Global Financial Governance: Swelling Deficit and Necessary Reform
The global financial governance (GFG) system is at a critical juncture.
Following the successive blows dealt by the US-China trade tensions, the COVID-19 pandemic, and the Ukraine crisis, the global economy has now fallen into a trap of weak demand, rising inflation, and disrupted supply chains. The world economy is likely to enter a recession in 2023 as a result of the ongoing interplay of cyclical, structural, geopolitical, geoeconomic, and public health factors. With a global debt crisis looming, a yawning gap in development financing, and the world‘s 11th largest economy barred from global financial markets, the demand for GFG has never been higher since the 2008 International Financial Crisis. However, due to fundamental flaws in GFG, little has been done to curb the aforementioned dangerous trends. To prevent the debt issue from developing into a full-fledged crisis and to bridge the development gap between the North and the South, the world’s major economies need to closely cooperate and advance the democratic reform of the GFG system.
Swelling Deficit
After the 2008 International Financial Crisis, the GFG system came under fierce attack for being unable to foretell and forestall the crisis. Under the Group of Twenty (G20) leadership, it underwent a comprehensive reform. However, after only 14 years, the mismatch between the demand and supply of GFG is once again conspicuous. Due to several interlinked and mutually reinforcing factors, the governance deficit in the area is rapidly growing.
.Reverse currency wars
The year 2022 was featured by a U-turn in America’s monetary policy. To fight stubborn inflation, the Federal Reserve (or simply the Fed) raised its key interest rates seven times from 0-0.2’% in March 2022 to 4.’-4.7’% in February 2023, triggering reverse currency wars at the global level. Many countries had no choice but to follow the Fed’s suit to prevent large-scale capital outflows. Concurrent with this collective interest rate hikes were disruptive adjustments in the global foreign exchange market. The US dollar index reached a new 20.’-year high in September 2022, trading at more than 114. In the same month, the euro fell below parity with the US dollar, reaching a 20-year low, while the British pound nearly reached parity with the US dollar, reaching its lowest point since 198′. The Japanese yen fell to 1’0 per US dollar in November 2022, its lowest level since 1990. From January to July 2022, approximately 90 currencies depreciated against the US dollar, with 34 falling by more than 10%. Former Chief Economist of the International Monetary Fund (IMF) Maurice Obstfeld feared that the central banks might “collectively go too far and drive the world economy into an unnecessarily harsh contraction “
Global exchange rate adjustments of this magnitude will undoubtedly harm global trade relations and result in an unjust and unfair redistribution of global wealth, necessitating their resolution through GFG platforms. After all, one of GFG’s stated goals is to maintain global financial stability. This time, however, international monetary policy coordination is out of the question. Countries are expected to defend themselves. The global foreign exchange market resembles a large, untamed jungle. Capital rules this market, and governments are either unwilling or powerless to intervene. Leaving the global exchange rate market primarily to market forces, on the other hand, has serious consequences. The looming debt crisis is one of them.
.A looming debt crisis
The global debt had reached $2” trillion by the end of 2019. After only two years of a raging pandemic, it climbed to a record of $303 trillion in 2021. In 201′, less than 30% of low-income countries were in debt distress; however, this figure has risen substantially in recent years. According to IMF Managing Director Kristalina Georgieva, 30% of emerging market countries and 60% of low-income countries will be in or near debt distress by 2022? World Bank President David Malpass also warned that “the developing world is facing an extremely challenging near-term outlook； and “a series of harsh events and unprecedented macroeconomic policies are combining to throw development into crisis.
In fact, right after the COVID-19 outbreak in early 2020, the IMF foresaw the fast-approaching debt issue and tried to take preemptive action. The IMF provided approximately $31 billion in emergency financing to 76 countries in 2020, 47 of which were low-income countries. Aside from a record emergency lending, the IMF allocated $6’0 billion in special drawing rights (SDRs) in 2021, with $21 billion going directly to low-income countries. The IMF had a record $13′ billion in loans outstanding at the end of September 2022, up 4’% from 2019 and more than double the amount in 2017, whereas the World Bank‘s total lending increased ‘3% since 2019 to a record $104 billion.1 The G20, the self-designated “premier forum for global economic cooperation,,‘ also came to rescue. In May 2020, the G20 implemented the Debt Service Suspension Initiative (DSSI), which suspended $12.9 billion in debt-service payments owed by 48 participators out of 73 eligible countries before it expired at the end of 2021.2 jn contrast, the public external debt stock for countries eligible for the DSSI stood at $477 billion in 2018. In late 2020, the G20 decided to replace the DSSI with the ambitious Common Framework for Debt Treatments (CFDT), which aims to help streamline debt restructuring for poorer countries afflicted by the COVID-19 pandemic. Legitimate countries are encouraged to apply to the platform voluntarily, but so far only four countries have signed up for it. Besides, the CFDT has been widely criticized for its glacier progress. Among the four applicant countries, only Chad secured a deal with creditors in November 2022; Zambia is still locked in talks; a civil war held up Ethiopia’s progress; Ghana applied in early 2023, but it is too early to tell how long it will take for this country to accomplish the daunting debt-restructuring task.
The mounting debt in the developing world is only one facet of the global debt problem. The accumulation of debt in the developed world is also concerning. Among developed economies, America’s ballooning sovereign debt poses a systemic risk to the global financial system. The US government reached its congressionally mandated borrowing limit of $31.4 trillion in January 2023. Both US President Joe Biden and Treasury Secretary Janet Yellen warned of a potential economic crisis on February 14, 2023, if the US Congress and the White House failed to raise the federal debt ceiling. If such a crisis occurs in the near future, it will wreak havoc on global financial markets, destroying the global economy, which has never fully recovered from the devastating effects of the 2008 International Financial Crisis. However, this vital issue is unlikely to be seriously discussed on any major GFG platforms.
.A gaping gap in development financing
Infrastructure is widely regarded as a driver of economic growth, providing a solid foundation for strong, balanced, inclusive, and long-term growth. According to the World Economic Forum, the gap between projected infrastructure spending and the amount required to meet the world‘s infrastructure needs is expected to reach around $1′ trillion by 2040? According to the Asian Development Bank, developing Asia alone will need to invest $26 trillion in infrastructure (defined as transportation, power, telecommunications, water, and sanitation) from 2016 to 2030, or $1.7 trillion per year, if the region is to maintain its growth momentum, eradicate poverty, and respond to climate change.
To help bridge this gap, the G20 has taken the lead in several areas. In 2017, the G20 launched its Principles of Multilateral Development Banks (MDBs)’ Strategy for Crowding-In Private Sector Finance for Growth and Sustainable Development. In 2018, it launched a Roadmap to Infrastructure as an asset class, which seeks to enhance the investment environment, promote greater standardization, and involve institutional investors. The G20 produced six principles for quality infrastructure investments the same year, which include maximizing the positive impact of infrastructure to achieve sustainable growth and development, raising economic efficiency in view of life-cycle costs, integrating environmental considerations in infrastructure investments, building resilience against natural disasters and other risks, integrating social considerations in infrastructure investments, and strengthening infrastructure governance.3 Although the same document acknowledged that “in infrastructure, quantity and quality can be complementary,too many new standards have been created while too few tangible fruits can be seen in increasing global infrastructure financing. Indeed, infrastructure-related development aid has become a source of contention between developed and developing donors. For example, China’s Belt and Road Initiative (BRI), first announced in 2013, has been under intense scrutiny by developed countries. Instead of complementing the work of the BRI, America and its Western allies seek to counter it with both global initiatives, such as the Build Back Better World and the Partnership for Global Infrastructure and Investment, and regional initiatives, such as the Indo-Pacific Economic Framework for Prosperity.
In addition to infrastructure financing, green or climate finance has received much attention in recent years. The United Nations (UN) Climate Change Conference (COP26) in 2022 and the net-zero commitments by major developed and developing economies signal a major mindset shift in how people perceive the green transformation. However, green transformation is difficult and costly to effect. It is estimated that $93.2 trillion in green infrastructure (including sectors such as energy, transportation, water, and digital communication) will be required to meet the Paris Agreement goals from 2016 to 2040? The demand for mitigation and adaptation finance in emerging market and developing economies is enormous. If they are to achieve net-zero greenhouse gas emissions by 20’0, they will need to invest $1 trillion per year in renewable energy by 2030? Given the enormous gap in green finance, MDBs led by the World Bank are expected to play a critical leadership role. However, the World Bank has long been chastised for not taking green finance seriously enough. It came under fire in October 2022 for failing to show that its claimed spending on the climate crisis was real. According to Oxfam research, up to $7 billion of the $17.2 billion reported by the World Bank for climate finance in 2020 cannot be independently verified. Private investments are also difficult to secure. According to a new Fed paper, on average, the world’s 30 top banks have committed $1.2 trillion a year in new green financing. If they keep investing at that pace, they are only likely to hit $33.6 trillion in new financing through 20’0. That comes out to roughly a quarter of what is needed, according to the papefs authors. To make the matter worse, green finance is no less controversial than infrastructure finance, reflecting a deep divide between the North and the South on fundamental issues such as who should be held more accountable for the impending climate crisis.
.Geopolitical rivalry
In 2022, the geopolitical rivalry between Russia and the West impinged heavily on GFG. Following Russia’s special military operation against Ukraine in February 2022, the United States and its allies joined forces to impose the most severe economic and financial sanctions on a major power since World War II Sanctions include freezing Russia’s Central Bank and sovereign wealth funds‘ overseas assets, prohibiting transactions with Russia’s Central Bank, Treasury Department, and sovereign wealth funds, expelling several major Russian banks from the Society for Worldwide Interbank Financial Telecommunication, and prohibiting Russia’s major state and private enterprises from transacting in international capital markets. Former IMF Chief Economist Pierre-Olivier Gourinchas observes that the Ukraine war reveals a sudden shift in underlying “geopolitical tectonic plates,” and the danger is that these plates will drift further apart, fragmenting the global economy into distinct economic blocs with different ideologies, political systems, technology standards, cross-border payment and trade systems, and reserve currencies.2 America’s policy of weaponizing the US dollar and Western countries‘ collective move to bar Russia from international financial markets have delivered a psychological shock to many countries: Western assets are no longer safe; Western capital markets are no longer free; and the US dollar’s security and neutrality as a global common good are further jeopardized. This new sense will inevitably erode trust in the current global financial system. In this sense, America’s abuse of financial sanctions poses a systemic risk to global financial stability. Major global economic governance platforms need to play a more constructive role to prevent the system from further fracturing and collapsing. However, the G20 has done little to help mend the rift in this area, whereas the Group of Seven (G7) has been busy adding fuel to the fire.
Embedded Defects
Several reasons contribute to the widening gap in GFG. Some lie at the systemic level and are almost impossible to rectify in the short- to mid-term. Some are at the operational level and can be discussed and modified.
.The global monetary and financial system is plagued by an original sin
Since the Bretton Woods System’s demise in 1971, hard rules such as maintaining a fixed exchange rate system have been completely abandoned. The international monetary system thus shifted from the dollar-gold standard to the US dollar standard, with the US government retaining most of the old system’s privileges without having to assume the old duties. This inherent defect of the current system, though periodically revisited and scorched by scholars in symposia, is dismissed as a discussion-worthy topic at global economic governance platforms dominated by Western countries.
However, after ‘0 years of unchecked evolvement, America’s monetary policy and swelling debt have become systemic challenges to global financial stability. The United States is unscrupulous in monetary policy innovation because it does not have to take responsibility for the negative effects of its macroeconomic policies on other economies. After the onset of the 2008 International Financial Crisis, the Fed embarked on a lengthy experiment in quantitative easing. Following several rounds of such experiments, the Fed’s balance sheet has grown from $0.9 trillion prior to the 2008 financial crisis to $8.38 trillion in mid-February 2023. The goal of this type of super-easing monetary policy is to suppress rising yield curves in US government bonds and force nominal interest rates below the level that would be expected in a perfectly competitive market. This is the American version of financial repression. The ultimate goal of this operation is to keep the US dollar’s international status.
Although the fundamental defect of the current international monetary system has been detected and debated for decades, at the present stage, the international status of the US dollar cannot be effectively challenged through market competition, global governance reform, or geopolitical gaming. In fact, the United States is the only country that can reap the economic benefits of other countries by periodically adjusting its own monetary policy, and it seems to have already developed path dependence on that.
.The overall architecture of GFG is problematic
Since the Bretton Woods System’s demise, GFG has evolved from a highly centralized system based on hard rules to a loose cooperation web guided by soft rules and composed of a plethora of either formal or informal organizations. These participators largely fall into four categories: intergovernmental organizations, formal international organizations, informal regulatory organizations, and business/private organizations. Intergovernmental organizations are informal gatherings of major economies‘ politicians and central bankers. The G7 (the United States, United Kingdom, Canada, Japan, France, Italy, and Germany), the G20 (the G7 plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the EU), and the BRICS (Brazil, Russia, India, China, and South Africa) are the most influential in this category. Formal international organizations, such as the IMF and MDBs, are created as a result of formal international treaties. Informal regulatory organizations include the Bank of International Settlements, the International Association of Insurance Supervisors, and the International Organization of Securities Commissions, etc. After the 2008 International Financial Crisis, the Financial Stability Board has also emerged as an important factor in GFG. Business and private organizations are largely comprised of international financial trade and professional groups, ranging from the International Swaps and Derivatives Association to the World Federation of Exchanges. These two are seldom heard of in the developing world, but they wield substantial power in international financial markets‘ rule making. Some informal organizations only gain international visibility during stressful times, such as the Paris Club and the London Club, which focus on debt restructuring.
Unlike international trade, global finance lacks a centralized international body to coordinate and enforce rules and mediate disputes. Global governance fragmentation and a lack of accountability make the international economy more vulnerable to future crises. This loose cooperation web has a poor track record when it comes to maintaining global financial stability and promoting inclusive economic development. It has been widely criticized for decades for a lack of representativeness, openness, legitimacy, responsiveness, and accountability. Except for the two Bretton Woods System organizations, the IMF and the World Bank, all of the above organizations have membership restrictions. A lack of representativeness and openness raises several concerns.
A. Ineffective in preserving financial stability. Non-member countries choose to follow the standards and rules observed by these organizations not because they wholeheartedly accept them, but because of a variety of pressures. Many decide to follow to raise their credit ratings in international financial markets, gain access to the IMF’s and the World Bank’s financing assistance, or obtain a bank license in developed economies. However, as the previous decades have demonstrated, these standards and rules are ineffective. The Basel Committee’s radical revision of the 1988 Capital Accord (also known as Basel I) was subject to regulatory capture, and the Basel Committee failed to adopt regulatory capital standards that would protect the global financial system from systemic risks, contributing significantly to the regulatory failures that caused the 2008 International Financial Crisis. And, because Basel II was a soft law that members and non-members adopted voluntarily, the Basel Committee was not held accountable for its mistakes. After the 2008 crisis, the Basel Committee quickly amended the accord, which became known as Basel III With the “grey rhinoceros” of the global debt crisis approaching fast, it is difficult to predict whether global banks will be spared from the crisis this time. But one thing is certain. If the current financial woes turn into a full-fledged banking crisis, the Basel Committee will not be held responsible for its ineffective standards.
B. Unbalanced in rule making. International debt-restructuring rules, which largely reflect Western countries‘ views and interests, are unpopular with developing countries. At present, GFG’s top priority is to assist low-income countries in getting out of debt. However, the debt-restructuring initiatives endorsed by the G20 and implemented by the IMF do not seem to be very appealing to eligible countries. Why are low-income countries hesitant to participate? There are several reasons for this.
First, the G20 approach to debt relief for low-income countries is heavily influenced by the Paris Club’s six principles. These include Club member solidarity, consensus, and information sharing, the requirement of an IMF program, and treatment comparability for non-Paris Club commercial and bilateral creditors. This strategy was used with high conditionality in large IMF lending during the 1980s and 1990s. Since then, political support in debtor countries for the type of IMF conditionality imposed in those episodes has dwindled dramatically. This time, both the DSSI and the CFDT adhere to these principles and rely on existing IMF tools. The G20 approach, which seeks to adapt the problem to the available tools rather than the other way around, is doomed to fail, as demonstrated by the DSSI experience.
Second, the responsibilities and rights of developed and developing creditors are imbalanced. Low-income countries new debt has been largely financed by developing creditors over the last decade. These countries, however, are not in charge of devising debt-reduction strategies. Since some low-income countries debt can likely be handled in bilateral talks without the need to impose the Paris Club-style principles, the multilateral framework is deemed by many eligible debtors only as a last resort.
Third, the CFDT fails to persuade private creditors to take comparable responsibility. They only participate voluntarily. One reason for the Paris Club to have succeeded in resolving the Latin American debt crisis is the involvement of private creditors. Low-income countries‘ official creditors concentrate in developing countries, but their private lenders are mainly from developed countries. Without the involvement of private creditors, the effect of any debt-restructuring plan will be limited. According to the World Bank data, multilateral financial institutions and commercial creditors hold more than three quarters of African countries‘ external debt. For example, in Zambia, multilateral institutions account fbr 24% of its external debt, private loans provided primarily by Western countries account fbr 46%, and loans from China account for only 30%. “Western leaders blame China for debt crises in Africa, but this is a distraction,said Tim Jones, Head of Policy at Debt Justice. “The truth is their own banks, asset managers and oil traders are far more responsible but the G7 are letting them off the hook.’* Glencore pic, a Swiss multinational commodity trading and mining company, owns one-third of Chad‘s external debt, while BlackRock, an American asset management company, is Zambia‘s largest private lender. Indeed, one of the primary reasons for Zambia’s debt default in late 2020 was that European private lenders refused its demand fbr a debt moratorium, whereas China agreed. To overcome collective action challenges and ensure fair burden sharing, the IMF suggests the necessity of private creditors to participate on comparable terms in the CFDT. Although Western governments say that private sectors are encouraged to make contributions, they have only paid lip’s service so far. No concrete actions have been taken. To make the CFDT relevant, G20 members need to talk seriously about reshaping the fundamental principles governing the debt issue.
C. Irresponsive and slow to adapt. Before the 2008 International Financial Crisis, GFG had been dominated by developed countries, and its main task had been to create and improve international financial regulatory rules. Another important task related to it had been to encourage developing countries to reform and open their economic and financial systems so that they could participate in global markets.
MDBs specialize in development issues but are not equipped with enough resources, expertise, and techniques to satisfy developing countries, huge need for large-scale infrastructure projects. Developed donors are not interested in this area either. They prefer to offer soft aid such as capacity-building programs instead of hard capital-intensive aid. With the arrival of a newcomer in 2013, the international development landscape has been transformed. China’s BRI aims to replicate its domestic economic success in other developing countries by assisting them in the construction of infrastructure projects. The BRI has since received widespread support from developing countries, sparking an ongoing international debate about the value of infrastructure investments. Although Western donors continue to find fault with this initiative, they have quickly developed new international development plans centered on infrastructure. However, because of their comparative advantages and a lack of mature mechanisms for mobilizing private capital, these plans continue to focus primarily on soft infrastructure. In this regard, aid projects provided by developing and developed donors are largely complementary rather than competing.
Green or climate finance is as complicated as infrastructure finance. The debate over green or climate finance boils down to three questions: who is more responsible for climate change, how transition costs should be covered, and whether developing countries have the right to choose their own development path and speed. The countries most vulnerable to climate change claim that they have lost a fifth of their wealth as a result of temperature increases and inconsistent rainfall patterns caused by climate change over the last 20 years. These losses primarily affect low- and middle-income nations, which were late to industrialize and thus contributed little to global warming in the past. By highlighting the current situation and future trends of developing countries‘ overall carbon emissions, developed countries try to shun their own historical responsibility and force developing countries to withstand the worst of the transition burden. Because heavy industries are mostly carbon intensive, many poor countries fear that adopting a green transition path will rob them of the opportunity to develop strategic industries and will keep them permanently at the bottom of global industrial chains. Furthermore, poor countries are concerned not only that rich countries have failed to provide the $100 billion per year in climate finance that has long been promised to them beginning in 2020, but that much of the money currently provided goes to middle-income countries that already find it easy to attract investment, and that more than 70% of it comes in the form of loans, which can drive poor countries further into debt.1
Necessary Reform
The current GFG system was developed in the 1970s and was only marginally reformed following the 2008 International Financial Crisis. Dominated by Western economies, it is neither responsive to developing countries‘ growing needs nor capable of preserving global financial stability. The central challenge for the GFG system is to create a cooperative international order while preventing the global financial system from fracturing and splitting in the face of an irreversible trend toward a decentralized and multipolar world. As the Ukraine crisis in 2022 demonstrated, the system is too weak to prevent America and its allies from weaponizing global reserve currencies and international financial markets, which will only erode the system’s credibility and effectiveness. To make the GFG system more relevant and responsive, the major economies need to democratize and modernize it to accommodate the disparate needs of the world.
.Refocus on key issues and work as a system
The accumulation of initiatives and the multiplicity of meetings within the G20 are widely perceived to risk crowding out issues that require strategic guidance and political consensus building. For the first four years, the G20 promoted international financial regulatory reform and balanced the global economy. It has gradually lost its focus since then. It has covered many new grounds, commissioned numerous research projects, achieved some tangible though minor victories, but has done little to address the most contentious issues that threaten to divide the group. The G20 should refocus on achieving strategic global goals, significantly reduce its agenda, and rely more on international financial institutions (IFIs) and other international organizations. Since the G20 is regarded as the mastermind in the GFG system, it must also make the entire system work as a system, rather than just a loose web of cooperation as it has been. Serious questions that require answers include: how to hold participatory organizations accountable for the rules and standards they promote; how to organize the world‘s multilateral development capabilities and resources in a way that can address the challenges confronting the international community while achieving greater and longer-term development impacts; and how to keep the most powerful countries from disrupting and tearing apart this cooperative system.
.Prioritize the development issue
Before 2008, the central task of GFG had been building and improving the global financial regulatory framework. After 2008, as the G20 replaced the G7 as the premier global economic governance platform, the development issue became more prominent. The G20 communique in 2008 reaffirmed commitments to the Millennium Development Goals adopted in 2000 and the Monterrey Consensus reached at the UN Conference on Financing for Development in 2002. The G20 leaders also urged IFIs and aid donors to continue and expand financial assistance to developing countries. Following that, the issue of development support has appeared on a regular basis in G20 summit communiqués. However, this type of support is primarily meant to boost morale and is not accompanied by meaningful reforms to change the status quo. This should be changed. The GFG system should transition from a mono-drive to a dual-drive era, with development issues at the forefront of its agenda. The G20 should put an end to the pointless competition among major economies over infrastructure financing and find a way to pool global resources and talents to close the development finance gap.
.Modernize the international debt resolution framework
Preventing the current debt issue from unfolding into a full crisis is of vital importance for emerging and low-income countries, because this represents the difference between achieving a sustainable post-COVID-19 recovery and experiencing a lost decade for development. The CFDT needs to be revamped to balance the needs and demands of debtor and creditor countries, developing and developed creditors, official and private creditors, as well as MDBs and non-MDB creditors. Some of the Paris Club principles are still relevant today and should be implemented. Private lenders and MDBs, for example, should share the burden of debt restructuring on comparable terms. In addition, creditor and debtor countries should collectively review the conditionality attached to IMF lendings. Both creditor countries and the IMF need to understand why the conditionality imposed on debtor countries backfires and why the CFDT is unpopular with low-income countries.
.Advance the reform of IFIs
The internal governance structures of IFIs need to be further reformed. The representativeness of developing countries should be enhanced in executive boards and management to reflect the world‘s economic reality. The IMF estimates that emerging market and developing countries together will account for more than 60% of the world’s gross domestic product in 2027. It is advisable that IFIs, especially the IMF and the World Bank, seriously consider appointing a chief hailing from developing countries.
MDBs must also update their mandates and change their business models accordingly. Yellen stated in April 2022 that the Bretton Woods System institutions needed to be modernized in order to address problems. In October 2022, German Development Minister Svenja Schulze echoed this viewpoint, saying that the World Bank needed to be restructured to address future global challenges. Although the need to reform IFIs has become a consensus, the international community has yet to decide what kind of form this reform will take. This time, the reform should be carried out with broad participation in order to fully reflect the needs and ideas of both developing and developed countries.
IFIs also need to develop more innovative tools to mobilize private capital into infrastructure and green finance. For example, the World Bank established the Global Infrastructure Facility (GIF) in 2014, which began as a G20 initiative. The main idea is to transform infrastructure needs into an asset class that private and public entities can easily invest in. As of December 2022, the GIF had received a total investment of $87 billion, with the private sector contributing $’6 billion.
IFIs also need to lead in making rules and standards in some important areas. Consider green finance: the Environment, Social, and Governance (ESG) score system was developed by private rating companies and institutions in Western countries, and the model is neither transparent nor subject to responsible regulation and supervision. Firms from emerging and developing economies have ESG scores that are consistently lower than their counterparts from advanced markets, and ESG-focused investment funds allocate significantly less money to emerging market assets. This type of scoring system tends to exacerbate market discrimination against developing countries, diverting private capital away from areas that need it the most. IFIs need to look at this kind of issue and devise plans to rectify market biases.
The IMF should press ahead with its SDR reform. The IMF Executive Board decided to include the RMB in the SDR currency basket in November 201′. In May 2022, it increased the weights of the RMB and the US dollar in the basket from 10.92% and 41.73% to 12.28% and 43.38%, respectively, while decreasing the weights of the euro, the Japanese yen, and the British pound. This reform, regarded as a necessary step toward democratizing the global monetary system, should be expanded, for example, by including more currencies from developing countries and making the methodology for determining currency weights and amounts in the SDR basket more transparent.
.Think outside the box
Given the massive disruptive adjustments in the global foreign exchange market in 2022, major economies need to reflect on the GF G system 怎 fundamental problems and consider whether some mechanisms managing short-term speculative capital flows could be embedded within the international financial architecture. Eric Helleiner‘s thought-provoking proposal in 2009 is still relevant today. He suggested mitigating the negative effects of capital flight by either recycling it through international public lending or taxing it and using the revenues to help the country, from which the capital fled. He argued that doing so might have two other benefits. First, it would help spread the adjustment burden more equitably within the country experiencing a financial crisis. Second, the existence of this kind of procedure at the international level might also discourage capital flight in the future.2 At first glance, such suggestions may appear bold and unrealistic, but encouraging discussions like this will almost certainly result in some truly innovative and practical action
Apart from the abovementioned international reforms, systemically important economies must also practice self-discipline. For example, America must devise a strategy to reduce its debt to a manageable level. According to a report issued by the US Congressional Budget Office in February 2023, the federal deficit will hit $1.4 trillion, $400 billion more than its projection in May 2021, and will rise to $2.7 trillion by 2033. Over the next decade, the federal debt is expected to rise to $46 trillion, nearly doubling its current level. The US government must learn from its own history. In the last decade of the 20th century, the Clinton administration managed to turn a huge fiscal deficit into a surplus. The US debt scale concerns its own economic prosperity and the stability and viability of the existing global monetary and financial system. The United States needs to confront this issue and reach a consensus on debt reduction the sooner the better.
Indeed, global confidence in the GFG system’s ability to implement necessary reforms is dwindling. Many countries opt to “self-insure” or “join forces with neighboring or similar countries ” Over the last decade, a decentralized, multi-layered structure of global, regional, plurilateral, and bilateral financial safety net arrangements has evolved. Major economies embark on a path to promote international use of their own currencies; the EU has taken measures to strengthen the euro’s global status; oil exporters have begun to shift away from US dollar settlements; members of the BRICS are discussing the feasibility of a BRICS Pay; and about a hundred countries are enthusiastically experimenting with central bank digital currencies, partly to avoid the US government’s long-arm jurisdiction.
China’s Role
China is a latecomer to the GFG system. In the aftermath of the 1997 Asian Financial Crisis, China became one of the founding members of the G20, a forum for finance ministers and central bank governors to discuss global economic and financial issues. After that, China secured a membership in most of the GFG organizations. However, in this system, China has always been a rule taker. After the outbreak of the 2008 International Financial Crisis, the G20 was raised to the summit level, and China, for the first time in history, stepped to the center stage of global governance. Although for the past 14 years, most of the agenda has still been dictated to a large extent by advanced economies, China has done its part by introducing Chinese wisdom and plans based on its successful domestic practices and experiences.
.China is an ardent advocator of international development cooperation
At the multilateral level, China is the fifth largest overall donor across the range of UN agencies focused on development, including the UN Development Program, World Food Program, and the World Health Organization. In 2021, with over $66 billion in total capital, China surpassed Japan to become the second largest contributor to the World Bank Group, providing some $200 billion in subsidized loans to poor countries yearly.17 At the bilateral level, according to a study released by the Center for Global Development, between 2007 and 2020, Chinese development banks provided $23 billion to finance infrastructure projects in sub-Saharan Africa, more than twice as much as the US, Japan, Germany, the Netherlands, and France’s development finance institutions combined. From 2016 to 2020, MDBs provided an average of just $1.4 billion per year for public-private infrastructure deals in the same region.2
China’s BRI is a game changer in the international development landscape. Unlike Western donors who see international aid as a “white man’s burden, China genuinely believes in co-development with other developing countries and is willing to invest in large-scale infrastructure projects that Western donors and MDBs avoid. China has signed over 200 BRI cooperation documents with 1’1 countries and 32 international organizations since 2013. With the assistance of Chinese companies, more than 10,000 kilometers of railway and nearly 100,000 kilometers of road have been built or upgraded in Africa alone, in addition to nearly 1,000 bridges, 100 ports, and a large number of capitals and schools. The BRI, unlike many other development initiatives promoted by Western countries, is more than just an infrastructure cooperation plan. It aims to strengthen economic, political, and cultural ties between China and the countries involved. China’s trade with countries along the Belt and Road reached a new high in 2022, accounting for 32.9% of China’s external trade, 7.9% higher than in 2013. Meanwhile, two-way investments in a variety of sectors have increased to a new high. China’s BRI has emerged as the largest international cooperation platform and the most popular international common good after ten years of unwavering commitment.
.China is also an active promoter of green finance
Under China’s presidency of the G20, green finance was incorporated in the summit agenda for the first time, and the G20 Green Finance Study Group co-chaired by China and Britain was set up. The study group presented the G20 Green Finance Synthesis Report to the summit, which summarized existing standards and practices on green finance in major economies, identified challenges, and provided solutions to address them for the benefit of interested countries. Since then, China has been an outspoken supporter of green finance. The G20 Sustainable Financial Working Group, co-chaired by China and the United States, submitted the G20 Sustainable Finance Report in 2022. This report proposed a framework for transition finance, the goal of which is to encourage high-carbon industries and companies to set and develop practical and credible emissions reduction targets and paths, as well as to mobilize financial capital to support these industries and enterprises‘ transition. In practice, China has vigorously incorporated green development into its BRI. China has developed the Green Investment Principles for Belt and Road Development, established the BRI Environmental Big Data Platform, and implemented the Green Silk Road Envoys Program since 2017. China and its partners established the Belt and Road Sustainable Cities Alliance, and the Belt and Road South-South Cooperation Initiative on Climate Change was jointly implemented. The BRI International Green Development Coalition drew more than 1’0 official and private partners from 43 countries for its first plenary session in 2019. This coalition also established the BRI Green Development Institute in late 2020 to promote collaborative research on green development, climate change, biodiversity conservation, and green finance. Since 2020, renewable energy has become an important component of China’s overseas investments, accounting for more than half of its total energy investments.
.China plays an active part in international efforts to address the debt issue.
China supports collective actions and demands that all creditors, multilateral and bilateral, official and private, participate on comparable terms. Despite the fact that the current international debt-restructuring framework is far from ideal, China has contributed significantly. China announced in February 2021 that it had canceled interest-free loan debt due to mature at the end of 2020 for 1′ African countries. China decided in August 2022 to waive debt owed by 17 African countries for 23 interest-free loans due in 2021. During a visit to Africa in early 2023, Chinese Foreign Minister Qin Gang stated that China had signed debt relief agreements or reached consensus with 19 African countries and had suspended the most debt service payments among G20 members. China actively participates in the DSSI and is involved in the CFDT’s case-by-case debt treatment for Chad, Ethiopia, and Zambia. Furthermore, China’s unofficial financial institutions have also taken part in debt relief on similar terms as those used by official creditors, which is rarely seen among G20 members.
In conclusion, China’s involvement in GFG differs from those of Western countries in many ways. Based on its own development experiences, it emphasizes the importance of infrastructure development in jump-starting economic growth; driven by the desire to achieve sustainable development, it incorporates the concept of green growth into its domestic and international endeavors; and motivated by the desire to build a community of shared future for humanity, it has taken on more than its fair share of responsibility to assist debt-stricken countries in making a fresh start. China has offered an alternative path to development while breathing new life into the old GFG system with its BRI, Global Security Initiative, Global Development Initiative, and unique path to modernization. As the history of global governance demonstrates, new ideas and approaches are always powerful engines propelling the governance system forward.