UNCTAD: World needs new monetary and financial system for sustainable development era

DUSHANBE, October 7, 2015, Asia-Plus – The United Nations Conference on Trade and Development (UNCTAD)’s Trade and Development Report 2015 (TDR 2015), which was launched on October 6, calls for radical reform of the international monetary and financial system to meet the demands of the new sustainable development era.

The report reviews recent trends in the global economy and focuses on ways to reform the international financial architecture. It warns that with a tepid recovery in developed countries and headwinds in many developing and transition economies, the global crisis is not over, and the risk of a prolonged stagnation persists.  The main constraint is insufficient global demand, combined with financial fragility and instability, and growing inequality.

These trends reveal the lack of a well-functioning international monetary and financial system, which should be able to properly regulate international liquidity, avoid large and lasting imbalances and allow for counter-cyclical policies; however, international liquidity and capital movements respond to economic conditions in developed countries rather than to actual needs in developing countries.  Furthermore, much of the current regime is in fact driven by large international banks and financial intermediaries whose activities increased much more rapidly than the capacity of any public institution (either national or multilateral) to effectively regulate it. Recent initiatives aiming at better regulation remain too timid and narrow.

This dysfunctional regime can neither prevent boom-and-bust episodes nor recurrent debt crises; and when such crises occur, it leads to asymmetric adjustment that throws most of the burden on debtor countries and exacerbates a pro-cyclical bias.  This calls for a mechanism for debt resolution, in particular for sovereign external debt, which minimizes the cost of crisis and shares it fairly among the different actors.  Furthermore, inefficiencies and missing elements in the international financial architecture have had negative effects in the provision of long-term finance for development.

Against this background, TDR 2015 identifies some of the critical issues to be addressed in order to establish a more stable and inclusive international monetary and financial system which can support the development challenges over the coming years. It considers existing shortcomings, analyses emerging vulnerabilities and examines proposals and initiatives for reform.

In order to improve global growth and financial stability, and to realize the investment push required to fulfill the new development agenda, the systemic problems of the international financial architecture need to be addressed.  Solutions are available, but they require dedicated action by the international community.

Following the 2008−2009 crisis and the rebound in 2010, the global economy has been growing at around 2.5 per cent, the report says.  The growth rate for 2015 is expected to remain more or less unchanged from last year, at 2.5 per cent − the combined result of a slight acceleration of growth in developed economies, a moderate deceleration in developing economies, and a more severe decline in transition economies.

Since the early 2000s, private capital inflows to developing and transition economies have accelerated substantially. External inflows to these countries, as a proportion of gross national income, increased from 2.8 per cent in 2002 to 5 per cent in 2013, after reaching two historical records of 6.6 per cent in 2007 and 6.2 per cent in 2010.  Worries of a sudden or substantial exit of inflows began with the economic slowdown and have become more pronounced with the increased volatility of recent months. The close ties between capital flows and key economic prices also increase the danger of a downward deflationary spiral

Particularly after the crisis of 2008, those capital flows owed as much to policy decisions in advanced economies as to improved fundamentals in recipient countries.  Prior to the crisis, borrowing and asset appreciation drove consumption booms and private investment bubbles in some major economies, and net exports in others.  After the inevitable collapse that followed, developed country policies of quantitative easing, together with fiscal austerity, have largely continued this pattern of generating excess liquidity in the private sector.

In mid-2015, global financial markets were spooked by recessions in Brazil, the Russian Federation and South Africa and by signs of economic weakening in China.  Global investors, already anticipating a hike in interest rates in the United States of America and a continuing fall in commodity prices, moved briskly to exit emerging economy equity and bond markets.

Overall, developing country growth is forecast to decline to around 4 per cent in 2015, continuing a slowdown that began in 2011 after what initially seemed to be a robust recovery from the crisis in 2008/09, when annual growth reached 7.8 per cent in 2010.  That forecast, though, hangs on robust growth in the Asia region; downside risks could push the figures sharply lower in the final quarter of 2015.

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