Info Service on Finance and Development (Dec11/02)
Below is the written statement of the intervention made by TWN at the recently held 5th High-Level Dialogue on Financing for Development in the United Nations in New York. It was delivered at a roundtable on “the reform of the international monetary and financial system and its implication for development” on 8 December 2011. TWN’s statement focuses on the structural changes needed in the global reserve system, the importance of strengthening national policy space by regulating volatile capital flows and the threat to growth and long-term development posed by fiscal austerity measures that contract economies and jobs.
TWN asserts that instead of a herd-like shift toward austerity policies across developed and many developing countries, a fundamental reorientation toward expansionary macroeconomics is urgently needed today. This includes the prioritization of employment in the mandate of central banks, and the political will to spend public money to strengthen social sectors, such as health, education and social safety nets. Given that countercyclical policies are a key catalyst in solving the unemployment crisis in developed countries, the current political consensus on austerity is unduly restrictive at a time when the recovery from the crisis is still in jeopardy.
Mounting reserve accumulation in the interest of self-insurance in developing countries constitutes a perverse net flow of resources from the South to the North, with an annual carry cost estimated at $130 billion, a sum which exceeds total official development assistance to developing countries. This number is even higher if the opportunity cost of foregone domestic use is quantified. Policy actions to address the insurance-based nature of the current reserve system, which creates wide global imbalances between surplus and deficit countries, would address ways to revamp the US dollar-based reserve system and policy options to reduce the reserve needs of developing countries. One proposal that has been put on the table as being the most feasible politically and institutionally, is that of a greater role for SDRs in the reserve system.
With regard to capital control measures, the IMF, and the Financial Stability Board, along with other bodies, should try to reduce the stigma, and macroeconomic preconditions, attached to capital account regulations and protect countries ability to deploy them.
TWN contribution to the 5th High-Level Dialogue of the
York, 7-8 December 2011)
of a global regime to prevent and mitigate financial crises and a reluctance
by many developing countries to resort to the IMF for financial assistance,
after adverse experiences with Fund loan conditions in earlier crises,
has led emerging market and developing countries to accumulate vast
sums of foreign reserves as an act of ‘self-insurance’. The rationale
is that when shocks such as financial crises instigate capital flight,
foreign exchange stocks can be used to prevent the currency from depreciating.
Policy actions to address the insurance-based nature of the current reserve
system, which creates wide global imbalances between surplus and deficit
countries, would address ways to revamp the US dollar-based reserve
system and policy options to reduce the reserve needs of developing
In the context of the slow recovery in developed countries and the Federal Reserve’s quantitative easing, where hundreds of billion in liquidity was created, investors across the world flocked to developing countries, and in particular emerging market economies like Brazil, South Korea, Taiwan and Indonesia. Then, in recent months, they flocked out of those emerging countries, showing once again how volatile and dangerous such flows are. Whereas capital inflows came with destabilizing pressures such as currency appreciation and asset price bubbles, reciprocal outflows trigger currency depreciations and balance of payments and loan servicing problems. This can lead to a global financial contagion, as seen in the Asian financial crisis of 1997-98.
controls can provide a significant method for developing countries to
protect themselves from a new financial crisis, while reducing global
imbalances. National policy space is strengthened when states can
garner some degree of checks and balances over the volatile whims of
unregulated global capital.
In contrast, the IMF asserts that capital controls should be used only after measures such as building up reserves, letting currencies appreciate and cutting budget deficits are first carried out. The IMF’s efforts to extend its mandate to police and harmonize regulations is inappropriate, as countries in diverse stages of development need national policy space to design measures that fit unique country circumstances, and ensure support for domestic financial systems and the real economy. The IMF, and the Financial Stability Board, along with other bodies, should try to reduce the stigma attached to capital account regulations and protect countries ability to deploy them.
The downward spiral of austerity threatens global economic recovery
Pro-cyclical fiscal austerity measures that contract the economy by dampening demand, employment and income pose a grave threat to growth as well as long-term development. As such, the vilification of public expenditure and investment impedes world economic recovery and forebodes a devastating downward spiral where “tightening the belt” becomes counterproductive both locally and globally.
Just this week the OECD released its report on global inequality, which illustrates how income inequality has increased and deepened across many developed and developing countries, and how this trend has been engendered by dilemmas such as the lack of access to education and labor flexibility policies.
A fundamental reorientation of macroeconomic policy goals is urgently needed today. This includes the prioritization of employment in the mandate of central banks, and a greater acceptance for higher fiscal expenditure, in the recognition that spending does not necessarily translate into an equivalent increase in the fiscal deficit if revenues in the real economy of production and income is also generated. Given that countercyclical policies are particularly important for combating unemployment crisis in developed countries, the global political consensus on macroeconomic policies is unduly restrictive at a time when the recovery from the crisis is still in jeopardy.
The current leadership of the IMF has acknowledged that too much austerity is risking jobs and growth, and the Fund staff’s report to the G20 suggested that developed countries “have scope to slow their current pace of consolidation, if offset by a commitment of additional tightening later.”
However, Fund loans and policy advice to developing countries continue
to promote fiscal retrenchment. In a study released
this year, UNICEF analysis confirms that the scope of austerity is severe
and widening quickly, with 70 developing countries reducing total expenditures
by nearly 3% of GDP, on average, during 2010, and 91 developing countries
will curb spending in 2012.
 Gallagher, Kevin P., “Beyond the G-20: Mitigating the Costs of Global Imbalances in the Absence of Global Coordination,” 28 October 2011, http://www.globalpolicyjournal.com/articles/world-economy-trade-and-finance/beyond-g-20-mitigating-costs-global-imbalances-absence-glo-0.
 Ambrose and Muchhala, “Fruits of the Crisis: Leveraging the financial and economic crisis of 2008-2009 to secure new resources for development and reform the global reserve system,” Action Aid and Third World Network, Geneva, January 2010, http://www.twnside.org.sg/title2/finance/docs/sdr_reserve_final.pdf.
 Akyüz, YIlmaz, “Why the IMF and the International Monetary System Need More Than Cosmetic Reform,” Research Paper No. 32, South Centre, Geneva, November 2010, http://www.southcentre.org <http://www.southcentre.org/> .
 Williamson, John, “Key Issues in International Monetary System Reform,” in Friedrich Ebert Stiftung, New Directions for International Financial and Monetary Policy, New York, September 2011, http://www.fes-globalization.org/new_york/new-directions-for-international-financial-monetary-policy-reducing-inequality-for-shared-societies/ .
 Ocampo, José Antonio, “The G-20’s Helpful Silence on Capital Controls <http://www.project-syndicate.org/commentary/ocampo10/English> ,” 30 October 2011
 Group of 20, “G20 Coherent Conclusions for the Management of Capital Flows Drawing on Country Experiences,” 15 October 2011, http://www.mofa.go.jp/policy/economy/g20_summit/2011/pdfs/annex05.pdf.
 International Monetary Fund (IMF), “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” Washington, D.C., 14 February 2011, http://www.imf.org/external/np/pp/eng/2011/021411a.pdf.
 Organisation for Economic Cooperation and Development (OECD), “Divided We Stand: Why Inequality Keeps Rising,” Paris, 5 December, 2011, http://www.oecd.org/document/51/0,3746,en_2649_33933_49147827_1_1_1_1,00.html.
 United Nations Conference on Trade and Development (UNCTAD), Trade and Development Report 2011, Geneva, http://www.unctad.org/.
 International Monetary Fund (IMF), “Global Economic Prospects and Policy Challenges,” 9-10 July 2011, http://www.imf.org/external/np/g20/pdf/070911.pdf.
 UNICEF, “Austerity Measures Threaten Children and Poor Households,” September 2011, http://www.unicef.org/socialpolicy/files/Austerity_Measures_Threaten_Children.pdf.