The UN lays into finance, speculation and the IMF: UNCTAD’s Trade and Development Report 2009

September 17, 2009

     By Duncan Green     

Another day, another UN report, this time the Trade and Development Report 2009, from the UN Conference on Trade and Development (UNCTAD), released last week. It’s surprisingly forthright. Set up in 1964, in the table-thumping days of the New International Economic Order, in recetdr2009_ennt years UNCTAD had become markedly more cautious, not least under its current secretary general, the distinctly un-fiery Supachai Panitchpakdi, (a former WTO boss). The global crisis seems to have changed all that. Some excerpts from the overview (italicised subheads are my attempt at a summary):

The origins of the crisis lie in financial deregulation:

‘Policymakers also failed to draw lessons from the experiences of earlier financial crises. Like previous ones, the current crisis follows the classical sequence of expansion, euphoria, financial distress and panic….. What makes this crisis exceptionally widespread and deep is the fact that financial deregulation, “innovation” of many opaque products and a total ineptitude of credit rating agencies raised credit leverage to unprecedented levels. Blind faith in the “efficiency” of deregulated financial markets led authorities to allow the emergence of a shadow financial system and several global “casinos” with little or no supervision and inadequate capital requirements.’

Speculation is driving commodity price volatility and needs to be curbed:

‘It is true that deteriorating global economic prospects after September 2008 dampened demand for commodities; but the downturn in international commodity prices was first triggered by financial investors who started to unwind their relatively liquid positions in commodities when the value of other assets began to fall or became uncertain. And the herd behaviour of many market participants reinforced such impulses. Financial investors in commodity futures exchanges have been treating commodities increasingly as an alternative asset class…. In order to improve the functioning of commodity futures exchanges in the interests of producers and consumers, and to keep pace with the participation of new trader categories such as index funds, closer and stronger supervision and regulation of these markets is indispensable. In the first half of 2009, commodity prices rose again, reflecting the return of financial speculators to commodity markets, which appears to have amplified the effects of small changes in market fundamentals.’

Developing country governments have responded well to crisis, but the IMF is holding them back:

‘A number of developing and transition economies also launched sizeable fiscal stimulus packages. On average, their size was even larger than those of developed countries: 4.7 per cent of GDP in developing countries and 5.8 per cent in transition economies, extending over a period of one to three years. The authorities in China were quick to announce a particularly large fiscal stimulus plan, amounting to more than 13 per cent of GDP…. By contrast, some developing and transition economies have had to turn to the International Monetary Fund (IMF) for financial support to stabilize their exchange rates and prevent a collapse of their banking systems. IMF lending has surged since the outbreak of the current crisis, extending to nearly 50 countries by the end of May 2009. However, the scope for expansionary policies to counter the impact of the crisis on domestic demand and employment has been severely constrained by the conditionality attached to IMF lending….. Several announcements were made to the effect that the IMF would recognize countercyclical policies and large fiscal stimulus packages as the most effective means to compensate for the fall in aggregate demand induced by debt deflation. However, in reality, the conditions attached to recent lending operations have remained quite similar to those of the past. Indeed, in almost all its recent lending arrangements, the Fund has continued to impose procyclical macroeconomic tightening, including the requirement for a reduction in public spending and an increase in interest rates.’  

A debt moratorium is needed to avert a new debt crisis:

‘The fallout of the global economic crisis is impairing [low income countries’] ability to service their external debt without compromising their imports…. A temporary moratorium on official debt repayments would allow low-income countries to counter, to some extent, the impact of lower export earnings on their import capacity and government budgets. Such a moratorium would be in the spirit of the countercyclical policies undertaken in most developed and emerging-market economies…. the total amount of such a temporary debt moratorium would be modest, amounting to about $26 billion for 49 low-income countries for 2009 and 2010 combined.’

Financial integration needs to be reconsidered, and the IMF should actively encourage the use of capital controls:

‘The realization that in a globalized world “shocks” emanating in one segment of the financial sector of one country can be transmitted rapidly to other parts of the interconnected system raises some fundamental questions about the wisdom of global financial integration of developing countries in general. The experience with the current financial crisis calls into question the conventional wisdom that dismantling all obstacles to cross-border private capital flows is the best recipe for countries to advance…. Assertions that capital controls are ineffective or harmful have been disproved by the actual experiences of emerging-market economies…. the IMF should more actively encourage countries to use, whenever necessary, the introduction of capital controls as provided for in its Articles of Agreement.’

The TDR also calls for a new international exchange rate system and reserve currency to replace the dollar, a role that could perhaps be played by the IMF’s ‘special drawing rights’ (SDRs). In a short additional section on climate change (every report needs one), it comes up with the new (to me) idea of extending the use of compulsory licensing for climate-friendly technologies, allowing governments to override patents (as they currently can in public health emergencies).