RECASTING THE INTERNATIONAL FINANCIAL AGENDA

This paper argues that the agenda for international financial reform must be broadened in at least two senses. First of all, it should go beyond the issues of financial prevention and resolution to those associated with development finance for poor and small countries, and to the “ownership” of economic and development policies by countries. Secondly, it should consider, in a systematic fashion, not only the role of world institutions but also of regional arrangements and the explicit definition of areas where national autonomy should be maintained. These issues should be tabled in a representative, balanced negotiation process. In the area of financial crisis prevention and resolution, a balance must be struck between the need to improve the institutional framework in which financial markets operate and the still insufficient attention to the design of appropriate schemes to guarantee the coherence of macroeconomic policies worldwide, the enhanced provision of emergency financing during crises, and the creation of adequate debt standstill and orderly debt workout procedures. In the area of development finance, emphasis should be given to the need to increase funding to low-income countries. The role of multilateral development banks in counter-cyclical financing – including support to social safety nets during crises – must also be emphasized. The enhanced provision of emergency and development financing should be accompanied by a renewed international agreement on the limits of conditionality and a recognition of the central role of the “ownership” of development and macroeconomic policies by developing countries. Regional and subregional institutions should play an essential role in the supply of “global public goods” and other services in international finance. The required financial architecture should in some cases have the nature of a network of institutions that provide the services required in a complementary fashion (in the areas of emergency financing surveillance of macroeconomic policies, prudential regulation and supervision of domestic financial systems, etc.), and in others (particularly in development finance) should exhibit the characteristics of a system of competitive organizations. The fact that any new order would continue to have the characteristics of an incomplete “financial safety net” implies both that national policies would continue to play a disproportionate role in crisis prevention and that certain areas should continue to be realms of national autonomy, particularly capital account regulations and the choice of exchange rate regimes.

Market, Social Cohesion, and Democracy

This paper offers three guiding principles for a better relationship between the economy and democracy: democracy as the extension of citizenship; democracy as diversity; and democracy as complementary to clear, strong macroeconomic rules. This view, it is argued, implies that economic and social institutions must be subject to democratic political choice. In this context, it analyses the role of both national and international institutions in improving the complementarity of the market, social cohesion and democracy. The central role of economic and social rights serves as the overarching framework for the analysis.citizenship, democracy, social cohesion, market economy, inequality, property rights

A Broad View of Macroeconomic Stability

This paper recommends a broad concept of macroeconomic stability, whereby “sound macroeconomic frameworks” include not only price stability and sound fiscal policies, but also a well-functioning real economy, sustainable debt ratios and healthy public and private sector balance sheets. These multiple dimensions imply using multiple policy instruments. The paper elaborates a framework for developing countries that involves active use of counter-cyclical macroeconomic policies (exchange rate, monetary and fiscal), together with capital management techniques (capital account regulations and prudential rules incorporating macroeconomic dimensions). It also explores the role of international financial institutions in facilitating developing countries’ use of counter-cyclical macroeconomic policies.macroeconomic stability, capital account volatility, counter-cyclical macroeconomic policies, capital management techniques, capital account regulations.

The Instability and Inequities of the Global Reserve System

This paper argues that the current global reserve system is inherently unstable due to the use of a national currency as the major international reserve currency, and the high demand for “self-insurance” by developing countries. The latter is due to the mix of highly pro-cyclical capital flows and the limited room to maneuver that developing countries have to manage counter-cyclical macroeconomic policies. Both features imply that the system is also inequitable. An important insight of the paper is that such inequities feed into the instability of current arrangements. Any meaningful reform of the system must therefore address these two interlinked features.Global reserve currency, seigniorage powers, financial volatility, pro-cyclical macroeconomic policies, self-insurance, inequities of international economic order

The commodity terms of trade and their strategic implications for development

Although the empirical literature is not unanimous about the existence of a continuous long-term deterioration in the terms of trade for commodities (the original and most common formulation of the Prebisch- Singer hypothesis) and, hence, about the possibility of inferring their future behaviour on this basis, there is a consensus as to the sharp drop in the barter terms of trade, especially from the 1920s on. This paper presents a critical review of the theoretical and empirical literature on the subject and the implications for development strategies.Terms of trade, Economic development

Price-based capital account regulations: the Colombian experience

The Chilean experience with price-based capital account regulations (i.e., deposits or reserve requirements on capital inflows) has been subject to extensive discussion in the recent literature. This paper presents evidence on the effectiveness of similar regulations in Colombia since September 1993, when traditional exchange controls were replaced by price-based regulations. It is important to emphasize that the Tobin tax equivalent of such regulations in Colombia has been quite high (13.6% and 6.4% tax for 12 and 36 months loans, respectively, in 1994-1998), and, as in Chile, it is certainly much higher than the rates suggested for an international Tobin tax. The econometric evidence presented indicates that these regulations have been effective in Colombia, both in terms of reducing the volume of flows and in improving the term structure of external borrowing. This indicates that price-based regulations give the authorities some room for maneuver to adopt restrictive monetary policies during international capital market booms. They have also been effective in improving the debt profile of the country, a crucial determinant of macroeconomic risks in the face of busts in the international capital market.

A counter-cyclical framework for a development-friendly international financial architecture

The major task of a development-friendly international financial architecture is to mitigate pro-cyclical effects of financial markets and open “policy space” for counter-cyclical macroeconomic policies in the developing world. This paper explores a series of policy instruments for this purpose: counter-cyclical prudential regulatory and supervisory frameworks; market mechanisms that better distribute the risk faced by developing countries through the business cycle; multilateral instruments that encourage more stable private flows; and better provision of counter-cyclical official liquidity. It also suggests that regional macroeconomic consultation, and common reserve funds or swap arrangements among developing countries can play a role in this regard.volatility, contagion, financial crises, counter-cyclical macroeconomic policies, counter­cyclical prudential regulation, GDP-indexed and local currency bonds, regional macroeconomic cooperation.

The Dual Divergence: Growth Successes and Collapses in the Developing World since 1980

This paper argues that developing countries’ growth successes and collapses tend to cluster in specific time periods—and that only the existence of a global development cycle can explain this. The cycle reflects the external factors that affect all, or large clusters of developing countries, and thus constrain their growth possibilities. Nonetheless, country-specific factors—particularly patterns of specialization—play a significant role in determining growth dynamics. From this perspective, the paper shows a very large difference between the economic growth of developing countries diversifying into higher technology manufacturing exports and those experiencing success in natural resource intensive sectors.economic growth, divergence, external factors, global development cycle, patterns of specialization, technological intensity of exports

The Financial Crisis and Its Impact on Developing Countries

This working paper has been commissioned by the Poverty Group, Bureau for Development Policy at UNDP, to identify the transmission mechanisms of the financial crisis from developed to developing countries and to provide broad policy recommendations at the national, global and regional level. The paper identifies three mechanisms that play a key role in spreading the consequences of the financial crisis to the developing world: remittances, capital flows and trade. The policy responses take MDG achievement and poverty reduction as the central policy concern. The paper indicates that a fair number of countries have policy space to protect vulnerable groups in the short run as well as to undertake investments to build resilience and reach these goals in the longer term. Other countries will need additional development assistance to protect development achievements. The authors point to a number of factors that need to be taken into account in determining what mix of policies to deploy including the macroeconomic, fiscal and policy stance of countries and their dynamics. The paper also proposes far-reaching reforms to address the global financial crisis, which would help to put the global macroeconomic, fiscal and financial coordination mechanisms on a firmer footing.The Financial Crisis and Its Impact on Developing Countries