Agreed Conclusions on the Financial Crisis by UNCTAD's Trade and Development Board

The following is the text of the agreed conclusions on "Interdependence and global economic issues from a trade and development perspective: The causes, management and prevention of financial crisis" from the 45th session of UNCTAD's Trade and Development Board in Geneva on 12 October 1998.

Agreed conclusions

1. The current financial crisis afflicting the world economy has systemic elements and the countries affected cannot deal with the problem in isolation. An effective response needs to combine measures at both national and international levels.

2. Domestic factors have certainly played a major role in financial crises in some countries. However, others with sound economic fundamentals and institutions have also been affected by global financial instability. Moreover, the adverse impact of the crisis on commodity prices has been a major factor in reducing export earnings and growth in a number of countries, especially developing countries.

3. A single recipe for responding to financial crises is neither feasible nor desirable. Domestic policies need to be tailored to the specific circumstances of each country and designed to revive growth, restore confidence and ensure an orderly return to financial stability. Such efforts should be complemented by appropriate actions by developed countries. These efforts should ensure sustained economic growth and sustainable development.

4. Recourse to protectionist policies cannot be the solution to current global problems, but would merely serve to deepen the crisis. Growth-oriented policies hold the key to averting the risk of global recession and pressures for protectionism.

5. Recent events underscore the importance of a favourable external environment in attaining policy objectives in developing countries. An enabling external financial environment to support domestic measures could require, inter alia, adequate and transparent supervision of volatile, short- term capital flows.

6. There is a need to reform the existing international financial architecture so as to reduce the likelihood of financial crises and to manage them better. Full representation and participation of developing countries should be an integral part of the reform process. The views of developing countries should be taken into account. Effective multilateral and domestic surveillance is essential for the prevention of financial crises. Such surveillance needs to recognize the role of global interdependence in transmitting financial instability. Greater coherence is needed in international policy-making in the areas of trade, money and finance.

7. Reform of the financial architecture should address weaknesses and gaps in the existing regulatory framework for cross-border lending and financial flows. The scope of such reform may need to be extended to a wider range of financial activities.

8. Greater transparency of the operations of private financial institutions, Governments and multilateral financial institutions is essential for effective surveillance of policies and supervision of markets and for timely action to prevent financial instability. A consultative process should be encouraged for this purpose.

9. Strengthened prudential regulation and supervision of the financial system in a well-sequenced process of liberalization can contribute to greater financial stability. Domestic reforms to be considered might include: (a) increased transparency and disclosure; (b) strengthening of domestic regulatory standards; and (c) more effective burden-sharing arrangements, such as improved insolvency and debtor-creditor regimes.

10. There may also be a need to use other instruments to prevent the build-up of external financial vulnerability without impeding trade or medium- and long-term investment flows. Useful lessons can be drawn from the successful experiences in a number of countries with the use of such instruments. However, regulation and control over financial flows should not be used to sustain inappropriate policies.

11. While prevention of financial crises should be the ultimate aim of reform efforts, measures also need to be put in place for better management when crises arise. Establishing a genuine international lender of last resort with adequate resources to provide the liquidity needed to support countries facing external financial difficulties might be such a measure. However, given the serious impediments to this, it may also be useful to explore alternative means of crisis management that would provide safeguards against speculative attacks and disruption of markets, prevent moral hazard, and secure more equitable burden-sharing between debtors and creditors. The establishment of orderly debt work-out principles could be further examined. Developed countries should also consider other actions to facilitate access to liquidity of developing countries facing external financial difficulties.

12. The Board expresses its appreciation for the sound, independent and timely analysis provided in this year's Trade and Development Report. It urges the secretariat to continue to study international trade, monetary and financial issues as part of its work on interdependence with a development perspective as recognized by "A Partnership for Growth and Development". The proposals for the prevention and management of financial crises contained in this year's Trade and Development Report deserve wider dissemination and discussion, and further analysis. Within its existing mandate and taking account of work undertaken in other relevant organizations, UNCTAD should contribute to the debate on issues related to strengthening and reforming the international financial architecture by continuing to provide relevant analysis from a development perspective. (Third World Economics No. 200, 1-15 January 1999)