For #Development & Growth for All, Need Reforms of Global Financial System

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Photo Credit: panarmenian.net
The economic crisis plaguing the globe is not over, and we need an overhaul of the global financial system in order to both heal overall and overcome the inequalities dominating emerging economies. The UN Conference on Trade and Development has issued its 2015 Report, linked below, with further observations and recommendations:

“…With a tepid recovery in developed countries and headwinds in many developing and transition economies, the global crisis is not over, and the risk of a prolonged stagnation persists. The main constraint is insufficient global demand, combined with financial fragility and instability, and growing inequality.

These trends reveal the lack of a well-functioning international monetary and financial system, which should be able to properly regulate international liquidity, avoid large and lasting imbalances and allow for counter-cyclical policies; however, international liquidity and capital movements respond to economic conditions in developed countries rather than to actual needs in developing countries. Furthermore, much of the current regime is in fact driven by large international banks and financial intermediaries whose activities increased much more rapidly than the capacity of any public institution (either national or multilateral) to effectively regulate it. Recent initiatives aiming at better regulation remain too timid and narrow.

This dysfunctional regime can neither prevent boom-and-bust episodes nor recurrent debt crises; and when such crises occur, it leads to asymmetric adjustment that throws most of the burden on debtor countries and exacerbates a pro-cyclical bias. This calls for a mechanism for debt resolution, in particular for sovereign external debt, which minimizes the cost of crisis and shares it fairly among the different actors. Furthermore, inefficiencies and missing elements in the international financial architecture have had negative effects in the provision of long-term finance for development.”

Recommendations:

The Report is rich in proposals as well, although implementation as well as mere adoption of recommendations remain as first steps. This is actually seismic in its breadth and depth addressing everything from wage stagnation to the structure of banking. Whether you agree with it or not, it’s worth a read:

“In order to improve global growth and financial stability, and to realize the investment push required to fulfill new development agenda, the systemic problems of the international financial architecture need to be addressed. Solutions are available, but they require dedicated action by the international community. The main recommendations of the Report are:

 

  • To avoid secular stagnation, developed countries need to combine monetary expansion with fiscal expansion and wage growth, and be mindful of the international spillovers that their policies can produce;
  • To make the provision of official international liquidity more stable and predictable, multilateral reform remains the desirable target – in the meantime, developing countries may build on regional and inter-regional initiatives, set swap arrangements among Central Banks and reduce the need for reserve accumulation;
  • A bolder regulatory agenda is needed. This should include strict separation of retail and investment banking, strong regulation of shadow banking as well as public oversight of credit rating agencies and their progressive substitution by more appropriate mechanisms for risk assessment;
  • Developing countries should not be required to apply prudential rules which have been conceived for countries hosting internationally active banks as they result in credit rationing to sectors and agents that need support from a development perspective;
  • A sovereign debt restructuring mechanism is urgently needed. This could be in the form of contractual improvements or internationally accepted principles to guide sovereign debt restructuring. However, the Report sees the best option in a statutory approach based on a multilateral treaty defining a set of rules for a debt restructuring that restores growth and debt sustainability;
  • Specialized public institutions and mechanisms are crucial for the provision of long-term development finance, in particular development banks. The international community needs to meet its Official Development Assistance commitments and to tune it better to strengthening the productive economy.”

(See: “UN Conference on Trade & Development“)
 

Also Read: “No Internet for Majority of Global Citizens

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  • Leif Erik Knutsen

    Capitalism, unrestrained by the requirements of Planetary life support systems, is guaranteed mutually assured destruction. Socially enabled capitalism is clearly a failed paradigm. Help end tax funded pollution of the commons for starters. This is nothing less than tax funded Planetary ecocide.

    The Fossil Barons are quick to point out the dilemma of their “stranded assets” following environmental constraints on polluting the commons. The flip side is the “stranded assets” currently suffered by “We the People” in the mitigation costs of increasing forest firers, floods, storms, sea level rise, agriculture loses, acidified oceans, even lives should steps not be made stranding those fossil “assets” while there is still a chance for the survival of the kidders.

    We’re the first generation to feel the impacts of climate disruption, and the last generation that can do something about it. Which side are you on? No fence sitting aloud.

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