SUNS  4310 Tuesday 27 October 1998


FINANCE: TDR VIEWS ON REFORMING FINANCIAL SYSTEM GAINS SUPPORT

Geneva, 25 Oct (Chakravarthi Raghavan) -- The existing international financial architecture needs to be reformed to reduce the likelihood of financial crisis and manage them better, and full representation and participation of developing countries should be an integral part of the reform process, the UNCTAD Trade and Development Board declared Friday.

In agreed conclusions, at the end of a two-week session dominated by a discussion of the financial crises in the world economy, the Board supported exploring alternate idea (to a global lender of last resort facility) of "unilateral standstill" by a debtor country facing attacks on its currency, pending renegotiation of the debts.

The 45th session of the Board saw the re-emergence of the unity of the Group of 77 -- with the group presenting, for the first time in many years, a common position on the financial crises and various other issues. The group had virtually ceased to function together after the 1992 Cartegena meeting of UNCTAD-VIII, and the preceding meeting of the Group of 77 at Teheran, where the Latin American and Caribbeans group (GRULAC), whose governments had embraced "neo-liberalism" more ardently, had sought to wind up the group system.

Though they did not succeed, with the Asians and Africans continuing to function in regional groups, the G77 have not functioned as such on substantive issues inside UNCTAD, the place where the group originally came into being. Since Cartegena, sometimes the GRULAC had presented common statements, but often times also functioned individually. But in the aftermath of the current financial crisis, there has been some renewed efforts at strengthening the unity of the Group.

The idea of a unilateral action by a debtor country, on the lines of the temporary safeguard actions that a country could take under the WTO system, and for "debtor in possession financing" for the indebted countries, with the IMF "lending into arrears" in such a situation, pending debt renegotiations, has been put forward in this years Trade and Development Report.

The report's analysis and its broad recommendations on the financial crisis and its causes, as well as ways to prevent them and deal with them when they occur, has received support and endorsement from several mainstream economists.

While prevention of financial crises should be the ultimate aim of reform efforts, measures are also needed for better management when crises arise, and establishing a genuine international lender of last resort with adequate resources to provide liquidity, could be such a measure, the Board said.

The Agreed Conclusions added: "However, given the serious impediments to this, it may also be useful to explore alternative means of crisis management that would provide safeguards against speculative attacks and disruption of markets, prevent moral hazard, and secure more
equitable burden-sharing between debtors and creditors. The establishment of orderly debt work-out principles could be further examined. Developed countries should also consider other actions to
facilitate access to liquidity of developing countries facing external financing difficulties."

The Board also expressed its appreciation for the "sound, independent and timely analysis" provided in this year's Trade and Development Report, and urged the secretariat to continue to study international trade, monetary and financial issues as part of its work on interdependence with a development perspective as recognized by the Midrand (UNCTAD-IX) mandate, "A partnership for Growth and Development."

"The proposals for the prevention and management of financial crises contained in this year's Trade and Development Report," the Board said further, "deserve wider dissemination and discussion, and further analysis. Within its existing mandate and taking account of work undertaken in other relevant organizations, UNCTAD should contribute to the debate on issues related to strengthening and reforming the international financial architecture, by continuing to provide relevant analysis from a development perspective."

Earlier, in its conclusions, the Board said that the current financial crisis afflicting the world economy has systemic elements and the countries affected cannot deal with the problem in isolation. An
effective response needs to combine measures at both national and international levels.
And while domestic factors certainly played a major role in financial crises in some countries, others with sound economic fundamentals and institutions have also been affected by the global financial
instability. Moreover, the adverse impact of the crisis on commodity prices has been a major factor in reducing export earnings and growth in a number of countries, especially the developing countries.

A single recipe for responding to financial crises is neither feasible nor desirable. Domestic policies need to be tailored to the specific circumstances of each country and designed to revive growth, restore confidence and ensure an orderly return to financial stability. Such efforts should be complemented by appropriate actions by developed countries. These efforts should ensure sustained economic growth and sustainable development.

Recourse to protectionist policies cannot be the solution to current global problems, but would merely serve to deepen the crisis. Growth-oriented policies hold the key to averting the risk of global
recession and pressures for protectionism.

Recent events, the Board said, underscore the importance of a favourable external environment in attaining policy objectives in developing countries. "An enabling external financial environment to
support domestic measures," the agreed conclusions added, "would require, inter alia, adequate and transparent supervision of volatile short-term capital flows.

"There is a need to reform the existing international financial architecture so as to reduce the likelihood of financial crises and to manage them better. Full representation and participation of developing countries should be an integral part of the reform process. The views of developing countries should be taken into account. Effective multilateral and domestic surveillance is essential for the prevention of financial crises. Such surveillance needs to recognize the role of global interdependence in transmitting financial instability. Greater coherence is needed in international policy-making in the areas of trade, money and finance.

"Reforms of the financial architecture should address weaknesses and gaps in the existing regulatory framework for cross-border lending and financial flows. The scope of such reforms may need to be extended to a wider range of financial activities.

"Greater transparency of the operations of private financial institutions, governments and multilateral financial institutions is essential for effective surveillance of policies and supervision of
markets and for timely action to prevent financial instability. A consultative process should be encouraged for this purpose.

"Strengthened prudential regulation and supervision of the financial system in a well-sequenced process of liberalization can contribute to greater financial stability. Domestic reforms to be considered might include: increased transparency and disclosure; strengthening of domestic regulatory standards; and more effective burden-sharing arrangements, such as improved insolvency and debtor-creditor regimes.

"There may also be need to use other instruments to prevent the buildup of external financial vulnerability without impeding trade or medium- and long-term investment flows. Useful lessons can be drawn from the successful experiences in a number of countries with the use of such instruments. However, regulation and control over financial flows should not be used to sustain inappropriate policies."

In other actions and conclusions, the Board called for a review of the design, implementation and conceptualization of structural adjustment programmes in Africa, for special actions to speed up the accession processes of Least Developed Countries to the WTO, and for actions to remove the debt overhang.

The Board also called for new initiatives and innovative approaches to deal with the African debt overhang, and ways and means of identifying the portion of the debt assessed as unpayable for possible action by creditors.

The Board also recommended to the UN General Assembly the convening of the Third UN Conference on Least Developed Countries in year 2001, and asked the UNCTAD secretary-general to organize an intergovernmental preparatory committee for this.

The 45th session of the Board which had discussed UNCTAD's contribution to the UN's New Agenda for Development of Africa in the 1990s (UN-NADAF), made an indirect reference to the proposals in the Trade and Development Report for a comprehensive assessment, by an independent panel of eminent persons, of the sustainability of the African debt. The TDR has said that most of Africa's $64 billion debt was public and owed to official creditors and virtually unpayable and needs to be written down. The assessment, the report said, should be done by a body "not unduly influenced by the interests of creditors", the report had said -- a polite reference to the inappropriateness of the IMF and the World Bank sitting in judgement in these matters, when
they themselves were creditors.
At the Prebisch Lecture by the World Bank Vice-President, Joseph Stiglitz, Mr. Yash Tandon of the Harare-based SEATINI, an African NGO, had said that the debt overhang was one due to the misguided policies forced on the African countries by the Fund/Bank institutions and their officials, and they should bear the responsibility for the debt.

In the agreed conclusions, the Board said that the economic recovery which began in 1994 in Africa had proved fragile owing to lower commodity prices and the more recent effects of a slowdown in the world economy as a whole. The recovery did not generate the hoped for increase in national savings and investments, which together with the attainment of a 6% annual growth target envisaged by UN-NADAF is essential for the achievement of sustainable development in Africa.

While African countries have made determined efforts to improve macro-economic fundamentals, reforms have failed adequately to address all structural constraints, especially as regards the under-development of human resources and of physical infrastructure, as well as institutional limitations, which remain severe.

"The design and implementation of structural adjustment programmes should take account of these constraints," said the Board in the agreed conclusions that in effect endorsed the analysis and conclusions of the Trade and Development Report which had challenged the whole range of
reform policies (including programmes of privatization and dismantling of agricultural marketing boards, with no effective substitutes in place) thrust upon Africa over the last decade by the Fund-Bank Structural Adjustment Programmes.

"Therefore, the conceptualization (of the SAPs), including the premises on which they have been built should be reviewed and adjusted to the requirements of individual countries, and coherence in policy advice should be ensured. Full ownership of reforms, founded upon a broad-based national consensus, is a necessary condition for success."

The debt overhang, the Board said, continued to be a major constraint facing African countries, and it is particularly acute in the light of the reduction in ODA, lower export receipts and meagre resource flows, including FDI. The debt overhand is having major adverse consequences for the fiscal health of African countries, and this may discourage domestic, foreign, public and private investment. While the HIPC initiative has been designed to contribute to an enduring solution to
the debt problem, greater flexibility, additional efforts and a broader basis would help to place African countries back on the path to growth and development.

"Bearing in mind the joint responsibility of both debtors and creditors in the accumulation of African debt, innovative approaches involving the affected countries are required," the Board said.

"In this connection, taking into account the proposals contained in the Trade and Development Report 1998, the international community may wish to consider ways and means of identifying that portion of the debt assessed as unpayable for possible action by creditors. UNCTAD should
continue to consider the debt situation of African countries and provide technical assistance for debt management."

The Board expressed concern over the continued fall in ODA levels in real terms, and called on donors to increase ODA in accordance with internationally agreed targets. The scale of ODA, as well as its quality and predictability remain critical for Africa, it added.

Given that Agriculture is centrally important in the overall development in most African countries, and there is a need to address the problem of under-capitalization and low productivity, the
market-based reforms need to be supported.

In most cases, the Board said, government action has an important role to play in overcoming the institutional hiatus in input and output markets, infrastructural impediments and deficits in research and development -- all of which hinder agricultural development.

Promoting the tradable sector in agriculture can be greatly facilitated by better market access and reduced subsidies in industrialized countries. And graduation into "value-added" agro-based manufacturing is highly desirable. To that end, the issue of tariff peaks and tariff escalation as regards products of export interest to African countries needs to be adequately addressed.

UNCTAD should therefore continue to analyze the ways in which conditions in domestic agriculture are affected by the global economic environment and come up with practical and sustainable policy options, including those involving enhancement of market access in the context of assisting developing countries in the formulation of a positive agenda.

But the emphasis on agriculture should not lead to the neglect of industrialization, the Board said. Experience has shown that commodity-based industrialization, building on either agriculture or
minerals, is a viable option. While FDI can play an important role, public sector support and domestic investment are crucial. UNCTAD should cooperate with other relevant international organizations in helping African countries identify opportunities open to them in this area.

While adequate openness to trade and full integration into the international trading system constitute a crucial objective for African countries, the timing, sequencing and degree of liberalization should be adjusted to the needs and constraints of African economies as they build up their international competitiveness. UNCTAD should continue to explore the links between trade, international transport and African economic growth and their policy implications.

The Board also called on UNCTAD and other international organizations to extend assistance to African countries to enable them to identify trade policy options available to them, and their rights and obligations under the WTO rules, in particular the implementation of special and differential measures in favour of developing countries. Measures should also be taken to facilitate rapid and negotiated accession to the WTO by non-member African countries. Along with this, the problems facing supply capacities in the productive sectors should be addressed and possible solutions implemented.

The board also called for increased cooperation, at subregional and regional levels, among the countries of Africa in the areas of trade, finance and investment, and for greater international support in this regard. Enhancing inter-regional trade and cooperation should also be fully exploited and encouraged, including through the Global System of Trade Preferences among Developing countries.

Institution-building remains a major challenge for African countries. Pro-investment policies, the development of an entrepreneurial sector willing to invest and reform of the public sector are fundamentally important factors. The creation of a partnership between the private and public sector, from a development perspective, has proved to be a successful policy approach both in Africa and elsewhere.

In separate agreed conclusions on Least Developed Countries (LDCs), the Board while encouraged that LDCs as a group had been able to sustain their recent economic performance, nevertheless expressed concern over the considerable uncertainty over the short-term prospects for LDCs. Even if their current recovery could be sustained over the years, it could not by itself contain the continued marginalization of the LDCs in the world trade or enhance their integration into the global trading system.

The Board noted that despite significant progress in implementing broadly-based economic reforms, most of the LDCs had not succeeded in attracting long-term investment. Although a wide range of investment opportunities existed in LDCs, particularly in the agricultural, tourism and mining sectors, LDCs still faced obstacles in trying to attract FDI and other forms of private capital.

This underscored the critical importance of the role of official agencies - multilateral and bilateral development financial institutions and aid agencies - in helping to promote private flows to
LDCs.

While welcoming major debt relief initiatives, including the HPIC, the Board noted that its implementation had so far remained limited. Two years after its launching, only one LDC had benefited from the full-fledged relief provided by the initiative. The Board welcomed the extension to year 2000 of the initial two-year deadline for countries to be considered under the initiative.

"However," said the Board, "there is a need to provide an effective and early exit from the debt overhang problem in support of debtor policy reform efforts and to secure the necessary resources for the full and expeditious implementation of the initiative. The eligibility criteria should be flexible enough to take in top account different debt situations and to include all LDCs which are in need of debt reduction and have been undertaking the necessary policy reforms."

The Board also called for expeditious accession processes for LDCs to join the WTO and asked UNCTAD to continue to assist the LDCs in meeting their terms of accession. LDCs should be enabled "to achieve accession on terms consistent with their LDC status" and the WTO accession
process should combine, within a reasonable time-frame, the necessary rigorous observance of multilateral disciplines with a degree of flexibility and understanding for the difficulties and constraints faced by LDCs.

The Board's agreed conclusions also called for effective implementation of the Marrakesh Ministerial decision in favour of the LDCs and of the WTO Action Plan for LDCs adopted at the Singapore Ministerial meeting as well as the High-Level meeting on integrated initiatives for LDCs.

LDCs should also receive assistance to enable them to take an active part in negotiations which were part of the built-in agenda and take an active interest in current debate on new issues, the Board said.

The Board also expressed concern at the pace of implementation of the Integrated Framework for Trade-related technical assistance.