The Challenge

The current order and governance ecosystem was designed in the immediate aftermath of WWII and therefore reflects the colonial structure and balances of power of that historical moment. Over the last decades, the main economic and financial powers have moved multilateral economic and financial governance even further away from participatory and inclusionary processes, which is remarkable given that these institutions in many cases reflect a colonial past (and present) shaped by stark power and economic inequalities. Organizations dominated by advanced economies, like the OECD or the Groups of 7 or 20, have further ossified their exclusive arrangements while proving unable to respond to new realities.

Therefore, while significant regulatory interventions are urgently required with respect to capital flows, monetary policies as well as financial markets, products and actors, the main challenge remains one of governance. Governments need to bring back decision making power to the United Nations General Assembly – building on the window offered by the Financing for Development process and inspired by the Monterrey Consensus - and democratically establish new normative frameworks and governance ecosystems.

This is a matter of utmost urgency. In 2022 only, developing countries spent approximately $379 billion from their reserves to defend their currencies, nearly doubling the new Special Drawing Rights (SDRs) allocated by the IMF in 2021. Despite these efforts, global net financial transfers to these countries have dropped to the lowest levels since the Global Financial Crisis, indicating that debt repayments to lenders now exceed new external financial inflows.

This financial dynamic has plunged millions into poverty and worsened economic hardships, with developing countries experiencing significant reversals in development, notably in gender equality during financial crises. The systemic issues are further compounded by power asymmetries in international negotiations and superficial reforms in international financial institutions which have not resulted in substantial power shifts or alleviated conditions imposed on these countries.

The ongoing crisis is not merely a liquidity issue but a deep-seated structural problem stemming from an inability to trade, industrialize, and mobilize domestic revenue effectively. This has led to an increased dependency on external borrowing and foreign direct investment.

Furthermore, past financial crises not only represented a massive failure in macroeconomic and financial regulation but also exposed the significant vacuum in governance over financial actors, particularly non-banking actors. Yet, the asset management industry has grown exponentially since the last crisis, now featuring a higher degree of interconnections between financial institutions and generating an even higher systemic risk.

Our Recommendations

The CS FfD Mechanism invites member states to undertake the following critical measures:

1. Assess the systemic risks posed by unregulated or inadequately regulated financial sector instruments and actors and undertake decisive steps to bring global finance under democratic governance:

• Define a global agreement on the importance of capital account management to prevent capital flight, limit speculative trading and arrest declines in currency and asset prices

• Agree on adequate regulation and supervision of financial institutions, credit rating agencies (see below) and hedge funds through a UN framework

• Establish a global ban on short selling among all markets and increase regulation/surveillance of high frequency trading

2. Reform Special Drawing Rights (SDRs):

• Decouple the allocation of SDRs from the IMF Quota System: Push for reforms in the distribution mechanism of SDRs to focus on economic need rather than the established quota system. This change would provide a robust countercyclical boost to the global financial safety net, helping prevent currency depreciations and associated cost-of-living crises in developing countries

• Expand the potential of SDRs: Explore reforms that can expand the potential of SDRs not just as reserve alternatives, but to underpin access to financing at most favorably low interest rates and without conditionality

3. Regulate Credit Rating Agencies in the public interest:

• Establish an intergovernmental ECOSOC Commission to regulate Credit Rating Agencies (CRAs): The United Nations should lead on further supervision and regulation of credit rating agencies (CRAs) by convening a universal, intergovernmental commission under ECOSOC with a mandate to examine needed international institutional innovations, including in the UN, required to correct and avert the adverse impacts of CRAs on international finance. In addition to looking at the adequacy of CRAs rating methodologies and possible bias in its implementation that undermine developing countries’ access to capital markets, CRA regulation would also need to focus on issues such as conflicts of interest, promoting competition to avoid quasi-monopolistic market dynamics, and tackling excessive reliance of investors on ratings

• Explore the potential of a UN Public Credit Rating Agency: The Commission should also further study proposals such as establishing an international public credit rating agency at the UN to provide more transparent and equitable assessments of creditworthiness

4. Commit to Systemic Reforms in Global Economic Governance:

• Uphold the Monterrey Consensus: Reaffirm commitments made in the Monterrey Consensus of 2002, emphasizing the need for international cooperation to correct systemic inequalities and colonial hierarchies in the global economic system

• Pursue Regulatory and Governance Reforms: Advocate for comprehensive reforms in the international financial architecture to create a more democratic, equitable and effective system that supports sustainable development in all countries