REFORMING WORLD ECONOMIC SYSTEM MEANS LIFE OR DEATH AMID FULL-BLOWN GLOBAL RECESSION, SECRETARY-GENERAL TELLS ECONOMIC AND SOCIAL COUNCIL MEETING
REFORMING WORLD ECONOMIC SYSTEM MEANS LIFE OR DEATH AMID FULL-BLOWN GLOBAL RECESSION, SECRETARY-GENERAL TELLS ECONOMIC AND SOCIAL COUNCIL MEETING
|Department of Public Information • News and Media Division • New York|
Economic and Social Council
Special High-Level Meeting
5th & 6th Meetings (AM & PM)
REFORMING WORLD ECONOMIC SYSTEM MEANS LIFE OR DEATH AMID FULL-BLOWN GLOBAL
RECESSION, SECRETARY-GENERAL TELLS ECONOMIC AND SOCIAL COUNCIL MEETING
At Annual Meeting, Bretton Woods Institutions,
Other Key Bodies Consider Solutions to Dire Interlocking Crises
With the full-blown global economic recession and its systemic nature portending a possible prolonged period of instability and distress, United Nations Secretary-General Ban Ki-moon today urged reform of the world economic system, stressing that taking concrete steps towards that goal was a matter of life and death for countless people living in poverty and facing even greater hardship in today’s tumultuous times.
In too many parts of the world, frustration had erupted into violent protests, threatening stability and peace, while development efforts sagged under the weight of the crisis, he said, as he addressed today’s special high-level meeting of the Council with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Development (UNCTAD).
Average incomes would tumble in much of the world amid the shrinking economy, he said, pointing out that global trade was already collapsing and hundreds of millions of people were losing their jobs and the ability to survive. Indeed, negative effects were expected in nearly every area covered by the Monterrey Consensus and the Doha Declaration, two landmark documents on financing for development.
He said the crisis exposed serious defects in three critical aspects required for a development-oriented, trade-supporting and investment-facilitating global economy: liquidity provisioning, trade and financial regulation, and macroeconomic policy coordination. Faith in financial deregulation and market self-regulation had been diminished, to say the least, and in its place was a new commitment to effective regulation and supervision -– not just nationally, but also globally. However, new forms of protectionism must be resisted.
With total world economic growth expected to be zero or less in 2009, he said the requisite reform of the international economic system would require many steps as well as the full engagement of all countries and the United Nations. The international community had an important opportunity to make progress in June, when the General Assembly convened the Conference on the World Financial and Economic Crisis and Its Impact on Development. Today’s discussions should generate ideas that would help the June event succeed.
Towards that end, there were two informal interactive dialogues today, the first on the impact of the crisis on development, including issues related to the international financial and monetary architecture and global governance structures. The second was on strengthening the intergovernmental inclusive process to carry out the financing for development follow-up.
As the major institutions began the formal segment of the meeting this morning, Indonesia’s Permanent Representative to the United Nations and President of UNCTAD’s Trade and Development Board said deregulation of financial markets had led to the creation of instruments detached from productive activities in the real economy. They had squeezed double-digit profits out of economies growing at a single-digit rate on the basis of the assumption that past trends in the development of asset prices accurately reflected future trends.
The crisis showed that such expectations about long-term price trends were not realistic because no funds had been invested in the productive capacity of the real economy, where they could have generated increases in real income, he said, warning that the crisis would seriously impede the developing world’s ability to achieve the Millennium Development Goals and also have serious implications for the six goals of the Monterrey Consensus.
The Deputy Director-General of the World Trade Organization, representing that body’s Governing Council, said many developing countries were now experiencing a “perfect storm” with myriad causes and symptoms that had sent their economies into a downward spiral. Already weakened by the effects of the 2007-2008 food and energy crises, their financing sources were drying up as they witnessed a simultaneous sharp decline in foreign direct investment, remittances from overseas workers, export earnings, tourism revenues and an outflow of domestic savings. Developing countries were expected to find it more difficult to raise capital in the developed world, where they would be competing for resources with Governments seeking to finance their financial and fiscal stimulus programmes.
She said it was fortunate that, to date, there had been no indication of a “slide into high-intensity protectionism”. The multilateral trading system built over the past 60 years had indeed provided a strong defence and a unique insurance policy against protectionism. Nevertheless, vigilance must prevail and low-intensity protectionist measures must be avoided, including those that directed trade restrictions at specific sectors or industries in order to protect jobs and business profit margins.
The Director-General for International Affairs in the Ministry of Finance and Public Credit of Mexico, which chairs the Development Committee of the World Bank, said the effects of the financial crisis in the developed countries were now hitting the developing world hard. World trade would plummet in 2009 for the first time since 1945, while global private capital flows to developing countries had fallen off a cliff, with the World Bank estimating a reversal of $700 billion a year since 2007. “The financial crisis is turning into a human and development calamity.” Facilitating recovery of the developing countries would contribute significantly to the recovery of the global economy as a whole.
Egypt’s Deputy Finance Minister and Deputy Chair of the International Monetary and Finance Committee of the Board of Governors at the International Monetary Fund (IMF) called for the urgent conclusion of an ambitious and balanced Doha development round and stressed the importance of ensuring sufficient trade finance. IMF should assess its actions regularly to restore macroeconomic stability, sustainable growth and international financial stability. The Committee wished to see reform of the Fund, including in the areas of resource mobilization, and the establishment of a global financial safety net. IMF should continue acting promptly to make available, under adequate safeguards, substantial financial resources to member countries with external financing needs.
The Senior Adviser in the Office of the Senior Vice-President and Chief Economist at the World Bank’s Development Economics Vice-Presidency presented the 2009 Global Monitoring Report.
Economic and Social Council President Sylvie Lucas said in her closing statement that the Doha mandate asked the Council to take up the question of strengthening the financing for development process and to formulate recommendations for action by the General Assembly. Today was the first occasion to take stock of those proposals. In the coming weeks, the Council intended to move towards informal consultations, before its substantive session in Geneva.
Summing up the interactive discussion, she said there had been strong interest and engagement on the challenges of effective, coordinated and coherence responses, as well as the implications of reforming the international financial architecture and global governance. There had been general agreement on the nature of the crisis and the urgency of the situation. Many had observed that such an unprecedented crisis required unprecedented responses and an unprecedented level of cooperation. Many references had been made to the man-made nature of the crisis, and while the developed countries might recover relatively quickly, the developing world could take a long time and the crisis could have lasting effects on development prospects.
She said another focus had been the need to concentrate on the human dimension of the crisis, which many felt had not been central thus far. It was widely held that developing countries should be assisted with increased fiscal capabilities and that they should be able to undertake counter-cyclical policies and not be prevented from doing so by conditionality. The intention of financial institutions to double or triple resources for development was appreciated, but the pending question concerned disbursement of those resources. The potential for a new debt crisis had been noted, along with calls to observe a debt service moratorium. General agreement had emerged to “ward off” protectionism to avoid worsening the crisis. Finally, the “indispensable and crucial” role that the United Nations must play to help facilitate a coherent response to the crisis had been underscored throughout the day.
The Economic and Social Council will meet again at a date and time to be announced.
The Economic and Social Council today held its annual special high-level meeting with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Development (UNCTAD), under the theme “Coherence, coordination and cooperation in the context of the implementation of the Monterrey Consensus and the Doha Declaration on Financing for Development”. Before participants was a note of the Secretary-General intended to inform today’s discussions, on the following selected themes: addressing the impact of the global financial and economic crisis on development, including issues related to the international financial and monetary architecture and global governance structures; and strengthening the intergovernmental inclusive process to carry out the financing for development follow-up.
According to the note, the world financial crisis, which first became apparent with a liquidity crisis in 2007, has now triggered a full-blown, global economic recession and its systemic nature portends a possible prolonged period of instability and distress. By the end of 2008, most advanced economies were simultaneously in recession for the first time since the Second World War. The economic slowdown has spread through to developing countries and countries with economies in transition through international trade and finance channels, among other ways. With total world economic growth expected to be zero or less in 2009, the onset of the crisis has exposed, among other things, serious defects in three critical aspects required for a development-oriented, trade-supporting and investment-facilitating global economy: liquidity provisioning, trade and financial regulation and macroeconomic policy coordination.
The Secretary-General suggests consideration of how the international community could coordinate and provide coherence to the crisis response, including whether there is a need for an interim oversight and coordinating mechanism. It is also necessary to consider what role the United Nations should play, how coordination with the Bretton Woods and other financial institutions could best be achieved, and what role the Economic and Social Council should play. How could the global community advance new and potentially difficult areas of international cooperation in such areas as tax matters and financial regulation?
In light of the calls made in Monterrey in 2002 and reiterated in Doha in 2008, the Secretary-General asks what kind of mechanisms could be put in place to build consensus and promote steady progress in fundamentally reforming the global system of economic governance, such as starting work towards a “second Bretton Woods” conference. Perhaps United Nations delegations and representatives of the international financial and trade institutions could consider a financing for development committee. If things remain as they are, should the biennial high-level dialogues of the General Assembly keep the existing format, and should a dialogue take place in 2009? Finally, how would any strengthened financing for development follow-up mechanism eventually relate to the establishment of new global bodies to address international financial architecture and governance issues?
SYLVIE LUCAS (Luxembourg), President of the Economic and Social Council, said the annual meeting was taking place at a time when the world economy was undergoing immense turmoil, the spiralling human costs of which were becoming increasingly evident across both developed and developing countries. The crisis had already seriously set back the development efforts of poorer countries and increased the magnitude of the challenges they faced. Even after overcoming the crisis, the world would be left with immense developmental challenges, including attainment of the Millennium Declaration Goals.
It was, therefore, all the more essential to review the intergovernmental process to provide an effective follow-up to both the Monterrey and Doha conferences and to ensure that the financing for development policy commitments made in the Monterrey Consensus and the Doha Declaration were implemented. Today’s meeting would, therefore, focus on addressing the impact of the global financial and economic crisis on development, including issues related to the international financial and monetary architecture and global governance structures; and strengthening the intergovernmental inclusive process to carry out the financing for development follow-up. Hopefully the discussions would make full use of the forum as a first opportunity for a truly inclusive multi-stakeholder dialogue on the issues at hand.
BAN KI-MOON, Secretary-General of the United Nations, said the global crisis was exposing dangerous weaknesses and flaws in the international economic system. What had begun with financial turmoil in the third quarter of 2007 had escalated into a full-blown global recession. The United Nations system, including the Bretton Woods institutions, foresaw a shrinking global economy in 2009, which would bring down average incomes in much of the world. Global trade was collapsing and hundreds of millions of people were losing their jobs, their income and their ability to survive. In too many parts of the world, frustration had erupted into violent protests, threatening stability and peace, while development efforts were sagging under the weight of the crisis. Negative effects were expected in nearly every area covered by the Monterrey Consensus and the Doha Declaration.
Calling on leaders around the world to recognize the gravity of those problems, he said the recent Group of Twenty (G-20) Summit had taken a number of steps to restore confidence, growth and jobs. It had pledged to repair the financial system and strengthen financial regulations; acknowledged the need to reform international financial institutions; pledged to reject protectionism and help the world’s most vulnerable people; and expressed readiness to embark on a green recovery. The G-20 had committed more than a trillion dollars to deal with the crisis, a huge step, but only a first one. Now it was necessary to examine where the funds would come from and ensure that countries made good on their pledges. It was also necessary to ensure that a large enough share of the additional resources would flow to developing countries, to help them cope with the crisis and preserve hard-won gains towards reaching the Millennium Goals. At the very least, existing commitments to increase aid for the poorest countries must be met fully.
The London Summit had been an important beginning, but there was a need for urgent action to keep the financial crisis and economic recession from evolving into a major humanitarian crisis and a breakdown in peace and security. The United Nations was in the process of establishing a system-wide mechanism for monitoring vulnerability and sounding the alert when necessary. To meet those challenges, the international community should pursue recovery in a way that would promote sustainable development. Indeed, devastating as the crisis was, it was also an opportunity to move towards a “Green New Deal”.
Recent events had proven that the current system of global economic governance was not adequate to today’s challenges, he said, stressing that international institutions and governance structures must become more representative, credible, accountable and effective. Faith in financial deregulation and market self-regulation had been diminished, to say the least. “In its place, we are seeing a new commitment to effective regulation and supervision -– not just nationally, but also internationally. I am afraid we are also seeing new forms of protectionism. We must resist this, not only in trade, but also in investment and international migration.” There also remained an urgent need to complete the development-oriented Doha Round of trade negotiations.
Reforming the international economic system required many steps, and must involve all countries, he continued. The United Nations, with its critical role and responsibilities and universal membership, should be fully engaged in the reform process. The international community had an important opportunity to make progress this June, when the General Assembly convened the Conference on the World Financial and Economic Crisis and Its Impact on Development. Today’s discussion should generate ideas that would help the June Conference succeed. There was also a need for better follow-up with respect to the financing for development process. Participants should discuss those matters and take concrete decisions as soon as possible, as they were matters of life and death for countless people living in poverty and facing even greater hardship in today’s tumultuous times. “We must join forces for their sake, and for a better future.”
DIAN TRIANSYAH DJANI ( Indonesia), President of the Trade and Development Board of the United Nations Conference on Trade and Development (UNCTAD), said that, since the global economic outlook remained bleak, the theme of last year’s UNCTAD XII Conference on addressing the opportunities and challenges of globalization for development was more relevant than ever. The worldwide economic situation reconfirmed the urgent need to enhance the coherence and consistency of the international monetary, financial and trading systems. UNCTAD was addressing the problems that developing countries faced through research, consensus-building and technical assistance, particularly as they concerned the interdependence and consistency of international trade, investment and financial policies and arrangements. Its deliberations were guided by the 2008 Trade and Development Report.
There was now a broad consensus that financial market deregulation had led to the creation of financial instruments detached from productive activities in the real economy in order to squeeze double-digit profits out of economies growing at single-digit rates. That had occurred on the basis of an assumption that past trends in the development of asset prices accurately reflected future trends. The current economic crisis showed that such expectations about long-term price trends were not realistic because no funds had been invested in the real economy’s productive capacity where they could have generated increases in real income.
The crisis would seriously impede the developing world’s ability to achieve the Millennium Development Goals and have serious implications for the six goals of the Monterrey Consensus, he said, listing the targets as mobilizing financial resources for development; mobilizing foreign direct investment and other private flows; stimulating international trade; increasing foreign financial and technical development assistance; reducing external debt; and creating strong and coherent international monetary, financial and trading systems.
The impact of the crisis on groups of developing countries varied, with some emerging markets suffering direct financial contagion due to foreign capital flight and scarcer, costlier external financing, he said. Export revenue had dropped sharply in all countries, exacerbated by a marked decline in commodity prices. The impact was particularly strong on the economies of least developed countries, still heavily dependent on primary commodity exports. Declining remittances from workers overseas, falling foreign direct investment and decreasing development assistance had also contributed to rising financial burdens. Still, many donors were standing by their aid pledges, and a counter-cyclical rise in development aid could help stimulate global demand.
Effectively solving the current crisis and preventing its recurrence was an important step towards addressing the systemic issues outlined in the Monterrey Consensus and ensuring more sustainable financing for development, he said. In the short-term, the priority was ensuring a global policy response to restore financial stability and economic growth through measures to regain confidence and stimulate demand in order to end the credit crunch and mitigate its impact on output growth and employment. In the medium and long term, the role of Government was more pertinent than ever in managing the financial system at both the national and international levels to strengthen regulation and supervision of financial intermediaries. To avoid systemic crises in the future and reduce the risk of excessive and destabilizing speculations, early warning systems must be set up nationally and internationally.
The global financial system must be reformed around the core principles of transparency, integrity, responsibility, sound banking practice and international governance, he said. Important steps towards an internationally coordinated response must be pursued further, both for counter-cyclical measures to pull the highly interdependent world economy out of the current crisis and reforms in the international financial system. Of note was the decision to increase transparency in the financial markets and strengthen the role of international financial institutions in crisis resolution and prevention. UNCTAD’s analysis, which had long highlighted the importance of such changes for sustained growth and structural change in developing countries, was reflected in a recent report by UNCTAD’s Secretariat on the global economic crisis. It addressed ways to curb destabilizing financial speculation and achieve greater coherence between governance of the international financial system and the multilateral trading system.
An important question that must be pursued further was the link between financial markets and those for commodity futures, which had contributed to recent hikes and increased volatility in commodity prices, he said. Speculative financial flows had contributed to instability and misalignment of exchange rates, with repercussions for international trade flows and macroeconomic stability. Many delegations participating in the Board’s 2008 session had, therefore, echoed UNCTAD’s call for measures to limit financial speculation and ensure timely and orderly exchange rate alignments, while many others had raised serious concerns about increasing protectionism, which had become an issue of growing importance worldwide. “The current crisis calls for a review of the system of global economic governance. This is an important opportunity to take decisive steps towards strengthening the coherence between international trade, financial and macroeconomic policies.”
HANY DIMIAN, Deputy Finance Minister of Egypt and Deputy Chair of the International Monetary and Finance Committee, Board of Governors, International Monetary Fund (IMF), recalled that, during its 25 April meeting in Washington, D.C., the Committee had committed to further strengthening the Fund’s ability to help meet members’ external needs. It was also committed to taking further decisive and cooperative actions to ensure economic recovery, including measures to ensure the soundness of systemically important institutions and restoring the financial health of banks, domestic lending and international capital flows; steps to deliver the scale of sustained fiscal effort necessary to restore growth, within credible fiscal frameworks, and ensure long-term sustainability; maintain expansionary monetary policies where appropriate and for as long as necessary, consistent with price stability; and develop credible exit strategies from extensive Government action as the crisis subsided.
Stressing the importance of members taking into account the impact of their economic, financial and investment policies on others and refraining from protectionism in any form, he called for the urgent conclusion of an ambitious, balanced Doha Development Round and underscored the importance of ensuring sufficient trade finance. The Committee called on IMF to assess regularly the actions taken and still required to restore macroeconomic stability, sustainable growth and international financial stability. The Committee would evaluate progress and the need for further action at its next meeting. Meanwhile, it welcomed the G-20 statement, including the Declaration on Strengthening the Financial System, and underscored the importance of enhancing sound regulation, strengthening transparency and reinforcing international cooperation.
He called on IMF to continue acting promptly to make available, under adequate safeguards, substantial financial resources to member countries with external financing needs, and urged a prompt start to the fourteenth general review of quotas in order to complete it by January 2011. The Committee noted the agreement to increase the resources available to the Fund through immediate financing from members of $250 billion, subsequently incorporated into expanded and more flexible New Arrangements to Borrow (NAB), increased by up to $500 billion, and to consider market borrowing if necessary. While an expanded NAB was an important backstop for IMF resources, it was not a substitute for increasing quotas. It was necessary to ensure that the Fund had adequate financing capacity to meet the needs of low-income countries. A key achievement at today’s meeting would be ensuring a doubling of IMF resources available for loan.
Welcoming the overhaul of IMF’s lending and conditionality framework, he expressed support for sufficient flexibility within IMF-supported programmes, in line with the Fund’s mandate. In particular, the Committee supported giving due attention to the fiscal needs of countries with solid medium-term fiscal prospects, and needs arising from bank restructuring and recapitalization, working with multilateral development banks as appropriate. The Committee called on IMF to ensure successful and even-handed implementation of the new lending and conditionality framework, and asked the Managing Director to report on progress at the next meeting.
To strengthen the global financial safety net, he voiced support for doubling IMF’s concessionary lending capacity to low-income countries, while ensuring debt sustainability. Subsidies could be financed through a mixture of bilateral contributions, possibly by new donors, and the Fund’s resources and income, including the use of additional resources from agreed gold sales, consistent with the new income model. Separately, the Committee called on donors to honour existing official development assistance (ODA) commitments; and to approve rapidly the pending amendment of the Articles of Agreement for a special one-time allocation of Special Drawing Rights (SDRs), as well as a general allocation of SDRs equivalent to $250 billion. The Committee called on IMF to put forward a concrete proposal assessing the case for allocation and describing how it could be implemented.
Turning to surveillance, he said IMF and its members must make efforts to enhance the effectiveness of surveillance and follow-up of the Fund’s recommendations. Particular attention to sources of systemic risk would be essential in helping to prevent future crises. There was a need to improve the surveillance process through a greater focus on the effectiveness of policy dialogue and clear communications, with an emphasis on candour, even-handedness and independence. It was also necessary to improve the analysis of macro-financial links, cross-border spillovers and sources of systemic risk wherever they arose.
Welcoming the work of the IMF Financial Stability Board (FSB) in providing better indicators of systemic risks and address data gaps and the work thus far of the joint IMF-FSB early warning exercise, he said he looked forward to discussing at the next meeting the means to facilitate peer review and incorporate continuous monitoring of the risk indicators of surveillance exercises that would provide signals of increased vulnerability and needed policy responses. Further, there would be a review of progress in reshaping the Financial Sector Assessment Programme (FSAP).
Concerning quotas and “voice” reform, he underlined the crucial importance of early action by national authorities to ensure the effectiveness of the April 2008 agreements on quota and voice reform, as well as the Fund’s new income model. The upcoming review of quotas was expected to result in an increase in the quota shares of dynamic economies, particularly the share of emerging market and developing countries as a whole. The Executive Board should start work on elements of the new quota formula that could be improved before the formula was used again. There was also a need for the prompt consideration of broader reforms to ensure the Committee’s active participation in IMF’s strategic decision-making process. The Executive Board should report on that issue, as well as on the report by the Eminent Persons Group, and work by other groups, on enhancing the Fund’s governance structure by the October 2009 Annual Meeting.
RICARDO OCHOA, Director-General for International Affairs in the Ministry of Finance and Public Credit of Mexico, representing Agustin Carstens, Chairman of the World Bank’s Development Committee, said the effects of the financial crisis in the developed countries were now hitting the developing world hard. World trade would fall in 2009 for the first time since 1945, with the Organization for Economic Cooperation and Development (OECD) forecasting a drop of more than 13 per cent. International private capital flows to developing countries had fallen off a cliff, with the World Bank estimating a reversal of $700 billion a year since 2007. “The financial crisis is turning into a human and development calamity.”
Progress made towards achieving the Millennium Development Goals was now in jeopardy, he said, pointing out that the World Bank reported more than 50 million people having already been driven into absolute poverty. Up to 400,000 more children might die each year, and many survivors might suffer life-long damage. Severe malnutrition at a formative age could permanently stunt brain development, while children taken out of school during a crisis seldom returned. Mexico challenged all members of the international community to help offset and alleviate the impact of the crisis on developing countries, especially on the poorest and most vulnerable in those societies. Facilitating the recovery of the developing countries would make a major contribution to the recovery of the global economy as a whole.
The Development Committee, at its meeting yesterday, had called on countries to translate their commitments, including those made at the recent London Summit, into concerted action and additional resources, he said. Commitments to increase substantially resources for the International Monetary Fund (IMF) were welcome, and all donors should accelerate the delivery of commitments to increase aid while considering going beyond existing commitments. The World Bank Group expected to treble lending by its International Bank for Reconstruction and Development this fiscal year, and had arranged to fast-track resources to the poorest countries.
Also at yesterday’s meeting, support had been expressed for several new crisis-related initiatives launched by the World Bank Group, he noted. The initiatives sought to mobilize resources to help developing countries deal with the following four challenges: protecting the poorest; reinvigorating trade finance; maintaining infrastructure development and creating jobs; and helping to support the financial sector in developing countries. Government contributions to those initiatives were welcome and they were urged to consider further support. The World Bank was a strong institution, financially speaking, but, if the recovery was delayed and the Bank had to continue lending at higher levels for an extended period, the time might come when it would need to draw on new resources.
Briefly citing new developments in the governance of the World Bank Group, particularly the drive for enhanced voice and participation of developing and transition countries, he pointed to enhanced “first phase” reforms, adopted at the Development Committee’s last meeting and now being implemented. Other changes would include the creation of a new chair on the Board to strengthen representation of sub-Saharan African nations. Work would be accelerated with a view to reaching agreement on “phase two” reforms by the 2010 meetings. G-20 leaders had identified the way forward at their recent Summit and there was a need to broaden that consensus to the wider international community. More crucial still was ensuring that well-chosen words were translated into timely and purposeful deeds.
VALENTINE RUGWABIZA, Deputy Director-General, World Trade Organization, speaking on behalf of the Governing Council and representing Director-General Pascal Lamy, said there had never been a more crucial time to adopt a unified strategy to address global problems. What many had called the “worst financial crisis of our lifetime” was occurring at a time of slowing economic growth, particularly in the main OECD countries, turning a moderate slowdown into a sharp decline, and by the end of the year, into a recession in many OECD countries. IMF had just forecast a decline of up to 1.5 per cent in Africa’s growth for 2009, down from 5.8 per cent in 2008 and 6.8 per cent in 2007. The consequences of that were not limited to the social and economic prospects of African countries, but also put at risk the political stability achieved by many of them in recent years.
She said World Trade Organization economists had projected that the volume of world trade would contract by as much as 9 per cent in 2009 due to the collapse in global demand and shortages of trade finance, which had added to already existing supply-side constraints in many developing countries. Banks and other financial institutions in many developing countries had initially been thought to have been shielded from the financial crisis owing to their limited exposure to the markets and the financial instruments at its core. However, it was now more clear than ever that domestic capital markets in developing countries, as well as their access to international capital markets, had been affected significantly. Many developing countries were now experiencing a “perfect storm” with a myriad of causes and symptoms that had sent their economies into a downward spiral.
She said developing economies were already weakened by the effects of the 2007-2008 food and energy crises, and now their sources of finance were drying up, in addition to sharp declines in foreign direct investment, remittances, export earnings, tourism revenues and an outflow of domestic savings. It was also expected that developing countries would find it more difficult to raise capital in the developed world, where they would be competing for resources with Governments seeking to fund their financial and fiscal stimulus programmes. That made it even more imperative to address the challenges facing the global economic and financial governance structure, particularly given that more than two thirds of World Trade Organization members were developing countries.
Turning to protectionism, she said it was fortunate that there had been no indication to date of a “slide into high-intensity protectionism” -- more aggressive moves by Governments to restrict trade indiscriminately and across all sectors. The multilateral trading system built over the past 60 years had indeed provided a strong defence and a unique insurance policy against protectionism. Nevertheless, vigilance must prevail and low-intensity protectionist measures must be avoided, including those targeting trade restrictions at specific sectors or industries to protect jobs and profit margins. Many such measures might be within the boundaries of current World Trade Organization rules, but their use should be dissuaded as they restricted trade in goods and services, which had proven the single most powerful stimulus of growth in developing countries.
Citing a recent study, she said the estimated average global rate of duty would double and the value of trade would be cut by a further 8 per cent if members were to raise their applied tariff rates to the levels of the World Trade Organization bindings. Clearly, the best practice in the current circumstances was a reduction in trade restrictions so as to cut costs and prices worldwide, complemented by the appropriate financial and fiscal stimulus. Where subsidies were affordable, their full value as a stimulus for economic activity would come from targeting them at consumption, not production, with consumers free to choose internationally the goods and services they bought. In the context of a global economic and development crisis, completing the Doha Round would be the surest way to safeguard individual trade interests and the multilateral trading system against the threat of an outbreak of protectionism. Pending conclusion of the Round, the G-20 commitment not to impose new trade restrictions and trade-distorting subsidies was of particular importance to the majority of developing countries whose economies were more vulnerable to the impact of new trade barriers.
Turning to the aid-for-trade initiative launched in 2005, she said that had brought a new political focus to ongoing efforts to help developing countries, particularly least developed countries, integrate into the multilateral trading system. Despite a significant expansion of aid-for-trade programmes in 2006 and 2007, there was, nevertheless, concern that official aid flows would fall in the present downturn and could become more volatile as donors scaled down ODA budgets. Aid flows might also be affected because most donors expressed those budgets as a share of gross domestic product, which in some cases was shrinking. From the start, the aid-for-trade initiative had prioritized trade finance or access by developing-country exporters and importers to cheap, reliable credit. The crisis had made intervention in that area even more urgent.
However, the drying up of global liquidity, combined with a general reassessment of risks by commercial banks, had led to a rise in the cost of trade finance instruments such as letters of credit, she said. In cooperation with other multilateral and regional organizations, the World Trade Organization had helped mobilize various actors to shoulder some of the risk from the private sector and encourage co-financing between providers of trade finance. In that respect, it welcomed the G-20 consensus to support global trade flows with assistance to finance trade. The committed $250 billion demonstrated the international community’s capacity to address urgent global needs and recognize the important role of trade as an engine of growth.
ZIA QURESHI, Senior Adviser, Office of the Senior Vice-President and Chief Economist, Development Economics Vice Presidency, World Bank, introduced the 2009 Global Monitoring Report, noting that developing countries had seen their sharpest decline in decades. Net private capital flows to those countries would likely turn negative in 2009, representing a drop of more than $700 billion from the 2007 peak, and estimates of their financing gaps in 2009 reached as high as $1 billion.
The real crisis was that economic growth in developing countries was plummeting, he said, pointing out that world output was projected to fall by 1.3 per cent while developing country growth would decline by 1.6 per cent in 2009. Per capita income would slide in more than 50 of those developing countries. The deepening crisis in developed countries was related to declining growth rates, which would subject an estimated 55 million to 90 million more people to poverty in 2009. Furthermore, the food crisis was far from over and efforts to fight it should not slacken. The food crisis had caused the number of hungry people in developing countries to climb from 850 million in 2007 to 960 million in 2008. The economic slowdown would raise that figure past the 1 billion mark in 2009.
On the implications of the global crisis for the Millennium Development Goals, he said most of human development targets were unlikely to be achieved on current trends and prospects were gravest in the health sector. Sub-Saharan Africa was falling short on all the Goals, while South Asia lagged on all those related to human development. Achievement of the poverty reduction Goal was also threatened. At the country level, a majority of developing countries were at risk of missing most of the Goals and many low-income countries faced serious shortfalls, but the outlook was especially grave in fragile States. An effective response to the development emergency required, among other measures, ensuring an adequate fiscal response that would support growth and protect the poor; improving the climate for recovery in private investment; and scaling up aid to poor and vulnerable countries, while ensuring that the multilateral system had the mandate, resources and instruments to support an effective global response to the global crisis.
More financing was only part of the answer, he said, noting that the infrastructure financing gap in Africa was $40 billion annually. However, it could be reduced by 45 per cent through improved management, efficiency and cost recovery. There was a need to accelerate progress towards attaining the human development Millennium Development Goals by reinforcing key public programmes in health and education, and better leveraging the role of the private sector in service financing and delivery. The crisis called for measures beyond existing commitments, and for a reaffirmation of commitment to the Millennium Goals and the Monterrey framework for attaining them.
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