CC BY
2O Igor A. Balyuk
Doctor of Economics, Associate Professor, Professor of the Department of World Economy and World Finance, Financial University under the Government of the Russian Federation
Leningradsky Ave., 49, Moscow, 125167 E-mail: balyuk@bk.ru
Main reasons for the dysfunctionality of the modern global financial architecture
The functioning of the modern global monetary and financial system (GMFS) is characterized by many contradictions and imbalances that destabilize it and periodically lead to financial and economic crises. The article systematizes the main institutional and functional contradictions of the current GMFS and reveals the reasons for its emergence. It is concluded that over time the structure of the GMFS becomes more complicated, but this does not mean solving existing problems and eliminating contradictions, since it does not affect the basic foundations of the existing world order. In this regard, the success of the formation of a new global financial architecture (GFA) and its effective functioning will largely depend, if not on the radical elimination of various contradictions accumulated over many years, then at least on its maximum possible mitigation.
Keywords: global monetary system, global financial architecture, institutional and functional contradictions, international financial institutions, competition of currencies.
JEL Classification: F3, F36
For citation: Balyuk I.A. Main reasons for the dysfunctionality of the modern global financial architecture. World Economy and World Finance, 2023, vol. 2, no. 3, pp. 14-19. DOI: 10.24412/2949-6454-2023-0170
i Балюк Игорь Алексеевич
! доктор экономических наук, доцент,
I профессор департамента мировой экономики и мировых финансов, | Финансовый университет при Правительстве Российской Федерации
| Ленинградский пр-т., 49, Москва, 125167 | E-mail: balyuk@bk.ru
Основные причины нефункциональности современной мировой финансовой архитектуры
Функционирование современной глобальной валютно-финансовой системы характеризуется множеством противоречий и дисбалансов, которые дестабилизируют ее и периодически приводят к финансово-экономическим кризисам. В статье систематизированы основные институциональные и функциональные противоречия валютно-финансовой системы и раскрыты причины ее возникновения. Делается вывод, что с течением времени структура усложняется, но это не означает решения существующих проблем и устранения противоречий, поскольку не затрагивает базовые основы существующего мирового порядка. В этой связи успех формирования новой глобальной финансовой архитектуры и ее эффективное функционирование во многом будут зависеть если не от радикального устранения накопившихся за многие годы различных противоречий, то, по крайней мере, от ее максимально возможного смягчения.
Ключевые слова: валютная система, финансовая архитектура, институциональные противоречия, международные финансовые институты, конкуренция валют.
Для цитирования: Балюк И.А. Основные причины нефункциональности современной мировой финансовой архитектуры // Мировая экономика и мировые финансы. 2023. Т. 2. № 3. С. 14-19. DOI: 10.24412/2949-6454-2023-0170
The destruction of the bipolar world after the Second World War where there was a confrontation between the USSR and the USA and its allies, and the formation after the collapse of the USSR of a unipolar GMFS with the dominance of one national currency and the complete subordination of all participants in international economic relations to the rules set by the main world power represented by the USA, became the reason for the emergence and aggravation of various institutional and functional contradictions and imbalances. As a result, the GMFS turned from a stabilizer into a detonator of global shocks [Prospects for the transformation of the modern global monetary and financial system, 2023. P. 9].
Along with the three key global financial imbalances [Reforming the global financial architecture and the Russian financial market, 2016] (between savings and consumption, external financing, regulation of international transactions), there are also many different institutional and functional contradictions that impede the effective functioning of the modern GMFS. Over time, the structure of the GMFS becomes more complicated, but this does not lead to solving existing problems and eliminating contradictions, since it does not affect the basic foundations of the existing world order [Balyuk, Balyuk, 2022. P. 76].
In our opinion, it would be possible to identify seven reasons for the main contradictions and imbalances of the current GMFS: geopolitical, essential, conventional, disparity, opportunistic, technological and mercantile. The systematization of institutional and functional contradictions of the modern GFA is shown in Table 1.
Table 1 — The main reasons for the institutional and functional contradictions of the global
financial architecture
Reason Type of contradiction / imbalance
Geopolitical 1. The dominant position of the advanced economies within the traditional international financial institutions (IFIs) against the backdrop of underestimation of the growing role of developing countries 2. High politicization of decisions made by IFIs
Essential 1. Lack of a universal supranational currency unit 2. Global debt problem
Conventional Increasing imbalance between the contribution of developing countries to global GDP and the use of its currencies for international settlements and payments
Disparity The global nature of the financial market and the predominantly national level of its regulation
Opportunistic Quantitative easing policies pursued by central banks
Technological Digitalization has pros and cons, including some technical and technological challenges
Mercantile 1. Tightening national and supranational regulation of banking operations 2. Use of offshore jurisdictions to erode the tax base and remove profits from taxation 3. The use of various innovative financial instruments that could destabilize the GMFS
Source: compiled by the author
It is reasonable to consider the cause-and-effect relationships that contribute to the formation and maintenance of the modern GMFS' dysfunctionality. One of the key institutional contradictions of the existing GFA, caused by a geopolitical reason, is the continued dominant position of the economically developed countries of the world within the traditional international financial and credit organizations against the backdrop of active containment of rapidly developing countries that have long been on the periphery of the world economy and world finance. The confrontation between the old and new leaders of the world economy objectively requires a change in the semantic structures of the socio-economic paradigm and considering the interests of developing countries [Kuznetsov, Alekseev, Krylova, 2024. P. 8]. The economically developed countries of the world, having initiated the creation of new international financial and economic institutions with the participation of leading developing countries and emerging markets (G20 and Financial Stability Board), essentially created the illusion of an active dialogue between different groups of countries. Elimination (or mitigation) of existing GFAs contradictions and imbalances 15 will require developed countries to make undesirable decisions that may be contrary to their interests.
Having retained control over all strategic decisions regarding the transformation of the GFA, and in fact managing all traditional international financial organizations (including rating agencies), various market operations, as well as cross-border capital flows and the movement of other factors of production, the advanced economies led by the United States were able to quite effectively dampen the growing discontent on the part of rapidly developing countries, whose role and influence in international organizations does not correspond to their real contribution to the world economy [Gao, 2023], creating formally equal conditions for discussion and adoption of global decisions. To resolve this contradiction, further changes within leading international financial and credit organizations (primarily the IMF) are required.
Another institutional contradiction associated with a geopolitical reason lies in the high politicization degree of decisions made by IFIs. The dominance of leading advanced economies allows them to replace previously established norms and rules for the activities of IFIs with new approaches that rather broadly, amorphously and extremely subjectively interpret the main provisions of basic documents and the initial principles of activity. Examples include the EBRD's refusal since July 2014 to finance new projects in Russia, which is a member of this organization; inclusion of the Chinese yuan in the basket of currencies for calculating the SDR rate, despite the incomplete compliance of this currency with established international requirements; the refusal of the IMF since 1984 to provide financing to Iran, which is a member of this organization (even during the coronavirus pandemic, when Iran asked for $5 billion in March 2020).
One of the main functional contradictions of the modern GFA, caused by an essential reason, is the absence of a universal supranational currency unit. As a result, the use of national money intended for the domestic economy as an international measure of value, as well as an international means of payment and reserve, gives rise to serious contradictions. Firstly, the use of unstable national money for servicing world economic relations contradicts the international nature of international economic relations and gives one-sided competitive advantages to the issuing countries. Secondly, the countries issuing world currencies abuse its status for the purpose of foreign economic expansion, infringing on the financial and economic interests of other countries and discriminating against their national currencies. Thirdly, world currencies periodically lose its dominant position, giving way to other national currencies that are in greater demand in the market.
The essential cause also underlies global debt problem, which has sharply worsened in recent years (especially during the coronavirus pandemic) since government bodies, the corporate sector and households actively borrowed internal and external funds [Gaspar, Pazarbasioglu, 2022]. The "debt overhang" was formed because of the practical implementation of an economic development model based on debt financing [Emre, Khadija]. Without the active participation of various GFA institutions, it is unlikely to be reduced, and if global debt continues to grow at a pace and continued reliance on debt financing as the conceptual basis for economic development, it could become a serious threat to financial stability throughout the world.
The conventional reason underlies another functional contradiction of the existing GFA — the increasing imbalance between the real contribution of developing countries in global GDP and the inappropriate scale of using national currencies of developing countries to service various types of international financial and economic transactions and the formation of global reserve assets. The continued active use of the US dollar is due to the historical tradition associated with the power and global dominance of the US economy after the Second World War. In addition, at present there is still no real alternative to the US dollar as the leading world currency. At the same time, despite the active use of the US dollar in international economic relations, according to some experts, there is an imperceptible erosion of its dominant role [Arslanalp, Simpson-Bell, 2022].
In addition, the sanctions imposed by the United States and its allies against Russia in February-April 2022 undermine confidence in the US dollar as a reliable and safe reserve asset and may lead to its weakening in the GMFS. A further aggravation of the imbalance noted above could intensify confrontation between developed and developing countries of the world in various areas (including strengthened political confrontation), significantly destabilize the situation in the world economy and world finance and, as a result, become one of the triggers of a new global financial and economic crisis [Claessens, 2019].
Further optimization of the GFA's functioning will require resolving the contradiction caused by the disparity between the global nature of the financial market and the predominantly national level of its regulation. Certain steps in this direction were made after the crisis of 2008-2009, and as a result, a supranational system of control and monitoring of operations in the global financial market was institutionalized. It is aimed at preventing the occurence of new global financial and economic crises 16 and strengthening control and regulation of various types of transactions in the global financial market
[Balyuk, 2021. P. 50]. Enhancing regulation has a purpose to ensure stability and increase the sustainability of the global financial market's functioning in conditions of high uncertainty caused by the COVID-19 pandemic and the aggravation of the geopolitical situation in the world at the beginning of 2022.
At the same time, the evolving new regulatory system does not yet have the appropriate powers to develop rules and regulations that are mandatory for compliance and execution by various participants of the global financial market. Proposed regulatory and supervisory standards and principles are indicative and recommendatory, and taking into account historical features of functioning and managing national financial markets, they may not comply with the prudential policies of government regulators in different countries. In addition, some recommendations of international institutions aimed at tightening control over the activities of systemically important participants in financial markets in order to strengthen their sustainability and ensure financial stability, may limit the functioning and development of other market participants and pose new problems for national regulators.
In addition, different approaches to regulating operations in financial markets at the national and international levels have become especially noticeable during the coronavirus pandemic. While IFIs keep adhering to liberal principles, many national regulators have tightened monetary policy and are actively applying various protectionist measures. Such actions conflict with the ideology of transparency and openness of domestic markets, previously proclaimed by many countries of the world under financial globalization.
In order to strengthen global financial stability, it is necessary to eliminate the institutional contradiction caused by market conditions and associated with the formation of excess liquidity in the developed countries as a result of pursuing quantitative easing policies by national and regional central banks. Funds received by financial institutions of the developed countries flow to developing countries and are used there for lending local financial and non-financial institutions at higher interest rates, as well as to capture the local market and acquire various types of assets. Such actions increase the dependence of borrowers from developing countries on lenders from developed countries, and also significantly complicate pursuing monetary policy by the central bank and, as a result, reduce the national economy's regulation effectiveness.
The technological reason underlies another functional contradiction of the modern GFA. Digitalization, on the one hand, provides additional opportunities and advantages for participants in financial markets in terms of simplifying, speeding up and reducing the cost of transactions; however, on the other hand, the process of regulating market activity becomes significantly more complicated as a result of a sharp jump in the number of participants and increased anonymity of transactions, which impedes the fight against money laundering, and also increases the risks associated with determining the level of reliability of counterparties and the degree of their financial stability. In addition, some technical and technological problems arise, including ensuring stable, uninterrupted operation of various electronic systems, its standardization and mutual technological compatibility, ensuring reliable protection of information and confidentiality of transactions, preventing and combating various cybercrimes, etc.
The development and implementation of modern digital technologies will require financial market regulators to develop and apply new forms of control over the implementation of various financial transactions (for example, the use by national regulators of technologies related to implementation of artificial intelligence to monitor and process data received from various financial market participants). This will allow to strengthen control over market operations, more accurately determine key trends in market development and promptly mitigate existing market risks. Besides, digitalization of operations in the future will require greater coordination of the national regulators' actions [Khudyakova, 2019].
The mercantile reason determines the existence of three functional contradictions in the modern GFA. One of them is associated with strengthening national and supranational regulation of banking operations (primarily with the participation of systemically important credit institutions) in financial markets, which stimulates the development of the so-called "shadow" banking system, since the possibility of regulatory arbitrage arises, i.e. making a profit due to the legally existing differences in the regulation of various market segments. Expanding the scope of the "shadow" banking business through the active use of transactions with securities, derivatives, and modern cross-sectoral financial products, denominated primarily in two world currencies (US dollar and euro), strengthens the interconnection and interdependence of the main segments of the global financial market and transmits existing risks to them. As a result, an increase in the level of risk in certain segments of the financial market increases the instability of the entire financial market's functioning and significantly aggravates systemic risk.
Since the "shadow" banking system encompasses financial assets several times bigger than the volume of global GDP, the task of strengthening its regulation and control is extremely urgent. International financial organizations are developing appropriate measures, which, among other things, include supervision and risk assessment, registration of hedge funds, stricter rules for securitization, 17
improvement of the indirect regulation system (for example, limiting the interaction of banking and non-banking institutions, developing more stringent rules for assessing the level of liquidity of financial assets, etc.). Such measures are designed to mitigate existing risks and ensure the stable functioning of the global financial market.
Another functional contradiction of the current GFA, caused by mercantile reasons, is the use of offshore jurisdictions to erode the tax base and remove profits from taxation. The joint efforts of individual countries and international organizations to combat offshore business using specially developed schemes and preferential conditions for taxation and business activities (including operations of offshore banks) to minimize or eliminate taxation, intensified after the crisis of 2008-2009. To fight against offshore schemes, the OECD, together with the G20, developed and adopted a corresponding action plan in 2013. Currently, more than 130 countries around the world are participating in the implementation of this plan. Since public expenditures have sharply increased during the coronavirus crisis, governments of various countries will need additional financial resources to stabilize the budget and finance socio-economic development programs. In this regard, one can expect increased pressure on offshore jurisdictions to ensure greater information transparency, as well as on the corporate sector to pay taxes at the place where profits are generated.
Another contradiction caused by mercantile reasons is related to the functioning of the global financial market and the use of various innovative financial instruments that can destabilize the GMFS. First, it concerns financial derivatives, which from instruments for hedging market risks have gradually turned into high-risk speculative financial instruments and become one of the causes of the global financial and economic crisis of 2008-2009 (at that time its value was an order of magnitude higher than the volume of world GDP). In the post-crisis period, certain measures were taken to streamline the situation in the derivatives market, and as a result, its volume decreased significantly. However, during the coronavirus pandemic, its further growth was noted. An increase in the level of risk and a potential exacerbation of the situation could become a catalyst for a new crisis and force national and international financial regulators to tighten control over transactions in the derivatives market.
According to many experts, at present, within the hierarchical and functional system of institutions that are the basis and organizational core of the modern GFA, there are quite serious contradictions and imbalances. The process of forming a new GFA should be based on conceptual fundamental foundations. The nature of such foundations is in the objective geopolitical and geo-economic development of the world [Global finance in the context of systemic, technological and environmental transformations, 2024. P. 18]. In our opinion, the success of the formation of a new GFA and its effective functioning will largely depend, if not on the radical elimination of various contradictions accumulated over many years, then at least on its maximum possible mitigation.
References
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Литература
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