NEW SPIRIT OF UNIVERSAL SOLIDARITY NEEDED TO TACKLE CHALLENGE OF COMPLEX ECONOMIC BREAKDOWN, SAYS GENERAL ASSEMBLY PRESIDENT, AS THREE-DAY EVENT OPENS
NEW SPIRIT OF UNIVERSAL SOLIDARITY NEEDED TO TACKLE CHALLENGE OF COMPLEX ECONOMIC BREAKDOWN, SAYS GENERAL ASSEMBLY PRESIDENT, AS THREE-DAY EVENT OPENS
|Department of Public Information • News and Media Division • New York|
Sixty-third General Assembly
Thematic Dialogue on World
Financial Crisis (AM & PM)
NEW SPIRIT OF UNIVERSAL SOLIDARITY NEEDED TO TACKLE CHALLENGE OF COMPLEX ECONOMIC
BREAKDOWN, SAYS GENERAL ASSEMBLY PRESIDENT, AS THREE-DAY EVENT OPENS
Measures Sought to Mitigate Possible Disastrous Consequences on Blameless,
Most Vulnerable, as Panels Consider Crisis’ Evolution, United Nations Response
Concrete action was needed to address and contain the complex economic breakdown unfolding around the globe, the President of the General Assembly, Miguel D’Escoto Brockmann, said as he opened a three-day interactive dialogue on the World Financial and Economic Crisis and Its Impact on Development.
“This morning, and over the next three days, we begin a new phase in the process of broad-based consultations to better understand the crisis and its impacts, and to deliberate on the appropriate response to its global turmoil”, he said, underlining the unique role the General Assembly could play in fashioning a legitimate global policy response. “I believe that we can find a new spirit of universal solidarity that can meet this challenge and lead us to recovery.”
The three-day dialogue was conceived as a “curtain-raiser” event for the high-level United Nations conference on the economic crisis, which was called for in the Doha Declaration on Financing for Development and has been scheduled for June. Its interactive panel presentations are intended to provide a comprehensive review of the origin and scope of the crisis, its possible effects on people and the real economy, and the nature and adequacy of global policy responses to date.
The principal recommendations of the “Stiglitz Commission”, as the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System has come to be known, are also expected to be presented by its Chairman, Nobel Laureate Joseph Stiglitz. The General Assembly President convened the group of 18 distinguished economists, central bankers and practitioners last year to identify critical gaps in the policy response and in the current systemic framework to address the crisis.
Mr. Brockmann said that, along with next week’s meeting of the Group of 20 (G-20) leaders in London, the United Nations conference in June, and meeting of the Group of Eight Governments of the northern hemisphere in Italy in early July, this week’s dialogue was an opportunity to build worldwide consensus for global action to address the deepening crisis. It would also serve as a critical step in addressing the economic crisis and its impact on billions of people worldwide in a dynamic and inclusive manner.
He said measures were clearly needed to mitigate the potentially disastrous impact on the most vulnerable, which bore no responsibility for the current catastrophe. To this end, it was urgent and vital for the General Assembly to live up its responsibilities to assure that all human kind, and the fate of the planet, was taken into account in developing a coordinated, coherent and effective approach. He urged Member States and the United Nations system to consider whether the policy responses to date had been sufficient, and he suggested they should begin the necessary work of addressing the weaknesses that had been exposed in the current framework for managing the global financial, economic and trading systems.
“We must recognize that most of the institutions we have today were created in, and designed to work for, a very different world than we have today,” he said. “The solutions we adopt today need to be seen in light of the significant evolution of the world economy that has taken place since 1945. We need a twenty-first century architecture to support a twenty-first century global economy that is at once dynamic, inclusive, safe for all participants and just.”
The morning panel on the origins, evolution and systemic aspects of the crisis, featured presentations by the Assistant Secretary-General of the United Nations Department of Economic and Social Affairs, a Special Representative of the International Labour Organization, and the Director of Development Studies Division of the Economic Commission for Latin America and the Caribbean, and was moderated by the Permanent Representative of Norway. Additional comments were made by the First Deputy Minster of the Russian Federation and the Chairman of the Committee on Finance and Treasury of the Italian Senate, who stressed that, while the G-7 was the world’s “old Government” and the G-20 could be its new beginning, a new “G-something” was clearly needed as soon as possible.
In the ensuing interactive dialogue, several Member States echoed this call for reform and underlined the need for greater equality of participation in the global economic and financial system. One speaker pointed out that the reform process should not be driven by some intangible principle of equality, but by the real need for developing countries to be heard. Others highlighted the need for the development dimension to be among the top priorities in refashioning the world’s financial architecture.
During the afternoon panel on the response of the United Nations system to the crisis, presentations were made by a representative of the United Nations Conference on Trade and Development, the Director of the Poverty Group in the United Nations Development Programme’s Bureau for Development Policy, a Senior Adviser at the World Bank, and the Deputy Director of the International Monetary Fund’s Strategy Policy and Review Department. Additional comments were provided by the Executive Director of the South Centre and the discussion was moderated by the Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
Nearly all of the panellists emphasized the multidimensional aspects of the current crisis and the accompanying need for diverse responses. Indeed, because the crisis had such different impacts on each developing country, any support from the international community should be tailored according to their circumstances. For that reason, some policy responses should not be too rushed. Nevertheless, the impact on human development was obvious and could not be ignored. Nor should the crisis be used as an excuse to provide fewer resources for the development goals. Immediate emergency responses were needed in some cases, but they should be considered along with an overarching examination of structural imbalances.
The General Assembly will meet at 10 a.m. on Thursday, 26 March, to hear the recommendations of the Commission of Experts.
The first panel, entitled “The crisis: Origins, evolution and systematic aspects”, was moderated by Morten Wetland, Permanent Representative of Norway. It featured presentations by Jomo Kwame Sundaram, Assistant Secretary-General, United Nations Department of Economic and Social Affairs; Jane Stewart, Special Representative to the United Nations of the International Labour Organization (ILO); and Daniel Titelman, Director, Development Studies Division, Economic Commission for Latin America and the Caribbean (ECLAC). Comments were made by Andrey Denisov, First Deputy Foreign Minster of the Russian Federation and Mario Baldassarri, Senator and Chairman of the Committee on Finance and Treasury of the Italian Senate.
Mr. WETLAND, stressing the importance of looking at the origins of the economic and financial crisis, said that, until 2007, the world had seemed to be living during a period of long-term sustainable growth. It was widely believed that, in the event of a crisis, the global economy and those national free market economies of which it was comprised, would self correct. But that had not happened. Indeed, the current crisis, which had its origin in the creation of poorly regulated financial products, had started “right here” in Manhattan. In addition, lax interest rate policy in Washington, D.C., had prompted people to use their homes as “ATM machines”. Loopholes in regulations were clearly exploited, with imbalanced and excessive remuneration schemes acting as primary drivers. After the Lehman Brothers collapse, banks no longer trusted their counter parties, and what was a liquidity crisis had turned into a full-blown credit crisis.
Mr. SUNDARAM said that, while many had not predicted the crisis, the United Nations had warned that a decade of unsustainable global imbalances left the world economy in a precarious position. Further, a great deal of hubris regarding deregulation and the potential of self-regulation had increased vulnerabilities, particularly in developing countries. Even the International Monetary Fund’s (IMF) own staff had recognized that financial globalization had not led to growth, but to instability. Not only had the populations of developing countries been innocent victims of that situation, but they remained victims of inadequate global responses to the crisis today.
Saying that the “masters of the universe” of the Group of Seven finance ministers (G-7) and the Group of 20 finance ministers (G-20) had failed to set a successful international economic course, he stressed that the crisis was also a reflection of the failure of multilateralism and global cooperation. Thus, a much more inclusive process among the G-7, G-20 and the United Nations was needed in order to respond to the current crisis and to chart a way forward. It must be recognized that globalization had largely been finance-driven, with the level of financial integration far more significant than trade integration. But, despite that financial integration, real investments had not increased, but had declined slowly over the last four decades. Global imbalances were starting to ameliorate, but that was in large part due the collapse of world trade, which was actually a disaster for export-oriented countries.
He said the crisis had unfolded along a few different vectors. The first affected the financial sector itself, where the sub-prime crisis had led to a credit crunch. That financial crisis had resulted in a recession in the real economy, which in turn had led to a deflationary spiral, including the collapse of stock markets and a credit squeeze. Demand had dropped and unemployment had increased.
Unfortunately, the prognosis was not optimistic, as had been noted by the January 2009 report of the United Nations Department of Economic and Social Affairs, a draft of which had been issued ahead of the Doha Conference, he said. IMF and the World Bank had recently published much bleaker forecasts. Unlike in the 1970s, when the West had experienced stagflation in the face of growth elsewhere around the world, today’s economies were more highly intertwined. As developed economies soured, growth in developing countries slowed. The financial impacts on developing countries included, among others, reversed capital flows, declines in foreign direct investment and a rise in borrowing costs and country spreads. One important difference from the Asian crisis of the 1990s was that more countries had surplus reserves of foreign capital. But, as exports collapsed, those reserves rapidly declined.
Underlining the potential social and political impacts of the forecasted -- and unprecedented -- collapse of world trade on the order of 10 per cent, he suggested that that might be a “Bretton Woods moment”, when international financial institutions were re-evaluated. The United Nations, as in the 1940s, might be in a position to lead the reform. But in the lead-up to the June 2009 summit on the economic crisis’ impact on developing countries, it was important to ask if the United Nations would insist on comprehensive systemic reform and ensure that the architecture of the financial system that emerged was inclusive and focused on development. Additionally, the policies of IMF and the World Bank, and the internationally agreed development goals had to be aligned to ensure policy coherence.
Ms. STEWART, focusing on the issue of equity in employment, said that, even before the onset of the sub-prime mortgage bust, the International Labour Organization had emphasized that the present course of globalization was not economically or socially sustainable. While the world economy had experienced consecutive years of robust growth, the benefits were not shared by all. In its December 2008 World of Work and Global Wage reports, ILO had noted that, during the two decades preceding the crisis, the incomes of the richest had grown faster than those of middle- and low-income groups. Stagnating wages and incomes for a majority of workers had spurred demand for credit to sustain consumption and housing investments. That, in conjunction with the light regulation of certain financial practices, had allowed for excessive debt accumulation and the persistent focus on short-term economic returns rather than long-term investments, which lay at the heart of the current crisis.
The crisis had now taken on its own dynamics and was dramatically impacting employment, business prospect and social stability, she said. In developed countries, there was a vicious circle of negative interactions between financial, product, trade and labour markets. Job losses led to lower consumption, which undermined industrial confidence and resulted in less investment and more job losses. In developing countries, multiple transmission mechanisms -- including reduced trade flows, declining commodity prices, reduced liquidity and tighter credit markets, reduced remittance flows and declining foreign direct investment and official development assistance (ODA) -- had increased the ranks of those in vulnerable employment and the working poor. Based on growth projections, the global number of unemployed persons could rise by 20 million at best, and 50 million at worst, bringing the worldwide unemployment rate to above 7 per cent. Women, youth and migrants would be the hardest hit. Further, vulnerable employment would also increase by 25 million, and there would be substantial downward pressure on wages in the informal economy. Against the backdrop of the imbalances of the pre-crisis expansionary period, perceptions of unfairness were mounting, increasing the risk of social instability. With limited or no social protection coverage, the labour market recession would lead to significant social hardship for millions of workers left without protection.
In response to that global picture, ILO was proposing the creation of a global jobs pact, she announced. To be effective, decent work should be seen as central to expansionary policy, as that would boost economic stimulus. The crisis should be looked at from the perspective of not only restoring growth, but as an opportunity for transformative action to “green” the economy and increase social justice. It should also be recognized that solutions must be nationally and globally coordinated with full participation of social partners and civil society. The new jobs pact should also focus on enterprise and human resource development, avoid wage devaluation, protect workers’ rights and promote international coordination in policy response. Further, a global jobs fund should be seen as a counter-cyclical global mechanism aimed at countries with little or no fiscal space. The world community should return to the “basic function of finance”, namely, promotion of the real economy.
Mr. TITELMAN, turning to the regional impact and expected effects of the global crisis, noted that the global context was more complicated than expected. World growth was forecasted to contract anywhere from 0.5 per cent according to IMF, to 2.9 per cent according to J.P. Morgan, with the recession expected to continue through 2009. A possible recovery in 2010 was predicated on adequate policies to stabilize financial conditions, adequate fiscal stimulus and improvement in credit conditions.
He said the consensus forecast also suggested that emerging market economies would register a significant slowdown in their growth trajectory. The main challenges facing emerging economies were tightening external financial conditions, declining commodity prices, weak and weakening external demand, and limited capacities to finance counter-cyclical policies. Since the financial crisis intensified in September 2008, exchange rate markets had become ever more unstable; equity markets had experienced a strong downward spiral; country risk spreads had spiked; international reserve stocks had decreased or stopped growing; and credit growth had slowed considerably in most developing countries. Experience from past crises showed that negative effects on poverty and welfare tended to slow progress towards achieving the Millennium Development Goals. Rising unemployment rates and reduced real wages impeded the ability of households to provide adequate food and basic necessities. Meanwhile, employment was shifting from sectors oriented towards dynamic exports to low-productivity informal sectors. Declines in remittances and widespread migrant returns also threatened to undermine anti-poverty gains.
On the regional level, fiscal stimulus plans were being adopted to boost aggregate demand and shore up social protection, he said. Regional financial institutions were providing a level of financial cooperation, but the global response should be enhanced. Developing economies required the provision of counter-cyclical liquidity on a global scale. The lending capacity of IMF and other global institutions like the World Bank should be boosted, while short-term liquidity facilities with light conditionality needed strengthening. New lending facilities, such as the credit line facility proposed by the United Nations should be established. It would be funded by emerging economies with accumulated substantial stocks of internationals reserves. Also critical was for regional initiatives to complement global arrangements.
Stressing that the current situation was a window of opportunity to move towards a more equitable and stable financial system, he said the efficiency, trust and legitimacy of the international financial system could be restored. To reduce systemic risk, a liquidity facility should become a permanent component of a revised system. In that new system, surveillance should be considered a public good. A consistent and widely accepted regulation and supervision framework would also be required. To improve governance, the demands and adequate representation of developed and developing countries alike should be incorporated, along with the current and growing role of emerging markets. That effort would require the active engagement of the United Nations and the Bretton Woods institutions.
Mr. DENISOV said the factors sparking the crisis included ineffective regulation by the existing financial system, as it had underestimated the risks, as well as the huge imbalances, in the world economy, both within nations and among countries and regions. The crisis was a logical outcome of excessive expectations, not just in the business community. The creation of a stable and predictable international economic system, based on well-known rules and the maintenance of macroeconomic and financial discipline by the leading world economies, was needed to restore the global economy’s normal functioning. The current situation required collective solutions, agreed to at an international level. He offered several proposals to restructure the global financial and economic architecture, including the development of an effective risk-management system and stronger regulation and supervision of the financial sector at the national and “super-national” level.
He stressed that today’s urgent economic issues required global solutions that could only be adopted on a legitimate basis, adding that the United Nations carried that legitimacy. The Russian Federation regarded the United Nations conference to be held in June as a landmark event; it would build a sound political foundation, which could consolidate the international community’s efforts to combat the global crisis. The key task of the United Nations, and particularly of the June high-level conference, was to promote the international development agenda and achievement of the Millennium Development Goals by all States. It was important that the collective efforts avert a crisis in development assistance and prevent the situation that had occurred in the early 1990s, when the global recession had been followed by a reduction in development assistance of more than 20 per cent. The Russian Federation reaffirmed its commitments to provide assistance to developing countries and its contribution the Eurasia Economic Community Fund, totalling $7.5 billion.
Mr. BALDASSARRI said a missing chapter in understanding the current financial crisis and its repercussions was understanding and acknowledging the previous imbalances in the world economy. “That was chapter one of the story.” Part of that imbalance had been created because the United States economy, the largest in the world, relied on consumption and had carried a current account deficit and a foreign trade deficit for more than a decade. Meanwhile, the Chinese economy, the second largest in the world, relied on excessive savings. One country relied on debt to grow, and the other on savings. The imbalance was unsustainable, and the financial bubble had given the illusion that that imbalance could go on forever.
He stressed the need to reform global macroeconomic policy in order to create higher growth and financial stability for everybody, and not continue policies that led to dangerous instability and negative growth for many people. The world needed improved financial institutions and new financial rules that were agreed by a new governing structure. “The G-7 was the old government of the world, the G-20 could be the beginning,” he said. “We need a new G-something and we need it as soon as possible.”
He also questioned the premise by which each continent depended on an export-led model of growth that relied on the economies of other countries. He urged China to switch, sooner rather than later, from an export-led economic model to a domestic model that increased the standard of living for Chinese citizens.
In the ensuing discussion, several Member States underlined that the crisis had its roots in long-standing structural imbalances in the economies of the developed world. They stressed the urgent need for reform of the global economic and financial system. Bolstering the development dimension of the world financial architecture should be among the top priorities of that systemic reform, many said.
Several speakers said broad dialogue would be required to achieve reform. Indeed, equality of participation was paramount and central in both the process and the aim of reform. The representative of Pakistan said the issue of equity should be looked at closely and the reform process should not be driven by some intangible principle of equality, but by the real need for developing countries to be heard. Speaking on behalf of the “Group of 77” developing countries and China, Sudan’s delegate said that incorporating the “double majority principle” into the IMF voting system should be the first step of reform. Further, conditionalities had to be abolished and nations should be granted “policy space” regarding capital-flow controls.
A few delegates called into question the international financial structure’s ideological underpinnings. Cuba’s delegate said solutions to the current crisis should extend beyond its financial aspects. That would require a re-evaluation of the neo-liberal model, the failure of which had resulted from avarice and an avoidance of social responsibility. India’s representative stressed that the current system’s logic had made the crisis inevitable. Real reform would have to move beyond the behaviour of investment bankers or hedge fund managers, beyond calls for greater regulation and beyond even global imbalance. Otherwise, misery would only be reduced, but not eliminated. Stressing that a real remedy was needed, he said that, unless IMF and the World Bank were fundamentally reformed, it did not seem that future crises could be prevented or even addressed
Responding to Member States, Mr. TITELMAN said regional financial mechanisms could help the world emerge from the crisis, but in order for their architecture to complement global mechanisms, the regional systems had to be rethought.
Mr. SUNDARAM said the last reference point for a global financial crisis was the 1930s, yet no conclusive analysis had ever been reached on what its real remedy had been. Many people would argue that because of the fitful character of the United States New Deal, it was really the Second World War that had brought the Depression to an end. In contrast, the United Nations was committed to reaching alternate solutions to “militarized Keynesianism”. His office believed that the conditions for creating greater “counter-cyclity” mechanisms and development discourse were needed, and the current discussion should focus on that.
The second panel discussion on the topic of “United Nations System Responses to the Crisis” comprised four panellists: Ugo Panizza, Chief of the Debt and Financial Analysis Unite, Debt and Development Finance Branch, Division on Globalization and Developmental Strategies, United Nations Conference on Trade and Development (UNCTAD); Selim Jahan, Director, Poverty Group, Bureau for Development Policy, United Nations Development Programme (UNDP); Jeffrey Lewis, Senior Adviser, World Bank; and Ranjit Teja, Deputy Director of Strategy Policy and Review Department, IMF.
Comments were provided by Martin Khor, Executive Director of the South Centre. The discussion was moderated by Yu Yongding, Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences.
Presenting UNCTAD’s report The Global Economic Crisis: Systemic Failure and Multilateral Remedies, Mr. PANIZZA said it was vital to understand the reasons behind the current economic crisis. The sub-prime mortgage crisis was just the tipping point. The absence of a coherent global financial monitoring system to check the economic imbalances had helped to create the crisis. Looking at the history of crises, he said the causes had been different, such as the tulip bulb crisis in Europe in the 1600s or the dot.com crisis in the early part of this decade, but the mechanism was always the same. Optimism grew around an asset and its value increased, with even sceptical people buying into the asset. Then, its value crashed. Regulation should be installed to prevent a future such crisis.
The UNCTAD report analysed financial, commodity and currency markets, and he focused his remarks on the review of financial markets. The report had seven lessons for financial regulators. One important lesson was to focus on the definition of an efficient regulatory system that would provide stability and smooth economic shocks as they occurred. The current system helped generate high returns, but created negative social returns. The credit default swaps, or so-called insurance contracts, were really a type of speculation that did not provide insurance. Market-based financial regulation could not solve all the problems or deal with market failure.
Another important lesson was the need for international cooperation, such as more data sharing to understand cross-border risks, and regulatory standards, he said. The report opposed the creation of a common regulatory standard, as countries with different development levels needed different standards. He urged developing countries to accumulate reserves during good times and be careful of overdependence on any regulatory system. All countries should be aware of the trade-off of having a larger and deeper financial system and the potential instability that a larger financial system brought with it. He cautioned that developing a proper regulatory system was a very difficult task, and he advised countries to take one step at a time and to avoid the boom-and-bust cycle.
Mr. JAHAN said the current crisis was multidimensional and geographically diverse. It was also especially volatile in terms of its effects on both high and low prices and it had a short-term and a long-term face. Immediate emergency responses were needed, but they had to be considered along with an overarching examination of structural imbalances. It was also necessary to look at the perspectives that underpinned various responses, the impacts of the crisis on multiple levels and the role the United Nations was playing and could play.
He stressed that, beyond financial considerations, efforts to address the crisis needed a human development perspective that examined the impact on human lives. Clearly, reversals in the gains made towards achieving the Millennium Development Goals would occur as a result of the crisis, but it was imperative for the world community to ensure that those Goals not be diverted. It was also necessary to remember that this was not a single crisis, but a number of them, depending on the regions under consideration. Likewise, the impacts of the crisis were unfolding on multiple levels. On one hand, the direct impact on individual economies resulted in a range of human consequences. For example, unemployment levels were rising and migration patterns were changing. On the other, many longer-term impacts, such as the effect on student dropout rates, child mortality rates and nutrition levels, remained unknown. But, if the impact of earlier crises bore out, the gender impact would be critical.
For its part, UNDP was undertaking an impact assessment to get a sense of the global and country-level impacts, as well as the responses at each of those levels, he said. The United Nations system had a role to play at each level. Towards that end, a joint platform with the multilateral financial institutions was needed. United Nations country teams should also be leveraged at the country level. At the global level, the impact assessment would provide numbers that were essential for any kind of advocacy. Policy debates should continue to identify the required actions. It was necessary to ensure a voice for all. Resource-mobilization strategies were also key. The crisis should not be used as an excuse to provide fewer resources for the development goals, but for more. Regional efforts should be studied and, where useful, they should be brought to the attention of the world community. At the country level, the outlook for the next few years was critical, for which UNDP provided a service delivery platform.
He said that panic responses, whether they were protectionist or not, could do more harm than good. The short term should be a major focus in any response, but not at the expense of long-term concerted efforts that included both the United Nations system and other intergovernmental partners.
Mr. LEWIS said the World Bank’s report Swimming Against the Tide had been prepared as background for the G-20 meeting of finance ministers, held in London last week, to ensure that the concerns of developing countries were represented. Some of the elements it covered included the ways in which the crisis impacted developing countries, the policy challenges those countries faced and the World Bank Group’s response to the crisis.
He said the crisis had a very different impact on each developing country, and the rapid decline of fuel and food prices hurt countries that were dependent on commodity exports for their revenues. Global trade was expected to decline as the drying up of trade finance slowed global trade flows. Capital flows into developing countries, which were $1 trillion in 2007, had fallen by half in 2008 and were expected to total only $160 billion in 2009. Bank loans were drying up and remittances were declining. The reductions were “mind-boggling”, he said.
The exact impact on the poorest people was difficult to ascertain, as such statistics took time to come in, he said. But the impact on human development was obvious and worrisome over the medium term. Unemployment was increasing, millions of people were pushed back into poverty, and malnutrition and infant deaths had increased. The first challenge for developing countries was to stabilize their economies and address the fiscal impact of the crisis. While each G-20 country had adopted a sizeable stimulus package, the poorest countries did not have the fiscal ability to do so and were hampered in their ability to stabilize their economies. At the same time, it was important for those countries to pay attention to policies and expenditures in areas such as human development and infrastructure, which would ensure their long-term growth. It was also important to protect the most vulnerable members of the population.
The challenge faced by leaders at the G-20 Summit and in the months ahead was to mitigate the crisis’ short-term impact on the most vulnerable people and, as the world emerged from the crisis, return to efforts to boost the economies of developing countries.
Mr. TEJA said this crisis, like others before it, had been caused by over-optimism. The reasons for that over-optimism could be divided into the demand side and the supply side. On the demand side, interest rates were low, with relaxed monetary policy as a result. Due to high commodity prices, among other things, there was also a large supply of savings looking for a safe outlet where they could garner higher returns than the widespread low interest rates could provide. In the face of that demand, the financial sector had developed a number of different financial products, which it had mistakenly marketed as safe securities. If there was an original sin, it was a misreading of the risk. Clearly there was a role for policy in that environment. Central banks had seen their primary job as keeping their rates low, and not managing the rising risk.
At the same time -- and much more prominently -- there had been a failure of financial regulation, he said. The ethos of financial regulators had focused too much on bank deposits without looking beyond the traditional banking environment. In the United States, that myopia meant that the flawed incentives and their mounting risks, which were growing in the sectors where innovation was most prominent, such as investment banks or hedge funds, were overlooked. Further, the bodies that were tasked with analysing the financial world had failed to adequately predict the dangers. Where warnings had been issued, they were vague or scattered. No one authoritative voice was speaking to those accumulating risks. IMF had not seen the looming catastrophe sufficiently early. It had made an effort to draw the global community’s attention to current account imbalances, but its focus had been on risks that had not materialized, such as the possible impact of a reversal of those imbalances and the possible flight from the dollar. Indeed, the current crisis had actually resulted in a flight to the dollar.
Turning to what IMF was doing now, he said that, in the context of next week’s G-20 meeting, the Fund was pushing for fiscal stimulus, as well as efforts to come to grips with the problems in the financial sector. In the short term, it was imperative to get rid of bad assets and recapitalize banks. But there was also a strong push for better and expanded regulation to cover the diversity of the financial environment. Calls to look at compensation frameworks and practices were also being made. In dealing with emerging countries and low-income countries, IMF was working to increase its resources, which had not kept pace with the world economy. It hoped to at least double and possibly triple its lending resources. With that money, IMF recognized that it needed to do a better job at designing its programmes, particularly in the area of conditionalities. It had doubled access for many countries and had introduced a programme for countries with established governance. Quota reform was also going to be instigated, and towards that end, a report had just been released which called for the formation of a high-level ministerial council made up of global finance ministers.
Mr. KHOR said the economic crisis had a very serious impact on developed countries, as those countries did not have the resources or means to combat the crisis. They had just begun to feel the effect in the last few months and the situation would only worsen next year.
He said that political leaders in developing countries were very concerned. People in developed countries were unemployed, but people in Africa, for example, did not have sufficient food and would die. It was a life-and-death crisis in many of those countries. Trade and financial flows were some of the primary transmission routes for the financial problems. Private companies in developing countries, for example, expected to have $1 trillion in private loans mature this year. There was $3 trillion in public debt facing maturity in the coming year. If the loans could not be rolled over, there would be a massive problem of external debt in those countries.
The sharp inflows of capital into developing countries during good times and the sudden and massive outflows in bad years had contributed to the crisis, he said, calling the present outflow of capital from developing countries “a tsunami”. The decline in trade financing had led to declines in trade. That had led to stresses on the overall balance of payments in developing countries, a fall in their foreign reserves and an inability to service their external debt.
He said it was urgent to create an international financial system that encouraged financial stability and predictable financial resources for developing nations. A new financial architecture should also deal with the threat of new debt crises facing developing countries, and the reform agenda should include international cooperation in resolving commodity issues.
In the discussion that followed, Member States stressed that the financial crisis had a more severe impact on the developing nations as many people in those countries lived below the poverty line and with subsistence incomes. The consumer model of developed countries could no longer be sustained, said the representative of Nicaragua, and the G-20 meeting did not represent the interests of most developing countries. The representative of Bangladesh said the crisis was different than previous ones, as the world economy was more interconnected and there was greater income disparity between the wealthy and poor.
Many Member States said the United Nations, supported by multilateral and regional development banks, had an important role to play. The representative of Indonesia, for example, urged the United Nations to provide budget support financing so countries could pursue counter-cyclical measures. The Organization could also promote emergency support for trade financing and support for the private sector. Representatives of civil society, and agencies including the World Food Programme, said the crisis would increase hunger and malnutrition for people who already had their resources drained, having dealt with last year’s high fuel and food prices. The question for 2009 was whether the financial resources would be there in the coming year for the world’s most vulnerable people.
Commenting at the end of the afternoon session, Mr. PANIZZA of UNCTAD said the lessons that developed countries needed to follow included the development of regulations that focused on social efficiency, as market-based regulations were not enough to prevent crises, as well as the adjustment of financial incentives for executives, and wider regulation to avoid the creation of a shadow banking system. While, in a perfect world, it would be better to revise regulations when events were calmer, the political will existed now to make reforms.
Mr. LEWIS of the World Bank said that the global economy would be more quickly repaired if the response was comprehensive and united. It was easier for political leaders to sell an economic package to their own constituents and legislatures when all countries were acting in tandem. The silver lining in this crisis was improved cooperation among regional, national and global institutions.
Mr. JAHAN of UNDP noted the collaboration between the Programme and international financial institutions. There also was cooperation at the global and country level to deal with the crisis. Investigating the links between poverty and the environment was a positive endeavour and could result in new jobs.
IMF should not be the only financier in this crisis, Mr. TEJA of the Fund said, agreeing with earlier comments that there was a role for regional organizations and other international institutions. He also agreed with the representative of the Sudan that conditionality was not necessary in some cases, although there was a legitimate role for conditionality. But it needed a more streamlined approach that was more respectful of political considerations in a country. A fair voice and representation were vital to legitimacy. He hoped the schedule for reforms would be accelerated.
Mr. KHOR of the South Centre said reform of IMF was very important so it could play its proper role. It was very difficult to know if IMF had learned the correct lessons during previous crises. Countries turned to the Fund because they did not have a choice. Regional resources were also being created to provide support, he added.
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