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DEVELOPMENT: An Opportunity to Create a New Financial Architecture
By IPS Correspondents
DOHA, Dec 1 (IPS) - The most severe financial crisis since the Great Depression needs massive
economic stimulus packages that are coherent and linked with sustainable
development imperatives, asserts a new report by top U.N. economists released
Monday on the sidelines of the Monterrey Review conference in Doha.
The first chapter of The World Economic Situation and Prospects 2009 - to
be launched in early January - calls for "deep reforms of [the] financial
system" to counteract the "synchronised global downturn". The report urges a
more inclusive global economic governance, to prevent against any future
repetition.
The developed countries could enter into a deep recession in 2009, causing
world output to fall and GDP growth in the developing world to drop to 2.7
percent, which would be dangerously low for the ability of countries to
sustain poverty reduction efforts and social and political stability, the report
warns.
Was this a crisis foretold?
According to Rob Vos, director of U.N. Department of Economic and Social
Affairs (DESA), past issues of this annual report from the U.N. have repeatedly
pointed out that the "apparently robust growth" of the last few years came
with enormous risks.
"That analysts and policymakers are now expressing bewilderment at the
extent of the crisis suggests not only a gross underestimation of the
fundamental causes underlying the crisis but also unfounded faith in the
self-regulatory capacity of unfettered financial markets," the report states.
Fingers are pointed at the growth driven to a "significant extent by strong
consumer demand in the U.S., stimulated by easy credit and underpinned by
booming house prices, and by very high rates of investment demand and a
strong export growth in some developing countries, notably China".
What price for developing countries?
For developing countries, the cost of external borrowings has risen sharply
and capital inflows are reversing. Also, prices of primary commodities have
reversed sharply affecting export growth and the current account balance of
many countries has shifted into the red.
The dollar has appreciated in the crisis, while currencies in a number of
developing countries, particularly those that are commodity exporters, have
fallen against the dollar substantially since mid-2008. The bailout packages
in the U.S. and the flight to safety to the U.S. by many financial institutions
resulted in the rebound of the dollar.
But Vos predicts the recent strength of the dollar will be temporary and the
risk of a "hard landing of the dollar" in 2009 or beyond remains. Job creation
will get significantly harder in most regions during the course of 2009. The
concern of policymakers should be to stave off sharp downfalls in economic
growth, the economists point out.
Growth prospects of developing countries will be severely hampered. Africa
will suffer from lower commodity prices and weakening export demand.
Growth in East Asia is affected by the weakening of global demand and the
global credit crunch. Capital outflows and waning investor confidence will
dim growth in South Asia.
Lower oil prices and the global slowdown will affect growth prospects in West
Asia. While Latin American and Caribbean economies will slow markedly in
2009.
What is to be done?
U.N. economists see the crisis as an opportunity to create a new international
financial architecture that will make for more inclusive participation of
developing countries.
The report identifies the need for the creation of a "credible and effective
mechanism" for international policy coordination to guide fundamental
revisions of the governance structure and functions of the IMF and the World
Bank, now led by the U.S. and EU.
In addition, fundamental reforms of existing systems of financial regulation
and supervision that will lead to the creation of a new internationally
coordinated framework to stem past excesses.
Economists also call for the reform of the present international reserve
system to create a multilaterally backed multi-currency system that will end
the almost exclusive reliance on the U.S. dollar.
And finally, "reforms of liquidity provisioning and compensatory financing
mechanisms, backed, among others, by better multilateral and regional
pooling of national foreign exchange reserves, and avoiding onerous policy
conditionality."
Will the reforms find consensus in Doha?
U.N. Assistant Secretary General for Economic Development Jomo Kwame
Sundaram asserts there is political will. "The EU and G-77 are prepared to
accept the draft outcome document which makes a number of provisions
including the call for a summit organised by the U.N. to respond to the
crisis."
In addition, the United Nations High-Level Expert Commission to Study the
Reform of the International Monetary and Financial System headed by well-
known critic of neo-liberalism, Joseph Stiglitz, was recently set up by the
President of the General Assembly Miguel d'Escoto Brockmann.
However, Sundaram qualifies, "there is continuing resistance to the initiative
(for a summit) largely by some countries!" The buzz in the corridors at the
conference in Doha suggests the spoiler is the United States.
(END/2008)
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