- Seminar on GDP-indexed Bonds: “Making it Happen” (New York, 25 October 2005)
- Seminar on GDP-Indexed Bonds: “An idea whose time has come” (Washington, D.C., April 21, 2006)
A major source of concern for developing countries and the international community has been excessive volatility and reversibility of private capital flows. This has been a cause of frequent and, developmentally, very costly currency crises because it has implied major declines in output and investment. Work by Professor Stephany Griffith-Jones and Ricardo Gottschalk from the University of Sussex has estimated that in recent years, these crises have cost $150 billion annually in lost gross domestic product (GDP).
After the Asian crisis in 1997, the international community has been focusing on measures to make such crises less likely. There has been increasing emphasis on the need for different counter-cyclical instruments, both public and market-based, that would help smooth private capital flows so they can better support – and not undermine – development. More precisely, such instruments could help avoid costly crises, as well as smoothing public expenditure over time by either providing additional international public lending or reduced private debt servicing, so that governments can maintain spending in less prosperous times. Both would have especially beneficial effects for poverty reduction, as the poor are particularly vulnerable in times of financial crises, and government spending cuts usually affect social spending. One such valuable counter-cyclical instrument that could promote smoother private flows are GDP-linked bonds. The advantage of these is that the servicing of them would be higher in times of rapid growth, and fall when growth declined, which would mean that debt crises would be less likely, and output – as well as employment – less volatile.
The Financing for Development Office of DESA has, in collaboration with UNDP, the G-24, senior figures from the private sector and think-tanks, been undertaking research and consultations to analyze the use of this instrument. A meeting was recently organized in Washington at the spring meetings of the IMF and World Bank on GDP-linked bonds, with speakers including finance ministers from Chile and South Africa, leading academics such as Robert Shiller and John Williamson, senior market participants and representatives of the multilateral banks and IMF. This meeting was a follow-up to another highly successful event that was held at the United Nations Headquarters in New York in October 2005. Both meetings broadly endorsed the advantages of such instruments and outlined next steps for the challenging task of implementation, which is likely to require a greater role for the Multilateral Development Banks. As UN Under-Secretary General, Jose Antonio Ocampo, pointed out, the World Bank could, for example, make loans whose servicing would be linked to GDP. The loans could then be grouped, securitised and sold to the private financial markets.
The critical issues that have been explored and the findings of the meetings in New York and Washington are contained in the reports above and in the background paper titled “GDP Indexed Bonds: Making it Happen”.