New Governance Regime under Way, Experts Say as Second Committee Holds Panel Discussion on Revitalizing Global Financial System

30 October 2009

New Governance Regime under Way, Experts Say as Second Committee Holds Panel Discussion on Revitalizing Global Financial System

30 October 2009
General Assembly
Department of Public Information • News and Media Division • New York

Sixty-fourth General Assembly

Second Committee

Panel Discussion (AM)

New Governance Regime under Way, Experts Say as Second Committee Holds

Panel Discussion on Revitalizing Global Financial System


In the wake of the economic crisis, a “new regime” of governance was under way in the global financial system, several experts told the Second Committee (Economic and Financial) this afternoon during a panel discussion on “Revitalizing the international financial system”.

Ranjit Teja, Deputy Director of the Strategy, Policy and Review Department at the International Monetary Fund (IMF), said there had already been an important shift away from dominance by a few developed economies towards increased international cooperation.  In the last six months, the Fund had tripled its lending capacity and been able to supply “adrenaline to the heart” of the global economy.

With the IMF already in the middle of major reform, the institution would look quite different a year from now, he predicted, noting, however, that the appropriate size of the Fund was an open question.  Going forward, one major issue that must be resolved was whether cooperation would take the form of a “super-national” entity or remain within a fundamentally national framework.  “My own view is that if you’re going to have a global crisis, and you need to respond to it globally, ideally you need a super-national organization,” he said, adding, however, that he did not believe individual countries were ready to cede the sovereignty needed to create a truly global regulator.

Turning to the issue of a global currency, he said that for the main part countries held United States dollars in their currency reserves and the dollar had become the de facto global currency because that was what people and markets wanted.  Although the dollar’s reputation had been “dented” because of the crisis, it was still widely trusted.  A formal move to a new global currency was not necessary as such a transition would happen organically, if it was needed.  However, an important element of international monetary reform was to establish what kind of alternatives could be provided for excessive reserve accumulation.

Jeffrey Lewis, Senior Adviser and Head of the World Bank’s International Policy and Partnership Group, Poverty Reduction and Economic Management Network, said the global economy had been hit by three consecutive and overlapping crises: fuel and food price shocks, the financial crisis originating in advanced economies, notably the United States, and the global economic recession.  All countries were affected, but to varying degrees and through different channels.  “We cannot simply search for a single option or solution.  We have to embrace this diversity,” he stressed.

The crisis had humbled the economics profession and forced policymakers and the broader public out of their comfort zone, challenging conventional wisdom, he said.  “We’ve had to acknowledge the fact that we didn’t see it coming, by and large, and that there weren’t mechanisms to act on it.”  The crisis had revealed many weaknesses in the system - notably that private sector credit-fuelled deficits had created enormous imbalances, forcing the public sector, where the crisis had not originated, to come to the rescue.  It had also revealed the vulnerability of middle- and low-income countries when access to finance was weakened, as well as their difficulty in mobilizing adequate financial aid on appropriate terms that could be rapidly disbursed to support counter-cyclical fiscal policies.

Mechanisms to help bridge gaps in private-sector financing were needed to keep infrastructure projects going, ensure microfinance lending and recapitalize distressed banks, he continued.  The unprecedented nature and scope of the current crisis required new approaches to support the private sector in restoring trade finance, collecting data on it, expanding the capacity of developing-country export credit agencies, and supporting a rules-based system to prevent protectionist measures.  Furthermore, it was important to support counter-cyclical fiscal policy, he said, adding that few low-income countries had the fiscal space for counter-cyclical spending.  On the contrary, countries without well-targeted social safety nets entered subsequent crises while fiscally and externally weakened.

Going forward, it was crucial to equip multilateral development banks over the medium-term in advance of future crises, he emphasized.  That was needed so they could better protect existing infrastructure and the debt sustainability of developing countries, prevent the rollback of poverty-reduction gains, minimize future demands on aid budgets during crises, help restore countries to pre-crisis growth paths, and manage an exit from crisis spending and borrowing in all countries.

Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development in the United Nations Department of Economic and Social Affairs, agreed on the need for systemic reform of the international financial architecture to ensure a developmental and inclusive financial system.  It was also crucial to align the policies of the IMF and World Bank with the United Nations development agenda and with the internationally agreed development goals so as to ensure policy coherence.  Financial globalization over the last decade had not led to growth, but it had promoted instability, he said, pointing out that developing countries had been innocent victims, while policy responses by international organizations to help them were inadequate and characterized by double standards.

The international financial system had changed and become very vulnerable over time, he said, noting that derivatives –- the risky financial instruments deemed responsible for much of the recent global financial collapse –- accounted for 78 per cent of the financial system, while securitized debt was just 11 per cent of the total and broad money only 10 per cent.  Proponents of capital account liberalization argued that it would create an uphill flow of funds to the poor, but the reality was that less than 20 per cent of net capital funds had gone to developing countries, while short-term capital inflows were not making any real contribution to investment or growth rates.  Instead they had created asset price bubbles, cheaper finance for consumption binges, and over-investment, leading to excess capacity –- factors which exacerbated instability.

While developing countries had not been involved in the sub-prime mortgage debacle, he said, the financial crisis had caused their stock markets to collapse, foreign direct investment to drop, borrowing costs to increase and foreign reserves to evaporate with the decline in exports.  The crisis had spread from the financial sector to the real economy, resulting in less investment and consumption.  Predicting a decline in the incomes of 60 developing countries in 2009, he said official development assistance (ODA) aimed at fostering growth in those nations was inadequate.  The $26 billion in ODA for Africa in 2008 was miniscule compared to the $20 trillion that the G-20 had recently committed for recovery efforts.

Furthermore, net ODA was the net of principal payments, but not of the interest received on such loans, he continued.  For example, in 2003, the Democratic Republic of the Congo had received $5.4 billion but only $400 million in net aid transfer.  Remittances to developing countries, which historically grew during times of crisis, were declining as migrant workers in host countries lost their jobs.  The International Labour Organization (ILO) estimated that the crisis would throw 51 million more people out of work.

During the ensuing question-and-answer session, several representatives expressed frustration with the fact that that poor countries had been the hardest hit by an economic crisis not of their making, as one delegate asked how global decision-making on the international financial system could become more inclusive.

In response, Mr. Jomo agreed that the Bretton Woods institutions were compromised by governance inequity, saying that Member States must develop an integrated international financial system that was more coherent and accountable.  Responding to a question about the best relationship between the financial sector and the real economy, he said there were no easy answers and that, to some extent, it was a political question rather than an economic one.  He added, however, that regulatory responses had been effective in past crises.

Mr. Teja pointed out that the bulk of the current debate concerned the “tremendous” bailout of the financial industry and that, in the future, such insurance could be financed by levies on the financial sector, rather than by raising general taxes.  Reiterating an earlier point about governance, he said that if an organization was too large to be effective, or too small to be seen as legitimate, it would eventually be displaced by a new structure.

In response to a question about the North’s moral obligation to give aid to offset the most damaging effects of the crisis, particularly in countries that had not caused it, Mr. Lewis said it also made sense for the North to assist those countries out of self-interest.  Middle-income countries, as well as a range of low-income ones, had been engines of economic growth prior to the crisis, and they must be “recharged” in order to restore good global economic health.

Responding to a question about the composition of the G-20, he said it comprised much more than 20 countries and had an increasing tendency to include other organizations that had some representation or legitimacy, such as the Association of South-East Asian Nations (ASEAN) and the African Union.  He voiced support for proposals to make the G-20 process more flexible.  As for the G-20’s influence on the Bretton Woods institutions, he said while it was not included in the governance structure of those institutions, its membership did represent 85 per cent of global gross domestic product and a large percentage of the voting power and shares of the World Bank and IMF.

Introducing the experts at the outset, Committee Chairperson Park In-kook ( Republic of Korea) said the economic crisis highlighted structural problems in the international financial system, and coordinated international measures in the form of expanded regulation, strengthened capital and risk management.  He also highlighted the need to reform executive compensation.

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