by Chakravarthi Raghavan

Geneva, 4 Apr 2000 -- Though developing countries now enjoy much less policy autonomy than at any time in the post-war period, they nevertheless have much greater scope for domestic policies for regulating and controlling capital flows and they should use these to shield themselves against financial instability of global markets.

In advocating this view at an UNCTAD organized inter-regional debt management conference here this week under the auspices of the UN Conference on Trade and Development, Mr. Yilmaz Akyuz, UNCTAD's chief macro-economist said there was a reluctance at international levels to accommodate concerns of developing countries and they should hence "effectively exploit the room they have" to ward off costly financial crises arising from the global financial system.

In absence of global agreements and actions to deal with systemic instability and risks of global financial markets, Akyuz suggested, that developing countries should not allow their available autonomy to be constrained by capital-account convertibility or trade in financial services, but exploit effectively the room they have.

Earlier, in an opening statement to the conference on debt management, attended by about 200 officials from 80 countries the UNCTAD Secretary-General, Mr. Rubens Ricupero said that while debt management differed significantly among various groups of countries, it was critical for all countries to have a professional debt management function.

Ricupero recalled that UNCTAD's involvement in this area, and its Debt Management and Financial Analysis System (DMFAS) and technical assistance programme, began at the start of the so-called debt crisis in the 1980s, and resulted from UNCTAD's participation in the Paris Club meetings. To enhance the capacity of developing countries to manage their foreign debt, UNCTAD began building a computer-based debt management system. The DMFAS that ensued had been regularly upgraded to adapt it to the evolution of international finance and to rapid changes in information technology.

The DMFAS Programme was now one of the major providers of technical cooperation services in the area of debt management, and its software was the most widely used standard system for debt management in the world. The DMFAS paid for itself by making debt-servicing procedures more efficient and by checking inconsistencies in the claims of creditor agencies. Substantial savings could also be made by avoiding unnecessary costs such as over-payments to creditors or penalty interests due to poor book-keeping.

While its gains were difficult to quantify or easily measured, the gains far exceed the costs, Ricupero said and cited the example of Argentina where the around $1 million cost of the DMFAS project, had resulted in a direct savings during a three-year implementation phase of about $25 million.

Debt managers in various countries, Ricupero said, faced different challenges and approached their tasks from different situations, experiences and perspectives. For some, debt sustainability was at the forefront; for others, market access or risk management techniques were the major issues. But whatever these differences, it was critical for all countries to have professional debt management.

Akyuz in a presentation addressed himself to the debate on international financial architecture and the various proposals and ideas that have surfaced and said that the discussions suggested that despite proliferation of meetings and communiques and multiplication of groups and fora on the international financial architecture, there remained a reluctance to accommodate the concerns of developing countries.

"Thus, in the current political environment," he said, "the maximum feasible strategy for developing countries in their search for an effective reform at the global level would seem to be to press for internationally-agreed arrangements for debt standstill and lending into arrears to help them to better deal with financial crises when they occur."

However," added Akyuz, "until systemic instability and risks are adequately dealt with through global action, the task of preventing such crises falls on governments in developing countries, at national and regional level."

There could be little doubt that developing countries now enjoyed much less policy autonomy than any time in the post-war period, and this loss of autonomy had three origins.

Firstly, systemic pressures had increased on governments as a result of liberalization and integration of markets, and this is most visible in the case of financial markets.

"As a result of greater exit option enjoyed by capital, government policies have now become hostage to financial markets, and the kind of discipline that these markets impose on governments is not always conductive to rapid growth and development."

Secondly, policies in developing countries were also subject to pressures from major industrial powers and multilateral institutions.

Finally, a number of policy instruments were not longer available to some developing countries as a result of their international commitments as part of their membership to such blocks as the OECD or NAFTA.

"Neverthless," the UNCTAD official said, "there is much greater scope for domestic policies for regulating and controlling capital flows than has been exploited in many developing countries. There is no global agreement that forces the developing countries to open up their financial markets."

For instance, while India and China had pursued a much more gradual and cautious approach to international capital flows, many countries in Latin America had rapidly opened up their capital and financial sector.

Again, a comparison between the policies adopted by Malaysia and the others in response to the East Asian financial crisis showed that policy options even under crisis conditions were not as narrow as generally assumed.

"If developing countries are to avoid costly financial crises," said Akyuz, "it is essential that their autonomy in managing capital flows and choosing whatever capital account regime they deem appropriate should not be constrained by international agreements on capital account convertibility or trade in financial services, and that they should effectively exploit the room they have for these purposes."

There was also much that could be done at the regional level, particularly among like-minded governments who were prepared to establish collective regional defence mechanisms against systemic instability and contagion, Akyuz added.

In this respect, the experience of Europe with monetary and financial cooperation and the Exchange Rate Mechanism (ERM), introduced in response to the breakdown of the Bretton Woods system, held some useful lessons.

"Regional monetary and financial cooperation among developing countries including exchange rate arrangements, macro-economic policy coordination, regional surveillance, common rules and regulations over capital flows, and regional mechanisms for the provision of international liquidity could present a viable alternative in the absence of global mechanisms designed to attain greater stability," Akyuz concluded. (SUNS4642)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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