16 Nov, 2013

Regulating Financial Institutions Critical to Avoiding Spread of Global Risk, UN meeting hears

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United Nations, 13 Nov 2013, (Department of Public Information) – International financial stability was tied to the regulation of financial institutions so they did not accumulate too much risk, José Antonio Ocampo, Professor in the School of International and Public Affairs at Columbia University, today told the Second Committee (Economic and Financial).

Delivering the keynote address during a panel discussion on “The world financial and economic crisis and its impact on development and prospects for restoring confidence and economic growth”, he said that macroeconomic policy coordination had seen disappointing results since 2009.

Efforts to develop countercyclical financing mechanisms had shown progress since 2008, he continued. The availability of credit lines had substantially increased and contingency lines of credit had been established. Multilateral banks had become key financing partners, while regional financial frameworks were emerging as new players in the domain. However, macroeconomic policy coordination had seen disappointing results, with most proposed reform policies failing to move forward. A sovereign debt restructuring mechanism remained illusive, although there was some advancement in the area of global financial governance.

Abdou Salam Diallo ( Senegal), Second Committee Chair, said the global economy continued to struggle, which had profoundly negative impacts on the international community’s ability to achieve development goals. To address those issues, global cooperation would be critical to mitigate the effects of the crisis on developing countries and ensure they received adequate assistance through innovative financing sources, as well as official development assistance (ODA). A strengthened international governance framework would be the cornerstone of recovery efforts.

Axel Bertusch-Samuels, the International Monetary Fund’s (IMF) Special Representative to the United Nations and its Deputy Director for Strategy, Policy and Review Department, said the IMF was striving to provide policy advice to help secure not only a sustainable and balanced recovery, but one that was also job-rich. The Fund had developed new instruments that examined the repercussions of a country’s policy from a multilateral perspective and also its spillover risks. “We will continue to protect the share and the representation of the world’s poorest countries,” he stressed.

James Zhan, Director for the Division on Investment and Enterprise at the United Nations Conference on Trade and Development (UNCTAD), pointed out that countries were promoting investment by liberalizing different sectors. Countries were reviewing their investment regimes, as well as revising and renegotiating their investment treaties. Emphasizing the shift of focus from bilateral to regional, he noted the dozen regional investment treaties currently in negotiation. Countries had also moved towards the direction of factoring in sustainable development in treaties.

In an ensuing discussion, the representative of Kazakhstan said his country was engaged in activities at the regional and international levels to develop an action plan to avert a future global financial crisis.

The representative of Senegal questioned how future shocks could be avoided to minimise the profound negative impact on developing countries.

The Second Committee will meet again at 10 a.m. on Thursday, 14 November, to take action on draft resolutions.

Interactive Dialogue

The Second Committee met this afternoon for a panel discussion on “The world financial and economic crisis and its impact on development and prospects for restoring confidence and economic growth.” The event, chaired by Abdou Salam Diallo ( Senegal), featured a keynote address by José Antonio Ocampo, Professor of Professional Practice in International and Public Affairs, School of International and Public Affairs, Columbia University, and Chair of the United Nations Committee for Development Policy. The panellists were: Axel Bertusch-Samuels, Special Representative of the International Monetary Fund (IMF) to the United Nations, and Deputy Director, Strategy, Policy and Review Department, IMF and James Zhan, Director, Division on Investment and Enterprise, United Nations Conference on Trade and Development (UNCTAD).

Mr. DIALLO said the outcome document of the Conference on the World Financial and Economic Crisis and Its Impact on Development in 2009 identified areas where urgent action was needed, including making the stimulus work for all, containing the effects of the crisis and improving global resilience, improving regulation and monitoring and reforming the international financial and economic system and architecture. However, five years on, progress was insufficient. The global economy was still struggling and the global jobs crisis continued unabated. The weak recovery greatly complicated efforts to accelerate progress toward achieving the Millennium Development Goals by 2015.

To deal with those challenges, he said the international community needed to increase international policy cooperation and coordination to address the continued weakness in global aggregate demand. Little progress had been made in tapping into innovative sources of development finance. Further steps were needed to improve regulation and monitoring, while efforts to reform the international financial architecture had to continue. Finally, a strengthened international governance framework was necessary for addressing those issues on a global level.

Mr. OCAMPO said international financial stability was tied to the regulation of financial institutions so they did not accumulate too much risk and spread it to the rest of the economy. The way in which the global financial crisis was managed was a key discussion point. The world had grown accustomed to facing financial crises, although the recent one showed that the international community was only just now learning how to manage them. The area where the international community had made the most progress since 2008 was in financial regulation. While there had been a great deal of collaboration to manage the issue, one major problem was that cross-border financing had not been consistently incorporated into the discussion of financial regulation.

He said that countercyclical financing was primarily the role of the International Monetary Fund (IMF) and the global economy had seen progress in that area since 2008. Credit lines had substantially increased, particularly for European countries. There was significant progress made in extending credit, including the conditionality associated with them. Multilateral borrowing was another key area, as many developing countries were willing to borrow from multilateral banks, but were not willing to borrow from the IMF. That had major implications as the World Bank was reducing available financing and official development assistance (ODA) was decreasing. New regional financial frameworks were now playing key roles as well.

Macro-economic policy coordination, he noted, had seen disappointing results since 2009. Initially there were concerted efforts to address the events that had negatively affected the world economy, but since then, those efforts had been largely ineffective. There were many reform proposals for the international monetary system, particularly ones designed to reduce the reliance on the United States dollar and establish a system based on an international currency. However, none of those proposals had moved forward.

A sovereign debt restructuring mechanism remained one of the missing elements of the international financial architecture, he said. There was a push for such a mechanism following the Asian financial crisis; however, no progress was made. Now, that issue was again at the forefront of consideration. There was some advancement in governance, including the reform of the Bretton Woods Institutions as well as international financial regulations. The creation of the Financial Stability Board was a significant innovation that had effectively pushed reforms through in recent years. However, it was paradoxical that such an important issue was not the subject of a treaty-based organization and was instead being addressed by an ad hoc group.

Mr. BERTUSCH-SAMUELS said over the past five years, much had been done to avoid a full-on global recession, including through the massive fiscal stimulus and accommodating policies by major banks. But the recovery had been disappointing, he pointed out. While addressing policy priority, it was important to complete the job of repairing the financial sector and reforming the financial supervision framework. The IMF was striving to provide policy advice that would help secure not only a sustainable and balanced recovery, but also one that was job-rich. The Fund’s management and board had fostered an environment that was examining closely and aiming to address jobless growth trends. Helping members deal with transitional challenges was essential. As financial system instability remained the root cause of the crisis, completion of those reforms was necessary, he said, stressing that market participants needed more clarity.

He emphasized the need to better move forward the process of monitoring shadow banking in order to avoid them contributing to another crisis. The Fund had developed new instruments that examined both sides and looked at the repercussions of a country’s policy from a multilateral perspective and also its spillover risks. The Fund had also provided technical assistance to its members to assist them in introducing new and innovative regulations. International taxation issues required better coordination because ineffective tax regulations had negative spillover effects. The Fund must be credible and also financially strong which required that Governments adapt to the global economy’s increasing interconnectedness. He also emphasized the need to boost the participation of low-income countries in the global market. “We will continue to protect the share and representation of the world’s poorest countries,” he stressed.

Mr. ZHAN pointed to cross-border direct investment noting its latest trends and developments. Global foreign direct investment recovery remained “bumpy” and in 2012, had suffered from an 18 per cent decline following a significant increase in 2011, he said. Developing and transition economies absorbed more than 60 per cent of global foreign direct investment than those in the developed economies. In recent years, foreign direct investment to developing countries had been on the decline. For the first half of 2013, inflows to the United States and France had dropped while foreign direct investment in the United Kingdom had increased. Indeed, the share of more restrictive or regulatory investment policies continued to increase.

Many countries were promoting investment and to liberalize different sectors, he said. In the same vein, those countries were tightening regulations in strategic industries such as mining and financial services. Countries were in the mode of reviewing their investment regimes, as well as revising and renegotiating their investment treaties. The lifespan of many bilateral investment treaties was about ten to 15 years, and the bulk of them had been signed in the 1990s and early 2000s. More than one-third had already reached their maturity, giving the opportunity for countries to reformulate their investment landscape. Emphasizing the shift of focus from bilateral to regional, he noted the dozen regional investment treaties currently in negotiation. Countries had also moved towards the direction of factoring in sustainable development in treaties.

When the floor was opened up, the representative of Venezuela said that during the panel discussion, he did not hear any reference to the impact of tax havens and how they affect investment. He also commented that he did not hear how investment impacted food prices, energy and raw materials. The problem was not a question of lack of capital; it was that the developed world had an overaccumulation of capital. Mr. OCAMPO responded that regulations on capital flows needed to be one essential element of the entire financial system. The IMF had taken positive steps but there needed to be tougher regulations to deal with the volatile nature of capital movements. Mr. ZHAN said tax havens were still in existence, but there were also a growing number of financial institutions that were involved in $6 billion worth of hidden transactions. At present, such activities were not illegal, but to address such challenges, multilateral cooperation would be needed.

The representative of Kazakhstan said there were no real solutions to achieving pre-crisis growth. He noted the presence of constant imbalances, which indicated the prospects for the global economy had deteriorated. Emerging markets were considered a driver of economic growth but there had to be a revision of the principles of global governance. He reported that his country was engaged in activities at the regional and international levels to identify effective measures and develop an action plan to avert a future global financial crisis. Mr. OCAMPO said the growth of international trade was critical to the global recovery, although the significant slowdown that had taken place as a result of the crisis was not always recognized. There needed to be more research to understand how to spread the benefits of international trade to developing countries.

The representative of Senegal said the global financial crisis resulted in a drop in export income for his country and a slowdown in production income. The dysfunction of the global economy had an impact on domestic life in Senegal. It was clear that the crisis demonstrated how vulnerable developing countries were to drops in global demand. He questioned how future shocks could be avoided to minimize the profound negative impact on developing countries. Mr. OCAMPO responded that developing countries were not always able to successfully develop countercyclical policies, because the space for such mechanisms was limited. One major source of instability was capital flows, which prevented the implementation of effective countercyclical policies.

Mr. BERTUCH-SAMUELS said that international institutions needed to focus on reducing the severity and frequency of financial crises. The global economy was a bit like an ocean — sometimes it was calm and sometimes there were storms. People could create mechanisms to help the world ride out the storms as part of crisis prevention. Policy space was an important item in that regard, which cut across all countries. There also needed to be effective bodies ready to take action when a crisis hits.