London. -- Badly shaken by the turbulence in the money markets and the Mexican crash, the Group of Seven leaders meet in Canada this weekend determined, according to their rhetoric, to fix the world's financial system, but programmed by their advisers not to stray from a safe brief.
Reforming the international financial institutions -- the International Monetary Fund and the World Bank -- with a safe brief is like conceiving children with safe sex, possible only by error or inadvertence.
John Maynard Keynes, one of the two great architects of the post-war reform of the disordered financial world that sowed the seeds for war, had a blueprint that is worth discussing again today:
* Keynes proposed an International Monetary Fund of a size equal to one-half of the world's imports, enabling it to exercise a major influence on the global monetary system. Today it controls liquidity equal to 2 percent of world imports in an age when more than a trillion dollars cross international boundaries every 24 hours.
* Keynes wanted the IMF to become a world central bank issuing its own reserve currency and creating sufficient international reserves whenever and wherever needed. Today, the IMF does possess a very minor currency, the so-called SDRs (Special Drawing Rights), but they constitute only 3 percent of the world liquidity. How can it do a good job in Russia, in Algeria or in Mexico when its hands are so tied?
* Keynes regarded balance of payments surpluses as a vice and deficits a virtue, since deficits sustained effective global demand. He advocated a penal rate of interest of 1 percent per month on outstanding surpluses. Imagine the effect of such a policy applied to Japan: The Japanese-American trade quarrel would simply not exist.
* Keynes believed there was no need for persistent debt problems -- surpluses would be simply used by the IMF to finance deficits. "The lost decade" of the 1980s that almost broke the back of Latin America would never have been.
At the time, in 1944, it looked as if Keynes and his American colleague, Harry White, had persuaded the international community to reject unilateralism in favor of multilateralism.
But here we are today, with nothing but improvisations, either made unilaterally or by a loose and uneven coordination of the G7.
The IMF, in effect, has become a policeman of the poorer countries of the Third World, handing out punitive measures for dealing with debt problems and for fulfilling international reserve requirements.
Its sister organization, the World Bank, has failed, too, except perhaps in South Korea, to build up the creditworthiness of individual developing countries. It no longer transfers any significant resources to developing countries. Recently, its net resource transfers have been negative, to the tune of $1 billion to $2 billion a year. In fact, the Bank is recycling the repayments of its own debts rather than creating any new resources.
Never in the 50 years of the international financial institutions has the need for a redesign been more obvious.
The IMF needs to recover its role as the ballast that stabilizes global economic activity. It needs to act as a lender of last resort to financial institutions and to be able to calm the financial markets when they become disordered. It needs to be able to regulate banks and financial institutions by applying a small tax on international currency transactions to curb excessive speculation.
And it needs to start creating substantial new amounts of liquidity, especially now, when global inflationary pressures are low and most industrial countries are concentrating on reducing their budget deficits.
The World Bank must find ways of recycling larger resources to )) developing countries in such a way as to promote a better distribution of income and a long-term economic growth. One way the Bank might raise extra money would be through a speculation tax which, if set at a modest 0.5 percent, would bring in $1.5 trillion a year.
The Bank, too, could take on the role of an international investment trust, selling bonds to nations with a surplus and lending the proceeds to developing countries.
Keynes made his blueprint when the bombs were still raining on London. The crash of Mexico and the collapse of Barings bank can't be compared with that. Nevertheless, the world is risking its own financial stability and economic success -- and the jobs, livelihoods and well-being of its people.
B6 Jonathan Power writes a column on the Third World.