Achieving Inclusive Capitalism: Views from Exclusive Institutions
by Ndeye Traore, New Rules Governance & Impact Fellow
The conference on “Inclusive Capitalism” that took place in London May 27th convened global leaders in finance, economics and politics. There were many issues discussed at the conference, but the predominant focus was on the causes and consequences of the financial crisis. Specific attention was directed at the short-termism mentality of finance and the problem of rising income inequality.
In one speech, given by IMF Managing Director, Christine Lagarde, increasing inequality was clearly denounced: “The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half of the global population– that is 3.5 billion people.”
Until now “inclusive capitalism” has not been the war-horse of international financial institutions, but the statements given by Christine Lagarde and Mark Carney, Chairman of the Financial Stability Board (FSB), may suggest a shift in institutional thinking.
Christine Lagarde opened her speech by pointing out the recent huge downward spiral of capitalism due to behavioral drifts. She also highlighted the challenges of persistent unemployment and growing social mistrust. In a global economy where expectations are the main drivers of individual and economic decision-making, trust must prevail in order to maintain growth and stability.
FSB head Mark Carney, who also serves as governor of the Bank of England, was even more severe in his speech towards excesses in the financial sector. He calls for more of a conscious in the banking system. Traders’ obsession with profit margins should be limited and even banished to ensure the continued existence of “ethical capitalism”. Mr. Carney declared, "We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital." He challenged behavior in the City[1] and attributed increasing income inequalities to misconduct in the financial sector. The Libor manipulation scandal delivered a hammering blow to trust in banks – and to the financial system as a whole.
Addressing the Problems in Finance
In her speech, the Managing Director of the Fund mentioned two key dimensions to achieve inclusive capitalism.
First, she highlights the problem of growing inequalities which impede inclusion in economic growth: Excessive inequality “hinders people from participating fully and developing their potential.” Strong disparities encourage social conflicts leading to democratic and political instability. IMF research showed that taxation and redistribution have been efficient tools to reduce inequality. But other options like improvement in education and better access to health are also paths to follow.
Second, Lagarde claimed that integrity in the financial system is essential. Bad decisions and behavior were at the root of the 2008 crisis; and the continued belief of being too-big-to-fail maintains an exclusive system and a risky and dangerous atmosphere. Despite the long and slow process, Lagarde encouraged the international community to continue reforming the financial system by following recommendations of the Basel Committee and the FSB.
Mark Carney echoed Lagarde’s sentiment stating that “market integrity is essential for fair financial capitalism.” As chairman of the Financial Stability Board, Mr. Carney joins the ranks of the IMF and global institutions responsible for promoting a more stable financial system.
He pointed out the efforts of the FSB to promote “sound compensation practices to align incentives with long-term risks” in order to reform the compensation system. Carney pleaded for a re-connection between banks and end-users in order to re-install “sense of vocation and responsibility”. And to support this initiative he ask for the creation of the Banking Standards Review Council (BSRC), an independent institution that promotes high standards of behavior and competence across the UK banking industry. This new body will help to restore public trust in the economy.
Mr. Carney encouraged the implementation of code of conduct among bankers and within banks. The responsibility for mismanagement should be assumed by leaders and executives of banks and no longer by tax payers. Lastly, he spoke in favor of more power for Central Banks in order to contain the risk of a new financial crisis.
Both Lagarde and Carney are not just stressing the importance of stability, but also the purpose of finance: to serve society and create opportunity. Lagarde reminded participants that “economic stability and full employment—and […] wellbeing of people” are the end goals of finance.
This is a welcome message from Lagarde and Carney, but how will the FSB and IMF translate this rhetoric into reality?
Achieving Inclusive Capitalism
Inclusive capitalism will require inclusive institutions to govern it. Financial rules and regulations that reflect the narrow interests of a few will not provide the foundation for a robust, and certainly not inclusive, financial system. We need to ensure that a wider range of interests – from both governments and non-governmental organizations – are considered in the global financial rule-making process. Currently, the IMF, FSB and other key institutions responsible for governing global finance are insufficiently inclusive.
A May 2014 paper “Ensuring Equitable Reform in Global Financial Governance: Lessons from Recent History" by Ranjit provides some guidelines for IFIs to reach this goal. He appointed governance structures in global finance as guarantors of a fair system and suggested four principles:
1. Governance structures should ensure a clear distance between regulators and financial institutions to prevent the formation of strong informal social links between them.
- Governance structures should minimize information asymmetries between stakeholders regarding the international regulatory agenda.
- Governance structures should prohibit the delegation of key regulatory functions, such as the drafting of provisions, to stakeholders.
- Governance structures should include robust oversight mechanisms that enable stakeholders to hold regulators to account for producing inequitable rules.
These four principles would certainly be a good place start.
[1]Referring toCity of London Corporation, which is semi-autonomous and different than thecity of London; “The City” competes with New York City as the financial capital of the world