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Towards a World Financial Organisation

By Supachai Panitchpakdi*)

The forthcoming Doha conference on Financing for Development (20 Nobember - 2 December) is presented with what might be called a "double whammy": Not only must the Monterrey process deliver on its MDG-linked commitments as elaborated in 2002 – already an uncertain affair before 2008 – but it must do so in an international economic environment still shaking from a considerable shock to its economic and ideological fundamentals.

 

Indeed, the needs for development finance have only increased with the triple crises and impending climate change. And the ready availability of phenomenal sums for bail-outs and stimulus packages make it hard to understand why resources should suddenly be so scarce when it comes to giving development assistance. As Jeffrey Sachs has rightly pointed out, Europe and the US have mobilized around $3trillion in the past month in guarantees and bailout funds for banks, but failed to mobilize even one ten-thousandth of that this year to help the world´s poorest grow more food – and this in the midst of a food and hunger crisis. This is unacceptable, and Doha must send a strong signal to that effect.

* A systemic failure

However, the Doha conference should also go beyond that, and discuss the implications of the current crisis, and begin a process of identifying systemic remedies, including a new global financial architecture. After all, what lies at the origin of this crisis is the failure of unregulated financial markets to adequately judge risk and deliver a sound allocation of resources. And this is not the first time we are seeing this. It is a systemic failure.

The responses to the crisis so far have largely been limited to necessary fire-fighting, by recapitalising weakened financial intermediation institutions, reducing volatility in financial and currency markets and reigniting consumer and homeowner confidence. Meanwhile, international official creditors, led by the IMF and capital surplus countries, have moved to make resources available for payments stabilisation operations in several important deficit economies. These measures are necessary and to be welcomed. But we also need to address the root-causes of the crisis.

In two days, the Secretary-General of the UN will join the Group of 20 and the executive heads of the other concerned international institutions, to launch what can only be the beginning of a process of reflection to generate bold ideas for action to get us out of this crisis and prevent a recurrence. Even in Washington and Wall Street, where much of the blame for this crisis is being directed, there is now recognition that there is a need for reform in the global financial system and that nobody has a monopoly on ideas. All of this bodes well for a constructive and cooperative spirit to prevail at Doha.

* Doha should bring a revival of UN role

The global response to the financial crisis cannot be de-linked or treated in isolation from the persistent, if not growing, need to ensure finance for development. The crisis has revealed the need for thinking outside the usual confines imposed by "accepted" or conventional wisdom, as conventional wisdom has repeatedly led to financial meltdown. As indicated in the UNCTAD Issues note, there is a particular need for fresh thinking also on the systemic issues, addressed in Chapter 6 of Monterrey. Many pundits are now highlighting the need for a new institutional architecture for global finance, involving varying degrees of inclusiveness in the process, be it G8, G10 or G20. I think that the truly global impact of the financial crisis should also mean that there is an important role for the "G192", as the President of the General Assembly recently said – the member states of the United Nations. Indeed, in my view the Doha conference should bring about a revival of the role of the UN as the universal forum for generating ideas and strategies for development. This is a vocation that evokes the historic role and purpose of UN agencies such as UNCTAD and DESA (UN Department for Economic and Social Affairs).

While fully respecting the decision-making and implementation functions of the Bank, the Fund and the WTO, the UN can too perform an essential function in generating innovative ideas, fostering universal dialogue and building consensus in these areas. Not only is the UN the home of the Monterrey Consensus, but it also the forum, par excellence, for universal participation in global decision making when needed. And if there is one lesson that must be learnt from this crisis and the responses it has brought forth from governments, this is a historic juncture that calls for all governments, large and small, east and west, to work together as they are equally concerned by the evolution of the current crisis and the best policies to confront and alleviate its impact.

In UNCTAD, we are working to make our contribution. We have assembled a secretariat Task Force on Systemic Issues and Economic Cooperation. The Task Force, to be chaired by Heiner Flassbeck, will coordinate research on major weaknesses in the international financial system and related institutional architecture of concern to developing countries. It will concentrate on identifying problems/weaknesses, causes and possible policy remedies under three clusters of issues:
* Currency speculation and global monetary cooperation
* Commodity futures speculation and price volatility
* Financial sector regulation and surveillance

As you know, UNCTAD has long engaged in innovative and ahead-of-the-curve thinking on global financial issues. And I am always pleased when I see one of UNCTAD´s longstanding policy-proposals being put forward in newspaper editorials, as has been the case quite frequently in recent weeks (even if they unfortunately only rarely refer to UNCTAD´s work). I should only mention the need for better financial regulation and transparency, or for better supervision of credit agencies, which we have argued long before this crisis.

But let me just mention another one of the UNCTAD´s long-standing proposals that has so far not yet received the attention it deserves in the context of the global crisis: And that is the need for global, multilateral solutions to reduce incentives for trade-distorting speculation in currency and commodity markets. You may remember this proposal from when you were negotiating the Accra Accord, and I think its logic and justification has become ever-more convincing in the light of recent events. Let me therefore share with you some preliminary thoughts on global exchange rate management.

* A rule-based global exchange rate management

The idea of a cooperative global financial and monetary system would be to ensure that the same "rules of the game" apply to all parties involved, more or less in the same way as multilateral trade rules apply to any trading partner. A code of conduct should reflect this new spirit of multilateralism in global economic governance, which would be based on the need to balance the advantages of one country against the disadvantages of other directly or indirectly affected countries. Such a balance is necessary, because changes in the nominal exchange rate deviating from the fundamentals (i.e. inflation differentials) can affect international trade just like changes in tariffs do. A multilateral approach to exchange-rate management could therefore aim to stabilize the real exchange rate among a group of countries. In this way, a level playing field would be created that would prevent fundamental trade imbalances as all participating countries maintain their level of competitiveness. Any adjustments to nominal exchange-rates should be achieved through the symmetric response of the Central Banks of both the depreciating and the appreciating currencies.

After all, history has shown us repeatedly that arrangements which peg the exchange rate unilaterally are prone to speculative attacks in times of pressure to defend currency depreciation. A symmetric response rule is likely to enjoy greater credibility, and will also remove incentives for currency speculation.

Needless to say, more work needs to be done both intellectually and politically. In my view, the Doha Conference should send a strong message for a truly multilateral solution to the crisis, for greater transparency and regulation of financial markets, and the need for continued and enhanced development financing. We should launch a process of intergovernmental consultations to find the best solutions – both institutional and policy-related that would provide for three crucial elements:
* Better and more inclusive global macroeconomic management and coordination.
* Transparent, coherent and effective regulatory mechanisms to govern global financial markets.
* Improved management of global reserves so as to pre-empt liquidity crisis and to make funds available as and when developing countries need them.

We also need to consider whether what is needed is just some adjustments to existing institutional arrangements, which are disparate and limited in terms of participation and scope, or rather a complete overhaul with a view to establishing a truly comprehensive and inclusive international financial institution - a “World Financial Organization".

Supachai Panitchpakdi is Secretary-General of UNCTAD. The text is an excerpt of Supachai’s speech at the 45th Executive Session of UNCTAD’s Trade and Development Board on 13 November 2008.

Recommended citation: Panitchpakde, Supachai (2008) 'Towards a World Financial Organisation', World Economy & Development In Brief, Luxembourg, 24. November 2008 (www.wdev.eu)


(Posted: 24 November 2008)

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Coordinated and Massive Global Stimulus Required / The Electronic Reader for Doha

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