TWN Info Service on Finance and Development (Nov08/05)
22 November 2008
Third World Network

Finance: UN only legitimate body to reform financial system
Published in SUNS #6591 dated 17 November 2008

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.

Lesotho's Ambassador Mothae Maruping was speaking for the Group of 77 and China at the 45th Executive Session of UNCTAD's Trade and Development Board (TDB). The one day preparatory session was on the follow-up International Conference on Financing for Development to Review the Implementation of the Monterrey Consensus (FFD). The Conference is to be held in Doha from 29 November to 2 December.

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 China. The Group has made a consistent call for a holistic approach to development for an enabling global environment, reform of financial architecture, greater disciplines and oversight of the major economies, better regulation of credit ratings agencies, and greater policy space for countries to develop tailor made policies to address their unique development needs.

When the G77 and China articulated these issues, Lesotho said, "we were criticised for being unrealistic and accused of promoting the agenda to escape meeting our international commitments. Our partners responded with the opposite, good governance became the code word for the prescriptions of the discredited Washington Consensus. The hallmarks of good governance - accountability, transparency and prudence - were missing in large doses from not only global financial institutions but also countries which caused the crisis."

The Group has underscored the fundamental flaws of the international economic system. Lesotho said the "development round" of the WTO's Doha Round was transformed into yet another trade liberalisation exercise devoid of much of the promised development content.

Most troubling of all after Monterrey, "which we thought would revitalise multilateralism for development, we saw the deliberate marginalisation of the UN from addressing the negative impact of globalization and efforts to strengthen global economic governance. While there were persistent calls for the reform of the UN system, there was resistance to reform of the much older Bretton Woods institutions."

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 Monterrey process deliver on its MDG-linked commitments elaborated in 2002 but already uncertain in 2008, but it must do so in an international economic environment shaking from a considerable shock to its economic and ideological fundamentals. Phenomenal sums have been made available for the bailout of banks and financial enterprises.

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.

The US has now the highest unemployment in 14 years, and expectations are for it to rise from 6.5 percent in October to 8.5 next year. This compares to the 1981/2 recession when the figure was 10.8 percent. The UK also has been hit very badly.

China's growth rate is expected to be below 6 percent, lower than the 8 to 10 percent needed to maintain the level of absorption of labour.

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 US, in fact the effective federal funds rate (as opposed to the official target) now averages less than 0.3 percent in recent days, and basically, there's nothing left to cut. SUNS]

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 Washington (at the G20 meet). "his is a core question that has not been discussed and we have to work further in this direction."

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), speaking from New York by video-link, said there is need to update and revise the Monterrey Consensus. He identified three priority issues: (1) greater tax cooperation at the intergovernmental level - as there is a beggar-thy-neighbour tax policy, (2) the FfD needs to develop a more effective mechanism, and (3) there is a need for systemic reform to include all 192 UN countries, not just the G20. At the UN in New York, Jomo added, developing countries have emphasised that Aid for Trade and climate change mitigation and adaptation assistance should be additional and not part of current commitments.

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 UK and EU. However, Jomo warned, some of the reforms, like Basel I and Basel II (the Basel Committee on Banking Supervision, located at the Bank of International Settlements), are not pro-development.

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.

Maruping, speaking for Lesotho, said extreme speculation and new instruments had caused the crisis. Developing countries were told privatise at all costs, deregulate and keep no policy space and let the market forces loose. Now we move to neo-Keynesian from neo-Classical economics.

For FfD, Maruping said, they could not forget the history of unmet big promises - as at Monterrey or Gleneagles. Not much headway has been made and there is a credibility gap.

Maruping was reminded of what Malaysia's then Prime Minister Mahathir had said about the Washington Consensus: if a doctor prescribed a medicine that kills the patient, the doctor is struck off the rolls. However, some of the global financial institutions still continue to function and practice (even though the countries have suffered by their policy prescriptions). There is a need for an inclusive global coordinated effort, he stressed. In particular it should include the view that the arsonists have to pay for the damage and shoulder the restitution. Restitution may be made through ODA.

On the WTO Doha talks, Maruping said that an early, fair, equitable and pro-development outcome was expected and not just an early one.

Chad, for the Africa group, said that the crisis has provoked a reduction of Africa's exports with negative effects. The crisis has laid bare the limits of liberalisation and shown the need for the State. In the past we were accused of being overly focussed on the role of the State and now this view has gained relevance. There is a need to overcome the dogmatic approach to development to ensure that social justice is favoured over short term profit.

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.

Barbados for GRULAC said the reform of the global financial system should be through a democratic process. Neither debt relief nor remittances should be seen as part of the ODA package. Private flows need to be increased to small economies, landlocked countries, with high and low incomes. The special needs of middle income developing countries must be taken into account. And existing development partnerships need to be strengthened.

Indonesia for the Asian group expected FfD to yield a tangible outcome. The key lesson of the Asian crisis in 1998 was the importance of systemic issues. The global crisis has shown that the impact of the failure to address the systemic problem. The recent Asia-Europe Forum (ASEM) reiterated the importance of reforming the international monetary and financial system. This should be undertaken under the framework of the United Nations.

France, for the European Union, said that there was a concealment of risk in the financial system. Financial stability is a global public good that requires supervision and international cooperation. There was an essential role for the Bretton Woods institutions to carry out complete reform of the international financial system based on the principles of transparency, banking stability, and the integrity of international economic and financial governance. It also remained attached to the MDGs and assistance to developing countries.

France said, there is need to invent a new model of economic governance involving the market economy, entrepreneurship and real development. The failure of conclusion of the WTO's Doha Development Round would be harmful for LDCs as it provides greater market access for their exports.

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.

Russian Ambassador Vassily Nebenzia said that Russia supported an early warning system. There is need to strengthen risk management, distribution of information and monitoring and responsibility for auditors. Countries who called for restructuring the global financial architecture were like preachers in the desert, their voices were not acknowledged.

India said that it was important to chart out a path for reform of the international financial architecture. The causes of the financial crisis was attributable to failures in regulatory and supervisory oversight of developed countries and private sector risk management. There was need to renew the spirit of global partnership and solidarity for the Internationally Agreed Millennium Development goals.

Venezuela was concerned that developed countries wanted to expand the donor base to include developing countries to shift responsibility for ODA. It was also concerned that in the WTO Doha talks developed countries continued to push for liberalisation of the financial sector.

Pakistan said there is a need to address global surveillance and to expand the role to include especially the advanced economies. Ratings agencies need to be looked at as they are opaque and arbitrary in their ratings on developing countries. More objectivity and transparency is required.

China said that development cooperation faces a shortage of funds. Donors need to undertake not to reduce commitments.

Malaysia said there is a need to get back to basics, and stop viewing the financial markets as self correcting and separate from the real economy and society. Financial markets should efficiently allocate capital. Their purpose is not to enable financial wiz kids to make a profit, we must put and end to this type of financial capitalism.

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).

Bangladesh Ambassador, Debapriya Bhattacharya, who is the President of the TDB, said that the deliberations at the session would be compiled into a chair's summary for transmission to the ongoing discussions on FFD's Monterrey Consensus (MC) in New York and the Doha meeting.