TWN Info Service on Finance and Development (Apr09/07)
3 April 2009
Third World Network

Up to UN to frame global reform, says Stiglitz at dialogue's end
Published in SUNS #6671 dated 31 March 2009 

New York, 29 Mar (Bhumika Muchhala) -- It is now up to the delegations in the United Nations to take up work to frame the reforms to the global economy, said Prof. Joseph Stiglitz at the close of the three-day UN General Assembly thematic dialogue on the global financial and economic crisis.

The delegations should be particularly sensitive to the concerns of developing countries and to the poor in all countries, said Stiglitz, who is Chair of the Commission of Experts on the global economic and financial crisis set up by the General Assembly President. Stiglitz and other Commission members had presented the proposals of the Commission during the dialogue.

The Commission's final report will be issued at the end of May. It is to be an input to a special General Assembly session, to be held at the "highest level", scheduled for the first week of June, to discuss the crisis and its effects on development.

Delegations have been meeting intensely to finalise the modalities of the session on the crisis, which was mandated by the Doha conference on financing for development held in December 2008.

In his closing remarks, Stiglitz, who is a Professor at Columbia University and a Nobel Laureate in Economics, said that the global community cannot go back to the way things originally were before the crisis. The Commission realized that it had to begin with a comprehensive diagnosis of the crisis. Its recommendations have focussed on ten short-term policies and ten long-term policies, he said. In the last few months of the global financial crisis, there has been a growing consensus around many of the necessary solutions.

Stiglitz said that there is now clear consensus on the need for a large global stimulus, and that unless developing countries receive substantial assistance, it will be difficult for them to play their required role in the global recovery process.

In the past, developing countries have not been given policy space to pursue the kind of expansionary policies they need to pursue at such a juncture of crisis. It is important that funds be provided to developing countries in the form of not only loans but also grants. Many developing countries are emerging from excessive debt burdens. It would be a shame to have them go through more debt burdens.

It is also important that these funds be provided through a variety of channels, Stiglitz said. The IMF is problematic because it provides loans, while the need now is for grants. The global community cannot ignore the fact that in the past the IMF has often pursued pro-cyclical policies, and has often pushed the kinds of deregulatory policies that have now contributed to the financial crisis.

This historical legacy of the IMF is not going to be wiped out overnight, he said. There will be reluctance to turn to the IMF by developing countries. So, it is vital that countries are responsive to the demands and needs of their citizens. It is important to create alternative venues and mechanisms for the funding that developing countries need. There are various arrangements that are more appropriate and responsive on the regional level.

An important recommendation is the creation of a new credit facility and the new use of Special Drawing Rights (SDRs). A key question that has been raised by delegates is on the trade-off between creating new institutions versus reforming existing institutions. It is important that we prioritize the speed of reform, and there are ways of doing this both inside and outside existing institutions.

A second aspect on which there is global consensus is the need for stronger global regulation, he said. The big issue here is the real risk of cosmetic reform instead of real reform. It is not going to be very easy to tell the difference between what the cosmetic reforms are and what the substantive reforms are because investors are very clever. They create complex mechanisms and some oversight structures can be established that do not have the ability to enforce anything.

In this area, Stiglitz said that there is an urgent need for comprehensive and real oversight with strong tools for intervention. Regulation has to be comprehensive both across institutions and countries. Only then can regulatory arbitrage, regulatory evasions, and the shift from the banking institution to the shadow banking institution be prevented. This comprehensiveness is absolutely essential.

Stiglitz noted that the Commission details in their report the specific forms that financial regulation needs to take. The functions that have to be served should be clear. It is very important for the creation of a safety commission, or an institutional arrangement that does oversight and ensures that the financial products are safe.

Another recommendation that has received a lot of attention is the creation of a new global system of international reserves. It may be a new concept for some, but the economist Keynes had argued for this 75 years ago. His hoped at the Bretton Woods meeting in 1944 that the IMF would be able to serve as this global reserve system. Keynes failed to achieve his proposal because of a veto from the United States.

The time has now come to revisit Keynes' original idea. Stiglitz said that it is in the interest of all countries to create such a reserve system. Global instability hurts all countries, and the accumulation of large reserves around the world also hurts all countries.

Stiglitz stressed that the institutional mechanisms and design of the proposed global reserve system need to be pursued in a manner that is non-inflationary and that will enhance global stability. The transition to this system can be done in a way that both maintains and enhances the durability and strength of the global financial system. It can be done either from a top-down or bottom-up approach.

Stiglitz also re-emphasised the proposal of creating a global economic coordination council within the UN. The IMF does not possess any accountability other than to the central banks of their member countries. So, the accountability structure of a new economic coordination council needs to be aligned with environmental issues and a host of other aspects in the global community. It is also important that gaps are identified in the global economic and financial architecture toward managing cross-border flows and achieving sovereign debt restructuring.

The task of repairing the global economic institutions will not be accomplished in one month, or six months or a few years. The Commission's aim is to set out a framework to achieving the end-goal of structural reform in the long-term.

Stiglitz said that 65 years ago, there was a recognition that the global economic architecture had failed. In some cases, it was decided that it was better to begin anew. Stiglitz said that we are again at that moment of beginning anew. The global economy has failed and this failure has severe consequences for all countries, and especially for the poorer countries.

Eleven years ago at the time of the East Asian financial crisis, many people had talked about the need for reform and had created fancy phrases such as the need for a new global economic architecture. There was hope on the part of some that people would continue to talk until the economy would recover, and until the momentum for reforms would be over. Then the creators of the crisis could go back to the way things were.

Stiglitz said that he hopes that this will not happen this time. He did not think that it will because this crisis is not just a crisis in the periphery, but one in the core which has spread to the whole world.

Stiglitz hoped that the delegations in the coming months can now begin to work and frame some of the reforms necessary to make the global economy more stable and just. He also hoped that all country delegations will be particularly sensitive, as they pursue their deliberations, to the concerns of developing countries and to the poor in all countries.

In final closing remarks, UN General Assembly President, Miguel d'Escoto Brockmann of Nicaragua, said that the global community must fulfill its collective responsibility to protect the common good and the voice of the people. The world's most vulnerable are in need of the global force of the 192 nations present in the UN body. The task now is to defend the rights of the world's most vulnerable people and to protect the world's fragile countries.

Before the closing session, the meeting heard a final substantive panel, on the macroeconomic policy responses in the crisis. The panel was comprised of several Commission members from France, China, the US, Tanzania, Belgium and India.

Commission member Yaga Venugopal Reddy, the former Governor of the Reserve Bank of India, said that capital account management needs to include external debt management. On whether existing multilateral institutions should be used or whether new ones should be created, he said there is an urgent necessity for new institutions. The existing institutions suffer the lack of confidence of the people and waning government support, highlighting the urgency for reforms. The global community simply cannot afford to postpone addressing problems.

Yu Yongding, a Commission member who is the Director of the Institute of World Economics and Politics in the Chinese Academy of Social Sciences, stated that the Chinese economy has been severely hit by the crisis. He described the Chinese fiscal stimulus package as a strong deal that can enable the country to reach its growth target of 8% for this year. Yu expressed confidence that this growth target is achievable, because the fiscal position, budget deficit and debt-to-equity ratio of the Chinese economy are all in a good position.

He said that China has not suffered from the liquidity shortage or the credit crunch. However, the demand for exports has dropped drastically, which will pose serious problems. Yu said the current international financial architecture is characterized by the fact that the richest country in the world borrows far too excessively from much poorer countries. This is both unacceptable and ridiculous.

The prospect of the dollar devaluation is very frightening. If China's investments in the US reserves goes awry, China may not be able to do much, he said. One of the most important tasks facing China is to try to decouple the link between the US bond market and the reserve positions of surplus countries. This can be achieved through the creation of a new international reserve currency or the extensive use of SDRs, said Yu. SDRs should replace the US dollar as the reserve currency of choice, and its composition should be broadened to include all major currencies.

Yu stressed that Asian countries have the right incentives in place to fix the crisis in their countries through pooling their resources in a regional fund, referring to the Chiangmai Initiative, an effort that is becoming increasingly important for a stable financial architecture.

Another Commission member, Robert Johnson, former Chief Economist of the US Senate Banking Committee, said that what has occurred is a failed vision in which economics reflects power rather than sound logic. There are now externalities of enormous proportion that have resulted from the crisis, as the actions taken in the financial sector has spilled over to the entire planet. He said that it is indeed an intellectual failing that people didn't account for the externalities.

Johnson said that the laxity of regulatory officials led to the failure of the banking system. The Commission is looking at ways to alleviate the burden of taxpayers who are charged with bailing out the very people who caused the banking failure.

John Maynard Keynes would have said that it is the surplus countries which should be pursuing more stimulus than the deficit countries, said Johnson. There is a high cost associated of taking money away from the rest of the world. Authorities become frightened of the scale of their debt and their creditworthiness and consequently cut back on economic and social programs that could contribute to long term stimulus and growth. While "market fundamentalism" is evoked to maximize the freedom of those in the financial sector, when a financial crisis occurs these very financiers that exhort on the free market expect to be bailed out. This creates a profound "moral hazard", where bankers and investors will take excessive risks, said Johnson.

The UN Commission's recommendations support the protection of consumers from financial products by proposing the creation of a consumer product safety commission, which could protect people from the persuasions that led to the sub-prime mortgage crisis.

Commission member Benno Ndulo, who is Governor of the Bank of Tanzania, said that there are two conditions that must be heeded to. First, there should be a separation between the lending and policy functions of the financial market so as to assure disinterested intervention. Second, financial markets must be democratically governed and free of conditions that prevent information disclosure, he said.

This means that financial policymaking should be free of political pressure from rich countries. The current boards of many financial institutions prevent the exercise of democratic oversight. Ndulo warned that without these two principles, the creation of a new global fund will have the same problem that other funds currently have.

Commission member Jean-Paul Fitoussi, Professor of Economics at the Institut d'Etudes Politiques de Paris, said that the current crisis resulted from credit bubbles that reflected capital gains rather than earnings from productivity. The financial sector did not pay sufficient attention to capital, human and environmental externalities. As a result, there has been a sharp loss of confidence in the financial system and labour market.

Fitoussi said there is a need to redefine exactly what stability should mean. It should not just reflect price stability, but rather the real stability and security of citizens. Related to this redefinition of stability, there is a need to re-evaluate inflation targeting programs in order to make economies more resilient to shocks.

Francois Houtart, who is from Belgium and is one of three Special Representatives of the President of the General Assembly, said that the Commission is only at the beginning of the "rethinking process."

Houtart doubts the idea of "capitalist democracy," and said that capitalism is a social construction and markets existed before this construction. There is a need for the Commission and the UN delegates to now think beyond capitalism in order to restore democracy.

Houtart said that there is a longstanding tradition of using abstract economic models to make developing periphery countries symmetrical in nature to the core countries. However, where there is an exogenous shock, capital flows out of the periphery countries, not the core countries.

This is why Keynes had proposed a recycling mechanism whereby multilateral institutions provide periphery countries with capital in order to replace the loss of capital being experienced through outflows. +