Three Panel Discussions, Held in Parallel with the Development Financing Dialogue, Consider Systemic Reform, Innovative Aid Sources, Resilience of Foreign Investment

8 December 2011
GA/11190

Three Panel Discussions, Held in Parallel with the Development Financing Dialogue, Consider Systemic Reform, Innovative Aid Sources, Resilience of Foreign Investment

8 December 2011
General Assembly
GA/11190
Department of Public Information • News and Media Division • New York

Sixty-sixth General Assembly

Dialogue on Financing for Development

Round Tables (AM)

Three Panel Discussions, Held in Parallel with the Development Financing Dialogue,

Consider Systemic Reform, Innovative Aid Sources, Resilience of Foreign Investment

Holding a series of expert panel discussions as part of its Fifth High‑Level Dialogue on Financing for Development, the General Assembly today provided space for in‑depth consideration by Government and civil society representatives of key issues such as reform of the international financial system, innovative sources of development aid, and the impact of the financial crises on foreign investment.

Even though the three parallel round tables covered distinct aspects of the financing for development process, the participants broadly supported the aims of the 2002 Monterrey Consensus as the main framework for international development cooperation.  Yet, the Monterrey outcome — and its follow‑up Doha Declaration — was not without its trouble spots and nagging implementation gaps, many of which, the participants said, had been dramatically compounded by the meltdown two years ago of major financial institutions in the United States.  The round tables were held as delegations in the Assembly Hall wrapped a two‑day plenary on the status of the Monterrey Consensus.  (See Press Releases GA/11186 and GA/11189)

As he opened the round table on the impact of the world financial and economic crisis on foreign direct investment (FDI) and other private flows, Lazarous Kapambwe, Permanent Representative of Zambia, and Chair of that discussion, said the crisis, which had eased somewhat, was still impacting private capital flows, trade and external debt, and could have serious consequences for development.  Additionally, both portfolio flows and cross‑border bank lending to developing countries were susceptible to a renewed downturn, owing to problems with economic fundamentals in the world’s leading economies.

Among the panellists, Michael Clark, Inter‑regional Advisor for the United Nations Conference on Trade and Development (UNCTAD) argued that today’s crisis was not the product of the subprime meltdown or the more recent euro crisis, but a single crisis of a global and systemic nature that would not end until its root causes were identified.  Efforts to rebalance the global economy ultimately required a new deal that could “lift all boats”.  People everywhere wanted the same thing:  a decent job, a safe environment, a better future for their children and a responsive Government.  In that respect, a battery of policy measures and institutional reforms at national and international levels that supported rising standards was needed.

Opening the panel on reforming the international financial architecture, its Chairman, Maria Luiza Ribeiro Viotti, Permanent representative of Brazil, said deficiencies in that architecture continued to cause global instability and hamper resource mobilization and crisis resilience in developing countries.  System reform and strengthening was needed to support development, including through better financial regulation and supervision, particularly by introducing the Basel III framework for bank capital and liquidity regulation.  Also, there was a need to tackle sovereign debt issues, provide safety nets, and give developing countries more voice and representation in the Bretton Woods institutions.

Panellist Jose Antonio Ocampo, Professor in Professional Practice in International and Public Affairs at Columbia University, said that while the financial crisis had led to significant advances in global financial regulation, little had been done to improve capital flow management.  Cross‑border finance — a major source of instability for developing countries — had been left out of the big push for better financial regulation.  Overall, the international monetary system, which still depended on a few currencies from industrialized countries, should be gradually reformed to centre on Special Drawing Rights (SDRs), in accordance with the International Monetary Fund’s original Articles of Agreements.

During the day’s final round table discussion, on the role of financial and technical development cooperation, including innovative resources for development, its Chairman Morten Wetland, Permanent Representative of Norway, said the discussions at the Fourth High Level Forum on Aid Effectiveness, held in Busan, Republic of Korea, from 29 November to 1 December, had revealed that the world would fall short of its commitment to meet the goals of the Millennium Declaration by some $300 billion a year.  Official development assistance (ODA) had increased during the two years of the economic and financial crisis, but only marginally.  “Still, the commitments stand and we all have an obligation to deliver on the pledges we have made, sooner rather than later,” he said.

One of the experts, Julien Meimon, Head of the Permanent Secretariat of the Leading Group on Innovative Financing for Development said the idea of innovative financing for development, first discussed at Monterrey in 2002, was seen as a way to redress the limitations of generating traditional ODA and weakness in the global market economy.  Indeed, innovative funding sources aimed to complement ODA and provide more predictable and stable finance bases.  A “menu” of options was now available and several initiatives had been successful in raising more than $5 billion since 2006, including airline ticket taxes, financial transactions tax, lowering remittance costs, and so‑called “debt to health,” or “debt to nature” mechanisms. 

Round Table 1

The round table on “the reform of the international monetary and financial system and its implications for development” was chaired by Maria Luiza Ribeiro Viotti (Brazil), and featured presentations by Jose Antonio Ocampo, Professor, Professional Practice in International and Public Affairs, Colombia University; Elliott Harris, Special Representative of the International Monetary Fund (IMF) to the United Nations; Emmanuel Nnadozie, Director, Economic Development and New Partnership for Africa’s Development (NEPAD) Division, Economic Commission for Africa (ECA); and John Vance Langmore, Representative of the Academic Council of the United Nations System.

Opening the round table, Ms. RIBEIRO said deficiencies in the international monetary and financial system continued to cause global instability and hamper resource mobilization and crisis resilience in developing countries.  More system reform and strengthening was needed to support development, including through better financial regulation and supervision, particularly by introducing the Basel III framework for bank capital and liquidity regulation; stronger early warning and other multilateral surveillance; and bolstered and institutionalized macroeconomic policy coordination.  In addition, there was a need to address sovereign debt issues, provide global and regional financial safety nets, further reform the international reserve system, and give developing countries more voice and representation in international financial institutions.

She encouraged participants to discuss specifically how to accomplish those goals and the United Nations role in doing so.  For example, she asked how the Organization should engage with the G‑20 and other informal groups of limited composition, how to make capital‑account and other policies affecting capital flows more responsive to capital surges and reversals, and whether there should be global rules governing cross‑border flows.  She asked how to bolster multilateral funding for liquidity support and external adjustment, as well as what would be the most feasible alternative reserve currency arrangement and what specific measures were needed to bolster the clout of developing countries and those with economies in transition in global economic decision‑making and norm‑setting. 

Mr. OCAMPO said the financial crisis had led to significant advances in global financial regulation.  Notably, the Financial Stability Board had given developing countries a say in global financial regulation for the first time.  The Basel Committee on Banking Supervision had introduced Basel III, a global framework that strengthened bank capital requirements and introduced bank liquidity and bank leverage regulation requirements.  Advances had been made in the global financial safety net; a few days ago the IMF increased its emergency lending window.  And in 2009, the first real important issuance of SDRs — an international monetary reserve currency created by the IMF to augment global liquidity by supplementing member countries’ standard reserve currencies — was made.  Regional cooperation, such as Asia’s Shanghai Initiative and plans to expand the Latin American Reserve Fund, were also steps in the right direction. 

But little had been achieved to improve capital flow management, he said.  Cross‑border finance — a major source of instability for developing countries — had been left out of the big push for better financial regulation in the last few years.  Earlier in the year, the IMF released cross‑border finance guidelines that were openly criticized by Brazil and other emerging economies.  Later, the G‑20 endorsed improved guidelines.  Some guidelines must exist, but they should be implemented in a way that enabled source countries to openly participate in cross‑border capital flows regulation.  “As long as the US and UK do not participate openly in a framework, there should be no framework,” he said.

Despite advances to address unstable capital flows into emerging economies and sovereign debt issues, the lack of a multilateral mechanism for sovereign debt restructuring was a major obstacle, he said.  The current surveillance system was inequitable for both countries and creditors.  A comprehensive multilateral sovereign debt framework would go a long way towards rectifying that.  Moreover, the international monetary system, which still depended on a few currencies of industrialized countries, should be gradually reformed to centre on SDRs, in accordance with the IMF’s original Articles of Agreements. 

The IMF could eliminate the use of national currencies altogether and fully become an “SDR institution” that used SDRs on a large scale, including for lending, he said.  The problem was that SDRs were underutilized.  As of January 2011, they represented less than 4 per cent of global foreign exchange reserve assets.  In addition, guidelines were needed to eliminate the extreme volatility plaguing major movements of exchange rates of currencies presently in use.

Mr. HARRIS agreed with most of Mr. Ocampo’s comments and noted the IMF’s central role in enhancing the international monetary system’s stability and effectiveness.  The Fund’s just concluded 2011 Triennial Surveillance Review revealed that Government authorities viewed the Fund’s advice during the 2008‑2009 crisis as timely and responsive, but felt that important gaps remained in analysis in several areas.  To remedy that situation, the Fund now was aiming to better integrate key messages for top policymakers through its Consolidated Multilateral Surveillance Report to the International Monetary and Financial Committee, the Fund’s policy advisory arm, as well as implement an action plan for regular analysis in existing and dedicated reports on spillovers and cross‑country flows, more systematic risk analysis in bilateral and multilateral surveillance, and more in‑depth assessments of financial and external stability, among other areas.

Further, the IMF had been working to develop a framework for policy advice to manage capital inflows, with an emphasis on structural measures to enhance States’ capacity to absorb those inflows and strengthen resilience to domestic financial markets, he said.  The recent financial crisis had shown the importance of maintaining adequate reserves to effectively address external shocks.  But the ongoing rapid growth in international reserves illustrated the failure of the global monetary system to resolve imbalances in an orderly, credible way and to create an adequate global financial safety net.  Considerable discussion had taken place over options to slow the growth in demand for reserves and to diversify the supply of safe reserve assets, including through an enhanced role for SDRs. 

The Fund had taken several steps to strengthen global financial safety nets, he said, such as tripling its lending capacity, making a general SDR allocation of $250 billion, as well as introducing a flexible credit line and a precautionary and liquidity line to provide balanced, predictable short‑term liquidity to countries in times of systemic shock.  The IMF was also looking at options to enhance capacity to deal with systemic crises, among them creation of a possible Global Stabilization Mechanism and synergies with regional financial arrangements. 

Mr. NNADOZIE, pointing to major criticisms of the existing international financial system, said Africa’s biggest concern was its lack of voice and representation, notably in the Bretton Woods institutions and the Financial Stability Board, and its need for help in dealing with a crisis it had not created.  African countries wanted to be in position to meet their existing financing for development obligations in terms of debt and trade.  They wanted greater financial services for the poor, more open trade markets and the Doha round of global trade talks to live up to its promise.  Those views had been well articulated at the 2009 G‑20 Summit in London.  The agreement reached at that Summit was a step in the right direction, but the gap between what had been promised and what was being delivered was expanding. 

African countries were concerned that the IMF would continue to impose pro‑cyclical conditions on African borrowers, he said.  The Basel II and Basel III frameworks posed many problems for African nations due to their complexity, compliance cost and implementation capacity, as well as inability of African banks to compete with larger, more established global banks.  There was a real risk of creating a two‑tiered financial jurisdiction with countries whose financial systems met the Financial Stability Board’s regulations and those, among them most African countries, which did not and, as a result, suffered adverse effects on capital flows and banking investments.

In the short term, it was important that Africa be integrated into the reform process as soon as possible, he said.  He called for clarification over accessing the $50 billion set aside at the London Summit for low‑income countries, general capital increases for the African Development Bank, bolstering Africa’s voice in implementing the Basel II capital framework and other prudential regulations, and financial transaction taxes, among other things.  African countries must do their part by putting in place a regional financial architecture to address future financial crises.  To achieve that, they should aggressively regulate and supervise their own financial systems to ensure prudent risk management, improve bank competitiveness, create incentives for sound corporate finance, develop microfinance institutions, and make the African Monetary Fund, the African Investment Bank and the African Central Bank operational.

Also weighing in on the matter, Mr. LANGMORE said the hubris and sense of entitlement among the economically powerful that was generated by the neoliberal economic policies of the 1980s had created mechanisms for rapid growth in inequality, severe financial instability, ecological damage and the entrenchment of a global underclass.  “Radical reform is essential,” he said, calling for a renewed economic paradigm focused on improving individual and national well‑being and restoring a balance between the market and States.  To achieve that, stronger banking regulation was essential, including agreement on international accounting standards and a global review of the role and structure of credit rating agencies.  In addition, retail and investment banking must be treated separately. 

Tax evasion facilitated by banking secrecy could only be addressed through international regulation, he said.  It had become commonplace to blame tax havens in developing countries for such evasion, but it also occurred in developed nations.  That was why reciprocal international agreements on tax secrecy issues, information sharing and decisions that were enforceable by international courts were essential.  Global rules were also necessary to require multinational corporations to publish reports showing their profits and taxes paid in each country in which they operated.  He called for creation of an international tax organization, by upgrading the United Nations Committee of Experts on International Cooperation on Tax Matters into an intergovernmental body, and for an international agreement to strengthen such cooperation.

The G‑20 also needed reform, he said, as it lacked the type of legitimacy required for global consensus building.  Moreover, the Stiglitz Commission on Reform of the International Monetary and Financial System had called for creation of a panel of experts to work towards better global economic policy coordination.  Such a panel could be set up quickly by pooling acknowledged experts from around the world in the same way the Intergovernmental Panel on Climate Change had.  He also backed the Commission’s call for reforming the global reserve system.  The IMF’s $250 billion SDRs issuance was a good start, he said, calling for a steady increase in the number of SDRs.

During the ensuing discussion, participants from Governments, the private sector and civil society alike echoed many of the panellists’ concerns and called for substantial reform of the international financial architecture.  In addition, a representative of the Inter‑Parliamentary Union (IPU) asked the panellists to shed light on the political obstacles to reforming the architecture.

For example, a State Minister from Bangladesh said ordinary people were increasingly realizing that the global system favoured the rich in developed countries at the expense of the developing world.  That frustration and discontent was manifested in the Occupy Wall Street movement and the Arab Spring’s youth uprisings.  He called for a comprehensive overhaul that reflected current realities and ensured the full voice and participation of developing countries in decision‑making and norm‑setting so they could address the cause of their “teeming millions”.  Similarly, the Permanent Observer of the Holy See said the overhaul must be people‑centred and ethical, and usher in a new era of sustainable, balanced economic growth.

The President of Cross‑Border Finance called on all major financial institutions to create an independent function charged with establishing systemic risk management to address and prevent systemic shocks.  A representative of the International Institute of Monetary Transformation, echoing Mr. Langmore’s call for creating a follow‑up Panel of Experts, asked the General Assembly to adopt a resolution to set one up to address monetary transformation, climate issues and sustainable development.

In response, Mr. LANGMORE said the problem was that Governments were too intent on reducing their expenditures and deficits, thus repeating the same mistakes made at the start of the Great Depression.  Instead, they should focus on countercyclical policies that expedited economic growth and revenue expansion such as issuing more SDRs, clamping down on tax evasion, and imposing a financial transaction tax, which in turn would enable Governments to reduce debt.  The problem was that many financial institutions objected to such policies because they threatened the latter’s ability to maximize trading in currency and speculation.

Mr. HARRIS said ample research showed that trickle‑down economics had not worked.  Countries with more equitable income and wealth distribution were able to sustain growth over the long term.  But many Governments had not come to grips with unemployment and were focusing too soon on short‑term fiscal consolidation, which hindered recovery.  Midterm consolidation plans would work only when they were viewed positively by everyone.  But there was a lack of credibility over such policies in many large economies, he said, pointing to the recent failure of the United States Congressional Joint Select Committee, or “Supercommittee”, to reach an agreement on spending cuts and tax increases to trim that country’s deficit.

Mr. NNADOZIE said the United Nations could play a role in addressing the capital flows haemorrhaging out of developing countries through illegal means that dwarfed the $100 billion in annual development aid coming in.  Reform of the international financial architecture must be inclusive and apply history’s lessons.  Had the G‑7 devised the right solutions, there would not have been a need for a G‑20.  IMF reform was very important for the world.  While there was no easy solution to mobilize political support, it was indeed extremely important.

Round Table 2

The morning’s second parallel on “The impact of the world financial and economic crisis on FDI and other private flows, external debt and international trade” was chaired by Lazarous Kapambwe (Zambia).  It featured:  Lawrence Goodman, President of the Center for Financial Stability, Inc.; Daniel Titelman, Director, Financing for Development Division, Economic Commission for Latin America and the Caribbean (ECLAC); and Michael Clark, Interregional Adviser, United Nations Conference on Trade and Development (UNCTAD).

Launching the discussion, Mr. KAPAMBWE said one by‑product of the world financial crisis on developing countries had been a severe contraction in private capital flows and trade.  Although those conditions had subsided somewhat, the crisis continued to impact on private capital flows, trade and external debt, and could have serious consequences for development.  Although net private capital flows to developing countries was up about $90 billion in 2011 from 2010 levels, they suffered a strong setback in the third quarter this year due to sharp deterioration in global financial markets.

The financial crisis had also negatively impacted FDI, which was a major component of private capital flows to developing countries.  While also somewhat recovered, foreign investment could be adversely affected in the event of a new slowdown in the global economy.  Additionally, both portfolio flows and cross‑border bank lending to developing countries were susceptible to a renewed downturn, owing to problems with economic fundamentals in leading economies.

He also stressed that the effectiveness of debt sustainability frameworks needed to be re‑examined through further work at the inter‑agency level.  Finally, the global crisis had distracted some of the attention of policymakers from the Doha Round of multilateral trade negotiations.  But it was imperative for countries to arrive at a successful and development‑oriented conclusion to the round.

First among the discussants, Mr. GOODMAN underlined the interplay between advanced economies and emerging markets, and stressed that the global crisis had demonstrated that economies and financial markets were now more highly interconnected than ever.  That interconnectedness had not caused the crisis, but it did play a role in understanding where to go now.  While the future for emerging markets was extremely bright, officials must take note that portfolio managers increasingly took their decisions on the basis of Government policy.  Thus, fiscal and monetary policies mattered.  Moreover, communication strategies of policy and plans were pivotal.

Outlining the crisis, which he said was man‑made, as well as the recovery, he suggested that although public spending had propped up demand in many nations, limits would soon be reached and markets would increasingly scrutinize both sovereign balance sheets and income statements.  Public spending limits would, in turn, impact the Millennium Development Goals.  Nations, therefore, should think creatively about how to engage the private sector.  At the same time, sovereign credit crises and foreign exchange volatility should be seen as opposite sides of the same coin.

Underscoring the balance between fiscal stimulus and the capacity of economies to expand, he said debt management strategy was critical for all countries.  Today, it was clear that fundamentals — math, actually — must be the focus, rather than rhetoric.  To that end, he argued for a new strategy, which, among other things, restored long‑term economic growth and identified sustainable levels of debt.

Since 2002, the world had seen a long‑term bull market for commodities, he said.  There was strong demand for food and better food.  Shifting weather patterns had clearly impacted commodity prices, but monetary policy had, too.  When the three major Central Banks engaged in a major monetary stance, there was a sympathetic impact on commodity markets.  In other areas, gross domestic product (GDP) had doubled between 2004 and 2008 in the 24 largest emerging economies.  Moreover, they had lost only $0.6 trillion during the crisis and, in the last two years, had recorded gains of several trillion — $3.2 and $2 trillion in each respective year.  In that context, he underlined a growing interest in emerging economies, including by multinational corporations around the world, with a huge shift towards more investment.

Focusing on the dynamics of capital and trade flows in Latin America and the Caribbean, Mr. TITELMAN said that some of the factors that explained the behaviour of financial flows at the start of the crisis in 2008 had never changed, while others were back.  Among other things, changes in global risk aversion had increased volatility and there was greater uncertainty about the future economic conditions of both the global economy and the Latin American region.

In terms of capital flows to Latin America, he said portfolio flows had dropped in 2008, but had recovered in 2009 and 2010.  FDI had dropped in 2009, but had recovered in 2010.  Both stood at roughly 2.3 per cent of GDP in 2010.  That was significant because, among other things, portfolio flows were more volatile and linked to speculative issues.  Thus, they introduced volatility, which negatively impacted development.  Currently, there was a strong debate regionally and globally on how to manage capital controls, and Governments must be alert to how the flows translated into domestic aggregate demand.  At the same time, it remained to be seen how the recent deterioration in outlook in developed economies, particularly in Europe, would impact capital flows.

In other areas, he said remittances to Latin America had been decreasing as a share of the region’s GDP since 2005, and in 2010, stood at 2.2 per cent.  ODA flows as a per cent of the region’s GDP had also shown declining trends and now stood at 0.22 per cent, which was almost 0.3 percentage points lower than in 1990.  Trade flows had recovered vigorously in 2010 and 2011, and the future performance of trade in the region would be determined by what unfolded in the developed economies and on external demand for commodities from China.  Moreover, with global uncertainty mounting in recent months, downside risks had increased, forcing growth prospects to be revised downwards.  While inflation was less of an issue, appreciation pressures remained a problem in some cases.  Meanwhile, volatility had increased and become generalized. 

Mr. CLARK said UNCTAD was preparing for its quadrennial reconvening, as UNCTAD XIII.  It would be the first meeting since the open outbreak of the global financial crisis in September 2008.  In UNCTAD’s analysis, that crisis was likely to end in one of two ways:  either by natural or market forces — which were likely to visit far more disruption, dislocation and misery than had yet been seen — or by a determined and concerted effort of developed and developing countries working together to stem the downward spiral caused by progressively shrinking investment, rising unemployment, stalling growth and the Hobson’s choice between public debt and self‑defeating fiscal austerity.

He argued that today’s crisis was not the product of the subprime crisis or the euro crisis, but a single crisis of a global and systemic nature that would not end until its root causes were identified.  Efforts to rebalance the global economy ultimately required a new global deal that could “lift all boats”.  People everywhere wanted the same thing:  a decent job, a secure home, a safe environment, a better future for their children and a responsive Government.  In that respect, a battery of policy measures and institutional reforms at national and international levels that supported rising standards was needed.  Policymakers must work urgently to fashion the appropriate mixture of measures to achieve that goal.

To attain development‑led globalization, three fundamental tasks must be undertaken, he said.  First, the financial system must be reformed to provide security for people’s savings, to mobilize resources for productive investment, to replace unruly pro‑cyclical, capital flows with predictable long‑term development financing and to regain stability in currency markets, among other things.  Regulation must also be strengthened at all levels.  Second, investment must be revitalized to increase productive capacities, thereby putting the world economy on the path to growth.  In that context, financial and other resources must be channelled towards the right kind of productive activities.  Third, the now‑defunct, post‑Second World War social contract must be replaced with a more durable, although more flexible and globalized, social contract.

In that context, he suggested that an inclusive development agenda could not depend on economic policies alone.  A balanced economy necessitated a strong social compact, which, in turn, required universal and integrated social policies, tailored to specific circumstances, to ensure that benefits sought were widely enjoyed and risks were fairly shared.  Ultimately, the answer to economic orthodoxy was pragmatism, not an alternative orthodoxy.  In that regard, there were hard questions to answer about whether current international arrangements could help to build socially inclusive alternatives to finance‑driven globalization and what kind of governance structure could support development‑centred globalization.

During the ensuing discussion, Singapore’s representative said that the fairly severe austerity measures being taken by some countries in response to the global crisis must be complemented by measures to spur growth, since growth was vital for recovery.  A representative of the business sector said the world needed more centres of outward growth production, which would allow the chance for other countries to run at “full steam”.  Referring to panellists’ comments on the connections between public policy and financial markets, Ecuador’s delegate said it was necessary to investigate the correlative — namely, the impact of financial markets on public policy. 

Pointing out that trade, FDI and other capital flows had grown so quickly that they now overshadowed ODA, the representative of the United States said it was important to explore how the growth patterns seen in middle‑income countries could be replicated for the least developed countries, which continued to rely on ODA.  Moreover, developing countries’ share of world trade was increasing and spoke to the growing importance of developing countries to each other.  He wondered how the financing for development process could be adjusted to better include developing countries.

A number of speakers zeroed in on the call for a new global social contract.  Germany ’s representative asked how the sequencing would work in fashioning such a contract in terms of the national and international levels.  Also, what role would the United Nations play?  A representative of civil society, who noted he had recently met with protesters from the Occupy Wall Street movement, said that to rebuild any broken relationship, truth‑telling was key.  Moreover, it was critical to review why the former — and farcical — social contract had failed.

Noting that as North‑South capital flows shifted, the so‑called BRICS ( Brazil, Russia, India, China and South Africa) were increasingly supplying commodities, a representative of civil society underscored the impact of those changes on women.  She wondered how to assess that impact and adjust policies accordingly.  Also, could financial regulations be adjusted through human rights frameworks?

Responding, Mr. GOODMAN said that as capital flowed into frontier markets, it was clear that the private sector could supplement ODA.  But in that context, communication was particularly important.  He agreed that more centres of gravity were needed.  Fortunately, his modelling showed that regional hubs were materializing.  He expected the trend for investment in emerging markets to continue in countries with strong policies.

He said that as the world worked to address the global crisis, Governments needed to play an important and meaningful role in that effort.  But it was clear that they did not always have the answers and that their policies could have unintended consequences.  For example, United States’ policy had been to put people in homes.  But that clearly had contributed to the magnitude of the crisis.  Also, the near‑zero interest rates pursued by the United States were currently encouraging retirees and other savers to make riskier investments.

Mr. TITELMAN said having access to foreign savings was very good, but the way to use those funds for development was not always clear.  Currently the banking systems in Latin America were financing public debt and consumption, not productive sectors, and how to move in that direction was a critical question.

He underlined China’s role in South‑South cooperation, noting that it had become the “first trader” in the Latin American region with a particular focus on commodities.  However, it was essential to recognize that strong economies were diversified economies and regional trading dynamics must be further investigated.  Data indicated that infrastructure was a large driver of regional trading and if it was easier to put your product in Asia, rather than to move it to a neighbouring Latin American country, there were clear gaps.

Mr. CLARK said the last 10 years for least developed countries, particularly in Africa, were, from one perspective, the best that could be seen.  But while trade and FDI in Africa had increased, many of its economies had not enjoyed structural diversification and, in some cases, had even seen “de‑industrialization”.  Moreover, there had been significant profit repatriation — meaning African countries were not benefiting from investments. 

There was strong evidence that the way globalization had worked was not necessarily good, he continued.  In fact, it was clear that there was “good” FDI and “bad”.  The latter simply replaced what existed, reduced diversification, distorted internal economics and substituted bank lending for other types of banking activities.  The criticism of finance‑led growth was that it substituted the purely financial criteria of foreign investors for the necessary decisions of national Governments vis‑à‑vis their people.  That was the “paradox of sovereignty”, that the decision‑making remained at the level of the nation State.  But in the world of the future, the math could not be tackled just on that level.  He believed finance‑led globalization needed to be rethought.

Round Table 3

The High‑level Dialogue also held an interactive discussion on “The role of financial and technical development cooperation, including innovative sources of development finance, in leveraging the mobilization of domestic and international financial resources for development”.

The discussion was Chaired by Morten Wetland, Permanent Representative of Norway to the United Nations, and featured presentations by Julien Meimon, Head of the permanent Secretariat of the Leading Group on Innovative Financing for Development; Ekaterina Gratcheva, lead Financial Officer, Banking and Debt Management at the World Bank; Abdallah Al Dardari, Director of the Economic Development and Globalization Division, United Nations Economic and Social Commission for Western Asia (ESCWA); and Renate Hahlen, Deputy Head, Unit A3 on Coherence of European Union Polices for Development and European Union Aid Effectiveness, European Commission.

Opening the dialogue, Mr. WETLAND said the discussions at the Fourth High‑Level Forum on Aid Effectiveness, held in Busan, Republic of Korea, from 29 November to 1 December, had revealed that the world would fall short of its commitment to meet the goals of the Millennium Declaration by some $300 billion a year.  ODA had increased during the two years of the economic and financial crisis, but only marginally.

“Still, the commitments stand and we all have an obligation to deliver on the pledges we have made, sooner rather than later,” he said, noting that Norway had exceeded the 0.7 per cent mark for ODA a few years ago.  “This issue is not going away,” he continued, adding that the Busan meeting had not only reaffirmed the need to meet agreed ODA commitments, but also to enhance tax structures and, importantly, reduce corruption and other illegal outflows of capital.

In many countries, such illicit outflows were many times what was being invested or provided through international development assistance.  He also noted the rising importance of innovative financing mechanisms, as discussions were under way on such measures as tobacco taxation, airline ticket taxes, and financial or currency transaction tax, which alone had the potential to raise between $30 billion to 40 billion a year for development.

The first expert, Mr. MEIMON, said the idea of innovative financing for development, first discussed at Monterrey in 2002, was seen as a way to redress the limitations of generating traditional ODA and weakness in the global market economy.  Indeed, innovative funding sources aimed to complement ODA and provide more predictable and stable finance bases.

He said that a “menu of options” was available and several initiatives had been successful in raising more than $5 billion since 2006, including tax incentives, airline ticket taxes, lowering remittance costs, and so called “debt‑to‑health,” or “debt‑to‑nature” mechanisms.  With the idea of an innovative financing mechanism gaining traction, he said:  “We need civil society and other non‑governmental organizations to join this movement”.

Next, Ms. GRATCHEVA, using a PowerPoint presentation, discussed the World Bank’s work to improve access to development financing through sovereign risk management.  She said that if one read the headlines very closely, it would be clear that the world had changed dramatically in the last decade; developed countries’ lagging economies and subsequent fiscal austerity measures had seriously impacted donor resources.  Developing countries had substantially increased their integration into global financial markets and improved their sovereign banking sheets.  So, with the developing world now better able to take advantage of even small improvements in the global economy, the World Bank’s focus on risk management aimed to ensure that sovereign resources were protected against future shocks and rapid implementation once funding sources were identified.

As an example of such work, she noted that Malawi had asked the Bank for help in outlining its strategy to deal with droughts or other extreme weather events, and ultimately, to reduce the country’s dependence on outside funding sources.  Malawi — landlocked and prone to recurrent droughts, which impacted maize production and heightened food insecurity — was searching for a way to cope with unpredictable or ill‑timed donor assistance; such assistance often arrived too late to help alleviate the immediate negative effects of drought.  The country needed to access funds quickly in the event of a severe and catastrophic drought, thus reducing dependence on humanitarian appeals.  The Bank responded by helping the Government transfer a portion of the risk of severe drought to the international financial market, using weather derivatives.  If a severe and catastrophic drought hit, Malawi would receive funds from the weather derivatives within days.

Ms. HAHLEN said collective ODA from the European Union had increased during the years preceding the economic and financial crisis and the Union’s leaders had recently recommitted to reaching agreed targets by 2015.  It was also the only bloc that was set to meet its promise to the least developed countries.  The European Commission had recently launched an “Agenda for Change”, which would focus on poor countries wherein the European Union aid packages would have the most impact.  The proposals confirmed a focus on regions and countries most in need, including those in fragile situations.  There would also be a focus on mutual benefit, rather than solely on traditional development cooperation.

As for innovative financing sources and mechanisms, she said that such mechanisms complemented other financing sources.  In that regard, the European Union had recently proposed a financial transaction tax as a way to mobilize new funds for tackling emerging development challenges such as climate change.  The European Union was also looking to widen the base of participants in such schemes, including private sector actors and non‑governmental organizations.

Finally, Mr. AL DARDARI said that while he did not know much about innovative financing, he would share some of the efforts of the Economic and Social Commission for Western Asia (ESCWA) to promote and support inter‑Arab and interregional cooperation for development, which might be helpful for the rest of the world.  The move towards such initiatives, which focused on, among others, using oil revenues for human and sustainable development, had been initiated following ESCWA’s examination of the socio‑economic and political tensions exposed during the “Arab Spring” movements of the past 10 months.

Further, ESCWA had estimated that, as prices stabilised and domestic use decreased, baseline growth in oil‑producing countries would stagnate in the 2020‑2025 period — a trend that would certainly affect growth in such countries.  He said that oil‑extracting or oil‑exporting economies were not currently set up to cope with that trend and the impact on labour demand and job creation would be serious.  So, there would be a need to put plans and programmes in place that would shift the region’s “rent‑based” economies — which were traditionally weak employment‑generators — to more knowledge‑based scenarios driven and supported by better management of resources, regional integration and effective ODA.

He went on to say that the Arab region must also move quickly to redress its unproductive and inefficient banking and financial structures.  Indeed, there was currently some $400 billion “sitting around in banks doing nothing”, much of it actually sitting in what were considered least developed and middle‑income countries.  Yet, with minimal financial innovation, that money could virtually transform human development in the region.  Innovative fiscal and monetary policies could, for example, channel those resources to small business or research and development institutions.

He believed that innovative banking, supported by ODA, would result in the attainment of all Millennium Development Goals in all Arab countries and ensure that, beyond 2015, the region could achieve its financial and human resource potential.  “It has become clear by what is happening in the streets and villages in the Arab world that people will not stand for using resources the way they have been for years,” he said finally.

During the ensuring interactive discussion, a civil society representative said that Monterrey had taken the lead in engaging the private sector in the development financing process.  In the changed international environment, Governments should work more closely with that sector to develop small- and medium‑sized business and ensure competitive domestic markets.  Another civil society representative said that innovative financial mechanisms must be bolstered to counter the negative impacts of corruption, capital flight and tax evasion.  She urged Governments to seriously consider taxing arms trade and currency transactions.

While several speakers expressed support for innovative financing mechanisms, particularly financial transaction taxes, a representative from Bangladesh warned everyone to be very careful, lest attention be shifted from the ODA commitments that had been agreed at Monterrey.  Indeed, the pledge to commit 0.7 per cent of GDP for development assistance must be paid in full, and any innovative measures to generate resources must be complementary.  Similarly, the representative of Egypt stressed that while innovative funding sources could certainly fill resource gaps, there must be broad agreement on what those innovative mechanisms actually were.  They must also be based on the priorities set by developing countries.

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