The global financial crisis could continue to plague both developing and developed countries for a long time unless market-based orthodoxies were questioned and resources better directed towards sustainable growth and development, experts said during today’s first round table of the Thirteenth Ministerial Meeting of the United Nations Conference on Trade and Development (UNCTAD XIII) in Doha, Qatar.
“This thing is going to go on and on until there is a change in direction,” said Robert Wade, Professor of International Development at the London School of Economics, Moderator of the round table on “Enhancing the enabling economic environment at all levels in support of inclusive and sustainable development”. The session was part of the Conference agenda of “Addressing the risks of a global recession: towards comprehensive, supportive macroeconomic policies and structural reforms”.
Panellists included Robert Sichinga, Minister for Commerce, Trade and Industry, Zambia; Paula Español, Under-Secretary for Foreign Trade, Ministry of Economy and Public Finance, Argentina; Yu Yongding, Senior Fellow, Chinese Academy of Social Sciences and Member, Stiglitz Commission; Heidemarie Wieczorek-Zeul, Member of Parliament, Member, Stiglitz Commission and former Minister for Economic Cooperation, Germany; Pedro Páez Pérez, Member, Stiglitz Commission, former Minister for Economic Coordination and former head of the Presidential Commission for a New Regional Financial Architecture, Ecuador.
Heiner Flassbeck, Director of UNCTAD’s Division on Globalization and Development Strategies, served as a discussant and Supachai Panitchpakdi, Secretary-General of UNCTAD, also made remarks.
According to the issues note prepared by the UNCTAD Secretariat (document TD/452), financial, not fiscal dysfunction caused the world recession and, therefore, fiscal retrenchment is not warranted. Instead, the risk of another global recession calls for comprehensive and coordinated action on the financial front, including a shift towards expansionary policies in major countries, pro-growth structural reforms and an international financial system supportive of national policy choices. Unfortunately, international finance now rests on unrestricted financial flows that have created an unprecedented boom-and-bust process, according to the UNCTAD analysis. Market forces will not fix the situation, which requires a comprehensive approach combining macroeconomic instruments and structural reforms. Reform of national and international financial systems should aim to ensure that they support the needs of the real economy, while improvements in labour markets and social policies are needed to reduce income inequality.
Mr. SICHINGA said the problem of the current environment in the wake of liberalization and recession could be seen in Zambia’s “growth without development”. Some parts of the country had poverty rates as high as 84 per cent, while growth rates were over 7 per cent annually. Privatization, the prescription of the World Bank and International Monetary Fund (IMF), did not require private concerns to build the infrastructure that could lead to remedies for such challenges, he noted. Zambia had, therefore, been providing raw materials to everyone else without value addition, a form of exporting jobs to other countries. “Clearly, this is unsustainable”, he said.
The country’s textile industry had collapsed due to cheap products from fellow developing countries in Asia, he continued. On the basis of advice from the Bretton Woods institutions, Zambia had liberalized its financial policies only to see exchange rates for its currency plummet. In response, the Government had instituted laws to encourage private sector development, thereby gaining a high rating from the institutions, but growth had not led to greater employment. People were being trained but technology transfer was lacking, he said, noting that Zambia had remained stable for decades and had substantial resources that it was looking to develop in a more sustainable way.
Ms. ESPAÑOL said Argentina’s experience of the past two decades illustrated the causes of the financial crisis. In the 1990s, the country had probably been “the spoiled child” of international financial institutions, having been committed to liberalization and deregulation. However, debt had left it vulnerable to shocks, leading to a need for funding associated with conditionality that required greater flexibility from the labour market. Those adjustment policies had led to the worst crisis in Argentina’s history, she said, noting that since 1993, social inclusion and healthy public investment in infrastructure had “turned the page” on those policies.
Regional integration and an active income policy were also critical to the inclusion of internal consumption as part of the formula for growth, she said, adding that social policies were part of that effort. Such Government intervention had led to much less vulnerability in the recent crisis. A policy of accumulating reserves was an important factor in allowing strong counter-cyclical policies. In other words, Argentina had enjoyed success by implementing policies contrary to the adjustments imposed by the financial institutions, she said. It, therefore, supported greater regulation of the international monetary system and advocated a greater voice for developing countries within the Bretton Woods institutions.
Mr. YU said that, even though China enjoyed high growth rates, it could still face the same problems that Argentina had suffered in the early 1990s unless structural reform was implemented. Investment rates were still high and exports were still a strong growth engine. However, the global economy had changed and developed countries were consuming less, a situation that might last a long time, he cautioned. Demand for exports might very well drop, so adjustments must be made. Reliance on both investment and exports must be reduced, he said, adding that those adjustments could, in turn, slow growth.
The trade surplus was a mixed blessing because the exchange reserves accumulated represented the bulk of Chinese savings, which were threatened by recession and policies that led to the printing of money, he continued. In order to re-balance the economy, it was necessary to reduce China’s surpluses, but not to further liberalize capital accounts, which could result in a flight of capital to purchase foreign monetary instruments or other investments. Chinese investment in other countries and international entrepreneurship were an important part of the effort to make growth sustainable and China welcomed advice on how best to integrate its investment into other countries’ cultures and development plans, he said.
Ms. WIECZOREK-ZEUL agreed that the financial crisis had financial rather than fiscal causes, and that high youth unemployment and global inequality were great threats to growth and stability. The German Government’s austerity policy was the wrong answer; the euro was important and should be defended, but an economic union concerned with employment and solidarity was needed. Given the sum of the current crises, including climate change, the international community should realize the need for a great transformation, which should be considered at the upcoming United Nations Conference on Sustainable Development, she said.
She said that, to integrate the discussion, she had been advocating a panel on systemic risks to the international community. In addition, financial markets should be regulated, particularly in regard to financial products. The levying of a financial transaction tax was particularly important, as were other improvements in the equity of tax policy. Development finance and social protections were related to those factors, she said.
Mr. PÁEZ stressed the critical importance of understanding the enormous amount of money — some $25 trillion — that had been put into faltering financial institutions during the economic crisis. For that reason, speculative bubbles were becoming irreversible in nature, and it was becoming impossible to turn such resources to productive purposes. Distortions in demand for commodities affected the entire global economy, particularly developing countries, he said. For that reason, State intervention must grow, alongside mechanisms for channelling investment into productive areas that would yield sustainable growth and employment.
The new financial architecture should change the logic applied by financial markets, he continued. It must work in the interests of the people and against those of global investment, which aimed to achieve high short-term profit. Industrial, social and environmental policy must be integrated into the new architecture, which in turn must validate the work done by women and communities. Zero-sum mathematics must be terminated and resources for development protected from the world of international investment. A heterogeneous people’s economy must develop, he stressed, expressing hope that all multilateral institutions could be brought into that effort.
Mr. SUPACHAI commented that development-centred globalization was not only relevant to developing countries, but also to those with advanced economies. World growth remained low and some major economies were still in recessionary mode. “Don’t ever think ‘we’re now safe’”, he cautioned, emphasizing the need to deal with the roots of the matter. Managing demand was particularly critical, and monetary policy must be pro-growth, he said, noting that the lack of reform following the crisis was a great cause for concern.
Mr. FLASSBECK emphasized the importance of consistency in economic thinking, noting that it was not often applied. For example, the international monetary order could not follow the fundamentals because the market did not follow them, but the market was still relied upon to regulate itself. Enormous distortions of the trade system had, therefore, been created. In addition, it was widely believed that, because of market forces, falling wages would lead to more employment, but that had not happened. The world was in denial, stuck in its belief in the market’s wisdom, he said, stressing that different opinions must, therefore, be allowed to challenge market orthodoxy.
During the ensuing dialogue, delegates commented on several key issues raised by the panellists. The representative of Nepal said the financial crisis had reversed development gains in least developed countries, noting that the current international policy framework was insufficient to support them and calling for greater emphasis on the quality, quantity and effectiveness of international aid measures.
The representative of Barbados said debt reduction and debt moratoriums were an important aspect of assisting international development, and the IMF should help in that process. The world was seeing a situation in which some countries were able to “export” the effects of their financial crises, and that fact had yet to be dealt with, she added.
The representative of Belarus said his country had weathered the sharpest part of its financial crisis, and noted that cooperation with regional neighbours had been integral to that effort.
The representative of Kenya said Africa continued to endure the same problems it had suffered 10 or 20 years ago. Agreeing with Mr. Supachai on the need for consistency and sustainability, he said there was also a need to change the way in which the world economy dealt with the continent’s poorest countries. That required much careful analysis, he stressed. For instance, would a global financial transaction tax apply to such things as school fees or microloans?
Ms. WIECZOREK-ZEUL replied that certain areas could be exempted from a financial transaction tax. The proposal advanced by the European Commission in that respect would not endanger the livelihoods of poor African nations.
Mr. YU said UNCTAD should study wider areas than just trade, adding that he hoped to hear more of its “precious voice” on other matters.
Ms. ESPAÑOL said there should be a stronger voice on international financial coordination, stressing that States needed to intervene and calling for “active States in active markets”.
Mr. SICHINGA, agreeing that Government intervention was “absolutely necessary”, said there was no question about the need for sustainable, inclusive development. The needs of developing countries must be better recognized, and specific terms were needed for Africa due to its lack of infrastructure. Nonetheless, he said he was pleased that the right questions were being asked.
Mr. PÁEZ, underlining the need for measures to distinguish between buyers and speculators, called for greater transparency by the Central European Bank and the Bank of England. Speculation must end, he said, adding that “we can do it here and now”.
The Meeting will continue this afternoon for a round table on “Promoting investment, trade entrepreneurship and related development polices to foster sustained economic growth for sustainable and inclusive development”.