TWN Info Service on Finance and Development (Jul07/03)

06 July 2007

UNITED NATIONS: WARNING OF GLOBAL ECONOMIC RISKS AS ECOSOC SESSION BEGINS

The High-Level segment of the United Nations Economic and Social Council (ECOSOC) kicked off Monday with warnings about a likely slowdown in global economic growth, and a major risk posed to the global economy by financial imbalances and a debate on the appropriate policy responses by the international institutions in meeting these challenges.

Both the new Under-Secretary General for Economic and Social Affairs Sha Zukang and UNCTAD Secretary General Supachai Pantichpakdi warned about the risk of a slowdown in global economic growth as well as possible financial instability arising from global imbalances and other factors.

There was some debate as to what reforms are needed in the international financial system. Some delegations and speakers expressed the need for comprehensive reform of the current system, while others maintained that incremental reform would be sufficient.

Below is a report on the ECOSOC opening session published in SUNS #6284 Tuesday 3 July 2007.

With best wishes
Martin Khor
TWN

United Nations: Warning of Global Economic Risks as ECOSOC Session Begins

By Celine Tan

The High-Level segment of the United Nations Economic and Social Council (ECOSOC) kicked off Monday with warnings about a likely slowdown in global economic growth, and a major risk posed to the global economy by financial imbalances and a debate on the appropriate policy responses by the international institutions in meeting these challenges.

The opening day of the three-week ECOSOC session heard statements from UN Secretary General Mr. Ban Ki-Moon, the UN’s new Under-Secretary General for Economic and Social Affairs Mr. Sha Zukang, UNCTAD Secretary General Dr. Supachai Pantichpakdi, WTO Director General Mr. Pascal Lamy, Deputy Managing Director of the International Monetary Fund Mr. Murilo Portugal and World Bank Chief Economist Mr. Francois Bourguignon.

Both Sha and Supachai warned about the risk of a slowdown in global economic growth as well as possible financial instability arising from global imbalances and other factors.

There was some debate as to what reforms are needed in the international financial system. Some delegations and speakers expressed the need for comprehensive reform of the current system, while others maintained that incremental reform would be sufficient.

Meanwhile, Lamy said there were actually only small differences in the Doha Round positions among the four major negotiating members (the G4), and that if the Doha talks failed, there would be geo-political repercussions beyond trade.

Asked by Munir Akram, Ambassador of Pakistan in the UN in New York and Chair of the G77 and China, whether the WTO could go ahead with a Development Package on a fast track basis if the Doha talks did not conclude, Lamy said that he doubted it, as the negotiations are not about morals but about trade offs about the “payments” to be made by different groups of countries.

At the start of the high-level dialogue with the heads of international agencies (DESA, UNCTAD, WTO, IMF, World Bank), Sha and Supachai both warned that after a period of broad-based growth in the global economy, there are indications that growth may slow in 2007 and 2008 amidst uncertainty in global financial markets.

Supachai said that while the short-term prospects for the world economy are generally bright, “new challenges are arising that could slow or even derail this remarkable record of strong global growth if not handled properly”.

While the current instability arising from global imbalances are due to developments in major countries, tackling the problem entails a global response. He said that tackling global imbalances and dealing especially with exchange rates and financial speculation “must remain a priority for the international community.”

He added that correcting the adjustments in the global pattern of demand and exchange rates should be a multilateral endeavour and warned that unilateral action focused on individual countries, notably US and China, will not resolve the issue as the problem is not confined to these countries.

With implicit reference to the recent pressures on China to float and appreciate its currency to resolve such imbalances, Supachai stated that such pressures may not necessarily lead to the expected outcome. This is because the crises in the international financial system in the post-Bretton Woods era have been precipitated by other factors, notably the “build-up in nominal interest rate differentials which is not covered by the depreciation in the exchange rate of the country with the higher nominal interest rate”.

He alluded to the fact that while imbalances have been high on the political agenda in recent years, improvements have been microscopic.

A similar sentiment was expressed earlier by Sha who called for an internationally coordinated policy response to manage economic adjustments which will accompany the slowdown in the global economy.

Sha said that “for the IMF to serve as the impartial mediator in such a mechanism, it will need to reform its own governance and representation. Seats on the Executive Board and votes in the Fund should better reflect today’s realities.” Though the IMF-World Bank meeting in Singapore in 2006 made a first step, “more comprehensive governance reform is still required.”

Sha added that in the long run, “only deep and far reaching reforms of the global monetary and financial system will be able to prevent a similar constellation of global imbalances from arising again and to deal with the asymmetries that are currently inherent in the global adjustment mechanisms.”

[In a later session, introducing the UN Secretary General’s report for the session, Sha said that the global imbalances pose a major risk to the global economy.]

Speaking from the floor, Amb. Munir Akram referred to the problem of global imbalances and remarked that it would be better to look at the international financial architecture and revive the question of the fundamental objectives of the IMF, which are to provide international stability and short-term financing to countries that need it and not those that have it.

He said the current proposals for reforming the IMF’s distribution of quotas would not achieve the objectives for which the IMF was created and which are needed even more in the situation of unrestricted capital flows today than when the IMF was created.

However, these calls for more systemic reforms were not shared by the United States delegation nor by the IMF senior official, both of who said that efforts at reform “at the margins” are sufficient.

The US Ambassador said in light of the overall prosperity of the global economy, there is no need for a major overhaul of the international institutions. We need to focus on improvements on the margins of the system to bring the poorest countries into the system and help them benefit from the overall economic growth.

Mr. Portugal said that the reforms taking place in the IMF, particularly those outlined in its Medium-Term Strategy, including reforms in voice and representation of developing countries, and the development of its new instrument - the multilateral consultations on imbalances - will lead to helpful resolution of the potential global economic problems.

In response to a question, he did not deny there is a need to reform international institutions, but probably more in the margins, referring to what the US said earlier.

Lamy in his statement said that it was not good news that the G4 had recently failed to coverage “but it could be fatal if these four members do not play a constructive role in multilateral negotiations now entering a crucial stage in Geneva.”

He added that what remains to be done is small. Today, reaching agreement on subsidies depends on additional concessions from the US equivalent to less than a week’s worth of transatlantic trade. It depends on an additional handful of percentage reduction in the highest agricultural tariffs by the EU and Japan. It depends on an additional handful of percentage reduction in the highest industrial tariffs by emerging economies such as Brazil and India.

Lamy said that today, a number of current substantive rules of the WTO do perpetuate some bias against developing countries. He added that while political decolonisation took place more than 50 years ago, “we have not yet completed economic decolonisation. A fundamental aspect of the Doha Development Agenda is therefore to address the remaining imbalances in the multilateral trading system.”

While trade opening is a necessary condition for growth and development, “it is not a panacea for all the challenges of development” nor “is it necessarily easy to accomplish or effective unless it is embedded in a supportive economic, social and political context”.

He said policy mix must be carefully considered. If addressing this policy mix is a difficult task in developed countries, which have the necessary means to do it, it becomes a truly uphill battle in many developing countries.

Akram raised the question, if the Round is unable to be concluded, would it be possible as a moral or economic right to have a separate fast track agenda to achieve the development objectives of the Round: “Why should the rest of the developing countries be hostage to major powers that cannot agree?” he asked.

Lamy replied that he doubts that there is room for a Development Package if the Round fails. If the Round fails, geopolitical consequences will go beyond trade.

“I doubt the negotiations are about morals, it is about trade offs,” said Lamy. If it was about morals, the subsidies and tariffs would have been reduced already. In the negotiations, the developed countries have to pay, developing countries have to pay less, and there is no need for the LDCs to pay. Lamy said that he doubted this could be substituted by morals.

Earlier, in his opening speech, UN Secretary-General Ban Ki-Moon also stressed the need to successfully conclude the Doha trade negotiations, arguing that existing trade barriers, agricultural subsidies and the restrictive global trade regime is a “handcuff to so many developing countries”.

He also said that successful national development strategies must be aligned to the Millennium Development Goals (MDGs) through internal efforts rather than through imposed external policies.

He maintained that the UN should be at the centre of efforts to strengthen the capacity to use the opportunities of global economic growth, and that the revamped ECOSOC should be the pivotal strand to implementing the UN’s development pillar.

Ban said that the “bold initiatives” undertaken by the ECOSOC “to re-energize its functions and rejuvenate its mission” will ensure that “it is well on its way to becoming the global hub for devising and overseeing development policies and practices”.

He said the introduction of the Annual Ministerial Reviews (AMRs) and the Development Cooperation Forum (DCF) (in the ECOSOC session) will go far in helping developing countries achieve their international development targets.

According to Ban: “The Ministerial Reviews can help the Council better assess national progress towards the internationally agreed development goals” while “the new Development Cooperation Forum can help countries better gear international development cooperation towards achieving these goals”.

The AMRs took place on Tuesday while the Development Cooperation Forum will be launched on Thursday.