TWN Info Service on Finance and Development (Oct08/04)
22 October 2008
Third World Network

Finance: UN calls for a central role in finance crisis summit
Published in SUNS #6572 dated 21 October 2008

Geneva, 19 Oct (Martin Khor) -- A summit meeting to discuss the world financial crisis and a possible re-shaping of the global financial system has been agreed to by leaders of the Group of 8. But the participation of developing countries and of the multilateral United Nations system appears to be sidelined so far.

UN leaders including its Secretary General Ban Ki-Moon and UNCTAD Secretary General Supachai Panitchpakdi have responded by calling for a central role for the organization in global talks on international financial reform.

Last weekend, a meeting of US President George W Bush, the French President Nicolas Sarkozy (the present President of the EU) and European Commission President Jose Manuel Barroso at Camp David in the US agreed that a series of summits would be held.

According to their statement after the meeting: "The three leaders had a very positive discussion about the continued coordination of steps needed to solve the crisis in today's global economy. They agreed they would reach out to other world leaders next week with the idea of beginning a series of summits on addressing the challenges facing the global economy.

"World leaders will be consulted about the idea of a first summit of heads of government to be held in the US soon after the US elections, in order to review progress being made to address the current crisis and to seek agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future. Later summits would be designed to implement agreement on specific steps to be taken to meet those principles."

Barroso told the media that the first summit would be ''to discuss the current financial crisis and also to set forth principles that would guide the future follow-on''. Of course, by then participants ''would be interested in the views and the input of whoever the president-elect is'', he said.

Details of the summit are unclear, including the venue, dates and most importantly, who will host it and which countries and institutions will be invited. The summit plan had been first discussed by G8 leaders during the IMF-World Bank meetings a week ago. The UK premier Gordon Brown and Sarkozy have been prominent in advocating the summit.

So far, the United Nations and the developing countries as a whole have been left out of the discussions on the summit.

This is ironic because in the preparations for the UN Monterrey Review Conference on financing for development in Doha later this year, the developing countries had been advocating that the UN convene another Bretton Woods-style summit to discuss reforms to the world financial system. And this proposal had received at best only lukewarm response from the developed countries.

The UN is now requesting that it be allowed to play what should be its central role. UN Secretary General Ban Ki-Moon last weekend offered to host the finance summit in the UN headquarters in New York in early December.

''I strongly believe that holding the summit at the United Nations, the symbol of multilateralism, will lend universal legitimacy to this endeavour and demonstrate a collective will to face this serious global challenge," he said.

''We must act together to ensure, above all, that the negative impact of the financial crisis on the world's economies not undermine the major UN efforts to achieve the Millennium Development Goals, fight against the effects of climate change and address the food crisis.''

In Geneva, UNCTAD Secretary General Supachai Panitchpakdi said the UN and a wider variety of countries should play a significant role as the international financial system is reshaped to cope with spreading turmoil and a looming worldwide recession.

Supachai was speaking at the end of last week at UNCTAD's monthly consultation with the president of the Trade and Development Board (TDB), in which member states took part.

The consultation turned into a discussion of the financial crisis. UNCTAD officials warned that the likely impacts of the crisis on the world's poor nations are not receiving sufficient attention as global economic giants deal day-to-day with the tumult.

TDB President, Ambassador Debapriya Bhattacharya of Bangladesh, said the crisis "is complex and interrelated, it has yet to fully unfold, and the impacts are not yet completely clear." He warned that there will be impacts on the trade, the currencies, and the investment prospects of the developing countries.

Supachai expressed concern for the "innocent bystanders" and said that the impact on developing countries will be much deeper than was anticipated. "The real sectors of their economies are beginning to suffer, and this is only the beginning."

He warned about the effects of volatile exchange-rate movements affecting some developing countries. "Trade will suffer, and the commodities boom that has helped developing countries for a number of years now is ending." Supachai remarked that four issues need to be addressed:

-- Global liquidity is being "sucked away" as banks in industrialized nations are bolstered by huge government infusions of funds, leaving the question of whether any cash will be left for credit and development aid needed for efforts such as achieving the Millennium Development Goals, enhancing productive capacities in poor countries, and coping with such problems there as climate change.

-- The fate of smaller private banks, especially in developing countries, has to be considered. They are not among the large institutions now "effectively being nationalized" around the world, and they may not be able to compete for limited funds or receive sufficient help in coping with the current turmoil.

-- More has to be done to keep capital from fleeing from developing countries. The so-called "capital-flow paradox" has intensified, meaning profits earned in poor nations often end up overseas rather than helping these countries to further their development.

-- Liberalized global markets need to be regulated so that they continue to energize the world economy but have less volatility and risk, especially for small nations that are at the mercy of such factors as large investment and currency shifts.

Supachai concluded that reforming the global financial system "must be a global effort." It should include the participation of all countries, and should include significant UN participation, he said.

Mr. Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies, described the current turmoil as "a global de-leveraging, a global going out of risky positions. That is all right on its own -- in fact, we have said for several years that this was going to happen -- but it can go too fast. It must be slowed down by government intervention."

Flassbeck said currency fluctuations, driven to a great degree by speculation, are proving now to be a major threat to small countries. Widespread speculation known as the "carry trade" for some time has driven currency values in the wrong direction from standard economic patterns. As these now unwind, "there is overdone flight out of currencies perceived to be less secure."

"The next row of dominoes to fall in this crisis could be from speculation in currencies," he warned, "and this is not being talked about enough. Countries with appreciating currencies must step in and help stop the process on behalf of countries with depreciating currencies. We have to avoid more cases of what is happening in Iceland."

Mr. Flassbeck also warned of a "huge slowdown in trade due to the global recession that is looming. The current malaise is that we have built a huge casino next to the real economy, and given too many people the means to play there, and now that casino has collapsed.

"We need to learn the lesson that this kind of casino is not productive, is not helpful. We must go back to balanced and real economic relations and to balanced relations between currencies."

Zimbabwe, speaking for the Group of 77 and China, said that the financial crisis has created a fundamentally different global situation than when the Accra Accord (the outcome of UNCTAD-XII in Accra in April) was negotiated.

Many of the positions taken during the Accra preparations (particularly on the part of developed partners) were based on assumptions of sustained economic growth. Zimbabwe also recalled that a central tenet of the position of the G77 and China was the urgent need to address systemic issues and reform of the international economic architecture.

Now, developing countries face two major impediments for their development prospects: they will find it more difficult to get access to funding; and exports will probably fall as the unfolding of the crisis undercuts demand, said Zimbabwe.

It pointed out that the financial crisis is a symptom of more fundamental problems with the international economic architecture, and that addressing its immediate effects is only the first step in addressing the broader, more fundamental problems of the global economy.

The G77 and China stressed the need for coordinated action to build a better multilateral system. The global community should act on two planes -- address the immediate impact of the financial crisis, and strengthen the international economic architecture. The group said it expected the following from UNCTAD:

-- The secretariat should continue analytical work on the crisis, its underlying causes, and its implications for the development prospects of developing countries, as well as possible means of addressing its implications in the short, medium, and long term. "We fully expect that UNCTAD will rise to the occasion as a key global institution on this issue."

-- The intergovernmental machinery should contribute to the Monterrey review conference, and live up to its responsibility as a body for policy dialogue. "We can no longer afford to shy away from substantive debate on difficult global issues."

-- UNCTAD should intensify its work on contributing to the global debate on the future of the global economic system. It should also assist developing countries to strengthen their collective response to the global crisis. The group pointed out that initiatives by the World Bank and the IMF to provide new emergency liquidity provisioning to developing countries to help them weather the crisis have problematic historical lessons, considering the negative impact that similar measures had during the crisis of 1997.

-- The group also asked developed countries to strengthen cooperation in the intergovernmental machinery to ensure that UNCTAD delivers on the needs and priorities of developing countries. "We therefore hope that our partners will not impose undue limitations on our work in the days, weeks, and months, ahead, as we seek to address the most significant global challenge to our development prospects."

Other speakers at the consultation were Angola, Argentina, Bangladesh, China, Ecuador, France, Honduras, Indonesia, Mexico, Singapore, South Africa, Thailand and Zimbabwe. +