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A Conference on Finance and Development? The author is Professor of Economics in the Department of Economics, University of Toronto, Canada. He is also Research Coordinator of the Group of 24, which is the grouping of 24 developing countries established by the Group of 77 (G-77) as an integral part of the G-77 to serve as a mechanism for the presentation of developing country views in the World Bank and the IMF. A longer version of this note was presented to the United Nations General Assembly Second Committee, New York, October 15, 1997. The past half-century has seen tumultuous change, much of it the product of "spon taneous" influences, in the world economy. In no sphere has this change been greater, particularly in the last quarter-century, than in international finance. In very large part, the emergence of globalized financial markets was the product of technical change in information processing, telecommunications and transport. But, that said, conscious governmental actions - in the general direction of market liberalization - have also played some role. Whatever the cause, private capital now dominates the total net (long-term) financial flows to the developing world - as much as 85 percent of the total in 1996. (This compares with around 45 per cent in 1990 and much less in the 1950s and 1960s.) Portfolio flows in globalized financial markets make up over 40 percent of current private flows to the developing world. Pension funds, mutual funds and life insurance companies, investing in bonds and equities, are now considerably more significant sources of development finance than banks whose activities peaked, to disastrous effect, in the late 1970s and early 1980s. Foreign direct investment is also rapidly rising again (and now accounts for about 45 per cent of total private flows: it made up 55 per cent in 1990 and much larger percentages in the 1950s and 1960s). (All data from the World Bank Global Development Finance, 1997). At the same time the world has been experiencing the so-called "crisis of aid"; official flows are stagnant or declining except from a small number of donor countries (the Nordics and the Dutch). Unfortunately, as is well known, private flows are highly concentrated in a relatively few countries. According to the World Bank, 95 percent of the flows to developing countries in 1996 went to just 26 countries; 140 countries shared the remaining 5 per cent. Worse still, private capital has proven highly fickle and volatile in its behaviour: portfolio managers have proven just as nervous in the 1990s as banks were in the 1970s and 1980s. And transnational corporations managing their own portfolios have emerged as major movers of short-term funds. It is not necessary to demonize George Soros or other money managers, who are merely trying to protect their shareholders interests in a highly uncertain world. It is simply in the nature of financial markets that they are susceptible to panics, crises and volatility. Governments can and do play some role both in the evolution of the global financial system and in the determination of its effects upon development in individual countries. At the national level, all governments have a particular responsibility for the stability and security of the dometic monetary, banking and financial systems - critically important to the functioning of any economy. The vulnerability of banking and financial systems to crises, instability and market failure has virtually every where produced central banks and regulatory authorities to protect the social interest and, usually, to mediate national interactions with global financial markets. Stability But who plays the role of the development-oriented state in the global economy? Effective global macroeconomic and financial management is far more important to overall output, employment, and development than any individual national-level actions or, for that matter, any changes in the trade regime. Exchange rate changes and misalignments can and do easily swamp trade policies in the short- to medium-run. Financial crises and surges in private capital markets can disrupt the global economy far more quickly and to far greater effect than any trade phenomena. It is therefore critically important to get the central macroeconomic financial institutions for the newly globalized economy broadly right. Today's global financial world in which governmental policymakers seek to promote development at both the national and international levels is utterly different from that facing the original architects of the Bretton Woods system in 1944, a time when the international financial markets had, in effect, been closed down. The central governmental institutions in today's global economy are those of the major industrial powers and, intergovernmentally, the metings of the G-7, realistically the G-3. (Finance Ministers or Heads of State), the International Monetary Fund, the World Bank, and the Bank for International Settlements, and all of their committees. Attempting to come to terms with some of the monumental changes in the global financial system of the past couple of decades, finance ministers and central bankers, in pursuit of safety and stability (not development per se), have been trying valiantly to develop appropriate governance arrangements to "catch up" with global financial market forces. Flawed Above all, the process is flawed because of its failure to take adequately into account the rapidly growing importance of non-G-7 members in the world economy, and therefore the growing importance of these economies to G-7 and global welfare. In purchasing power parity terms, developing countries alone alrelady account for nearly half of world output. According to the World Bank, by the year 2010 they will account for 56 percent of global consumption and 57 per cent of global capital formation. And developing countries as a group are still generally projected to grow at roughly double the rate of the industrial world during the coming decade. Mexico and now Southeast Asia remind us that developing countries' economic performance is subject to much greater volatility than that of the more industrialized countries. The closer integration of the developing and transition countries into the world economy and their greater importance to it pose increased risk, not only to themselves but also to the entire global system. There are bound to be many more Mexican-style and Southeast Asian-style crises in the years to come. Apart from the fact that the G-7 countries represent a small and declining proportion of the world's population, their own economic and political security now rests significantly and increasingly upon events in the rest of the world. From these facts flows and inescapable conclusion: the world must find a way not only towards improved management of a newly globalized economic system - a difficult enough task - but also toward more politically and economically representative, and therefore more legitimate and more effective, means of global economic governance. And the search for such reformed arrangements must begin in the world of global finance, where the risks are highest and the potential gains from improved arrangements are greatest. Macroeconomic Some urge the United Nations to stay out of monetary and financial affairs. One can certainly make a case that, in the interest of an efficient international division of labour, monetary and financial issues should be raised and addressed in the appropriate multilateral fora - presumably, at present, the International Monetary Fund and the World Bank group. Most Finance Ministers and Central Banks do not regard the UN as an appropriate forum for discussion of these matters. The IMF and the World Bank group have in fact done much of their work extremely well; better than quite a lot of the work undertaken by other specialized agencies of the UN; and one must never minimize the difficulty of achieving effective international governmental co-operation in any sphere, let alone in the complex world of international money and finance. But let us also be clear that they have done their work relatively well principally because they were financially supported to do it well. The administrative budgets of the IMF and World Bank - totalling roughly two billion dollars per year - are considerably larger than the combined administrative budget of all of the rest of the UN system with all of its other responsibilities. The question of the cost-effectiveness of these expenditures in the Bretton Woods institutions, in support of multilateral economic and financial governance, is rarely raised. The question is: are the current international financial institutions likely to be able to transform themselves, spontaneously and without prodding and in a reasonable time frame, into what will be required for the emerging world of the twenty-first century? Primary concerns Perhaps the developing (and transition) countries have not tried hard enough within the existing institutional machinery. Perhaps their spokesmen and women, and their representatives on the relevant boards, have been too junior in their levels, or too timid in their efforts. Perhaps developing-country Finance Minister should assign higher priority than they now do to these multilateral economic governance issues (although their frequent inability and/or unwillingness to do so is perfectly understandable for smaller and poorer countries). Perhaps the G-24 could run its affairs much more effectively. All of these could be done. But would it, under current arrangements, make much difference? Considering some of the recent evidence, I suspect not much. Recent efforts to amend the articles of the IMF centred on: (i) an "equity" allocation of SDRs, rather than an allocation to meet global needs as perceived by the majority of its members, and (ii) an expanded mandate to permit it to push the liberalization of private international capital flows with greater vigour - hardly the top priority reform for the majority of IMF members either. At the same time, the recent expansion of IMF quotas made virtually zero concession to the growing importance and needs of developing countries. The most the Managing Director could do was to offer, in return for developing-country support for the much-needed current quota expansion, to look at these matters next time. These are not signs of an organization able easily to recast itself in the interest of the majority of its members. They are, rather, stark reminders of who still really runs the principal global monetary institution. Governance The reforms being pursued in the sphere of international banking supervision by the BIS and the regulation of international securities markets by the International Organization of Securities Commission (IOSCO) are, of course, welcome and overdue. But the BIS, a central bank for G-10 central bankers, is even less representative of global interests than the IMF; and IOSCO is even less so. Both deserve credit for recently consulting with developing countries. But is this enough? (Incidentally, neither are answerable to elected representatives in their own countries). There is an overwhelming intellectual case for a strengthened multilateral framework both for the conduct of international/global finance and for sound global macroeconomic governance in the interest of both stability and development. But one cannot continue to recommend the strengthening of the roles of the IMF and World Bank in global macroeconomic management and the management of the international financial system as long as their own governance has not been reconstituted so as to reflect more accurately and fairly in their activities and policies their global membership, rather than the views and interests of a few major industrial countries. Comparing the governance structures of a large number of multilateral organizations, the IMF and World Bank come last in their representativeness of the majority of the world's countries and peoples. Developed countries (as defined by the World Bank) account for 17 per cent of overall votes in the Global Environmental Facility (the same as in the UN itself), 24 per cent in the WTO, 34 per cent in the IFAD, 48 per cent in the IDB, 60 per cent in the ADB, and 61-62 per cent in the World Bank and IMF. Financial strength should not grant the degree of cross-the-board institutional and political power currently enjoyed in the international financial institutions by the G-7 governmental oligopoly. No doubt financial contributions bring some extra rights. (They also bring extra responsibilities). Political democracy and the rule of law have been based, however, on quite different principles (granted that they have frequently been abused in practice). At stake But how can it move events forward? Of the many possible options, one is a global conference. There should certainly be no expectation that, as at Bretton Woods, one extended meeting can deal with all of the problems. One should instead be thinking in terms of a more effective process of change. But either as a starting point or early in the process, a conference would serve an important educative and galvanizing purpose. It must not serve, as conferences sometimes do, as a de facto substitute for action. Four realistic options for an improved process might be considered and they are not necessarily mutual exclusive. Panel As earlier recommended by the Group of 24 (G-24), one could seek to re-initiate an intergovernmental process like that of the Committee of Twenty, created by the Bretton Woods institutions themselves in the 1970s, to reconsider their functioning in the new financial world of that decade. (The twenty were equally divided between industrial and developing countries). In the absence of IMF/ Bank response to this request, such a prospect would have to be initiated from elsewhere, and might be more difficult to launch. It might usefully be discussed in the Second Committee. Separate reviews might be initiated at the regional level; perhaps by the regional economic commissions of the United Nations (or perhaps by the regional development banks), and perhaps all under the Secretary-General's or the Economic and Social Council's (ECOSOC's) umbrella authority. Proposals from Japan and Australia for regional IMF-style funds and improved arrangements for increased regional monetary co-operation in Asia suggest that some such thinking is already under way; and it needs to be placed appropriately into a more global context. Some developing countries and/ or some industrial middle powers might initiate their own independent or intergovernmental review with recommendations, as has previously been done in other dimensions of UN activity. These possibilities and other possible avenues for broader progress in the sphere of global economic governance might be actively explored in the forthcoming Extraordinary Meeting of G-24 Ministers of Finance, as developing countries debate the proposed conference on the financing of development. - South Letter Fears grow of new debt crisis in
Korea SEOUL, May 19 - No pain, no gain. That’s what South Korean President Kim Dae-jung has been telling the nation in town meetings since his inauguration in February. But economists and analysts say that pain is probably going to be much worse than expected, and some say a new financial crisis is on the horizon. They say South Korea’s economy may contract by as much as five percent this year, unemployment will grow much worse and the banking system could collapse under the sheer weight of bad debt and a domino effect of corporate bankruptcies. "We have seen clear signs of severe recession taking hold in Korea in recent months," said Stephen Marvin, head of research at Ssangyong Investment and Securities in Seoul. Industrial production plunged 11 percent year-on-year in March - but an extraordinary 45 percent quarter-on-quarter. Factories operated at around 65 percent of capacity in March, which means unemployment - already at a 12-year high of 6.5 percent in March - is likely to soar as plants start shutting down. "Disguised unemployment in Korea may be 25 percent or more," said Dave Carbon, market strategist for Pacific Asset Management in Singapore. "The eventual outcome is clear. Either layoffs grow or firms go bankrupt and layoffs grow." GDP FIGURES REVISED DOWN Marvin at Ssangyong Securities projects the economy will shrink by five percent. Rob Subarraman, regional economist at Lehman Brothers in Tokyo, is also predicting a five percent drop in GDP. But Richard Samuelson, head of research at SBC Warburg Dillon Reed, is forecasting a 1.9 percent drop and Mark Neale at Dresdner Kleinwort Benson is forecasting a one percent fall. Much of the concern is over the growing mountain of bad debt in the banking system. Finance Minister Lee Kyu-sung said last week bad debts in the financial system had reached a staggering 120 trillion won ($83 billion), and half may have to be written off. Lee Hun-jai, chairman of the Financial Supervisory Commission (FSC) that supervises the financial system, said financial sector reform will cost 81 trillion won over five years. Half of it has to come from the government, he said. "More large bankruptcies are inevitable and the banking system will come under increasing pressure," Marvin said. "We will likely experience a full-blown financial crisis, a breakdown in the financial system, in the next few months." The bearish view was reinforced last week when Moody’s Investors Service lowered the long-term debt rating of 19 Korean banks. But FSC Chairman Lee says the situation is manageable. "I clearly say there will not be any crisis in June," Lee told Reuters in an interview. "There will be some effort by the financial companies to negotiate with business firms to extend the terms to longer terms," he said. DEBT RESCHEDULING TALKS "I don’t expect another crisis," Neiss said in an interview. "I think the government is able, and all interested parties are willing, to deal with the next difficult phase. That phase involves massive debt rescheduling talks between banks and companies and means some banks and weak firms will have to exit the scene, he added. Marvin and others estimate corporate debt at more than a half-trillion won, or roughly 120 percent of GDP. "Monthly interest payments alone are 6.0 billion dollars. That means total interest payments this year will be more than half of total exports last year," Marvin said. "So a substantial portion of this debt must be written off, which means banks, foreign and domestic, have to book substantial losses." Dresdner Kleinwort Benson, in a recent report, predicted nearly 15 percent of quoted stocks, mainly the smaller ones, could go bankrupt by the end of this year. More than 10,000 companies went out of business in the first quarter of this year, official figures show. With bank debt drying up and share prices in the doldrums, corporations are looking for money on the bond market. Securities dealers say companies have offered 3.0 trillion won a month in new issues this year against 2.5 trillion last year. The difference is that 90 percent of the issues were subscribed last year against just 30 percent this year. But SBC Warburg’s Samuelson believes Korea can avoid a financial crisis. "I think the government will have to recapitalise the banks. Fortunately, the government has enormous borrowing capacity. They have to come around to the idea of using it." "I don’t think it’s going to reach the stage of crisis in the sense that banks can’t lend to anybody, good companies or bad," he said. EXTERNAL CRISIS HAS
EASED The IMF projects a current account surplus this year of $21-$23 billion against an $8 billion deficit last year. Usable foreign exchange reserves were $35.54 billion on April 30 after plunging to $6 billion on December 2. "We have moved to a different phase in the recovery process," the IMF’s Neiss said. "The first phase, stabilisation of the forex situation, has been accomplished." The next step, the restructuring of banks and conglomerates, has begun, he said. Last week, South Korea’s highly geared top six conglomerates unveiled grandiose plans to downsize by selling off assets totalling some $30 billion by 2000. "Bank restructuring has been under way for some time," Neiss said. "It is on schedule and we have discussed a possible acceleration of the schedule. "Chaebol (conglomerate) restructuring is really at the beginning and has not started in all seriousness." - (Reuters) |
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