Author : Supachai Panitchpakdi
Date : September 9, 2009
The global financial and economic crisis, and how to fix it, has dominated newspaper headlines and public policy discussions this year. The financial turmoil which started with the collapse in the US Sub-prime mortgage market is of a scale not seen since the 1930s. However, recent positive economic data from Asia and Europe have raised hopes of a turnaround in the global economy, and vindicated the robust fiscal stances of many governments who sought to apply countercyclical traction to their economies. The stimulus packages seem to be working - or at least have prevented the situation from becoming even worse - but of course, the immediate stimulus needed will only treat the symptoms of the crisis. Addressing the deeper causes will require a different set of measures, targeting reform at the system of global finance.
Indeed, there now seems to be agreement, and even the adoption of some measures, to reform the global financial architecture. Yet, the actions and proposals to date have been limited to relatively marginal tinkering, for example, increasing the voice of developing countries in the IMF, strengthening banking supervision, or even closing down tax-havens (with no obvious link to the current crisis). In contrast, relatively little public discussion has been devoted to the broader systemic challenges and more fundamental reforms of global finance. Nevertheless, they will be needed, and UNCTAD's 2009 Trade and Development Report identifies several ideas that could be addressed by policymakers in this regard. Here, I outline, in brief, a few of the Report's findings; to read more, please visit the UNCTAD website.
Re-regulating global finance
There is growing consensus that the model of deregulated global finance has failed. Based on the mythical belief that the "market knows best", this model failed to take into account that speculators are subject to herding behaviour, and that markets do not always price risk accurately. And this global crisis is only the latest in a series to painfully demonstrate that markets can fail.
In addition, the light-regulation model underestimated the possibility of regulatory arbitrage, with banks simply shifting risky assets to less regulated non-bank institutions, creating a veritable "shadow banking system". At its peak, the US shadow banking system held assets of approximately $16 trillion, about $4 trillion more than regulated deposit-taking banks. While the regulation focused on banks, it was the collapse of the shadow banking system which kick-started the crisis.
In response, UNCTAD's 2009 Trade and Development Report calls for more comprehensive regulation of financial markets, and complex financial instruments in particular. An early task of regulators should be to weed out financial instruments which only increase risk without providing any true social return.
In order to avoid arbitrage, any such regulation should tackle excessive speculative financial activity across all sectors. Establishing national regulations to prevent housing bubbles and the creation of risky financial instruments alone would only intensify speculation in other areas such as stock markets or commodities futures markets, which we witnessed last year. Similarly, regulations should not be exclusive to one region alone. Regulators around the world should communicate and share information, set standards, and avoid "races to the bottom" in financial regulation in attempts to attract investment funds. Nevertheless, it would be a mistake to impose uniform regulatory standards: there is no single regulatory system which is right for all countries.
A multilateral exchange rate system
A further form of speculation that requires a comprehensive response is currency speculation. Over the past two decades, short-sighted domestic policies and an unregulated international financial system attracted financial investors to leverage the short-term opportunities provided by divergent monetary policies in different countries. Under the so-called "carry trade", billions were borrowed from countries where interest rates were low and invested in countries where interest rates were high, generating large short-term profits for investors and artificially inflating the value of the currencies of the capital-receiving countries. As the financial crisis hit, the highly leveraged exchange-rate "bubble" burst.
The fallout from short-term currency speculation has contributed to sharp collapses in the values of some national currencies as the global economic crisis has intensified. That has made the economic damage of the crisis much more severe for some countries. The Icelandic krona declined by 51% (against the US dollar) in the second half of 2008, for example. Subsequently, a further wave of devaluations reflected the de-leveraging of speculators' positions and also the shocks hitting the global financial sector at large.
The first step in stemming such destabilizing effects is to remove most of the incentives for short-term speculation in currencies. UNCTAD therefore proposes a new multilateral exchange rate management system that links lead and satellite currencies (either globally or regionally) in a way that would maintain effective real exchange rates at relatively constant levels. Nominal exchange rates would be adjusted to reflect differences in rates of inflation between trading countries. That way, real exchange rates could be kept constant, allowing fair competition between producers from different countries and preventing potentially damaging speculation.
Needless to say, these are only suggestions, which will require further work and refinement. However, we should ensure that such a debate about the broader systemic issues at stake actually takes place, and that this reform does not fall by the wayside. For let us not forget that already after the Asian Crisis of 1997/1998, several reports with ambitious recommendations for much-needed reforms were published. Some of the reforms proposed may have helped to prevent this crisis. Unfortunately, as the world economy recovered, they were largely ignored. Let us not make the same mistake again.
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Date : April 9, 2010 01:29
I’d like to pick up on the point of harmonisation that you mention in your blog entry.
You advocate that financial regulators pool knowhow on a pan-regional basis, and should set common standards in financial regulation. Leaving aside the complex legal issues in implementing such an ambitious undertaking, I think it important to highlight a couple of key variables which would challenge the practical potential for implementation of this plan. For example, over-regulation tends to stifle innovation, or at the very least, it encourages innovative methods to remain within the letter, but not within the spirit, of the law. The real question here is whether a race to the bottom could realistically be avoided, for in the absence of a world government, there’s always going to be the renegade countries which attempt to capitalize on a glaring economic opportunity. A case in point is the much-maligned Irish government policy in relation to Corporate Tax. At a rate far undercutting the EU-average, Ireland’s government boasted an enviable track record of inward foreign investment motivated in large part by the prevailing tax base.
With this in mind, backtracking to the idea of a more globalised form of market regulations, it is important to consider the implications for the developing world. At present the governments of developing countries can claim, with some justification, that a democratic deficit continues to exist in terms of their representation in global financial institutions. This issue, which has implications for some 5/6ths of the world’s population, is unlikely be solved by further regulation through the global governance status quo. Inevitably, developing countries will look to examples such as the Irish corporate tax model in their search for ways to introduce national competitive advantages within an increasingly homogenized global financial regime. Surely we should reflect further on the global picture, before jumping headlong into sowing the seeds for any future breakdown in trust in the financial markets, at the hands of a global financial regulatory regime in which the loyalty of its stakeholders would remain forever dubious.
Date : October 27, 2009 13:01
Dear Supachai Panitchpakdi and friends in the Forum .
Now in Vietnam you can hear projects , projects .Every where people waite projects , seeking projects and afraid projects .
It can be money for some persons , and it can be trouble for some communities .
In general development is good . Because of changing the management rules , people can pay money and changing came from private funds .I read some where, 60% house in Hanoi build by private money .
But for state projects : it terrible in same places .They approval projects,they take the lands and no money The projects can't be expanding .People can't live normal .They waite payment from government , they waite new construction plan ... the life is not normal
What I dream in Hanoi : Do not put money for destroying old parts of Hanoi.Let it be OLD HANOI . Put money to the new place where you do not destroy any things , build new -NEW HANOI .
When people came to put projects : please think very carrefully about mobilization domestic money .The rules are changing , so it not easy to mobilize .
It can be troule If Investor do not know carrefully domestic rules.
Thank you
Date : October 25, 2009 13:44
Je partage certainement l'argument sur la mise en place de mesures qui visent à empêcher la spéculation sur les monnaies et/ou les distorsions sur le marché des changes, ainsi que la conclusion. En revanche, je ne partage pas la minimisation des conséquences potentielles de déclarations restées, malheureusement, sans effet: "les actions et les propositions à ce jour se sont limitées à des choses relativement marginales, par exemple donner plus de voix aux pays en développement au sein du Fonds monétaire international, renforcer la supervision des banques, voire éliminer les paradis fiscaux". Le dossier suivant, par exemple, met bien en évidence les enjeux sous-jacents à la suppression des paradis fiscaux et à une amélioration de la régulation, de la démocratie et de la transparence dans le domaine de la finance internationale.
http://www.oxfamfrance.org/pdf/dossier_oxfamfrance_paradis_fiscaux.pdf
Date : September 25, 2009 16:17
The article seems to be right on the point, but I must say that "glogal financial and economic crisis" have a very tight relationship with the capitalism system. please correct me if I am wrong. The essence of Capitalism is for the rich to become richer and for the poor to become poorer. Is it fair to say that that the economic cris that we are experiencing right now is favorable to to rich? There is an opportunity to invest in the housing market using the so-called " buy low and sell high" later on. If this statement is correct, there is nothing we can do about it. Ten years later, we are going to experience the same phenomenon.
Date : September 25, 2009 16:17
The article seems to be right on the point, but I must say that "glogal financial and economic crisis" have a very tight relationship with the capitalism system. please correct me if I am wrong. The essence of Capitalism is for the rich to become richer and for the poor to become poorer. Is it fair to say that that the economic cris that we are experiencing right now is favorable to to rich? There is an opportunity to invest in the housing market using the so-called " buy low and sell high" later on. If this statement is correct, there is nothing we can do about it. Ten years later, we are going to experience the same phenomenon.
Date : September 12, 2009 09:56
I think the only way to fix the current financial situation is to redefine our use of technology. I mean, we created financial rules and regulations and we get to change it where we see fit.
Please see the following article as a way to possibly fixing this mess we are in.
http://www.slx.za.net/rtfm/ezine/bank_of_atlantis.html
Date : September 10, 2009 17:13
Estimados Amigos:
El articulo que se menciona es muy interesante y a la vez relevante para nuestros tiempos donde la Crisis sigue golpeándo a las economías,pero son las que sienten mas el golpe de la Crisis las pequeñas y sobre todo aquellas en las que no tenga Sistema Financiero bien Regulado.
Esta Crisis para el mundo Capitalista tiene que convertirse en una lección importante,los Mercados se deben regular de manera eficaz y eficiente,de lo contrario se crean torpezas y el mercado se desvirtúa acomodándose mejor a su mejor postura,la que le de mas beneficios y que comparativamente le de expectativas favorables.
Pero no olvidemos que también estamos en un proceso global,donde las Regulaciones en materia Económica-Financiera son cada vez más incierta en su aplicación y hasta en el Efecto mismo,por lo que escribo en este Foro,sirva para relevar el papel de la Sociedad como la que soporta lo acertado o desacertado las Politivas Económicas es decir (las que impactan en el bolsillo) de las empresas,familias y estados.
Date : September 10, 2009 01:57
No debemos olvidar que venimos de un largo historial de crisis por excesos de transferencia, la crisis de los años 10 del siglo pasado sobrevino por la acelerada transferencia de capitales del campo (de hacendados y terratenientes) a la industria metalmecanica, producto de la acelerada ferrocarrilización del mundo que requería mayores cantidades de acero que de cualquier otro metal o que de granos. Posteriormente la crisis del 29 llevó los capitales hacia la industria de los metales blandos y específicamente hacia el oro, tan aceleradamente que los países ya dependientes del acero y de su combustible, la madera, se quedaron atrás hundidos en una crisis de dimensiones catastróficas. a esta le siguió una nueva transferencia de recursos hacia el agro que dio lugar a una crisis regionalista que se vivió solo en algunos países, pero que trajo su propio apogeo con la época del milagro mexicano, el milagro pampero y otros similares en América Latina, y que consistió en transferir recursos para la industria agrícola, es decir, no solo al campo, sino a la industria de producción agrícola en masa, a este milagro le siguió su propia adevacle cuando abruptamente transferimos todos los recursos hacia la industria extractiva y de transformación, esto trajo su propia crisis, en cada país con versiones tan comunes entre si que generaron grandes movimientos de jóvenes en todo el mundo, en los años 60, posteriormente, la era tecnocrata transfirió estos recursos a la nueva era tecnológica y vivió su propia crisis y finalmente dejamos todo en manos de los grandes emporios financieros buscando la relación mayor ganancia con menor capital y similares y dimos origen de facto a nuestra actual crisis, que dicho sea de paso no es la ultima ni la peor. la realidad es que no hemos aprendido la lección histórica pues el problema no reside en qué sostiene a las economías sino en el exceso de transferencias a ese sector. En el caso mexicano hay bancos que cobran un 87% anual sobre créditos a cinco años, todo el trabajo de esa gente que se endeuda se transfiere a los bancos, sin tocar su economía pero se les permite en pro de la libertad de mercado. ES UN ASALTO EN DESPOBLADO, pero además recordemos que todas estas crisis han tenido un eje común, el incremento del numero de pobres, y es que la transferencia es vertical, de abajo hacia arriba y los pobres transfieren sin saber siquiera que lo hacen. Es necesario modificar el esquema de transferencias de capitales, permitiendo la ganancia para todas las etapas del proceso real y no solo para el ultimo nivel del sistema. Veamos este tema de las transferencias: ya desde el debate de la campesinizacion y descampesinizacion del mundo de Wolf vemos que el nos habla de las transferencias que hace un sujeto social. y de ahí nos agarramos en esta nueva discusión. Los habitantes de México están sujetos a varios tipos de transferencias, primero hacen una transferencia en forma de pagos de servicios que se supone se dan con sus impuestos, mismos que le son substraídos de sus ingresos en forma de impuestos al trabajo y que luego, vuelve a pagar impuestos en el consumo mediante el IVA, luego paga impuestos en cada articulo que adquiere y en los servicios profesionales, pero también paga impuestos sobre los servicios federales, luego paga intereses exorbitantes por cuentas corrientes, cuentas de crédito, y !dios guarde la hora! si adquiere un crédito hipotecario pues pagará cuatro a seis veces el mismo bien. finalmente, si se le ocurre poner algún negocio pagará impuestos por una suma equivalente al 37% de su ingreso, del cual no se deduce su subsistencia y sin embargo tiene que comer, verán, uno tiene esa mala costumbre de comer todos los días, así que si se aprueba la nueva ley de recaudación pagará nuevos impuestos al consumo, lo cual finalmente lo único que hace es des incentivar el consumo.
Creo que la gran solución a la crisis esta en reducir las trasferencias para permitir la acumulacion y así que la gente misma saque al país de la crisis. Desde luego esta no es la panacea, cada país ha vivido su propia versión de la crisis, pero finalmente lo que impera en todas es el exceso de transferencia. Un campesino productor de sandías en Durango México gasta en el año 16000 pesos para producir una hectárea de sandía que le pagarán en excelsos 18000 pesos, ¡¿quien vive todo el año y paga el siguiente ciclo productivo con dos mil pesos mexicanos?!
para mayor información respecto a casos directos de etnografías de la pobreza (incluido el propio) estoy a sus ordenes en mi mail analaura.gonzalezvaldes@gmail.com
Date : September 10, 2009 01:46
Sir, those are good intentions. I wonder a bit what "An early task of regulators should be to weed out financial instruments which only increase risk without providing any true social return. " means in reality.
Perhaps I am ignorant, but apart from the vague theory of the "invisible hand" I have never seen proof that normal shares in limited companies provide much true social return. "Risk taking" in general was perhaps a good thing for society in the expansion and colonial phase (but not for those being colonialised), but today risk taking is not only reflected in the financial crisis but also in climate change, biodiversity destruction and all kinds of social problems.
The problem is mainly that legislation protect risk takers, that governments are socialising the failures while the profits are privatised.
Date : September 10, 2009 00:49
La crise financiere mondiale a bel et bien montre les limites du marche libre. Pourquoi les Etat n'atteindraient que les crises pour agir au lieu de les prevenir. Il est grand temps que la communaute internationale puisse aussi mettre les mecanismes d' accompagement du systeme financier mondial adapte au marche libre.
Et que dire des pays en developpement qui ont des finances precaires surtout en Afrique. Un grand lobbying mondial doit s'affirmer pour un systeme financier mondial equitale.
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