Service on Finance and Development (Nov08/05)
UN only legitimate body to reform financial system
Geneva, 13 Nov (Riaz K. Tayob) -- Only the United Nations, with its universality of membership, has the credibility to ensure that a reformed global financial architecture will have the legitimacy, and confidence of the global community to make it viable, the Group of 77 and China said Thursday.
Earlier, the UNCTAD Secretary-General, Dr. Supachai Panitchpakdi said in the face of the gravest economic and financial challenge for generations, there is a need for a "serious rethink" of all relevant systemic issues including global financial and monetary cooperation. There has been the least progress on this issue, covered by chapter six of the Monterrey Consensus, Supachai added.
Maruping said that all the areas of the FfD are issues within UNCTAD's mandate.
UNCTAD, he said,
was one of the few institutions that had been warning about the current
global economic crisis particularly in the Trade and Development Reports
since 2000. Many of the views of UNCTAD were previously articulated
by the G77 and
When the G77 and
The Group has underscored
the fundamental flaws of the international economic system.
Most troubling of
It is a vindication for the Group, Lesotho said, that the developed country partners are now adopting many of the policies advocated by the G77 for so long - a revitalised enabling role for the State, a call for greater regulation and prudence, counter-cyclical fiscal and monetary policies and reform of the global financial system.
As the world slides into recession, there will be inevitable negative effects on aid flows. Instability and fragility of international finance system must be addressed in earnest and there is a need to restore credibility and legitimacy to the international economic system and its institutions.
The Group disagreed with the proposition that the majority of humanity should be excluded from the reform of the international economic system. At a time when "green room diplomacy" has been discredited, it was unacceptable that the reform could be left in the hands of a few and inconceivable that those who caused the crisis are to prescribe the solutions.
A more credible balance and approach is needed and only the UN has the universality of membership and credibility to ensure that the resulting global economic architecture will have the legitimacy and confidence of the global community to make it viable. The systemic issues cannot continue to be ignored. The Group called on UNCTAD to continue to assist all countries to mitigate and overcome the current crisis. The current crisis highlighted the importance of the UNCTAD's consensus building pillar and for the TDB to play its policy dialogue function.
In his initial intervention,
Dr. Supachai said that the FfD has been presented with a "double
whammy": not only must the
This made it hard to understand why resources were so scarce when it comes to give to developing countries. According to Prof. Jeffrey Sachs, the bailouts have mobilised $3 trillion for banks, yet they have failed to mobilise even one ten-thousandth of that to help developing countries. ODA, in the coming years would decline by 20 to 40 percent based on UNCTAD preliminary estimates.
According to UNCTAD's preliminary estimates, a 10 percent drop in demand for vehicles, electronics and textiles could reduce developing countries exports by $95 billion, almost as much as ODA.
Supachai called for launch of a process of intergovernmental consultations on three crucial elements: better and more inclusive global macroeconomic management and coordination; transparent, coherent and effective regulatory mechanisms to govern global financial markets; and, improved management of global reserves so as to pre-empt the liquidity crisis and to make funds available when developing countries need them.
UNCTAD has assembled a task force on Systemic Issues and Economic Cooperation to concentrate on (1) currency speculation and global monetary cooperation, (2) commodity futures speculation and price volatility, and (3) financial sector regulation and surveillance. The weakness of architecture is coordination, and there is a need to focus on weaknesses including on the role of credit ratings agencies, Supachai announced.
A number key issues need to be brought forward. First, modern market-based finance capitalism has to be addressed fundamentally. The system need not be discarded, but in a Keynesian way "learn we can learn from mistakes to buttress and fortify the system."
Second, there is a need to deal with excessive speculation, particularly in commodities. Excessive speculation creates gyrations, while speculation on a normal basis is expected.
Third, is to deal with the shadow financial economy, of which "we just have a glimpse of in the form of securitisation and derivatives." This system has become a huge casino, instead of its function of efficient allocation of funds, it creates volumes of trades and profits for financial sectors.
Supachai said that policy space should no longer be thought of as a taboo, since the countries of the North are using it as much as the South that has requested such space.
Fourth, we cannot avoid the issue of power in the new governance (arrangements) of the financial system.
Fifth, how to tame irrational complacency, irrational exuberance or moral hazard, when addressing these issues as it cannot be avoided.
The financial crisis has metamorphosized, Supachai said. It emerged as a liquidity crisis. Banks were short of funds to meet their borrowing requirements and repayment of debts. Then it evolved into a solvency crisis. That is, a lack of capital, or institutions had more debt than capital. Now a kind of deflationary trend has taken over, and all these factors have been absorbed into the real economy.
Central Banks are making their contribution and have lowered interest rates, yet the 2 percent cut is not enough and some speculate an additional percent cut.
[According to Paul
Krugman and other economists, in the
The IMF efforts have been commendable. It began assisting countries with a special conditions loan. It also helps with swop arrangements without conditions. The question is whether the Fund has enough financial facilities: will its $300 billion be enough to stem the tide of the crisis. There is a request to supplement this fund, Supachai added.
The OECD estimated a 40 percent decline in FDI flows to developing countries. In 2009, remittances are also expected to decline between 1 and 6 percent, Supachai said.
The ILO has estimated that the crisis could result in an increase of global unemployment of 20 million persons and an increase of 40 million people living under extreme poverty.
Regarding the consequences of the other crisis on food, UNCTAD gave a warning at a Food and Agriculture Organisation (FAO) meeting, and called for more targeted support to agriculture. The drop in prices recently did not mean the food crisis is solved.
In spite of the discussion on decoupling and cushioning, developing countries will be affected in different ways. Countries with large foreign exchange reserves, well regulated domestic markets, diversified economies and budget and current account surpluses will fare the best. The idea that developing countries would somehow be "decoupled" from the crisis is a myth. "I don't want to use the term decoupling because there cannot be complete decoupling in a globalized world," Supachai said.
FfD must go beyond its discussions and identify systemic remedies including a new global financial architecture as this is not the first time we are seeing systemic failure, Supachai said. There is a failure of the unregulated financial market which has been shown to be unable to judge risks and allocate resources - and this is not the first time. There is the need to address the root of the crisis.
The Washington G20 meeting can only be a beginning of a process to get out of the crisis. Even Washington and Wall Street recognise the need for change and that no one has a monopoly on ideas.
Outlining some preliminary thoughts on global exchange rate management, Supachai said a cooperative global financial and monetary system would ensure that the same rules of the game apply to all parties in the world, in same way as multilateral trade rules. A code of conduct should reflect this new spirit of multilateralism in global economic governance. Changes in exchange rates can affect trade just like tariffs. There is a need to stabilise the real exchange rate between countries to create a level playing field.
There needs to be better macroeconomic coordination. And this requires a transparent, coherent regulatory mechanism for the financial markets and the need for continued and enhanced development financing. A world currency reserve system that preempts crisis is required when developing countries are in need. There should be consideration of whether adjustments are needed in (current) institutional arrangements or there is need for overhaul to establish a complete (global) financial institution.
Heiner Flassbeck, Director, Globalization and Development Strategies, UNCTAD, said this crisis is over non-regulation in one crucial sector of finance. This is a systemic question that needs to be addressed at the global level. There are several "speculation games (trades)" unwinding - in currencies, commodities etc. The sub-prime crisis has triggered the unwinding of speculative positions that would have to had be unwound sometime anyway.
The world has learnt
nothing from the Asian crisis, but looked away and has not tackled the
currency or commodity questions. Developed countries have detracted
discussions away from currency speculation. It is obvious that this
issue will not be tackled in
There is an imminent inconsistency, developing countries asked to open their capital markets fully, but nobody gave them a viable currency system. Currency markets are even driven in the wrong direction by speculation. When there is a change in the exchange rate, there is a change in the competitive position of countries. The WTO Doha talks (on tariff cuts) "is fictitious"; developing countries cannot benefit from trade, if there is no multilateral solution on a currency system.
K. S. Jomo, Assistant
Secretary General UN Department of Social and Economic Affairs (DESA),
On the global architecture issue, and the role of the Bretton Woods Institutions, Jomo said there is little evidence of a decline in conditionalities. In the BWI conditionalities there is a significant problem of incoherence. The World Bank's Independent Evaluation Group has said that there is now a "bunching" of conditionalities. At the IMF, after initial discussions, there has been no progress on a sovereign debt restructuring tool.
As for the Financial
Stability Forum, developing countries have not had much say in it, Jomo
said. The Forum had not succeeded in averting the current crisis. There
is growing appetite for reform, including amongst the
Jomo said that the world economy is more integrated and hopes of decoupling are not found in evidence. There is concern that finance flows to developing countries have contributed to asset and stock bubbles, consumer binges and distorted investment priorities. The arguments that aid does not help are fallacious, because once politically motivated aid is taken out, there is a contribution.
For FfD, Maruping
said, they could not forget the history of unmet big promises - as at
Maruping was reminded
On the WTO Doha talks, Maruping said that an early, fair, equitable and pro-development outcome was expected and not just an early one.
The main pillar of response has to be regional and needs strengthened regulation measures, developing financial services and a basic minimum program on a continental basis to minimise shocks. Without rejecting aid, Africans need to free themselves from dependency.
The Washington Summit marks an important commencement of the process to address questions of method and ambitious reform of the international financial system. The role of developing countries in the Bretton Woods Institutions needs to be strengthened.
Vassily Nebenzia said that
The Deputy Minister of Trade and Industry of Ghana, Kwaku Agyemang Manu, said that even before the crisis, the vast majority of countries would not have met the MDGs, although they were half way through (the implementation period).