I attended two interesting events today in DC. The first one was about a report by Stiglitz Commission (UN) and how the fallout of the global financial crisis on the developing economies. Jomo KS, Assistant Secretary-General for Economic Development in the United Nation’s Department of Economic and Social Affairs (DESA) went over the Stiglitz Commissions’ recommendations and the way forward in the aftermath of the global financial crisis. As some economists have been arguing earlier, the crisis was expected and world leaders were warned, even by the United Nation.
However, the IMF and the WB largely ignored the warning and downplayed pessimistic assessment of the economy before the crisis, he argued. The belief on excessive deregulation and self-regulation (including that of capital account liberalization and leaving little fiscal and monetary space for domestic policy maneuver) promoted by the IFIs and BWIs, without adequate and appropriate regulation set the stage for the crisis. After the aftermath of the crisis, the policy responses have been inadequate, mainly in the part of the developing countries, and the IMF has been using double standards in dealing with the affected countries (like the one in Costa Rica, where it argued for stimulus and at the same time ‘forced’ the central bank to hike interest rate, leading to little effect on stimulating the economy). The whole discussion somehow focused on how the IMF is screwing up things, how it needs to do things, and how it can be a part of the solution after being a part of the problem.
Some of the recommendations by Stiglitz Commission (immediate measures):
- Stable additional funding (SARs, regional liquidity schemes) without conditionalites, for developing countries
- Additional development funds via new credit facility
- Developing countries need more policy space (including financial policy to pursue countercyclical policies)
- Rectify lack of coherence between trade and finance policies
- Meaningful regulatory reforms urgent for financial stability, growth, inclusion, and development
- Financial support measures need to be globally coordinated
Systemic reforms recommended by Stigltiz Commission
- Create new Global Reserve System (multi-country system with greatly expanded SDRs)
- Reform governance of BWIs and other IFIs
- Better and more balanced surveillance
- Reform central bank policies to promote development (rather than just being too obsessed with controlling inflation)
- Financial market policies (create Financial Products Safety Commission, Comprehensive financial regulation, Regulate derivatives trading, Regulate Credit Rating Agencies, Host country regulation of foreign subsidiaries)
- Crate sovereign debt restructuring mechanism, improve framework for handling cross-border bankruptcies
- Need for more stable and sustainable development finance
Jomo argued that developing counties responses are constrained by their exposure to systemic, market, and institutional pro-cyclicality, monetary policy is less effective (made worse by independent central banks???), IMF’s fiscal requirement for stimulus and its consistent drumbeating on the highly likelihood of developing economies failures, restricted policy space, and loss of productive capacities due to openness. He argued that there has been a high disconnect between NY (UN) and Washington (IMF and WB), despite the latter being under the UN system. The emphasis should be on sustaining growth, employment creation, reconstruction, development and not just financial stability.
Another speaker Johannes Linn, Executive Director of Wolfensohn Center at Brookings Institution, was a bit skeptical about the policy recommendations by Stiglitz Commission because he thinks most of them are not politically feasible. He argued that tax financed ODA is not likely to be increased and most of the leading would be loans. He thinks there has to be reform in IMF governance and soft-loan windows were needed to finance stimulus in developing countries. It is possible to give more policy space to developing counties but it is unlikely that conditionalities would be eliminated. Also, the talk about replacing the dollar as a reserve currency at a time of this crisis would further destabilize the markets. He argued for a need to focus on linking G8, G20 and the UN and also create secretariat offices for representation. While arguing for more financial regulation, he argued that it is not good to kill a goose by plucking more and more feathers!
Steve Suppan, Senior Policy Analyst at Institute for Agriculture and Trade Policy, talked about financial crisis and commodity price volatility. He made pretty interesting notes:
- Net capital outflows in 2008 from developing countries to developed countries equaled between $1 trillion (WB) to $2 trillion (UN)
- Global unemployment by 2010 is expected to reach 100 million
- More than 30 developing countries have reserves to fund imports for less than three months
- Between June 2008 and November 2008, commodity prices dropped by 60 percent
- In 2007, food import bill of 37 percent of LDCs increased
He argued that commodity price volatility is caused primarily because of low reserves, high demand and tight supplies leading to more speculation; and over the counter “weight of money” from financial institutions that bet on commodity prices in the international market.
The other event was about the reforms needed at the IMF and was organized by New Rules for Global Finance. The speakers pretty much repeated the same stuff from an earlier event.
Two good events!