Transcript World Economic Situation and Prospects 2004

Achieving
Financial Stability
Parliamentary Conference on the Global Economic Crisis
Inter-Parliamentary Union, Geneva
8 May 2009
Crisis Unexpected?
• A crisis foretold
• Unsustainable global imbalances
• International financial architecture
• Ideology: deregulation, selfregulation, capital account
liberalization
• Financial Globalization: growth,
stability?
Globalization: finance>trade
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350
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US$ Trillions
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80
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100
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0
0
1980
1990
1995
2000
2006
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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As percent of GDP, indices 1980=100
300
Finance-investment nexus?
0.30
0.25
Gross Fixed Capital Formation
0.20
0.15
Gross Financial Investment Abroad
0.10
0.05
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06
20
04
20
02
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00
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70
0.00
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
Contagion: crisis spreads
Financial 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
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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, output
 lower employment, incomes
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
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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?
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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
Stiglitz Commission:
10 Immediate Measures
2. Stable additional funding (e.g. SDRs,
regional liquidity schemes), without
conditionalities for developing
countries
3. Additional development funds via new
credit facility
4. Developing countries need more policy
space (including financial policy to
pursue countercyclical policies)
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Stiglitz Commission:
10 Immediate Measures
5. Rectify lack of coherence between
trade and finance policies
6. 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
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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
Thank you
Please visit UN-DESA www.un.org
G24 www.g24.org and PGA
www.un.org/ga/president/63/ websites
• Research papers
• Policy briefs
• Other documents
Acknowledgements: UN-DESA, ILO, ESCWA
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