Linking trade and financial policies
Aldo Caliari (© Center of Concern)
16 March 2012

In the run-up to the coming quadrennial conference of UNCTAD, Aldo Caliari of CIDSE's US member Center of Concern was one of the speakers at a Hearing with Civil society being held on March 7, 2012, in Geneva, Switzerland.

Thank you, Mr Chairman.

I want to refer to three areas where we believe UNCTAD’s role in the next four years is crucial:

  • Rethinking Macroeconomic Policies
  • Reforming the international monetary system
  • Financial regulation

Rethinking Macroeconomic Policies

I want to start with what I think is a positive impact of the crisis, and this is that it validated the efforts of governments that were willing to be pragmatic and depart from hitherto considered “safe” orthodox models. These governments reaped the rewards, they were better positioned to weather the impacts of the crisis.

Countries that promoted a greater reliance on domestic (as opposed to external) demand were more capable of weathering the turmoil which, for developing countries in particular, was largely propagated through trade channels.

Policies to support decent employment and livelihoods (including rights at work), social protection floors and a more equitable distribution of income proved their potential to yield important dividends in terms of macroeconomic stability. We would always say that reducing inequality was important in its own right but now we also say that inequality is a source of  financial instability. For instance, IMF research found that reducing the bargaining power of the lower income groups leads to more leverage throughout the system and makes that economy prone to collapse. So reducing inequality, now we can also say, is crucial to achieve financial stability.

It is also important to rethinking of the relationship between trade and financial policies, and this is an area where UNCTAD, as central focal point for trade and development, and its relationship with finance, investment, etc. can make a difference. The structural reforms prescribed for developing countries were oriented to an export-led model whose measure of success was the volume of exports.  There was little attention paid to the structure of exports or their connection to national production and value-added. Recovering the link between trade and financial resilience demands a renewed vision that moves away from the obsession with constantly growing market access and that emphasizes fiscal, monetary, investment and financial policies at national and global levels more tailored to ensure that trade supports development.

But, just as we emphasize the rethinking that is going on in so many quarters, we also have to refer to the other side of this coin, to examples where countries have relied on a repetition and intensification of failed policies to try to climb out of the crisis. One puzzling example is the persistent focus on austerity measures as a response to fiscal and debt crises – in spite of the evidence showing that such measures can only lead to a vicious cycle of contraction and further damage to the fiscal and debt ratios that the measures ostensibly seek to improve.

UNCTAD has done an assessment of the performance of austerity programs in the last 3 decades (which, by the way, I have not seen any other organization produce). If one wants to use percentage terms, the success rate of these programs has been less than one per cent. I am not sure who would want to implement a policy that has been shown to work less than one per cent of the times, but here we are. The fact that there is so little attention paid to the empirical basis for these policy responses represents, in our minds, a strong argument why UNCTAD should get a strong support to continue producing these analyses that, I repeat, nobody else produces.

Of course, the countries that have rethought their macroeconomic policies are not the only ones who want to do it. That’s why the call for policy space continues to be important. It was UNTAD XI, in Sao Paulo, when for the first time this concept was agreed in a North-South conference.  The space to rethink the policies as I said before is constrained by disciplines of trade and investment agreements and donor and international financial institutions conditions.

Reform of the monetary system

We also need an international monetary system that can help countries take advantage of trade for development. Let us remember, Keynes envisioned the Bretton Woods Institutions and the Bretton Woods system as the natural complement for the international trading system.

So, reform of the monetary system is definitely a task where UNCTAD should have a place, if we want the monetary system to be functional to trade and development.

[Increased levels of exchange rate volatility have a strong impact on trade performance through channels such as the levels of domestic investment, the variations of relative prices of export products (which, in turn, affect competitiveness of the economies), the price of access to finance for production and the evaluation of the value of market access concessions. By affecting the prices of essential imports such as food and energy, they also carry consequences for food security and the balance of trade. Without an international financial and monetary system that can counter these trends, international trade will continue to place developing countries at a disadvantage in the global economy. ]

The dangers inherent to a continuation of the current system where the domestic currency of one country as the main international trading and reserve currency are evident – I again refer to research from the IMF along these lines. But there is no shared vision for reform. We believe there are four challenges that a reform of the monetary system must address:

a) rebalancing and coordinating trade deficit and surplus countries;

b) ensuring adjustments are non-recessionary;

c) limiting exchange rate volatility; and

d) enabling mechanisms for the generation of development and climate finance.

Only those paths for reform that are centered around developing a supranational currency can measure up to facing those challenges.

In addition to action at the global level, developing countries can indeed overcome shortcomings in the current monetary system by intensifying steps towards regional monetary and financial cooperation. Such arrangements, by anchoring South-South trade to more stable exchange rates, could contribute to reducing the volatility transmitted from the global reserve currency fluctuations in regards to other major currencies

Financial Regulation

We believe financial regulation must be designed at the national level with participation of all those who have a stake in the performance of the financial sector – that is, society as a whole. This is very different from the approach prevailing before the crisis when only those familiar with the complexity and technicalities of financial markets were able to influence such regulation.

Here I want to draw attention to another particular aspect where UNCTAD should play a role because it affects trade. The particular problem is related to the what that the utilization of tools required to alleviate crises has been greatly compromised by bilateral trade and investment agreements as well as the “request-offer” WTO-GATS rules on liberalization of trade in financial services. The implementation of pro-employment industrial as well as fiscal, monetary and banking policies, such as exchange rate-targeting, are also compromised by the discipline on capital management and the respective dispute settlement clauses contained in such agreements. 

The existing rules on trade in financial services were developed on the basis of a paradigm of self-regulation which everybody is now aware that must change. And, yet, we have not translated that insight into the necessary consequence that rules for trade in financial services developed under that paradigm should also be revised.

Finally, I want to refer to another aspect of financial regulation. With developed economies showing the greatest debt levels seen since World War II, it is clear that debt sustainability concerns are no longer the exclusive province of developing countries.

The lack of an effective debt crisis resolution mechanism threatens to entrench moral hazard on the side of private creditors at the expense of citizens and workers subject to endless series of fiscal adjustment. One can, indeed, agree with politicians in Europe who state they are not in favor of a bailout for Greece because the bailout would not go to support workers and citizens, but to support creditor banks. Indeed, I wonder, who can be in favor, if that is the case? But the creditors will only operate differently if there are clear, ex ante rules for allocating the losses in case of a crisis. There is no point in expecting market discipline on the creditors as long as those rules do not exist.

But the lack of a sovereign debt workout mechanism is compounded by the limited progress on effective mechanisms for resolving the systemic threats posed by large and complex financial institutions (or institutions that are “too big to fail”). European countries’ fiscal and debt sustainability indicators deteriorated substantially only after they had to rescue financial companies in the wake of the crisis. Debt and fiscal levels would not have deteriorated so much without that initial act of transfer to society of private losses.

We want to welcome and encourage an expansion of UNCTAD’s work on responsible lending and borrowing principles. Only with that work can we hope that rules to embed co-responsibility in lending and borrowing will become a reality, and not the mere aspiration that they are today.

Thank you.


Last modified on Tuesday, 02 October 2012 10:47

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