G20 needs to consider financial reform not just for this continent
March 16, 2009
By Neil Balchin
On the back of the Group of 20 (G20) summit last November, the G20 leaders are due to meet again in London next month, as high-level attempts to contain the fallout from the global financial crisis intensify.
As the sole representative of Africa in this key economic governance forum, South Africa's role in shaping a response that helps the continent to overcome the debilitating effects of the crisis will be critical. With this in mind, the South African Institute of International Affairs recently hosted a workshop to explore potential responses from world and African leaders to mitigate the effects of the crisis on Africa.
Despite the disconnect between Africa and the root causes of the crisis, and the initial belief that the continent - and indeed other developing country regions - would be "decoupled" from its effects, the workshop highlighted the reality that African economies have already been severely affected. And the impact is likely to worsen considerably.
Demand and prices for commodity exports have declined significantly amid a sharp drop in global industrial production. At the same time, the financial crisis has resulted in an enormous reduction in bank financing, leading to a sharp decline in the availability of trade finance and a curtailing of Africa's access to international credit.
This is likely to be exacerbated by declining foreign capital flows into African economies in the form of foreign direct investment, portfolio flows and remittances from developed countries.
Several participants emphasised the threat to African economies of increased protectionism stemming from the crisis in the context of an already constipated multilateral trading system.
In particular, it was noted that the prospect of "murky protectionism" threatens to considerably worsen the already tenuous economic situation of many African countries.
On a global level, the crisis has exposed structural weaknesses in the global financial architecture and sparked calls for extensive reform of international financial institutions. Several problems with the current financial architecture were identified. First, international financial institutions (IFIs), including the World Bank and the International Monetary Fund (IMF), are fragmented and lack co-ordination.
Certain relevant issues, such as financial risk management practices, are currently excluded from the scope of financial regulatory activities.
Furthermore, the legitimacy of the current global financial architecture is questionable, given what is perceived to be a complete imbalance of control in the IFIs.
Given these systemic problems, a number of pragmatic solutions to reform the global financial system were proposed.
A recurring theme was the issue of representation and the need for a change in the relationship between developing countries and the World Bank and IMF, with developing countries demanding to play a far more meaningful role in the affairs of these institutions. In addition, participants called for changes in the IMF mandate, citing the need for even-handed surveillance of all countries, not only developing nations, in terms of macroeconomic and policies. page 21
Neil Balchin is a researcher at Mthente Research and Consulting Services.
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