High stakes

Although the initial effects of the financial crisis were largely limited to the US and European countries, its knock-on effect has serious implications for those in developing countries.

Experts warn that if appropriate action is not taken and decisively implemented, then it could lead to disastrous humanitarian consequences. The UN Millennium Campaign reports that the fight against poverty has been pushed back by up to three years, while the UK’s Department for International Development has likened the credit crunch to a tsunami, warning that 90 million people will be forced into poverty by the end of next year. The International Labour Organization estimates unemployment could rise by 50 million.

Poorest hit hardest

Such forecasts spell a potentially devastating blow for the world’s poorest, already hard hit by last year’s oil and food price crises. Experts predict that foreign investment in developing countries in 2009 will be 80% down on 2007 figures and there is widespread concern that wealthy countries will cut back on their aid commitments.

In a letter to G-20 leaders UN secretary-general Ban Ki-moon called for a US $1,000 billion (€737 billion) stimulus package for developing countries to protect the world’s poorest from the worst effects of the financial crisis. In an interview with the Financial Times he warned: “If we don’t handle the current economic crisis properly with a sense of strong determination and very strong and solid political leadership I’m concerned that this may not only be an economic crisis, but may develop into global political instability.”

Other international organisations have sounded similar warnings. IMF chief Dominique Strauss-Kahn has said that the financial crisis could spark "social unrest, some threats to democracy and maybe for some cases, it can also end in war," (AFP). OECD chief Angel Gurria told G8 Labour and Employment Ministers recently, “Governments need to take quick and decisive action to avoid the financial crisis becoming a fully-blown social crisis with scarring effects on vulnerable workers and low income households.”

A global problem

To support recovery and reform efforts Transparency International (TI) submitted a detailed set of recommendations ahead of the G-20 Summit. Emphasising the need for all measures to be grounded in transparency, accountability and integrity, the letter puts forth recommendations that require a concerted global approach to tackle a global problem.

From the use of public funds in ‘bail-out’ programmes to strengthening the role of international governmental organisations and regulatory authorities, the recommendations set out comprehensive measures crucial to regaining investor confidence and public trust, and protecting against potential risks.

In response to the G20 communiqué, TI welcomed the decision to prioritise transparency as a means to curb systemic risks in the global financial and economic system and to provide a stimulus that also extends to the developing world.

“Agreeing to tackle opacity and to establish a new global governance body in the form of the Financial Stability Board announced today, is the kind of decisive action that we expected from this summit,” said Huguette Labelle, Chair of TI. “In the long term, however, the G20’s initial steps towards transparency must be taken beyond the corridors of power and properly implemented, with input from civil society”, said Labelle.

Time for transparency

While the pressing need for bold and decisive action is clear, all measures must be married to the appropriate regulation and monitoring to ensure that the intended results are achieved. It is critical that world leaders enshrine transparency as a principle for recovery efforts to be successful and financial reforms effective and viable.

The increases in funding to the IMF and the World Bank must be accompanied by accountability mechanisms and fiscal transparency requirements in order to truly help those it is intended to serve. Increased money means increased accountability and opportunities for citizens to see that steps are being taken to help them in their daily struggle to cope with the global economic meltdown.

With respect to trade barriers, which were addressed by the G20 mainly in the context of protectionism, foreign bribery must be tackled as it distorts competition and adversely impacts on development and the poor the G20 is seeking to protect.

Trust in the financial markets vanished when the lack of transparency became apparent, resulting in a global burden and the largest corporate bail-out in history, at the expense of the tax-payer. The sheer complexity of repackaging subprime mortgage loans to achieve AAA ratings is indicative of recent efforts to deceive through disguise. Similarly, hefty hedge fund brochures veiled in legal jargon should not be considered transparent tools of disclosure; it is a means of obfuscation.

To safeguard against risks of opacity, unaccountability and deceit all reforms must be rooted in transparency. From preventing excessive short-term risk taking to exposing potential conflicts of interest, transparency is key to improving the financial system and ensuring confidence is restored.