## Smart Governance: Solutions for Today's Global Economy

_IMF News, December 5, 2013_

## Source details

**Canonical URL:** [Smart Governance: Solutions for Today's Global Economy](https://www.imf.org/en/news/articles/2015/09/28/04/53/sp120513)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/53/sp120513/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/53/sp120513/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/53/sp120513/bundle-manifest.json)

## Bibliographic details
- Authors: Nemat Shafik Deputy Managing Director
- Published: December 5, 2013

---

### Overview
- Speech by Nemat Shafik, Deputy Managing Director, International Monetary Fund, delivered in Oxford, United Kingdom, December 5, 2013.
- Purpose: make the case for "smart governance" and outline how global economic governance and policy coordination should evolve to manage globalization.

### Making the case for smart governance
- Global shocks reveal shortcomings of international rules and institutions; failures in banks and capital markets can spread through the international financial system.
- Global challenges cited: climate change, nuclear weapons proliferation, health pandemics—"What happens anywhere affects everybody—and increasingly so."
- Cites Martin Wolf’s argument for extraordinary creativity in providing global public goods and managing overstretched and at-odds states.

### A world in transition — key facts and trends
- Emerging and developing economies already make up more than 50 percent of global GDP (on a PPP basis); ten years from now this number is expected to increase to 64 percent.
- Cross-border bank claims grew from $6 to over $30 trillion between 1990 and 2008.
- Global merchandise exports of goods and services increased from $4 trillion to $20 trillion (period up to 2008).
- Typical manufacturing company relies on inputs from more than 35 different contractors from around the world; for some companies (e.g., car and airplane manufacturers) this number can range in the tens of thousands.
- Despite rising interconnectedness, global governance did not expand commensurately prior to the 2008 crisis.

### Crises as opportunity — historical examples
- Historical link between crises and governance reform:
  - Post-World War I: creation of the League of Nations.
  - 1920s hyperinflation: efforts to restore the gold standard.
  - Great Depression and World War II: creation of the United Nations, IMF, World Bank, and GATT (now WTO).
  - U.S. 1907 financial crisis: creation of the Federal Reserve.
  - Great Depression: Glass-Steagall Act in 1933, separating commercial and investment banking for more than sixty years.
  - Asian crisis: Chiang Mai Initiative (regional currency swap arrangements).
- The 2008 global financial crisis exposed an "undersupply of global governance" and created a window of opportunity for governance reforms.

### A mixed score card — governance reform since 2008
- Reforms split into three categories: coordinating macroeconomic policies, fixing global financial regulation, and strengthening regional and global safety nets.

- Coordinating macroeconomic policies:
  - Six major central banks announced a coordinated cut in policy rates in October 2008.
  - The U.S. Federal Reserve and 14 different monetary authorities established temporary U.S. currency swap arrangements.
  - The first ever G20 Leaders’ Summit took place in November 2008, leading to coordinated fiscal stimulus and a pledge to refrain from protectionism.
  - Recent slowdown in momentum for policy coordination; challenges include unwinding unconventional monetary policies and managing spillover effects and debt burdens accumulated during the crisis.

- Global financial regulation:
  - Financial Stability Board (FSB) created in 2009 with a mandate to develop and promote effective financial regulation.
  - Progress: strengthening system-wide oversight, increasing capital and liquidity buffers, promoting the exchange of financial information, implementing macroprudential policy frameworks, and facilitating cross-border resolution.
  - Remaining challenges: ending the too-big-to-fail problem, reforming shadow banking, making derivatives markets safer, reversing financial fragmentation in the euro area, and moving towards a full banking union.

- Strengthening regional and global safety nets:
  - Trebling the size of the IMF’s resources and increasing the allocation of SDRs were measures taken to strengthen the global financial safety net.
  - Europe: creation of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transactions (OMT) framework.
  - Regional financing arrangements reinforced: Chang Mai Initiative and the Eurasian Economic Community Anti-crisis Fund.
  - IMF governance reform: the 2010 agreement on quota and governance reforms has not yet been implemented; "two of three required conditions have been fulfilled," but further support is needed for the final condition to allow the reform to take effect.

- Overall assessment: a "somewhat mixed" report card; urgency needed to keep reform momentum alive while political opportunity remains.

### Soft versus hard policy coordination
- "Hard" policy coordination:
  - Characterized by quid pro quos, focus on specific and tangible outcomes.
  - Examples: initial G20 Leaders’ Summits and coordinated fiscal policy response; creation of the FSB.
- "Softer" coordination:
  - Process-based, facilitating exchange of views and information without expectation of substantial outcomes.
  - Example: regular discussions among central bankers at the Bank for International Settlements (BIS).
- Complementarity: soft arrangements can sustain dialogue in quiet times and provide a framework for harder cooperation during crises.

### Soft versus hard governance
- "Hard" governance:
  - Treaty-based, legal obligations, independent institutions (UN, IMF, World Bank, WTO).
  - Advantages: strengthens credibility and legal enforcement powers.
  - Drawback: slow to establish and adapt to changing circumstances.
- "Soft" governance:
  - No international legal personality or obligations (G20, BRIC groupings, FSB, FATF).
  - Advantages: more flexible and quicker to put in place.
  - Drawback: limited ability to enforce commitments, potential challenges for long-term relevance and effectiveness.
- Private sector governance examples: Collective Action Clauses (CACs) and IFRS.

### A mosaic of solutions — combining hard and soft governance
- Future global governance may be an ecosystem of complementary hard and soft elements, issue- and context-driven.
- Examples of mixed approaches:
  - Trade: WTO dispute resolution ("teeth") complemented by mega-regional agreements addressing standards and non-tariff barriers.
  - Euro area crisis: hard governance from IMF and ECB, soft governance from the Eurogroup; existing European arrangements worked in peace time but were not well suited for crisis decision making.
  - Financial regulation: IMF’s mandatory Financial Sector Assessment Program (FSAP) every 5 years (hard surveillance) complemented by FSB peer reviews every two years after an FSAP (soft governance).

- Risk noted: if hard institutions adapt too slowly, soft institutions may substitute rather than complement, potentially weakening the global governance system.

### The case for IMF governance reform
- IMF’s historical adaptability cited: responses to the fall of the fixed exchange rate system in the early 1970s, the debt crisis of the 1980s, and the collapse of the Soviet Union in 1991.
- Factors in IMF’s relevance:
  - Political governance structure that adapts slowly but does adapt.
  - Independent staff and Articles of Agreement allowing a longer-term perspective.
  - Integration of hard elements (mandatory surveillance) with soft elements (voluntary Reports on the Observance of Standards and Codes, facilitation of standards for sovereign wealth funds).
  - Consensus-based decision-making enabling member countries’ perspectives to be heard.
- Argument: IMF governance should reflect relative positions of member countries in the global economy; approval and full implementation of the 2010 reforms is an important step.
- Political challenge: some countries will need to accept relative declines in quota and voting shares to ensure IMF strength and legitimacy for the entire membership.

### Conclusion — policy implications and recommendations
- Momentum for governance reform and policy coordination has slowed since the initial crisis response.
- The current system is effective in crisis ("when there is a lot to lose") but less effective at galvanizing action in normal times ("when there is potential for mutual gain").
- Two modes of governance can be complementary:
  - Soft governance: works when innovation is needed, there is time to act, and a subset of countries acting is sufficient.
  - Hard governance: needed in a crisis or when global approaches and consistent enforcement are key.
- Recommendation: integrate soft and hard governance intelligently, use political opportunity when it appears, and be "smart about the governance we need" to achieve better outcomes for all countries.

*As prepared for delivery by Nemat Shafik, Deputy Managing Director, International Monetary Fund, Oxford, United Kingdom, December 5, 2013.*

---

## Content in this bundle

- [120513apdf (PDF)](/-/media/websites/imf/imported/external/arabic/np/speeches/2013/120513apdf.pdf){rel="external" type="application/pdf"}
- [120513cpdf (PDF)](/-/media/websites/imf/imported/external/chinese/np/speeches/2013/120513cpdf.pdf){rel="external" type="application/pdf"}
- [120513jpdf (PDF)](/-/media/websites/imf/imported/external/japanese/np/speeches/2013/120513jpdf.pdf){rel="external" type="application/pdf"}
- [120513rpdf (PDF)](/-/media/websites/imf/imported/external/russian/np/speeches/2013/120513rpdf.pdf){rel="external" type="application/pdf"}

---

## References

- [United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [IMF Quotas -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2022/imf-quotas)
- [The IMF and the World Trade Organization -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2022/imf-and-the-world-trade-organization)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Nemat Shafik](https://www.imf.org/external/np/omd/bios/mns.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp120513_