TWN Info Service on Finance and Development (Oct08/09)
29 October 2008
Third World Network

United Nations: Role of UN in rebuilding financial multilateralism
Published in SUNS #6577 dated 28 October 2008

Geneva, 27 Oct (Kanaga Raja) -- Global cooperation and global regulation are imperative in both trade and finance, and the United Nations is the most credible international organization to spearhead the design, discussion and launching of such efforts, according to a policy brief issued by the UN Conference on Trade and Development (UNCTAD).

In its latest policy brief, "Rebuilding financial multilateralism", UNCTAD argued that global cooperation and global regulation are imperative -- not just in trade but in finance as well. Just as international trade in goods and services requires a predictable and rules-based multilateral framework, so too a stable system for global finance can be achieved only through a multilateral approach.

The failure of governments to pursue such an approach is the primary reason for the current global predicament. And the implications of this predicament extend far beyond the realm of banking and financial regulation; they go to the heart of the question of how to revive and extend multilateralism in a globalizing world.

Given the open channels between the international trade, financial and banking systems, a truly global, cooperative and non-partisan approach to tackling the most important issues like commodity and currency speculation must be found.

But developing countries have only a limited voice in international financial institutions. The global institution that possesses the most credibility for implementing such an approach is therefore, more than ever, the United Nations, said UNCTAD.

UNCTAD noted that with world markets absorbing the first waves of the continuing financial crisis, attention is shifting to ways to collectively manage the unwinding of global imbalances and prevent systemic turmoil.

UNCTAD said that this is something that it has advocated even in the midst of the irrational exuberance generated by unlimited speculation. In an interconnected world, no country can act in isolation -- a tenet that has been at the core of UNCTAD's message of interdependence since its inception, and cannot be overemphasized today.

According to the UNCTAD policy brief, the financial crisis continues to fan out across regions, countries and sectors of activity, despite desperate attempts by governments to contain the fallout and avoid contagion. But stopping the global de-leveraging process is proving difficult, as the speculative positions of millions of independent households and companies unwind in a number of important markets.

The shock of a near-meltdown in the US financial system and beyond has deeply shaken the belief that business as usual will soon return to the markets; and expectations have vanished that capital yields can be achieved without making overly risky investments.

The de-leveraging is clearly as necessary as it is unavoidable, said UNCTAD, pointing out that once the speculative positions have unwound, prices will in most cases be better aligned with the underlying fundamentals of supply and demand.

However, the short-term effects of the gyrations in prices and exchange rates must not be underestimated. In many cases, households and enterprises could probably adjust their balance sheets smoothly by reducing their exposure to high-risk assets and liabilities -- assuming they had enough time to do so. If, on the other hand, asset prices or exchange rates overshoot in the short term, the same households and enterprises might be forced into default.

The policy brief noted that current government fire-fighting thus entails the difficult balancing act of letting the fire consume what is in any case un-salvageable, while also protecting those parts of the edifice that are most vital and that can eventually be rebuilt.

The events of recent weeks have uncovered the huge misallocation of resources that has accumulated over the past decade of unfettered financial liberalization and deliberate non-intervention by governments in anonymous and purportedly efficient financial markets. As UNCTAD has repeatedly pointed out since 2004, speculation on currency markets -- the so-called "carry trade" -- has clearly moved many exchange rates in the wrong direction over long periods of time.

Contrary to the predictions of mainstream economic theory, currency markets are not effectively balancing the competitive positions of nations. Rather, they are driving them away from an overall balance by allowing uncovered arbitrage in interest rate differentials, said UNCTAD, adding that this has intensified the global imbalances visible in several large current account deficits and surpluses and in the exposure of many households and companies to risk as a result of currency mismatches.

The dramatic evolution of the situation of Iceland is only the most recently discovered tip of this huge and largely unexplored iceberg. In the same vein, said the policy brief, speculation in primary commodities, which is also unwinding, has an upside and a downside. It is increasingly clear that the tremendous rise in prices of food, metals, oil and other primary commodities since mid-2007 has been driven largely by speculative activities, mainly through so-called "indexed funds".

With the long-overdue correction of those prices, however, the situation of many commodity producers in developing countries has rapidly deteriorated. In addition to reducing export revenues, this correction is devaluing a good deal of the investment in equipment and infrastructure arising from the demand boom and mushrooming revenues of recent years.

According to UNCTAD, for countries that depend on commodity imports, the drop in prices is welcome: It allows for greater expenditure on manufactured products or services, which may provide some relief to domestic productive sectors otherwise battered by the sustained commodity price bubbles and, more recently, the fallout from the financial crisis.

The policy brief observed that the currencies of countries like Hungary, Iceland and Brazil have come under heavy devaluation pressure. Many residents of these countries hold debt in foreign currencies with low interest rates, such as the Swiss franc or the Japanese yen, while a huge amount of domestic assets is held by foreigners who had been attracted by high interest rates and currency revaluation over the past months or years -- a clearly unsustainable constellation.

The nominal and real appreciation of the currency led to a deterioration of the country's competitive position, resulting in mounting current account deficits. At the same time, nearly all commodity prices and stock markets came under pressure as the perception spread that the world was on the brink of a full-blown recession and that a big drop in real activities could not be prevented by policy measures to tackle the banking and financial crisis alone.

UNCTAD stressed that the global community must recognize that in an increasingly interdependent world where financial markets are closely interlinked by modern computer technology, no country can act in isolation. It is simply not possible today for all countries to generate current account surpluses or improve their international competitiveness simultaneously by devaluing their currency or cutting costs: One nation's advance is another's retreat.

UNCTAD noted that three policy steps should follow once the fire-fighting in the banking sector of developed economies is over:

-- First and most urgent, the international community must assist countries whose exchange rates have come under downward pressure. These are mostly smaller countries where recent unfettered speculation led to considerable currency over-valuation, and which are now unable to stabilize their exchange rate at a reasonable level, as general market panic threatens to drive the currency to levels of undervaluation that are fundamentally unjustified. In these cases, assistance should take the form of stand-by arrangements, including direct intervention in the currency markets by the counterparts -- i. e., those countries whose exchange rate is appreciating.

-- Second, the international community must assist those commodity-dependent countries where speculation threatens to drive prices far below the level that was reached before the full unfolding of international speculation, in the summer of 2007. Here, the support can take the form of direct intervention in markets as well as grants and loans to buffer and stabilize the sharp drop in revenues.

-- Third, all countries with low and declining inflation rates must engage immediately in counter-cyclical measures in terms of stimulus by fiscal measures and interest rate cuts.

But even if prompt action can be envisaged in some of these areas, the likelihood of a sharp and prolonged downturn of the world economy remains high, warned UNCTAD.

Fortunately, policymakers in many developed countries stand ready to fight big fires at home. Unfortunately, however, the thick smoke at home has clouded their view of their neighbours' fence.

Awareness of the degree of interdependence and closely related fires in developing and transition countries has so far been minimal. But as the alarm bells start ringing and the smoke begins to clear, the needs of these trading partners may soon become apparent.

Once the biggest fires are extinguished, the international community will have to reflect carefully on the options for system reform. Given the open channels between the international trade, financial and banking systems, a truly global, cooperative and non-partisan approach to tackling the most important issues like commodity and currency speculation must be found, said the policy brief.

But developing countries have only a limited voice in international financial institutions. The global institution that possesses the most credibility for implementing such an approach is therefore, more than ever, the United Nations, the brief concluded.

[Meanwhile, according to a UN Press Release issued on Friday evening in New York, the Chief Executives Board (CEB) of the UN System, at a meeting on 24 October, undertook a wide ranging assessment of the ongoing global crisis in financial markets and the threat of recession in the global economy, that "holds serious risks for people, families and communities everywhere." The CEB headed by the UN Secretary-General, has as its members Executive Heads of the UN specialized agencies, funds and programmes, and the World Bank and the International Monetary Fund and the head of the WTO.

[In a statement read out to media after the meeting, UN Secretary-General Ban Ki-moon, who chaired the meeting, said that the "financial crisis, the threat of global recession and the huge volatility in commodity prices threaten the foundations of globalization that has underpinned global growth." The CEB statement also said "we call on all states to re-engage in efforts to conclude Doha trade negotiations. A healthy, open and rule-based trading system is essential to maintaining long-term economic growth to the benefit of all. At a time of strain on economic and social systems, we must resist protectionism and promote openness and inclusiveness."

[Participants at Friday's CEB meeting included Dominique Strauss-Kahn, Managing Director of the IMF, Robert Zoellick, President of the World Bank, Juan Somavia, Director-General of the International Labour Organization, Dr. Supachai Panitchpakdi, UNCTAD Secretary-General, the UNDP head Kemal Dervis and Pascal Lamy, Director-General of the WTO.

[Meanwhile, a UN General Assembly press release issued earlier last week said that the President of the UN General Assembly, Mr. Miguel d'Escoto Brockmann of Nicaragua (a former foreign minister in the Sandinista government) is in the process of setting up a task force, headed by Nobel Laureate Prof Joseph Stiglitz, on the financial crisis and reform of the international financial architecture. Prof Stiglitz has agreed to head the task force, and other members are soon to be named. This initiative of the General Assembly President appears to have riled the President of the World Bank. At the CEB meeting, according to reports, Zoellick was strongly critical of the UN role in the reform of the financial architecture, and resisted the CEB's own initiative and statement.

[However, other members of the CEB, including UNCTAD head Dr. Supachai, ILO chief Juan Somavia, the UNDP head and others present, are reported to have taken the view that the global financial markets and systems need to be regulated, and that the United Nations is the only body that can have any legitimacy in this task. Mr. Zoellick, now heading the World Bank, was one of the original Neo-Cons. When George W Bush became President, Zoellick was named the USTR in the first George W Bush administration, and then after the 2004 election became a Deputy Secretary in the State Department, before joining Goldman Sachs on Wall Street, from where he became World Bank President, when then President Paul Wolfowitz had to resign. -- SUNS] +