World economic situation and prospects
The current outlook for the world economy is grim, probablycloser to the pessimistic scenario outlined in the UnitedNations’ World Economic Situation and Prospects 2008: growthof the world economy is expected to drop significantly from the 3.7 percent of 2007 to below 2 per cent in 2008.
The U.S. housing slump has spread to the U.S. economy atlarge, leading to declines in employment, industrial production, retailsales, and consumer sentiment. While an outright contraction of U.S.GDP in 2008 is likely, there is also concern that the slowdown willextend into 2009. While slowdowns in the developed economies of WesternEurope and Japan are already evident, more spill-over effects from theU.S. slowdown are expected to become manifest in other economiesworldwide via international linkages of trade and finance. While thenature of the world economy and the sources of economic growth havechanged significantly in recent years, the optimistic case, based onthe ‘decoupling’ thesis, remains unpersuasive.Nevertheless, there are grounds for confidence in the underlyingeconomic strength of the real economy, which could provide the basesfor recovery if other conditions become more conducive.
The fastest growing developing countries and economies intransition will not be immune to the US slowdown, even though they aremore capable of absorbing external shocks, thanks to their improvedeconomic conditions and considerable accumulation of foreign exchangereserves. The simultaneous sell-off in the equity markets of emergingeconomies in early 2008 may signal a reversal of the capital inflows tothese markets; such a trend may intensify if the financial strains indeveloped markets get worse. The sharp decline of commodity prices bynearly ten per cent over a few days in mid-March 2008 – thelargest percentage decline in two decades – serves as analarming reminder of the vulnerability of many developing countrieswhose growth rates largely depend on the exports of commodities.
International Cooperation to Sustain Global Growth and toRegulate Finance
Policymakers in developed and developing countries face thechallenge of attempting to moderate the depth of the global slowdownand to safeguard economic development efforts amidst an economic slumpand continued financial turmoil in the developed economies. As noted inprevious UNDESA statements, while a global slowdown cannot be avoidedbecause of the weight of the US economy, early resolution of thefinancial crisis and rebalancing of global demand will reduce itsnegative impacts. Emerging economies with large export surpluses canboost domestic demand while allowing a measured appreciation of theirexchange rates and without jeopardizing the sources of their growth.
Central banks of major developed economies have adoptedsignificant measures to contain the financial turmoil, including acombination of substantial reductions of policy interest rates and fulluse of monetary resources, as in the case of the US FederalReserve’s recent intervention to arrange for a rescue of amajor investment bank. With banks increasingly unwilling to lend orpass on lower interest rates, it appears that monetary policy optionsare constrained. Fiscal policies, to sustain output and employment, arealready beginning to be deployed.
International cooperation should also be extended to ensurethat the economic slowdown does not slow progress towards achieving theinternationally agreed development goals, including the MillenniumDevelopment Goals (MDGs). Sustaining growth in the developing countriesis a clear priority and is also consistent with rebalancing globaldemand.
Protecting low-income countries from external economic shocks,including the recent increases in food prices – such asthrough improved compensatory financing mechanisms that can provideresources quickly or new ones where gaps exist – is an urgentpriority. Existing compensatory facilities do not provide sufficientresources relative to the shock and have high conditionality, whichlimits their effectiveness for events beyond the control of theaffected country. Because of high conditionality, countries haveresponded to shocks by tightening fiscal and monetary policy, therebyundermining their own reform processes, instead of attempting to accessthese official facilities.
The transformation of the mortgage market collapse in onecountry into a multi-country financial crisis highlights theinter-related nature of national financial systems, includingregulatory policies and standards. International cooperation isrequired in setting standards and improving regulation. More intrusiveand stricter regulation and standards in one national jurisdictionwould give undue advantages to competitors based in otherjurisdictions. However, with globalized financial markets, theactivities of less regulated competitors are no longer confined totheir home markets and threaten to undermine stability elsewhere.
Many regulatory standards, such as Basle II on capitaladequacy of banking institutions, have been designed with littleparticipation by developing countries; they are not adequately suitedto the institutional realities of these countries and rarely designedto promote development financing. These standards determine the accessthat developing countries have to international finance. Developingcountries need to become full participants in the regulatory policysetting, if only to protect themselves from the harmful effects ofexternal financial developments, as in the current situation.
Voice and Representation in the Bretton Woods Institutions
The IMF Executive Board has recommended to the Board ofGovernors the adoption of the staff proposal on a second-round of adhoc quota increases of close to ten per cent. Basic votes will betripled, partly offsetting their decline in total voting power. Therealignment of quota and voting shares will lead to a net increase of 2.7 percentage points in the voting share of emerging markets and otherdeveloping countries as a whole. This is a very modest change achieveddue to the use of a compression factor; the willingness of severaladvanced countries to forego part of the quota increases for which theyare eligible; and the application, to several emerging market anddeveloping countries, of a greater weight to the PPP GDP measure thanfor other countries.
These ad hoc adjustments suggest that the new formula per sehas not achieved the stated goal of providing a simpler and moretransparent means of reflecting members’ relative positionsin the global economy. At this critical time of global financialcrises, and with the legitimacy and relevance of the Fund at stake, theproposed reform is too modest to provide real impetus to the ability ofthe Fund to play a significant role in international monetary andfinancial matters.
The World Bank has also launched its own process of voice andparticipation reform. The outcome of the Fund’s quota andvoice reform is likely to exert a strong influence on the direction ofthe Bank’s actions. It should be recognized, however, thatthe Bank has a manifestly different mandate so that, followingprecedents set in other development financing institutions, it canconsider voting weights of at least fifty per cent for the main usersof its funds, that is, for its developing country members.
Doha Conference to Review the Monterrey Consensus
The international discussions in anticipation of the Monterreyreview conference scheduled to be held in Doha, Qatar from 29 Novemberto 2 December 2008 have attracted strong participation by Member Statesof the United Nations. The ongoing global financial crisis and the listof unresolved questions in external debt, private capital flows,domestic resource mobilization, and systemic issues have mobilizednumerous experts and elicited a variety of suggestions from membergovernments. We are grateful for the strong participation of theinternational financial institutions in these discussions and lookforward to a successful outcome in Doha.
The Doha review of implementation of the Monterrey Consensusprovides an opportunity to update the parameters of the Consensus inthe context of both obstacles encountered thus far and profoundstructural changes in the world situation. Since 2002, many developingcountries have improved their macroeconomic management and fiscalbalances, and have developed their financial sectors. The currentfinancial crisis suggests that, while developing countries have shownsignificant progress in meeting their commitments, instabilities andweaknesses in the international financial system have not beenaddressed adequately. Inadequate regulatory approaches in the developedcountries continue to threaten sudden stoppages to developmentfinancing. If the international financial system is unable to providestable financing, it should at least “do no harm”to the efforts of developing countries to develop their own financialcapabilities. In another part of the Monterrey Consensus, developedcountries are not on track in meeting their promises on increasingofficial development aid. In the case of trade, the Doha round ofnegotiations is behind schedule and mired in disagreement over whetherwhat is stake is truly developmental.