The United Nations Conference on Trade and Development (UNCTAD) held its first public symposium on 18-19 May 2009 in Geneva, at a critical juncture in the build-up to the High-Level UN Conference on the World Financial and Economic Crisis and its Impact on Development. Organized in cooperation with NGLS and other partner organizations, the symposium brought together from different parts of the world more than 360 representatives of civil society, the private sector, labour organizations, academia, parliamentarians, international organizations and UNCTAD Member States. The meeting was structured around the following key topics:
• The global economic crisis - its causes and its multiple impacts, especially on developing countries• Assessing existing responses to the crisis at international, regional and national levels – limitations and best practices• Proposals for the way forward - obstacles and opportunities
The Secretary-General of UNCTAD, Dr. Supachai Panitchpakdi, said this forum was intended to “give voice to the voiceless – the innocent bystanders.” He emphasized that an exit strategy for the crisis was needed for all countries. Real reforms were necessary to avoid going back to the same old cycle of boom and bust.
The President of UNCTAD’s Trade and Development Board later forwarded the main conclusions of the Symposium to the President of the General Assembly as an input to the preparations of the UN Conference. Many of the key recommendations related to the more difficult negotiation items on the Conference agenda, notably on reform of the global economic governance system - including the establishment of a Global Economic (Coordination) Council within the purview of the United Nations - and shifting towards a more stable and pro-development international financial architecture, including a new global reserve system (see Box 1).
2. Causes of the crisis
Participants generally concurred on the multiple long-term causes of the crisis, which included a failure to meet agreed commitments; lack of oversight; structural imbalances in the world’s largest economies; macroeconomic imbalances; and other systemic and/or institutional factors. The crisis was not simply the result of developments or “misbehaviour” in the corporate and financial sectors but had been in the making for a good 30 years or more. It was rooted in contradictions of the current global development trajectory and development paradigm – such as income inequality, in which the richest 1% of the world population received as much as the entire bottom 57%. This was a major cause of economic instability and crisis, as it led to a deficit of global aggregate demand.
Many participants attributed parts of the causes to “crisis before the crisis” namely the global jobs crisis. Even before the financial and economic crisis hit in 2008 and despite the previous period of relatively high global growth, the global economy had not been capable of generating enough productive employment for the steady rise of entrants into the global labour market. Combined with rising inequalities resulting from stagnant (or declining) real wages in many parts of the world, the global economy depended on the US to act as a “consumer of last resort.” However, since wages were also stagnant if not declining in real terms for the average US worker, this had to be accompanied by an unsustainable consumer credit bubble which burst on the housing market and precipitated the current crisis.
Global imbalances (between deficit and surplus countries), which were described as part of the underlying causes of the crisis, were said to impose asymmetric adjustments on developing countries (including the build-up of excess reserves) which in turn contributed to insufficiency of global aggregate demand. It was noted that since the breakdown of the Bretton Woods system in the 1970s, the current system of flexible exchange rates and reliance on the US dollar as the de facto global reserve currency, had proven not only highly unstable and inequitable: its inherent deflationary bias was incompatible with global full employment.
It was noted that in the United States and other developed countries, the financial system contributed about 10% of GDP but 40-to-50% of total profits. Financial capital and financial interests – which had become detached from the interests of the real economy – predominated, and the real economy was increasingly subject to financialization, which prevented long term investments capable of generating decent and sustainable jobs.
Inequality reflected increasing global interdependence, but without effective global institutions to cope. The crisis also called into question the wisdom of economic integration and relentless liberalization, given that the countries most affected were the ones most open and most dependent on external trade. A new economic paradigm and a rethink of globalization were required.
3. Multiple Impacts
Participants elaborated on the numerous and tremendous impacts of the crisis on developing countries. The problem for developing countries was not just how far their per capita income would fall, but how long the recession would last; there were fears of another “lost decade for development”. How much would conditions get worse before they got better? In addition, the crisis might well trigger other sorts of crises, including a worsening of the current food crisis and the eruption of a new debt crisis. An exit strategy was needed that would cover all countries, and especially the weakest and most vulnerable, since everyone would be scrambling to get out and the weakest might get trampled on or not even survive, participants warned.
Inflows of foreign direct investment (FDI) were down worldwide, with developing countries affected the most severely. International trade from developing countries in 2009 would be down by an estimated 7 to 9 %. That decline in trade was more than just declining revenue: it also meant declining output, jobs, productivity, incomes, and increasing poverty.
Credit, official development assistance (ODA) and other forms of financing had also been cut, especially to developing countries, which were projected to have net capital outflows of $700 billion this year. Debt sustainability was again a major concern, as developing countries were earning less but paying more. Their foreign reserves were generally depleted; exchange rates were increasingly volatile; and their fiscal pressure on the rise.
The crisis was reinforcing existing inequalities within and between countries and between the sexes. Women workers in developing countries were particularly vulnerable in such sectors as apparel, agriculture and tourism, where they predominated. By contrast, stimulus packages and incentives had generally been directed to sectors traditionally dominated by male employees, including the car industry and finance.
4. Assessing Existing Responses
At the national level:
It was noted that the ability of developing countries to mitigate the adverse effects of the crisis was contingent on their level of dependence on external demand (exports), external financing (FDI, remittances, ODA), and also on their space for fiscal expansion/discretionary demand management and the ability of the authorities to use it flexibly. The need for developing countries to engage in counter-cyclical policies was emphasized. However, all sources of financing for developing countries were affected by the crisis, making it hard for fiscal stimulus in those countries to compensate for lost sources of growth. Developing countries simply did not have the capacity to pursue large stimulus packages. It was pointed out that the question of how to finance that drop in fiscal earnings remains unanswered, and could not be tackled in the traditional IMF balance-of-payments framework.
Some concern was raised in the discussion concerning the implications of the enormous stimulus packages of the developed countries ― particularly in light of the "buy American" clause. It was also mentioned that the effect of stimulus packages by more advanced developing countries (such as China and India) might have quite distortionary impacts on the competitiveness of LDCs which are not able to afford similar stimulus measures. It was stated that the best designed fiscal stimulus packages are those that focus on targeted job generation and social protection at the core, but that, unfortunately, direct spending on employment had made up only a minimal share of fiscal stimulus packages.
It was also noted that restoring health to the financial sector has taken longer than expected. The financial sector remained in a critical state in many countries. The limited bank lending taking place was often at high interest rates. It was also emphasized that the recent signs of recovery on the stock markets should not be interpreted as signals of a turn-around. Banks were still facing huge credit gaps that could not be filled by interventions by central banks and multilateral institutions.
At the global level (G-20 Outcome):
Concerns were expressed as to whether the outcome of the April 2009 G-20 meeting was sufficient to deal with the current crisis in developing countries. Implementation challenges of the G20 outcome identified include: i) the amounts quoted are aspirations and the money is not yet committed by the major players; ii) despite official pronouncements to the contrary, the continued procyclical conditionalities of the IMF in a number of countries continues to “add fuel to the fire;” iii) the IMF is still surrounded by political and economic stigma that makes many countries reluctant to approach it until they are in serious trouble. In addition doubt was expressed as to whether diverting 0.7 % of the stimulus packages to a vulnerability fund would materialize in light of the failure to deliver previous donor commitments.
It was stated that the United Nations system as a whole was invisible and did not get assigned an important role in the G20 communiqu�. The importance of the role of the UN and the need for inclusive international governance was underlined. Participants added that the role of the IMF in the G20 proposal poses a dilemma, as the institution lacks credibility.
Moreover, it remains to be seen how strong the G20’s commitment is to put employment, social protection and labour market issues at the centre of policy responses. It was emphasized that it is important to not only promote recovery but to lay the foundations for a more inclusive and sustainable pattern of growth and globalization in the future.
5. The Way Forward
In looking ahead to the future, it was asserted that it is clear from the current crisis that the financial system is unable to regulate itself. It was pointed out that the present crisis is an opportunity to promote innovative patterns of growth and to re-think and re-balance development agendas, not just to return to policies of the past. In particular, many emphasized the need to find a better balance between domestic demand-led and export-led growth, which implied much more effort at boosting domestic productive capacities for local and regional markets and generating a steady rise in wages and incomes through productive employment generation. There was general agreement on the need for fundamentally new approaches to governing the international financial system.
Role of the UN and other actors
It was highlighted that the current crisis requires a joint global effort. The importance of more inclusive international governance was underlined, notably with respect to the participation of African countries. It was asserted that UNCTAD should go the "extra-mile" to discuss the ethics behind a new world economic governance structure.
If the process is to be inclusive, counter cyclical, equitable, and environmentally-sustainable, there is a need for a more decentralized approach with a stronger coordinating role for the UN and a subordinate role for the IMF and other specialized bodies in dealing with tax, finance and the economy. One participant questioned the capacity of the UN to deal with financial sector reform, but other discussants noted that UNCTAD and the UN system have an important role to play – not so much in “micro-managing reforms” but in “thinking out of the box”, identifying new problems and alternative policy approaches and bringing legitimacy to global economic institutions.
It was suggested that the proposals of the Stiglitz Commission should be taken as the basis of future UN reform. In particular, many participants supported the proposal to establish a Global Economic Coordination Council under the umbrella of the United Nations, as a way to develop a democratic and legitimate alternative to the G-20.
Many speakers stressed the challenges, not only of designing the reforms ahead but also of securing collective action from disparate nation states. They highlighted the positive role that civil society could play in this regard, including:
• Collective civil society pressure can promote multidimensional action; • Civil society can add a dose of grassroots reality to the so-far largely rhetorical debate.
Parliamentarians also had a critical role to play. It was noted that many parliaments were now in the process of significantly strengthening their oversight capacity on global economic matters.
There was a clear focus on the need to plug the ‘holes in the buckets’ and monitor actions carefully to make crisis fire fighting more effective. Many speakers noted that there was no ‘one size fits all’ solution; rather, multilateral action had to be ‘localised’ and tailored to meet the particular needs of each country and region. This could be achieved in part through stronger regional approaches. For example, regional institutions could develop and fund special recovery programmes and plans (e.g., infrastructure and other ’back to basics’ projects).
Policy Space in International Agreements
Related to this were calls to ensure that countries were accorded sufficient policy space to take necessary stimulus measures, manage currencies and avoid debt traps. Many speakers highlighted the need in international agreements and crisis packages to allow national policy space to fight crises and carry out domestic reforms. This would include unilateral action on Financial Transaction Taxes and capital controls to counter ‘carry trade’ and short-term speculative ‘attacks’. At the same time, it was seen as equally important to ensure that trade and investment agreements did not impede developing country governments’ ability to take countercyclical measures to respond to economic difficulties. Several speakers suggested reviewing the WTO financial services negotiations and commitments and a number of bilateral treaties (existing or still under negotiation, such as EPAs) to ensure they enable effective crisis response and appropriate regulatory measures.
Global Financial Architecture Reform
Many speakers called for reform of the global financial architecture, including the need to reform the exchange rate system in order to underpin macroeconomic stability and avoid debt traps and speculation. This would involve going “back to the basics” – to the rules invented at the 1944 Bretton Woods Conference – in particular, fixed but adjustable exchange rates reflecting fundamentals such as inflation rates. Speakers added that keeping real exchange rates stable would prevent major distortions in international trade and currencies.
In addition, there was now momentum for creating a new global reserve system to help deal with increasingly unsustainable global imbalances. A new international reserve currency - which could evolve through a greatly expanded and more equitable form of Special Drawing Rights (SDR) allocation - could play a substantial and frequent role in countercyclical policies and help in financial stabilization. (A new global reserve system is a key recommendation of the Stiglitz Commission.)
It was noted that while a growing number of countries support exploring the transition to a new global reserve system, there is still strong resistance by some of the more powerful actors in the global economy, including financial markets. An “evolutionary approach” that would build on and eventually transform the existing SDR system was thus seen as the most politically realistic way forward. A bottom-up approach through regional reserve systems such as the SUCRE (Sistema Unificado de Compensaci�n Regional) recently adopted by a number of Latin American countries could serve as building blocks towards the new system. It was also important to find ways to build broad popular support, which was a major challenge given the complexity of the problem. It was suggested that the new global reserve system could be explained as a sort of “tax” to bring greater equity between surplus and deficit economies (instead of the current system that – with the exception of the United States – places all the adjustment pressure on deficit countries and forces developing countries to build up excess reserves which are diverted from real economy investments).
A Global Jobs Pact
It was noted that the crisis was causing not only alarming rates of unemployment and new working poor: there were already signs of wage deflation, which was described as even more dangerous than beggar-thy-neighbour devaluations and protectionism. There were possible parallels with widespread wage deflation which contributed to and prolonged the Great Depression in the 1930s. It was noted that in today’s crisis, workers around the world were often faced with the dilemma of losing their jobs or accepting a wage cut. This seemed rational behaviour at the enterprise level. However, if this pattern became generalized, it would become a self-defeating exercise as more jobs would be lost as a result of further contraction of global aggregate demand.
It was thus urgent to take measures to reverse this trend. The ILO, in cooperation with other international organizations, was in the process of developing a Global Jobs Pact. The Pact was since adopted following a three-day ILO Global Jobs Summit that included the following strategies: better coordinated collective bargaining and other policy support measures (such as minimum wage policy) to would help a process whereby wages in all countries would rise in line with productivity growth; much more employment intensive stimulus packages that should also contain the strengthening or introduction of social protection measures; better coordination between national efforts in this regard; respect for workers’ fundamental rights at work; and special credit and productive capacity support for SMEs. The Pact also calls for the construction of a “stronger, more globally consistent supervisory and regulatory framework for the financial sector, so that it serves the real economy, promotes sustainable enterprises and decent work and better protects the savings and pensions of people.”
At the Symposium, it was noted that the role of the State as a “lender of last resort” had dramatically returned to the mainstream policy agenda because of the systemic risks posed by a collapse of the banking system. It was urgent to recognize an at least equal role of the State to introduce automatic stabilizers (social protection) and/or act as an “employer of last resort” in the face of the systemic risks posed by a collapse of global aggregate demand.
Other proposals for the way forward discussed at the symposium are summarized in Box 1. Full details and background papers on the Symposium can be found on:www.unctad.org/publicsymposium