7. A Global Central Bank
The present international monetary system or non-system, a mixture of fixed and fluctuating exchange rates, is not satisfactory. Firms find themselves suddenly facing much stiffer competition as a result of a movement in the exchange rate. Long-term investment in productive capacity is therefore discouraged. Claims for protection of various kinds are made against what is seen as unfair competition. The location of investment is determined not only by long-term cost considerations but also by the movement of exchange rates. Some of this will be through take-overs and buy-outs, and competition will be reduced.

The use of the dollar as an international reserve asset is subject to well-known difficulties. The generation of dollars by the US is not guided by the international need for liquidity in the light of price stability, full employment and growth. The Special Drawing Rights (SDRs) have so far not fulfilled the need for an international liquid asset. It is therefore desirable to consider the need for a single world currency and a global central bank.

It may not be obvious that we should hand over our fate to a new group of global central bankers. Reflecting on the ability of bankers to deal with a financial crisis, John Kenneth Galabraith wrote, "The sense of responsibility in the financial community as a whole is not small. It is nearly nil." 4 And "It is often difficult to believe that international bankers belong to the thinking classes" begins a review in the Financial Times. 5

In spite of this bad press, bankers, particularly central bankers, fulfil an important function. In the event of a run on the banks, the Central Bank is the lender of last resort, providing the public, at a price, with the liquid resources it wishes to hold. It has become a commonplace to say that with 24 hour rapid communications, international financial markets have become fully integrated, so that a run on the banks in any one country can bring down the whole international financial system. As things are now, the monetary authorities (the Treasuries and Central Banks) have responded to this globalization by co-ordinating their efforts to regulate and supervise financial transactions. The IMF and the Bank of International Settlements in Basle have supported these international arrangements somewhat half-heartedly.

There has been progress towards the establishment of a European central bank, which will be associated with the role of the European Currency Unit. It could evolve as one of several regional reserve currencies. The European central bank, would then be one of these regional central banks whose activities would be co-ordinated by a global central bank. The global central bank, being the lender of last resort, would also have to exercise regulatory and supervisory functions in order to avoid moral hazard problems. It would probably also be necessary to introduce some co-ordination of budgetary policies, so that any one country cannot run large budget deficits, going too much out of line with others, and draw capital to itself.

Long-term capital-intensive investments are needed for economic growth and development. Fluctuating exchange rates discourage this form of investment, by creating or exacerbating uncertainty about future profitability. In the past the stability of the currency of the dominant economy has played the role of an international standard and store of value. The dollar is still the most important of these currencies, although the Japanese yen and the Deutschemark are increasingly used. The attempt to move towards a world currency with the creation of Special Drawing Rights has been so far not altogether successful. They have not replaced the major world currencies as instruments of international settlements. If we wish to move in the direction of a pluralistic, democratic world order, a world currency will have to be an important part of it. It would provide the basis for stability and reduced uncertainty that freedom of movement requires. But it could initially be a combination of SDRs and the major trading currencies.

The IMF is the primary candidate for an embryonic global central bank. Some critics have charged the IMF with excessive emphasis on expenditure-reducing, and not enough on expenditure-switching policies. Others have charged it with an excessive concern with specific means (devaluation, monetary and fiscal austerity) rather than with results (improvements in the balance of payments). Both of these criticisms lead to the complaint that IMF conditionality has led to excessive reductions in demand, and excessive underutilization of resources, including, above all, excessive unemployment. Pressures on surplus countries would also help fuller employment of resources. Ideally, however, the surpluses should be used for long-term investments in capital-hungry developing countries.

The International Monetary Fund is, of course, not a global Central Bank. Such an institution would have to be given the power to conduct open market operations to regulate the world currency for the three sources of demand for money: transactions, precaution and speculation. In order to provide enough liquid resources for world transactions, to be a lender of last resort to prevent panic runs on deposits, and to maintain the stability of the financial system, the global central bank would need independent authority. Even a small possibility of a financial breakdown should lead to our making provisions against it.

As a first step the IMF and the central banks of the major trading countries would form a co-ordinating committee to manage world liquidity. 6 As the role of the IMF in providing world liquidity increases, its regulatory function would have to grow with it. The role of the SDRs would grow as a substitution account is established. Member countries would deposit foreign exchange into it and receive SDR denominated certificates in exchange.

Above all, there is a need for an international lender of last resort. Repeated swings between euphoria and despair among national bankers -- with despair leading to serious collapses of enterprises -- led Bagehot 120 years ago to identify the function of a national lender of last resort as crucial for the Bank of England. His arguments were soon accepted. Just as the Bank of England has performed this function in times of crisis, so it also took on the function of limiting, by nudge and wink rather than by direct order, excess lending in good times. Such a stabilising function is now desperately needed at the global level, as the enormous swings in bank sentiment, and with it cross-border lending, clearly show. The lender of last resort has to exercise restraint in good times, as well as provide insurance in bad. The purpose would not be only to assist in a crisis, but to avoid the occurrence of crises. The problem of moral hazard -- that banks, knowing they would have access to funds, overlend or lend imprudently -- can be avoided by asking them for good collateral and charging a penal interest rate, or by leaving them in doubt as to whether funds will be available to them. In the case of sovereign debt the "good collateral" could consist in the acquisition by the international lender of last resort of the banks' claims at a discount. 7

Co-operation between countries to avoid unemployment, inflation, and protection is necessary if mutually destructive outcomes are to be avoided. It is usually the poor who bear the brunt of such outcomes. An extension of the powers of the IMF, in line with Keynes's proposals at Bretton Woods, in the direction of a global central bank would contribute to stability and growth in the world economy. Whether countries are ready to co-ordinate their fiscal and monetary policies, and to permit the freer movement of goods, capital and labour that would be called for by a global central bank, and, to go one step further (as recommended by Keynes), by a single world currency, is, to say the least, an open question. Countries respecting democratic civil rights pride themselves on an independent judiciary. Should not the same principle be applied to a global monetary authority, independent of national political control?
 
8. An International Debt Facility
At the heart of the recalcitrance of the debt problem lies the conflict of interest over who shoulders the costs of continuing debt service or of debt relief: the banks, the industrial countries' tax payers, or the developing countries. If the banks, is it the managers, the shareholders or the depositors? If the taxpayers, is it the rich or the poor? If the developing countries, is it the urban or the rural people, the rich or the poor?

Much has been written about the international debt. Four main methods of debt reduction have been proposed. 8 Each involves reducing the present value of the discounted flow of all future receipts due to the creditor. The first is debt-equity swaps, or the conversion of fixed-interest debt into equity, a claim to a share in profits. The lending bank sells its loan at market value for local currency in the debtor country, and uses the receipts to buy equity capital. No additional foreign exchange is required from the debtor, but the inflationary impact of the deal should be reduced. This is a form of debt reduction, though not necessarily of debt relief, since it does not necessarily reduce the present value of the payments due, though of course it may. 9

The second method is cash buy-backs, in which the debtor country uses its foreign exchange to buy back loans at market value. The discount will be greater than under the previous method. The foreign exchange needed for this transaction may come from the World Bank or the International Monetary Fund. Here again, the impact on the debtor country is inflationary.

In the third method, or collaterilization, old debts are exchanged for new debts, but either at lower face value or at lower interest rates. The debtor may, for example, issue long-term "exit" bonds. Against the new debt the debtor provides collateral. Here again, the World Bank or the IMF may help.

The proposal of international debt relief (or debt reduction), conditional on policy reform, combined with government guarantees of the reduced debt is perhaps different from some of the other proposals, because it applies to the present situation, from which it would be hoped that a lesson would be learned, and that it would not be repeated. On the other hand, since the possibility of repetition cannot be excluded, some global equivalent of a bankruptcy facility might well constitute a permanent feature of the global landscape.

On the assumption that some part of the outstanding international debt will have to be written off and relief will have to be granted to the borrowers, two questions arise that call for a co-ordinated, global solution. Both involve the free rider problem, and therefore require concerted action.

One would expect that normally a reduction of the contractual value of a debt (debt relief) would reduce the actual repayments received by the creditor. In some situations, however, debt relief can lead to larger debt service payments than would be made in the absence of the relief, as well as more obviously to gains for the debtor. This would be so if it led to increased domestic investment, more productive work, and greater current sacrifices in the debtor countries, both because more resources would become available and because the incentive to invest and work would be improved. Higher investment would lead to higher growth, and this in turn to a larger amount of debt service payments. The means for repayment would become available, and the incentive to make current sacrifices for the sake of a larger production later, both of which would be absent, or much lower, if it were expected that a higher proportion of (or all) resources would have to be devoted to debt service.

But although all banks would benefit from such a general debt relief, because growth and exports could be resumed by debtor countries, each bank has an incentive to let others make the concessions. Relief by only one or some means that the remainder of the payments goes to pay interest to those not having made the concessions, and thus frustrates the purpose of the exercise. Each bank has an interest in not giving relief, whether others give relief or not. At present, banks already sell their claims at discounted values to other institutions, including to some debtor countries, but this is no help to the debtors, unless the debt reduction is passed on to the debtor country. The buying back by the debtor country at lower value tends to be inflationary, since it involves a large current liability. But the free market does not solve the problem of this passing on of debt relief to the debtor, because of the logic of collective action. Concerted action by all to forgo part of the claims by all lenders is necessary in order to reap these gains. This would be one of the functions of the International Debt Facility. The possibility that debt service payments would actually be larger is, of course, not essential to the operation.

Second, after part of the debt has been forgiven, multilateral guarantees are needed for the remaining debt. In this lies the attraction to the creditors to forgive part of the debt. Here again, concerted action by the US and other creditor governments, the Fund, the Bank and the debtor governments is needed. Only then can normal lending be resumed. Neither the market nor the uncoordinated actions of governments can bring about this solution of the debt problem. It is in the interest of any one government not to guarantee, whether others guarantee or not. But is in the interest of the major lending countries' governments to jointly guarantee the debt. This co-ordination would be an additional function of the International Debt Facility.

A further function of the Facility would be to buy the debts from the banks at a discount and then to forgive the debtors part of the debt. This may benefit the banks, because the market price of their debt may rise. The outcome will depend on whether the Facility has prior claims on interest and repayments before other creditors, and on how large the holdings of the facility are. The proposal takes different forms, but in essence it amounts to a debt reduction. The functions could be fulfilled by existing international institutions such as the World Bank and the International Monetary Fund.
 

9. Global Taxation
The absence of a system of global taxation is an important incentive for capital flight, which in turn constitutes one of the major damages suffered by developing countries from their coexistence with industrial countries. It implies either that investment and growth are lower than had the capital been retained, or that more money has to be borrowed from abroad, with the higher debt burden this involves.

One step towards a global system of taxation would be to sign treaties to secure an exchange of information between the losing and the haven countries that would permit the collection of taxes on foreign investment income. This would presuppose the adoption of taxation by residence, as well as by origin, so that income by all residents is taxed, wherever it arises, and all income arising in the country is taxed, wherever the subject resides. It would also assume that tax laws are implemented and no evasion occurs. Double taxation agreements would prevent the same income being taxed twice. This would permit the collection of taxes due on foreign investment income. In 1989 many OECD countries have ratified a Multilateral Information Sharing Agreement, negotiations on which started in 1980, on the exchange of information of data on capital flight. The Draft Convention on Mutual Assistance in Tax Matters has been confined to industrial countries, but should be opened to developing countries. Of course, tax evasion has been only one of the motives for capital flight. Corrupt receipts of money, differential interest rates, exchange controls, bad macro-economic policies, risks of expropriation, are among others. The OECD Multilateral Information Sharing Agreement, ratified by most countries in 1989, is a step towards global co-operation to avoid capital flight.

Revenue-sharing has been proposed by Carlos Diaz-Alejandro, who suggested that the United States should hand over the money collected from a withholding tax on interest on deposits of Latin Americans to the Inter-American Development Bank. 10 The US has already accepted this principle for the proceeds of assets seized from narcotics trade from nationals of countries with which the US has concluded Mutual Legal Assistance Treaties. These proceeds are shared between the US and the relevant country. It constitutes a useful precedent. 11

In addition to reducing capital flight, global taxation would provide a pool of resources for global use. The main principle of global taxation would be to move towards a system of automatic collection of revenue, but not automatic disbursements. Disbursements would remain dependent not only on obvious factors such as size of population and level of poverty, but also on performance in economic policy, human development, human rights, and similar areas. But the form of conditionality practised by the Fund should be replaced by a dialogue between the tax authority and the recipient country, which would be part of a global compact.

The present target of 0.7 per cent of GNP would be replaced by a levy the amount of which for each country would be progressive with income per head, multiplied by the total population. There would be a low exemption limit, and another limit entitling countries to receive grants.

If a progressive international income tax is regarded as too radical, there are other bases for taxation which may be found more acceptable. Such bases for global revenue would be oil, the arms trade, international tourism, or license fees on patents and copyrights. Ideal taxes would be those imposed on carbon dioxide and sulphur emissions or pollution of the oceans.
 

Footnotes:

4.John Kenneth Galbraith, The Great Crash, 1929, Penguin Books, 1961, p. 20.

5.The FT Review of Business Books, September 26, 1991, p.2

6.A.W. Mullineux, "Do We Need a World Central Bank?" Royal Bank of Scotland Review, No. 160 December 1988, pp. 23-35.

7.Michael Lipton and Stephany Griffith-Jones, "International Lenders of Last Resort: Are Changes Required?" Midland Bank Occasional Paper in International Trade and Finance, March 1984.

8.Stephen Browne, Foreign Aid in Practice, Pinter, London, 1990, pp. 152-153.

9.The distinction is due to Max Corden, "The Theory of Debt Relief: Sorting out Some Issues," The Journal of Development Studies, volume 27, No. 3, April 1991, P. 137.

10.Carlos Diaz-Alejandro, "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, no. 2, 1984.

11.John Williamson and Donald R. Lessard, Capital Flight: The Problem and Policy Responses, Institute for International Economics, Policy Analyses in International Economics, Washington, D.C., November 1987.