Achieving Financial Stability
Parliamentary Conference on the Global Economic Crisis
Inter-Parliamentary Union, Geneva8 May 2009
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Crisis Unexpected?•A crisis foretold•Unsustainable global imbalances •International financial architecture
•Ideology: deregulation, self-regulation, capital account liberalization
•Financial Globalization: growth, stability?
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Globalization: finance>trade
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Global financial assets
Global merchandise trade
) Global financial assets as a percentage of GDP(right axis
) Global merchandise trade as a percentage of GDP(right axis
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Finance-investment nexus?
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Gross Fixed Capital Formation
Gross Financial Investment Abroad
Financial globalization
•Net capital flows from South to North (US largest borrower)
•Cost of funds not generally lower due to financial deepening (more intermediation, financial rents)
•Higher volatility•Lower growth, higher instability
Short-term capital inflows very problematic•No real contribution to investment,
growth rates•Asset (shares, real estate) price +
related (e.g. construction) bubbles instead
•Cheaper finance for consumption binges•Over-investment excess capacity•All exacerbate instability, pro-cyclicality
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Contagion: crisis spreadsFinancial sector contagion (incl. vicious circles):Sub-prime crisis financial crisis asset price deflation liquidity/credit crunch
Financial crisis Economic recession(including feedback loops)Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less consumption
Reduced demand for imports, i.e. for exports of others Prices, output declines globally Growth, employment declines globally
Deflationary spiral•Asset (stock, property) markets
deflating negative wealth effect
more bank insolvency generalized credit squeeze
•Lower external demand, world trade excess capacity investment slowdown
•Depressed domestic demand lower prices, outputrices, output lower employment, incomes
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Financial impacts on developing countries• Despite non-involvement in sub-prime debacle:
Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs
• But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances)But reserves rapidly evaporating with export collapse; fiscal space also disappearing
Social, political impacts •>200 m. more working poor •ILO: Unemployment to rise by 51m
•Government social spending at risk
•Rising social and political unrest•US intelligence report:
crisis -- greatest security risk
Financial reform?•Financial intermediation important•Rethinking role of banks (Buiter)•Rethinking role of stock markets•Appropriate financial regulation?•Avoiding excessive risk management•Ensure comprehensive systemic
reform•Ensure developmental financial
system•Ensure inclusive financial system
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Stiglitz Commission: 10 Immediate Measures2. Stable additional funding (e.g.
SDRs, regional liquidity schemes), without conditionalities for developing
countries3. Additional development funds
via new credit facility4. Developing countries need
more policy space (including financial policy to pursue countercyclical policies)
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Stiglitz Commission: 10 Immediate Measures5. Rectify lack of coherence between
trade and finance policies6. Avoid protectionism (including finance)
8. Meaningful regulatory reforms urgent (for financial
stability, growth, inclusion, development)9. Financial support measures need to be globally coordinated.
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Stiglitz Commission: Systemic Reforms
• Create new Global Reserve System (multi-country system with greatly expanded SDRs)• Reform governance of BWIs and other IFIs • Better and more balanced surveillance
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Stiglitz Commission:
Systemic Reforms• Reform central bank policies to
promote development• Financial market policies
Create Financial Products Safety Commission
Comprehensive financial regulation
Regulate derivatives trading Regulate Credit Rating Agencies Host country regulation of foreign
subsidiaries
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Stiglitz Commission:
Systemic Reforms• Support for financial innovations to enhance risk mitigation• Create sovereign debt restructuring mechanism, improve framework for handling cross-border bankruptcies• Need for more stable and sustainable development finance
New Bretton Woods moment?
Bretton Woods, 1944: United Nations conference on monetary and financial affairs
• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 44 countries (28 developing countries; 19 LA)• IMF, IBRD, ITO – UN system• Clear emphasis on sustaining growth, employment
creation, development, not just financial stability
• But BWIs very different governance arrangements
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Thank youPlease visit UN-DESA Please visit UN-DESA www.un.orgwww.un.org
G24 G24 www.g24.orgwww.g24.org andand PGAPGA www.un.org/ga/president/63/ websites websites
• Research papersResearch papers• Policy briefsPolicy briefs• Other documentsOther documents
Acknowledgements: UN-DESA, ILO, Acknowledgements: UN-DESA, ILO, ESCWAESCWA