A Promising new debate on the financial crisis

January 29, 2009

     By Duncan Green     

Take a look at Development and the Crisis, a new online debate moderated by Dani Rodrik, which has kicked off with contributions from Nancy Birdsall, Jose Antonio Ocampo, Arvind Subramanian, and Yung Chul Park. Here are some excerpted highlights from Dani’s opening pitch ‘Let developing nations rule’:

‘There is just possibly a silver lining for developing nations in the present crisis, and it is that they may well emerge collectively with a much bigger say in the institutions that govern economic globalisation.

The US and Europe will come out weakened from their financial crises, both as economic actors and as upholders of the policy and intellectual orthodoxy; the relative weight and importance of developing nations in the global economy will have risen even more.

To get the debate going, here is what I think developing nations should push for. New rules that make financial crises less likely and their consequences less severe…. means discouraging foreign borrowing in good times, and preventing capital flight in bad. Instead of frowning on capital controls and pushing for financial openness, the IMF should be in the business of actively helping countries implement such policies. It should also enlarge its emergency credit lines to act more as a lender of last resort to developing nations hit by financial whiplash.

Greater transparency on all fronts, including banking practices in the advanced countries that facilitate tax evasion in the developing nations.

A Tobin tax – a tax on global foreign currency transactions. Set at a small enough level – say 0.25%. The revenues collected – which would easily amount to hundreds of billions of US dollars annuallycould be spent on global public goods such as development assistance, vaccines for tropical diseases, and the greening of technologies in use in the developing world.

In trade, developing nations should push to enshrine the notion of “policy space” in the constitution of the WTO.

But with greater say comes also greater responsibility.

Capital-exporting developing nations should be willing to accept greater transparency in the operation of sovereign wealth funds and pledge not to use them for political purposes. The largest developing nationssuch as China, India, and Russiawill need to shoulder some of the burden of reducing greenhouse gas emissions.

Policy space is a two-way street. [President Obama’s] chief economic advisor Larry Summers has also been vocal of late on globalisation’s adverse impact on workers. It will not do much for good for developing countries to raise the spectre of protectionism each time such concerns are voiced. They should say no to trade protectionism straight and simple. But they should be willing to negotiate with advanced nations on avoiding regulatory races to the bottom in such areas as labour standards or tax competition.’

Very promising. Let’s just hope the debate continues after the initial flurry of prearranged posts – over to you!