UN: North's bailouts destroyed trading system's playing field, says Stiglitz

Original Publication Date: 
29 June, 2009

New York, 26 Jun (Bhumika Muchhala) -- The bailouts given to companies in developed countries have destroyed the framework of the multilateral trading system for a level playing field, according to the Nobel prize-winning economist Joseph Stiglitz.

 

Speaking at the UN conference on the global financial and economic crisis, Stiglitz said that the massive bailouts and stimulus programmes of the rich countries have "destroyed the framework for an international and multilateral global playing field for trade."

 

The profound effect of bailouts and guarantees to firms affect any remaining notion of a level playing field. Even if a developing country gave guarantees of the same monetary worth, it does not have the same effect as guarantees given to firms in developed countries.

 

Stiglitz also said that given the lack of governance in the global financial and capital markets, there was need for a global economic and coordinating council. Thus, the importance of a global economic coordinating council cannot be overlooked at this conference, he stressed, speaking at a roundtable, held on 24 June, on the theme "The Role of the UN and its member states in the ongoing international discussions on reforming and strengthening the international financial and economic system and architecture".

 

Stiglitz is the Chairman of the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System, whose report was distributed at the conference.

 

The roundtable was co-chaired by the Prime Minister of Barbados, H. E. The Honourable David Thompson and the Prime Minister of the Republic of Serbia, H. E. Mirko Cvetkovic. Other panel members were Ms. Ngozi Okonjo-Iweala, Managing Director of the World Bank, Ms. Alicia Barcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Mr. Andrei Bougrov, Executive Director of the International Bank for Reconstruction and Development, and Mr. Yu Yongding, former member of the Monetary Policy Committee of the Peoples' Bank of China.

 

Stiglitz said it was imperative to address the developmental impacts of the financial and economic crisis. He said that policy space for developing countries is crucial in light of the highly uneven playing field in global trade and finance that has been created as a result of the massive bailout and stimulus packages of the rich countries.

 

The regulation of international financial markets is also an imperative, and the responsibility for that lies primarily in the developed world, while also requiring the cooperation of the global community.

 

Stiglitz highlighted that the reform of the IMF, in particular, is more fundamental than ever before. The world needs to remember that it was the IMF that contributed to and exacerbated the financial crisis of 1997-1998, over ten years ago. The Fund's past track record calls for the need to create new institutions and more efforts to disburse funds through a variety of mechanisms. Funds to developing countries should be disbursed through grants, not loans, in order to avoid a new debt crisis in developing countries.

 

Furthermore, competition among the various funds-disbursing agencies is required. Such competition would lead to better policies, better management and more choice among developing countries. For example, there are large sources of liquidity in the world that could serve as funds for developing countries. However, the problem is that many of these country sources of liquidity do not trust the existing institutional mechanisms by which to provide the funds.

 

Stiglitz said that a double majority voting structure should be implemented in the IMF. He said that it is a good thing that the heads of the World Bank and IMF will be selected on the basis of merit, as agreed to by the G20, but more needs to be done in light of the immediacy of developing-country needs. An agenda of deeper reforms is needed.

 

Any new growth model should recognize the constraints imposed by natural resources, Stiglitz emphasized. A new growth model should try to focus on more ultimate objectives of increasing human welfare in a comprehensive way. The current financial crisis, if anything, emphasises the extent to which existing economic growth doctrines were flawed, said Stiglitz. "Our Commission's view is that reform of the existing doctrines is not enough. There is a need to go further."

 

The massive bailouts and stimulus programmes of the rich countries have "destroyed the framework for an international and multilateral global playing field for trade." The profound effect of bailouts and guarantees to firms affect any remaining notion of a level playing field. For example, even if a developing country gave guarantees of the same monetary worth, it does not have the same effect as guarantees given to firms in developed countries. In that sense, "even symmetric actions have asymmetric implications," Stiglitz said.

 

Stiglitz concluded by saying that the challenges posed by the current financial crisis are enormous, and they cannot be solved in this kind of a conference. However, the conference had initiated a process towards solving the financial crisis.

 

Alicia Barcena, of ECLAC, expounded on five specific actions necessary to attain effective global economic governance.

 

First, the balance between the market and the government must be restored. The government's role has to be brought back to life after years of being subdued by dominant economic policies. Second, the provision of global public goods needs to be espoused by the multilateral institutions in a democratic manner.

 

Third, there needs to be a movement from self-selected bodies to an inclusive and representative multilateral system. Fourth, the global economy needs to move from an oil-based economy to a carbon-free economy. And last, a more integrated and strategic approach needs to be applied to global economic governance in the coming future.

 

Trade protectionism is a major concern in the region, in that unilateral exchange rate protectionism and competitive bilateralism are on the rise. The biggest shock of the crisis is the trade shock, much more so than the financial shock. Trade has fallen by about 40% in the Latin American and Caribbean region. What is needed is a cash transfer programme on a global scale.

 

Financial and trade movements are happening at a much faster rate than institutional and political developments. This asymmetry results in a reckless form of globalization that is threatening equitable development in the most fundamental of ways.

 

On a new global architecture, she said that the structure of crisis management needs to be articulated. Second, crisis prevention and risk mitigation need new structural changes, such as in regulatory systems, in transparency and accountability and in looking at development through a more cross-sectoral vision.

 

Andrei Bougrov said that the global attention is on the Bretton Woods Institutions and loan conditionalities, as the World Bank and International Monetary Fund, in particular, are criticized to a high degree.

 

"I am of the opinion that conditionality does not work," said Bougrov. He also believed that the Bretton Woods Institutions cannot be reformed from within, primarily because its shareholders are not concerned with reform.

 

The current global crisis reminds us that we can no longer afford to ignore real reforms anymore. Institutions and systems need to be better coordinated on an urgent level.

 

Yu Yongding said that since China had over $1 trillion of reserves in the form of US Treasuries, it had to worry if there is a devaluation of the US dollar, or inflation, as it would suffer great losses. China has engaged in crisis management through a stimulus package and a second step is the need to address the reality that China cannot keep relying on exports, because the global economy is in recession. Thus, China needs to be engaged in structural reform and stimulate domestic demand which would also benefit other countries.

 

Policy space for developing countries is also crucial, said Yu, as capital account and financial market liberalisation in developing countries has left very little policy space with which to act in response to the crisis. Developing countries should be able to self-determine what policies they need to adopt and this needs to be an integral part of the reform of global governance.

 

There is need to reform the system in order to address the present system's instability, an inherent deflationary tendency and inequality. There is also need to address the global reserves system so as to avoid future crises.

 

Yu said that some people have said that change is too utopian and we should not think about reform now. But it is not utopian but realistic to undertake reform. The time for change is now, and we should use this opportunity, at this pivotal time, for change, he concluded.

 

Ngozi Okonjo-Iweala, Managing Director of the World Bank, said that there has been a massive plunge in the average growth rate in developing countries, which has fallen from 7.7% in 2008 to 1.2% in 2009. An additional 55 to 99 million people are going to fall into poverty as a result of the crisis, and this is on top of the 135 million people who had already been thrown into poverty by the food and fuel price crisis last year.

 

What are we, the international community, going to do, particularly for the low-income countries, asked Okonjo-Iweala. What have the international financial institutions been doing? Are we going to provide a fiscal stimulus for developing countries?

 

She explained that the World Bank has been implementing its Vulnerability Financing Facility. During the food and fuel price crises last year, the facility amassed $2 billion in total, and disbursed $730 million to a total of 33 countries severely impacted by the food and fuel price crisis.

 

Capital flows from the World Bank Group to its developing-country members has doubled in amount from previous years to $34 billion currently. Out of this $34 billion, $14 billion is going to low-income countries, and a good part of that is being disbursed in the form of grants, so as to avoid the accumulation of further debt. In this way, Okonjo-Iweala said, the World Bank has been helping developing countries to close their financing gap so that they can retain some food security.

 

In response to this current crisis, $8 billion has been mobilised for low-income countries by the World Bank Group and the International Finance Corporation. She asked, how can more funds be mobilised in such a way, toward the low-income countries?

 

With regard to the ongoing debate on global governance, Okonjo-Iweala emphasized that "we should not forget that the World Bank is part of the UN system." Any response through the UN has to touch upon the World Bank as well. +