Economic and Social Council President Praises ‘Open and Constructive’ Discussions, as Two-Day High-Level Meeting with Major Financial Institutions Concludes

19 March 2010
ECOSOC/6418

Economic and Social Council President Praises ‘Open and Constructive’ Discussions, as Two-Day High-Level Meeting with Major Financial Institutions Concludes

19 March 2010
Economic and Social Council
ECOSOC/6418
Department of Public Information • News and Media Division • New York

Economic and Social Council                                

Special High-Level Meeting                                 

6th & 7th Meetings (AM & PM)

Economic and Social Council President Praises ‘Open and Constructive’ Discussions,

as Two-Day High-Level Meeting with Major Financial Institutions Concludes

Thematic Debates:  Supporting Rehabilitation Efforts of Developing Countries;

Enhancing Coherence of International Financial System in Support of Development

The President of the Economic and Social Council today welcomed the “open and constructive” discussions held during the 54-member body’s special high-level meeting with the Bretton Woods institutions, and expressed hope that the spirit of engagement over the past two days marked the beginning of closer relations between the United Nations and the major international financial institutions. 

As he closed the event, convened to mobilize targeted actions to help achieve the Millennium Development Goals by 2015, Council President Hamidon Ali, of Malaysia, announced that he was pleased to accept the World Bank’s invitation to attend the 24-25 April spring meetings of the Joint World Bank/International Monetary Fund (IMF) Development Committee to report on the outcome of the session.

With the target date fast approaching for the achievement of the Millennium Goals, the Council had expanded to two days its yearly meeting with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Development (UNCTAD).  Mr. Hamidon said he hoped the new, expanded format, which had included three interactive debates, had helped make the meeting more open and productive. 

“But at the end of the day, format can only take you so far.  What is more important is the spirit of engagement from all the participants,” he continued, thanking all the Council’s guests from Washington, Geneva, and around the world.  He said it was also clear from the interventions that the representatives of the Bretton Woods institutions and the trade- and development-focused United Nations agencies shared his hope that the event “would better promote relations among all our organizations and institutions”.

Mr. Hamidon then went on to provide a brief overview of the discussions over the past two days, and informed delegations that he would submit a full summary at a later stage.  The theme of the meeting -- “Building on Monterrey and Doha:  Achieving the internationally agreed development goals, including the Millennium Development Goals” -- evoked the outcomes of the 2002 International Conference on Financing for Development, held in Monterrey, Mexico, and its review conference, held in Doha, Qatar, in 2008.

He said all speakers during the opening plenary had stressed that meeting the commitments made at Monterrey and Doha was critical to achieving the Millennium Goals.  The role of the State in development, in implementing the right polices and respecting the basic rules of governance was also noted as critical, as was the notion that building productive capacity in developing countries linked to creating jobs formed the economic foundation for achieving the Goals.    

Participants had also stressed that imbalances in the global economy and regulatory shortfalls needed to be effectively addressed, as well as imbalances between the asymmetry in benefits for developed and developing countries.  He said the conclusion of the Doha Round of World Trade Organization negotiations to deliver on its development objectives was cited as imperative.  That should be complimented by significant and targeted “aid-for-trade” to help build supply-side capacity in developing countries.

As for the Council’s thematic debate on “mobilizing domestic and international resources to fund existing and emerging MDG implementation gaps”, held yesterday afternoon, he said speakers had noted the continuing impact of the financial and economic crisis on employment and job creation worldwide.  Many had also stressed that high unemployment and the lack of quality jobs were an impediment to their country’s efforts to boost domestic resources for development.  It was noted that, for poorer countries, the socio-economic damage from the slowdown in growth had been greater than the rebound during recovery.

The Council’s work today was shaped by the discussions in two thematic debates.  The morning discussion focused on “supporting rehabilitation, recovery and development efforts of developing countries with special needs and those facing humanitarian emergency situations”.  The first featured presenter was Sarah Cliffe, Special Representative and Director for the World Bank World Development Report, who previewed the Bank’s flagship publication, “World Development Report 2011:  Conflict, Security and Development.” 

While stressing that the report was still very much a work in progress, Ms. Cliffe said that one of its main themes concerned the relationship between conflict and the Millennium Development Goals.  The Bank had found that high levels of violence significantly impacted the achievement of the Goals.  For instance, conflict-affected States made up between 70 and 90 per cent of those countries not expected to attain the Goals by the 2015 deadline.  While the report’s overall recommendations had not been finalized, she said a few options were being explored, such as devoting more attention to prevention in post-crisis programmes and exploring regional initiatives and a possible untapped potential for more work at the regional levels.

Also making a presentation was Charles Gore, Head of the Policy Analysis and Research Branch of the United Nations Conference on Trade and Development (UNCTAD) Division for Africa, least developed countries and Special Programmes, who previewed that agency’s Least Developed Countries Report 2010. He highlighted traditional challenges facing those countries, including, among other, lagging economic growth, lack of capacity, the impact of rapid urbanization on rural and farming sectors, and low employment, especially for burgeoning youth populations.

As for remedies, he said job creation and increased access to new technology would be critical.  Moreover, to promote good development governance, countries must create a mixed economy, which was not too heavily reliant on the State, but in which the State harnessed the private sector for development objectives.  The most successful least developed countries used improved agricultural productivity to reduce poverty, and were able to link farmers with technology, as their income grew.  In doing so, they were able to “formalize the informal sector”.  Thus, democratic development was not based on electoral processes alone, but rather on promoting a bottom-up citizen participation, he added.

In the afternoon, the Council followed a similar formula, with thematic debate on “Enhancing coherence and consistency of the international monetary, financial and trading systems in support of development”.  Previewing the Department of Economic and Social Affairs’ flagship publication, World Economic and Social Survey 2010, “Towards a New Development Paradigm:  Coherence in Development Policy and International Cooperation”, was Robert Vos, Director of that Department’s Development Policy and Analysis Division.

He said sustained and widespread prosperity in the future would require major reforms in global economic governance and new thinking about global economic development.  A central aspect of such new thinking would have to be a focus on sustainable development -- which balanced material wealth improvements with environmental protection -- rather than the narrow focus on economic growth that was principally dependent on generating private wealth.

Ultimately, the international community must find ways to retool national development policies along with mechanisms dealing with international cooperation and global governance to facilitate a fairer and more sustainable development path for all.  “Finding such consistency is the working definition of policy coherence that is a central theme of the forthcoming World Economic and Social Survey,” he continued, adding that while the report was still a work in progress, it would, overall, highlight some of the issues at stake in the areas of trade and finance and illustrate some possible options for overcoming the challenges.  

The final presenter of the day was Detlef J. Kotte, Head, Macroeconomic and Development Policies Branch, Division on Globalization and Development Strategies, United Nations Conference on Trade and Development, who made a presentation on “New Challenges in the Reform of Global Economic Governance”.  He said that such reform efforts in the wake of the financial crisis had overlooked global governance.  At the outbreak of the crisis, bold calls were heard for a new Bretton Woods agreement.

Yet, he said that analysis of what had happened since then indicated that the Group of 8 industrialized nations, as well as the Group of 20, had focused on the short-term stabilization and reform of financial regulation, while paying insufficient attention to macroeconomic and monetary aspects.  But, clearly, the crisis was not just about financial fragility and instability of interconnected national financial markets.  It included unsustainable current account balances, currency instability and misalignment, and excessive commodity price fluctuations.

Background

The Economic and Social Council this morning convened for the second day of its annual high-level meeting with the Bretton Woods institutions, the World Trade Organization, and the United Nations Conference on Trade and Development (UNCTAD).

Thematic debate of the whole:  Theme 2

In the morning, the Council heard two presentations on the theme “Supporting rehabilitation, recovery and development efforts of developing countries with special needs and those facing humanitarian emergency situations”.  Providing a preview of the World Bank flagship publication, World Development Report 2011:  Conflict, Security and Development was Sarah Cliffe, Special Representative and Director of the World Bank’s World Development Report.  Providing a preview of the UNCTAD publication The Least Developed Countries Report 2010 was Charles Gore, Head of the Policy Analysis and Research Branch of UNCTAD’s Division for Africa, least developed countries and Special Programmes.

Ms. CLIFFE said that the World Development Report 2011 was very much a work in progress.  The first findings and ideas of the report were now coming out, but had not yet been fully validated or fleshed out.  The World Bank had benefited from a variety of consultations that had been taking place, which would help in looking at some of the issues that were changing and evolving in relationship to the approaches to conflict-affected countries.

One of the main points coming out of the report, she said, concerned the relationship between conflict and the Millennium Development Goals.  The World Bank had looked at the impact of conflict and high levels of violence on achievement of the Goals, and found that the impact was very significant.  For instance, conflict-affected States made up between 70 and 90 per cent of those countries not expected to attain the Goals by the 2015 deadline.  This signified that the constraints of conflict-affected countries and the adverse impact of conflict were central factors on development.

Delving into conflict and development linkages, she said there was some evidence that the type of conflicts and development linkages looked at needed to be updated to reflect twenty-first century realities, particularly violence that occurred after peace settlements, organized crime, trafficking, gang violence, civil conflict and cross-border violence.  Regarding violence that occurred after peace settlements, she stressed that, up until the late 1990s, peace settlements more or less did the job expected of them, in that very little fighting occurred afterwards.  From the late 1990s onwards, however, that picture had changed quite dramatically, and there were 8 to 10 countries every year with quite significant violence occurring after peace settlements.

Furthermore, she stressed that, in the last 10 years and much more so than in previous decades, aid programmes and peacekeeping operations were being deployed into areas where there was ongoing violence. That confirmed what many practitioners in the field had felt to be the case, which was that those involved were operating in more insecure environments.

Another point coming out of the report related to the linkages between the different types of violence.  Highlighting Latin America, she said that a very sharp rise had been seen in homicides in some countries, particularly in Central America.  Many countries, such as Guatemala and El Salvador, had entered into successful post-conflict settlements, but were subject to problems that raised the levels of post-conflict violence as high as those experienced during their own civil wars.  This was also true in West Africa, she said.

The report also looked at cross-border violence, which provided real problems for countries in terms of continuing with an organized development course.  Such violence also included movements that were originally national in origin, but which now operated across countries.  One example was the Lord’s Resistance Army, which was now in more than six neighbouring countries.

She said that another aspect being examined was the causes of conflict risk, namely the stresses on societies and their capacity to respond and restore confidence in situations of high risk.  Noting that stresses could be both internal, such as high youth unemployment or rising inequality, and external, such as pressure related to the economy, climate change or trafficking, she said that the World Development Report framework covered a range of studies regarding how countries had addressed the risks of violence.  That included violence in middle-income or low-income countries, and it was clear that those with fewer resources had a harder time responding to those sorts of problems.

The Report also examined the element of social cohesion, as well as the ability of countries to call on additional capabilities from their regions or international sources, when necessary.  It also looked at links between security, development and justice issues.  Further, from the Report it was clear that confidence could not be restored through the action of international institutions, since the population of conflict-affected countries knew well that such institutions would not be around forever, and that restoring real peace and stability would rely on national institutions.

Turning to concerns arising from the Report, she said that international expectations of reform in institutions appeared to be quite unrealistic in terms of timing.  For example, in a visit to Haiti at end of last year, the World Bank was struck that there were expectations that the country would carry out, among other things, a constitutional reform, a fundamental economic restructuring programme and a reform of the justice system, as well as anti-corruption and anti-trafficking drives.  The expectation was that such reform would be carried out in a period of one year to 18 months, during a time when the country had two elections planned.  No developed countries could carry out that much reform, so the question arose as to whether such reforms were unrealistic, and did damage, in that sense, however unintentionally.

The Report had also found that, in some cases, the idea of the institutional model that countries were encouraged to adhere to might be unnecessarily rigid, or more like Western institutional models, instead of, perhaps, models of other countries in their region.  That was particularly true for countries that were quite dependent on international assistance.  In addition, the report found that reform areas could be something of a double-edged sword with relation to their impact on conflict; in the short term, those reforms could sometimes lead to increased conflict.

Regarding recommendations that would be made in the report, she said that the World Bank was very much in the early stages of that, and so they had not yet been finalized.  Some areas that were being explored included paying more attention to prevention in post-crisis programmes; looking at the inequities in funding in the current framework; examining the greater use of principles-based standards as a way to help provide more flexible support; exploring regional initiatives and a possible untapped potential for more work at the regional level; and examining a greater role for South-South relations.

Mr. GORE discussed the need for a new policy framework for development in least developed countries, drawing on years of research conducted by UNCTAD as part of its series of reports on development.  While least developed countries experienced better growth during this decade compared to the 1990s, with the growth rate exceeding the 7 per cent target set in the Brussels Programme of Action, a quarter still performed poorly.  Even in those where growth was high, the sustainability of that growth was questionable, since it was based on high commodity prices and greatly increased external finance.  That type of growth was not found to be effective in reducing poverty, and the global economic crisis had put them further off target.

He said a past report had identified a decline in the percentage of people living on less than a dollar a day and in child mortality rates between 1990 and 2004.  Notably, 1994 marked the start of that decline, preceding the adoption of the Millennium Development Goals.  Since 2000, when the Goals were adopted, the rate of decline had actually slowed, and was now slower than what was needed to meet the 2015 target.  The high rate of population growth meant that the absolute number of poor people continued to increase, outpacing gains in economic growth.

Creating employment would be key in the coming decade, he said.  World Bank research had found that, in Mali, for example, the number of new entrants to the labour force totalled 171,000 people.  Given the demographic structure of Mali’s population, where the number of young people was high, the number of new job seekers was set to increase steadily until about 2045.  Without enough jobs, it would be impossible to tackle poverty in that country.

In the 1980s, most people sought work in agriculture, he said.  Now, people were increasingly seeking work outside agriculture, and about half of least developed countries had made that type of employment transition in this decade.  But, farm sizes were declining and many were increasingly located in marginal land, especially in land-scarce countries.  Even in countries that were not land-scarce, for example in Zambia, the poor were unable to obtain access to land.  This phenomenon, described as “blocked structural transition”, meant that economies were unable to generate sufficient off-farm jobs, forcing people to engage in “urban survival activities”, which was often the start of conflict.

The idea that urban demand would stimulate domestic agricultural growth did not hold, he noted.  Big cities imported their food from foreign sources, leaving domestic products unable to compete.  The level of food imports had risen, reaching $20 billion. 

He said knowledge and technology would become ever more important, especially to tackle emerging issues, such as climate change.  Those issues presented opportunities for South-South cooperation, but it might also prove challenging.  One third of least developed countries had had negative per capita growth in 2009, with total exports falling by about one third, most of which was petroleum.  With the decline in trade and migrant remittances, aid flows would become particularly important in 2011.  Mr. Gore showed participants a cartoon in which the image of a hungry peasant was juxtaposed with that of a corporate executive at his computer, pointing out that bonuses received by Goldman Sachs executives would amount to $16 billion this year, twice the gross domestic product of Haiti, which was $7 billion.

New approaches were needed, he said.  In UNCTAD’s view, the central focus should be on creating the capacity to produce goods and services that depended on accumulated resources, infrastructure and trained people, to be built on evolving technological capabilities, economic diversification and increased links within an economy.  It would require a different role for the State, as well as new regional policies and different types of international support mechanisms for least developed countries.  “Development governance”, based on the notion of a new “developmental state”, would not merely concern itself with procedures ‑‑ such as transparency, accountability, and so on ‑‑ but be oriented towards outcomes. 

Drawing on past experience, he said that to promote good development governance, countries must develop a mixed economy, which was not too heavily reliant on the State, but in which the State harnessed the private sector for development objectives.  The State’s main functions were to provide a vision, to organize and coordinate, and to manage conflicts.  The most successful least developed countries used improved agricultural productivity to reduce poverty, and were able to link farmers with technology, as farmers’ income had increased.  In doing so, they were able to “formalize the informal sector”.  Democratic development was, thus, not based on electoral processes alone, but rather on promoting a bottom-up citizen participation.

He said that, up to now, good governance agendas were disabling because they had been too ambitious.  Least developed countries were much better able to build on existing achievements through a process of “strategic incrementalism” as opposed to sweeping reform where everything must be re-built from scratch.  They were much better positioned to succeed if they engaged in policy learning, such as in Malawi, which learned and changed its policies regarding fertilizer subsidies, which eventually led to an increase in maize production.  Success required good leadership.  They also required coalitions among key actors ‑‑ such as among Government, the private sector and farmers associations.

He stressed, as well, the importance of creating enough policy space.  At the moment, least developed countries did not have enough domestic resources to undertake modern governance.  Donors should orient their assistance towards Government spending to help develop “developmental state” capabilities.  There was a need to rebalance aid towards production and economic infrastructure, which was currently on the decline in least developed countries.  At the regional level, States could increase cooperation within regions and with new development partners, exchanging experiences with one another.

The current international support mechanism needed to be reshaped to be more effective and new ones created, he said.  Existing ones were focused on trade and needed to be broadened to include finance and technology.  Knowledge and technology would become increasingly important in climate change adaptation and mitigation, and to manage the development impact of foreign direct investment and to understand links to global value chains.  In addition, the international community must realize that systemic improvements in the international financial architecture mattered to least developed countries, even if they were not specific to them.  For, although they had special needs, policies directed at least developed countries must not isolate them from other developing countries.

Opening the interactive portion of the dialogue, Economic and Social Council President Hamidon Ali (Malaysia) highlighted a note by the Secretary-General (document E/2010/11), which he said underscored the imperative to provide timely and comprehensive assistance to countries with special needs that had been hit hard by the confluence of the financial, food and energy crises and devastating natural disasters.

The ensuing discussion centred on how development efforts could be improved in post-conflict situations, the importance of the role of the State in capacity-building and sustainable development, and the need for cooperation between the United Nations and Bretton Woods institutions and for South-South cooperation.  Speakers emphasized that poverty could not be overcome without sustainable growth, and expressed concern about the sometimes unrealistic and excessive expectations placed on certain countries as they moved towards achieving the Millennium Development Goals.

Other speakers questioned the effectiveness of current financial institutions and asked how they could be more relevant for achieving development goals.  Several speakers stressed the importance of good governance, as well as the importance of finding ways to overcome the root causes of poverty and not just the symptoms.

Many speakers expressed concern about aid effectiveness, and questioned the rigidity of the current approach to aid management policies.  Others asked about linkages between urban and agricultural elements, particularly concerning the least developed countries, with many asking how extra efforts could be made so that the Millennium Development Goals were fully fulfilled in those countries.  In addition, several speakers asked how the problems of multiplicity of efforts and a lack of cooperation regarding post-conflict situations could be ameliorated.

In response, Ms. CLIFFE pointed to the centrality of job creation and employment, stressing that it was an extremely strong focus of the work in the World Development Report.  Such actions were fundamentally linked to efforts in violence reduction and recovery.  She also underscored the importance of long-term sustainability factors, and said a section of the report would look at the evidence for longer-term reform that increased resilience to conflict.

She said the report would also examine broadening access to leadership opportunities and participation, as well as the role of gender, particularly the impact of violence on women and women’s roles in terms of both local-level and national-level activities on recovery.  It was important that the word “gender” was used correctly to mean both men and women, she stressed, because a disproportionate impact also existed in terms of violence for young men.

Turning to the debate on rigidity in aid effectiveness in some institutional models, she said the issue was a core theme in the World Development Report.

While perhaps the expectations of progress made on the Millennium Development Goals were unrealistic with regards to certain countries, she stressed that there were indeed some countries that had made very fast progress, despite coming from a background of vast conflict.  Giving Mozambique and Burundi as examples, she said it was necessary to be wary of passing too much of a pessimistic message.  It was also important to take stock now and to realize to what extent the problem of unrealistic expectations was central to achievement of the Goals. The immediate response to that should be to refocus and redouble efforts, rather than to back away from those commitments.

On that same issue, Mr. GORE, for his part, said that the indicators being used to measure ownership were inappropriate.  Aid management policies at the recipient-country level were a key tool for increasing aid effectiveness.  The recipient countries should look at their own indicators and evaluate how aid was working at the country level.  They should also specify the types and forms of aid that they wanted, as was being done in Uganda and Tanzania.  Perhaps the next stage was to link that to the development cooperation forum, and to have different countries share their experiences.

Turning to the issue of governance and the role of the State, Mr. Gore stressed that no one was suggesting bad governance.  Governance had to be good, but in analysing the concept of good governance, he found that it was focused on institutions, rather than institutions plus policies.  Good governance also looked more to procedures, rather than outcomes.  Good development governance, however, was concerned with both procedures and outcomes, particularly economic development in terms of the production structure and employment.

Regarding South-South cooperation, he said that the exchange of experience was critical.  He stressed that coherence was needed, as were policy innovation, new ideas at the national and international levels, and an open policy coordination process.  It was also necessary to encourage policy entrepreneurship and innovation, he said.

Taking part in the thematic debate were the representatives of Chile (on behalf of the Rio Group), Nepal (on behalf of the least developed countries), Guatemala, Indonesia, Australia, Brazil, Japan, Benin, Belgium, Mexico, Mongolia, France, Switzerland, India, Venezuela, Turkey, and Iran.

Also speaking were a representative of the World Trade Organization, the President of UNCTAD’s Trade and Development Board, the Dean of the Board of Directors of the World Bank, Executive Directors of the World Bank, and members of civil society and the business sector.

Thematic debate of the whole:  Theme 3

In the afternoon, the Council heard two presentations on the theme “Enhancing coherence and consistency of the international monetary, financial and trading systems in support of development”.  Providing a preview of the Department of Economic and Social Affairs’ flagship publication, World Economic and Social Survey 2010, “Towards a New Development Paradigm:  Coherence in Development Policy and International Cooperation”, was Robert Vos, Director of that Department’s Development Policy and Analysis Division.  Detlef J. Kotte, Head, Macroeconomic and Development Policies Branch, Division on Globalization and Development Strategies, United Nations Conference on Trade and Development, made a presentation on “New Challenges in the Reform of Global Economic Governance”.

Mr. VOS said the global economic crisis of 2008-2009 had exposed systemic failures in the workings of financial markets and gaps at the core of economic policy-making.  The rapid spread of the financial fallout from the United States to nearly the entire world, affecting jobs and livelihoods, underscored the interconnectedness of the global economy.  Moreover, the economic and financial turmoil had come on the heels of several other crises, including skyrocketing and highly volatile world food and energy prices, and the increasingly felt impact of climate change.

“These multiple dramas, which unfolded almost simultaneously, have drawn attention to major weaknesses in our mechanisms of global governance to face up to such challenges,” he continued.  Getting back on track towards the same types of growth dynamics seems undesirable, as it would only put the world back on an unsustainable course.  Indeed, he said, sustained and widespread prosperity in the future would require major reforms in global economic governance and new thinking about global economic development.  A central aspect of such new thinking would have to be a focus on sustainable development -- which balanced material wealth improvements with environmental protection -- rather than the narrow focus on economic growth that was principally dependent on generating private wealth.

“Global solutions will need to be found for the structural problems, and, given the interdependence of these problems, policy responses will need to be sufficiently coherent at various levels, if the international community is to achieve the multiple objectives of a fair and sustainable global development,” he said.  Pursuing that would not be easy because of the complex nature of all the global challenges, and especially because it required new thinking, as well as finding a balance between local decision-making and the work of global institutions.

Retooling global development in that sense was the main theme of this year’s World Economic and Social Survey, Mr. Vos continued, adding that while that study did not pretend to set out a blueprint, it did aim to provide ideas which could put together a new coherent “toolbox” to guide development polices and international cooperation.  “The present challenges come at a moment which may well represent a watershed in history,” he said, citing four major changes in the global economy that were likely to dominate this century:  the shifting balance of global economic power; the impact on demographics of increasing interdependence; the fallout from rapid environmental degradation; and the interconnectedness of global economic processes.

“The question is how to reform global governance institutions [to be] better suited to address these challenges with greater coherence, while at the same time allowing nations and peoples the space to determine their own destinies,” he said, noting that tensions could arise regarding global solutions to such vital issues, especially since the 2002 Monterrey Consensus on Financing for Development had assigned developing countries the prime responsibility for their own development.  Yet in that same document, developed countries had accepted primary responsibility for sustaining an international environment that facilitated development for all.  “This distribution of labour may not be so simple anymore, now that truly global solutions are needed,” he said.

Ultimately, the international community must find ways to retool national development policies along with mechanisms dealing with international cooperation and global governance to facilitate a fairer and more sustainable development path for all.  “Finding such consistency is the working definition of policy coherence that is a central theme of the forthcoming World Economic and Social Survey,” he continued, adding that while the report was still a work in progress, it would, overall, highlight some of the issues at stake in the areas of trade and finance and illustrate some possible options for overcoming the challenges.          

On trade, he drew attention to the abiding impasse of the Doha Round of negotiations launched by the World Trade Organization in 2001.  The stalemate could largely be attributed to the difficulty in striking a balance between the desire to have a “common set of rules of the game” and the principle of accommodating differential capacities among countries to effectively engage in trade.  While the “common but differentiated” approach had historically been a part of designing international regulations, in the case of the Doha Round there were serious gaps in proposals or initiatives that would provide developing countries with duty and quota free market access for their products.  The differentiated approach would, thus, imply helping countries with weak capacities support their home industries.

While “aid-for-trade” schemes were one remedy for that, he said such initiatives provided only very limited support that was nowhere near what Governments in fast-growing Asian countries had provided their nascent industries during the initial stages of their integration into global trading systems.  Retooling trade polices would thus require a reassessment of how to implement the common but differentiated approach to create greater development opportunities, including through recalibrating internationally authorized subsidies in support of export industries in developing countries. It would be necessary to ensure that such subsidies were truly selective, temporary and performance-related.

Turning next to finance, Mr. Vos said the crisis had revealed that the current international financial system had devolved into “a perilous makeshift arena”.  A coherent financial system must deliver sufficient long-term finance for investment in the developing countries in a non-volatile way.  “In recent decades, we have seen an enormous growth of international private financial flows, outstripping by far the growth of world trade,” he noted, adding that had been the result of deregulation of capital flows and domestic financial sectors.  Ultimately, a sound global financial system should efficiently channel resources for productive investments consistent with sustainable growth and development patterns, and counteract rather than foment the emergence of imbalances.

Mr. KOTTE said reform efforts in the wake of the global financial and economic crisis had neglected global governance.  At the outbreak of the crisis, bold calls were heard for a new Bretton Woods agreement.  Yet, an analysis of what had happened since then indicated that the Group of 8 industrialized nations and the Group of 20 had focused on the short-term stabilization and reform of financial regulation, while paying insufficient attention to macroeconomic and monetary aspects.  But, clearly, the crisis was not just about financial fragility and instability of interconnected national financial markets.  It included unsustainable current account balances, currency instability and misalignment, and excessive commodity price fluctuations.

In particular, he said current account imbalances resulted from the ineffectiveness of the international exchange-rate system, lopsided distribution of domestic demand and lack of macroeconomic policy coordination.  This was certainly true for imbalances among the large industrialized economies, including China.  Meanwhile, currency instability and misalignment resulted from the use of the dollar as a reserve currency, speculative capital movements, and the absence of rational exchange-rate management to ensure the stability of the global economy.

Continuing, he said excessive commodity price fluctuations resulted from the “financialization” of commodity markets by agents that had no link to the real market for primary commodities.  In those cases, new actors dealt with commodity “contracts” that transformed commodities futures into an alternative asset class for financial investors and undertook index trading on individual commodity markets that was entirely detached from fundamentals.

Due to institutional shortcomings, the International Monetary Fund, along with the Financial Stability Board, failed in the most important part of its mandate -- maintaining international monetary and financial stability.  He suggested the Fund’s failure in preventing the crisis resulted from the fact that its surveillance was asymmetric and ineffective in terms of:  monitoring the systematically important economies; managing the exchange rates of the major reserve currencies; and promoting coherence in global macroeconomic policy.  One reason why was the Fund’s mistaken assumption that financial markets knew best.  Obviously, the financial crisis showed these markets could not be trusted.

On top of its failure to prevent the crisis, once the crisis set in, the Fund also failed in managing it, he said.  Among other things, the Fund’s provision of liquidity was quantitatively insufficient, unreliable and linked to procyclical conditionality.  While it was geared at creating “market confidence,” there was a lack of global governance for a globalized economy.  A system of multilateral rules and disciplines for monetary and financial policies, akin to the system for trade policy and trade relations that was governed by the World Trade Organization and the General Agreement on Tariffs and Trade, was missing.  Among other implications, this absence raised the possibility of large macroeconomic divergences and trade distortions through exchange rate volatility and misalignment.

He said stronger global economic governance would entail surveillance and coordination of financial regulation, stricter regulation of commodity futures markets and price stabilization.  An alternative reserve medium might also be needed.  If special drawing rights took a stronger role -- as had been called for by many parties -- the need for international reserve holdings could be reduced, as could the dependence on the dollar.  More reliable and countercyclical international liquidity could also be provided.  However, while special drawing rights reserves would have more stable values than individual national currencies and could facilitate exchange rate management of developing countries and emerging market economies, they would not solve the problem of exchange-rate instability.

He went on to say that multilaterally-agreed rules for managing exchange rates were also needed.  One proposed rule would be that the stability of real exchange rates should be at a level that was consistent with a sustainable current-account position.  Moreover, if exchange rates were managed according to the “stable real exchange-rate rule”, excessive currency speculation of the carry-trade type could be curbed and unsustainable current account deficits and currency crises could be prevented.  By removing the tendency of countries to move into unsustainable current account deficits at the same they garnered the “confidence” of financial markets and rating agencies, it would also help avoid unsustainable debt accumulation.  Since no country had to hold a reserve “cushion” to defend its currency and to compensate for potential volatility in export earnings, it would minimize the need to hold international reserves. 

Turning to complementary, “second-best” reforms, he said the coordination of macroeconomic policy should be institutionalized to avoid the tendency towards imbalances and the need for nominal exchange-rate adjustments.  The macroeconomic surveillance and discipline of all countries should also be strengthened and capital controls should be rehabilitated as a means of macroeconomic management.  Developing and transition economies also needed a new policy orientation.  Among other things, it must be realized that dismantling all obstacles to cross-border private capital flows was not the best recipe for advancing economic development and surging capital inflows were not necessarily a sign of strength, but were always a potential source of disequilibrium.  Finally, financial sector development must go hand-in-hand with increasing regulation and supervision.

During the wide-ranging discussion that ensued, several speakers endorsed the call for a global reserve currency that was not a national currency.  In that context, at least one speaker emphasized the conclusions of the Stiglitz Report.  Others underlined the potential of regional monetary funds, while a number of speakers asked what role the United Nations could play in addressing weaknesses in global economic governance.  Indonesia’s representative asked how currency speculation could be controlled and reduced, and specifically what role taxes could play.

On governance issues, many speakers continued to stress the need for greater democracy and transparency at the Bretton Woods institutions.  To that end, a representative of civil society said that to make the International Monetary Fund (IMF) a more responsible and effective institution, the make-up of its executive board, which was the very definition of the “black box”, had to be considered.  She also suggested that too much of the Fund’s time, money and personnel were focused on bilateral analysis, as if countries were isolated from each other.  Meanwhile, the surveillance of developing countries seemed to have the quality of law, while the surveillance of rich countries was happily ignored.

Several of the Fund’s executive directors commented on the presentations.  While acknowledging that it had been unable to prevent the crisis, one of them stressed that the “quick and decisive” way the Fund reacted bore some promise.  She agreed the Fund’s surveillance must consider the “spillover” effects of domestic policy, but much depended on the willingness of national constituencies.  She favoured greater use of peer review, such as the peer review mechanism of the Group of 20.  She pointed out, however, that the current crisis was not a crisis of major currency fluctuations.

Another executive director stressed that rather than being procyclical -- as they were accused of being -- the Fund’s programmes had always focused on sustainability.  Seconding that, another executive director stressed that how much space is available for countries to undertake anti-cyclical measures depended on the financing, which was frequently quite limited.

The Fund’s executive director from China said that the Fund’s most important purpose was to promote stability of exchange rates.  During the Asian financial crisis, the Chinese currency had served as a stable reserve, as a result of the Chinese Government’s leadership and decisions.  During the current crisis, some countries were in similar position to the one China had held then and he hoped they would maintain the strength of their economy and project an image of stability.  He further stressed that all countries, big or small, should treat each other on an equal footing and seek solutions through consultations.  The resort to pressure or other tactics would not solve problems, but would prove to be counterproductive.  In fact, as history had proved, exchange rates were not the crucial element in restoring the exchange rate balance.

Responding, Mr. KOTTE said a wider use of peer review mechanisms could bring significant progress, but it would still be far from the kind of framework seen in the trade arena with the World Trade Organization.  He wished to clarify that he had not said the Fund did not properly do surveillance, but that it did not properly transform that surveillance into recommendations.  In some cases, this was because member States did not react to those recommendations.  Indeed, they did not have to.  Thus, he meant to critique countries that relied on the Fund to govern international finance.  He said that the Fund’s discussions on exchange-rate systems were good.  But, in the meantime, there was a “non-system”.  Moreover, the IMF could not impose a new exchange-rate system.  For its part, the United Nations could take a lead in urging Member States themselves to have that discussion.

He said that to reduce international currency speculation, incentives for such speculation had to be addressed.  Financial transaction taxes could be useful by making those transactions more expensive.  The introduction of capital controls could also be useful instruments to shelter individual countries from the impact speculation could have.

For its part, UNCTAD did not have a blueprint on how to create a system of rules, nor did it have in mind a body to enforce those rules.  It could be the IMF, which was competent.  But, certainly, the tendency to play a confidence game in which the right thing to do was whatever pleased the financial market had to be curbed.  In that, a rethinking of the role of the financial sector in individual countries was very important.  It was also critical to rethink the criteria used for evaluating if a policy was sound or not.

In conclusion, he said that focusing on certain objectives, like inflation stabilization and account balance and making countries attractive for foreign financial investors, had often led to undesired results.  This was why many countries had had to repeat IMF programmes.

Mr. VOS said there was no specific view within the United Nations on the role it could play in ensuring policy coherence in the economic world.  However, the issue was being discussed at high levels and specific suggestions would likely be forthcoming. 

With respect to surveillance, he noted that the International Monetary Fund had made attempts at multilateral surveillance.  The Group of 20 had also made efforts in that respect.  But, the important question was what could and would work.  Clearly the Fund’s efforts several years back had not.  One question arising from that failure, particularly in light of the recent crisis, was if surveillance should be undertaken without considering a reform of the reserve system.  Indeed, the sequencing of reforms was critical.

Turning to the development dimension, he noted the need for massive investments in energy sectors in developing countries, which would most likely require technology and resource transfers to them from developed countries.  Further, if countries had less need to accumulate huge currency reserves, they could use these resources to develop their own infrastructure and make other important domestic investments. 

Also participating in the discussion were representatives of:  Chile (on behalf of the Rio Group), Russian Federation, France, Peru, Saint Lucia, Venezuela, Mexico, Paraguay (on behalf of the landlocked developing countries), Spain (on behalf of the European Union), Indonesia, Mozambique, Guatemala and Uruguay.

A representative of business also spoke.

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For information media • not an official record
For information media. Not an official record.