internationally agreed standard', which is then benchmarked against country practices in a given area of state policy or market behaviour. The primary aim of this exercise is to promote the 'proper management' of financial liberalisation in the developing world. Although internationally agreed standards are not new, the ROSCs are novel in that they have not only expanded octopus-style surveillance in the public sectors, but have also moved into the private spheres of emerging market economies. The module of corporate governance, for example, falls under the 'official' responsibility of the World Bank and its regional satellites such as the Asian Development Bank (ADB), the Organisation of Economic Co-operation and Development (OECD ), and implicitly, the US-based credit-rating agency, Standard & Poor's (S&P). In this way the international standard of corporate governance is inspected more frequently and intensely than simply on an annual basis via the Fund's Article IV consultations . Despite the absence of a consensus, the OECD describes corporate governance as 'the structure through which shareholders, directors and managers set the board objective of the company, the means of attaining those objectives and monitoring performance'.39 The ultimate aim of adapting good corporate governance measures is to ensure that investors (suppliers of finance, shareholders, or creditors) get a return on their money.40 This imposed standardisatio n of corporate governance serves two overlapping goals. First, it attempts to stabilise the international financial system by ensuring that emerging markets adapt to the exigencies of the neoliberal open market economy. Second, by placing greater emphasis on 'shareholder value' rather than on other variants of corporate governance, the interests of foreign capitals are protected. Both these aims converge on a wider disciplinary strategy imbued in the corporate governance module of the ROSC s, namely a class-based attempt both to establish comprehensive webs of surveillance in order to better police the behaviour of economies and states in the emerging markets, and to legitimise the subjective 615 SUSANNE SOEDERBERG meaning of these codes by insisting that the ROSCs represent 'common values' across national spaces. Yet they clearly serve the interests of Western institutiona l investors (eg public and private pension funds, insurance companies, bank trusts and mutual funds) who are closely tied to the relatively more powerful world financial centres, such as Wall Street and Main Street. Taken together this twopronged strategy serves to construct a reality in which no other alternative but the principle of free capital mobility is permitted to exist. As the former General Manager of the BIS, Alexandre Lamfalussy, puts it, to correct mismanaged liberalisation there needs to be, broad institutional adjustment in a number of key areas: for existing institutions the 'management culture' has to change, in particular in risk-assessment and risk-control procedures; an appropriate institutional framework has to be set up that allows for the creation of new institutions, for instance, mutual funds or other institutional investors needed for a well-functioning capital market ... (my emphasis).41 Many powerful policy makers seem to agree with Lamfalussy. For example, to promote a 'correct' management culture in the global South the IMF aggressively sought the revision of its Article I of its charter, which would effectively charge the Fund with the responsibili ty of promoting the 'orderly' liberalisation of capital accounts in its member states. Likewise, in 1998 President Bill Clinton and Prime Minister Tony Blair encouraged the G-7 to set out a plan for the IMF to extend short-term credit lines to any government that implements IMF-approved reforms, drawing from the recently approved $90 billion increase in the Fund's lendable resources. As George Soros observes: 'the G-7 ministers also called for increased collaboration between private sector creditors and national authoritie s and the adoption by the IMF member nations of a code of financial transparency enforcement by annual IMF audits'or what are known as Article IV consultations. 42 This decision was subsequently reinforced at the 1999 Cologne summit, where the G-7 leaders urged the IMF to co-ordinate surveillance of the degree to which countries comply with international standards and codes of conduct. These concerns to construct a framework whereby developing countries may properly manage financial liberalisation have also been reflected in the way in which the Fund's new Managing Director, Horst Khler, has approached his core mission: maintaining macroeconomic stability. 'In [Khler's] mind, going back to basics requires a greater emphasis on capital markets and financial flows; a bigger effort to prevent crises, rather than simply to manage them; and a streamlining of the conditions the Fund attaches to its loans'.43 Within the wider frame of neoliberal institutionalism, the codification of norms and rules presupposes a convergence of expectations, which in turn assumes that participants in the international system have similar ideas about what rules will govern their mutual participation: everyone expects to play by the same rules. From this perspective, the IMF's push for international standards and codes, such as corporate governance, are seen as reducing cheating or free riding because all states know what the others are doing. Through the ROSC s, alongside other policing activities such as the Fund's General Data Dissemination System,44 the IMF and the World Bank are able to pursue surveillance activities not only in the public but also the private spheres of the developing world. In its 2001 Annual 616 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE Report, the IMF noted that its surveillance 'now devotes more attention to factors that make countries vulnerable to financial crises, including financial system, capital account developments, poor governance, and public and external debt management'. It is clear that these efforts to strengthen the financial system are aimed at reproducing the status quo by incorporating 'the views of and developments in international financial markets into its surveillance activities ... As a result of these efforts, surveillance has become more focused and candid'.45 All told corporate governance is a more specific expression of the ascent of a disciplinary strategy that not only subjects emerging markets to more direct influence from the exigencies of the ever-increasing short-term horizons of major players in the world market, such as pension and mutual funds, but also legitimates and reproduces a single version of reality that serves this same constituenc y, as well as the interests of the USA. Thus the version of corporate governance put forward by IFIs, and the economic backlash tied to following anything but 'good' corporate governance, is part of a larger objective to construct a loose regime around the sentiment of free capital mobility, an outlook not shared by all political elites. The question that arises at this point is: does the NIFA mitigate or aggravate the paradox of economic growth fuelled by financial liberalisation and increasing volatility in the emerging markets? It is to this question that the concluding section now turns. The deepening of contradictions in global capitalism: what hope for 'systematically important' emerging markets? The NIFA may, at least temporarily, moderate the expression of the deep-seated contradictions of global capitalism based on free capital mobility. However, upon closer inspection, this building appears to aggravate more than it placates the underlying paradox of global capitalism. Specifically, there are at least two important tendencies that can be identified. First, there appears to be a greater vulnerability of the economy to risk, financial volatility and crisis in emerging markets. Second, there is a growing imposition of restrictions on policy autonomy,46 that may result in increased economic problems and higher levels of repression in the Third World. To elaborate on the first point, as governments of emerging markets embrace portfolio investment (stock and bond purchases) as a source of financing, their exposure to the risks of capital flight increases. As mentioned above, the Asian crisis has clearly demonstrated that even sound economic fundamentals (eg low inflation, high savings rates, falling unemployment numbers) no longer provide a guarantee that mammoth amounts of highly mobile capital will not choose to flee the country in a nanosecond. Despite the robust macroeconomic equilibria and high rate of domestics savings, for instance, these 'miracle economies' buckled under the quick exit of foreign funds. Indeed, the changing nature of financial flows to emerging markets has made it increasingly difficult to protect the domestic economy against the devastating effects of contagion and capital flight. There is another downside to this new financial openness: the increased likelihood of a cross-border contagion. Similarly, during panics investors and lenders see developing countries in an undifferentiated 617 SUSANNE SOEDERBERG fashion, or what Ilene Grabel refers to as the principle of 'guilt by association'.47 On the second and related point, the need to continuously signal creditworthiness to global financial markets has not only limited the scope of policy autonomy of states in emerging markets, but has made policy makers more accountable to the needs of transnational capitals than to those people it governs. To attract what appears to be the main source of public financing, governments enter into a 'pact with the devil', whereby market credibility assumes a central position in policy making in such areas as exchange and interest rates as well as tight fiscalityall of which must take precedence over other domestic concerns, especially the needs of powerless segments of the population such as labour unions and the poor. In more substantive terms, policy making is constrained in two ways. One the one hand, in the current era of a flexible exchange rate regime, a large amount of capital inflows leads to an appreciation of a country's domestic currency. For developing countries, most of which are dependent on exports, currency appreciation implies dearer imports and more expensive exports, which could bring about an increase in the country's current account deficit. On the other hand, for a country to attract FPI, the domestic interest rates have to exceed the international rate of interest (ie US rates) by at least the expected rate of depreciation of the domestic currency. These high interest rates can have harmful effects on productive investment as well as making the servicing of public debt more expensive, which could in turn limit the already low levels of welfare expenditures.48 There exists another issue brought about by free capital mobility for developing countries: institutional investors (pension and mutual funds) appear to value political stability and a consistency in policies that favour the interests of foreign investors over democracy. Mary Ann Haley suggests that investors, attracted to those countries that rapidly implement and maintain intense economic reforms while simultaneously controlling political opposition to these measures, may continue to find political democracy not only unnecessary, but also perhaps even contrary to their interests.49 Above all, and especially during times of crisis, the government is required to maintain political stability. This, in turn, has led to a situation of increased authoritarian tendencies aimed at quelling social discontent so as to attract and maintain capital inflows, which in turn limits the process of democratisation within and beyond the national borders. For example, the limits placed on policy autonomy and the priority given to transnational finance in terms of neoliberal policies (liberalisation, flexibilisation, privatisation) makes it increasingly difficult for other voices (labour unions and the poorthose largely associated with the vibrant internal economy) to be heard, let alone for their demands to be responded to. As the cases of Thailand, South Korea and Malaysia make clear, the popular protests and struggles that ensue from these constraints on state intervention are usually accompanied by increased forms of political repression and national populism by the government to protect one of the most coveted features of a good investment site or creditworthy nation, namely, political stability. This is not easy in current times, especially given the waning levels of broad public support for the neoliberal project in the wake of ever-widening income polarisation and increased poverty rates in many 'systematically important' 618 CONTRADICTIONS OF THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE emerging countries such as Indonesia, Argentina, and Russia.50 The corollary of this is that the political and social effects of the vicious cycle of 'crisis and bailout' over the past two decades are making the neoclassical stance of free capital mobility difficult to sustain and to legitimate to those who pay the costs whenever short-term indebtedness falls due and asset price bubbles implode. The flood of 'second generation' policies of the IFIs, which are aimed at issues of social justice and anti-poverty, may be viewed as an attempt to address the waning levels of legitimacy for the existing neoliberal reforms that the G-7 believe must be adopted if these countries are to become economically viable. It remains to be seen how long the NIFA can continue to legitimate and stabilise the politically constructed imperative of free capital mobility, while these contradictions in global capitalism continue to place pressure on the crumbling foundations upon which its scaffolding has been built: the neoliberal virtues of the Washington Consensus. Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Peter Gowan, The Global Gamble: Washington 's Faustian Bid for World Dominance, London: Verso, 1999, pp 125-126. K Nordhaug, 'The political economy of the dollar and the yen in East Asia', mimeo, Department of Geography and International Development Studies, University of Roskilde, Denmark, 2001, p 2. Elsewhere I discuss this changing nature of US structural power as 'imposed leadership '. See S Soederberg, 'The New International Financial Architecture: imposed leadership and emerging markets', in L Panitch & C Leys (eds), Socialist Register: A World of Contradiction s, London: Merlin Press, in press. 'Unraveling the Washington Consensus: an interview with Joseph Stiglitz', Multinational Monitor, 21 (4), 2000. Jagdish Bhagwati, 'The capital myth: the differences between trade in widgets and dollars', Foreign Affairs, May/June 1998, pp 55-64; cf Barry Eichengreen, Toward a New International Financial Architecture: A Practical Post-Asia Agenda, Washington, DC: Institute for International Economics, 1999. On the importance of the role of the state in globalisation, see, for example, Leo Panitch, 'The new imperial state', New Left Review, March-April 2000, pp 5-20. John Dillon, Turning the Tide: Confronting the Money Traders, Ottawa: Canadian Centre for Policy Alternatives, 1997, p 70. Adam Harmes, 'Institutional investors and the reproduction of neoliberalism ', Review of Internationa l Political Economy, 5 (1), 1998, pp 92-121. New York Times, 1 November 1997. S Soederberg, 'Grafting stability onto globalisation? Deconstructing the IMF's recent bid for transparency' , Third World Quarterly, 22 (5), 2001, pp 849-864. Dillon, Turning the Tide, p 70ff. Elmar Altvater, 'The growth of obsession', in Panitch & Leys, Socialist Register, p 79. Dillon, Turning the Tide, p 70ff. IMF, 'IMF builds on initiatives to meet challenges of globalisation ', IMF Survey, September 1997, p 8. Benjamin Cohen, 'Capital controls: the neglected option', in Geoffrey RD Underhill and Xiaoke Zhang (eds), What Is To Be Done? Global Economic Disorder and Policies for a New International s Financial Architectur e, Cambridge: Cambridge University Press, forthcoming . The vote surrounding the release of this huge sum of money played a major role in setting up the International Financial Institutions Advisory Commission (IFIAC) and the subsequent publication of the Meltzer Commission Report, which was released in March 2000. This was made clear in the IMF's first comprehensive review of the crisis, namely IMF -Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment, Occasional Paper 178, Washington, DC: IMF, 1999. The Economist, 'A survey of Asian business: in praise of rules', 7-13 April 2001. See, for example, Cohen, 'Capital controls'. David Felix, 'The economic case against free capital mobility', in Leslie Elliot Armijo (ed), Debating the Global Financial Architecture, New York: SUNY Press, forthcoming, p 172. 619 SUSANNE SOEDERBERG 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 P Arestis & M Sawyer, 'What role for the Tobin tax in a world economic governance? ' in Michie & Smith (eds), Global Instability: the Political Economy of World Economic Governanc e, London: Routledge, pp 151-167. Bhagwati, 'The capital myth', p 10. Dillon, Turning the Tide, p 95. James Tobin, 'A proposal for international monetary reform', Eastern Economic Journal, 4 (3-4), 1978, pp 153-159. Many countries already have some form of domestic financial transaction tax, eg Australia, Austria, Belgium, Germany, France, Hong Kong, Japan, Singapore, the UK, and so on. Basically this tax operates like the Tobin tax, but is applied to the domestic as opposed to the international economy. See Dillon, Turning the Tide, pp 100-102. This was the result of a private conference of 47 international financial experts called the Bretton Woods Commission in 1994, chaired by Paul Volcker. See, for example, Bretton Woods Commission, Bretton Woods: Looking to the Future, Washington, DC: Bretton Woods Commission, 1994. Arestis & Sawyer, 'What role for the Tobin tax?', p 163. Cohen, 'Capital controls'. Walden Bello et al, 'Notes on the ascendancy and regulation of speculative capital', in Walden Bello, Nicola Bullard & Kamal Malhotra (eds), Global Finance: New Thinking on Regulating Speculativ e Capital Markets, London: Zed, 2000, p 18. 'The New Financial Architecture ', Financial Times, 24 September 1999. For more information, see the G-20 website at www.G-20.org. The first meeting of the G-20 was convened in Berlin in 1999. The second was held in Montreal in 2000. The third meeting was held in Ottawa in November 2001. www.fsforum.org. Geoffrey RD Underhill, 'Private markets and public responsibility in a global system: conflict and cooperation in transnational banking and securities regulation ', in Underhill (ed), The New World Order in International Finance, London: Macmillan, 1997, p 31. Stephen Gill, 'The emerging world order and European change: the political economy of the European Union', in Les Panitch & Ralph Millibrand, Socialist Register, London: Merlin Press, 1992, pp 157- 196. Underhill, 'Private markets and public responsibility '. IMF, IMF Survey, 30 (7), 2001, p 105. Ibid, p 106. OECD, OECD Corporate Governance Guidelines, Paris: OECD, 1998. Xavier Vives, 'Corporate governance: does it matter?', in Vives (ed), Corporate Governance : Theoretical and Empirical Perspectives, Cambridge: Cambridge University Press, 2000, pp 1-22. Alexandre Lamfalussy, An Essay on Financial Globalisation and Fragility: Financial Crises in Emerging Markets, New Haven, CT: Yale University, 2000, pp 90-91. George Soros, 'Capitalism's last chance?', Foreign Policy, Winter 1998-99, p 63. Khler's new crew', The Economist, 16 June 2001, p 69. Soederberg, 'Grafting stability onto globalisation? '. IMF, 'Reports on Observance of Standards and Codes (ROSCs): Republic of Korea, fiscal transparency , 23 January 2001', downloaded on 12 October 2001 at http://www.imf.org/externalp/rosc/rosc/asp. Ilene Grabel, 'Marketing the Third World: the contradictions of portfolio investment in the global economy', World Development, 24 (11), 1996, pp 1761-1776; and L Elliott Armijo, 'Mixed blessing: expectations about foreign capital flows and democracy in emerging markets', in Armijo (ed), Financial Globalization and Democracy in Emerging Markets, London: Macmillan, 1999, pp 17-50. Ilene Grabel, 'Mexico redux? Making sense of the financial crisis of 1997-98', Journal of Economic Issues, XXXIII (2), 1999, pp 375-381. Sumangala Damodaran, 'Capital account convertibility: theoretical issues and policy options', in Bello et al, Global Finance: New Thinking on Regulating Speculative Capital Markets, London: Zed, 2000, pop 162-163. Benjamin J Cohen aptly terms this contradiction the 'unholy trinity', which reflects the contradictory relationship between exchange-rate stability, capital mobility and national policy autonomy. Mary Ann Haley, 'Emerging market makers: the power of institutional investors ', in Armijo (ed), Financial Globalization and Democracy in Emerging Markets, pp 74-90. World Bank, World Development Report 2000/2001: Attacking Poverty, Oxford: Oxford University Press, 2000, p 3. 620