Discussion Papers | G-24

Discussion Paper Series

The G-24 Discussion Paper Series is a collection of research papers prepared under the research program of the G-24, This project aims at enhancing understanding of the complex issues in the international monetary and financial system, and at introducing a development dimension into the discussion of international financial and institutional reform.

Revising Basel 2: The Impact of the Financial Crisis and Implications for Developing Countries

10th June 2010 Abstract

Since the start of the drafting process of Basel 2 ten years ago the agreement has assumed a central position in the reform of international rules on financial regulation. The finalization of Basel 2 has proved much more difficult than anticipated by the initiators of the negotiation process owing to the complexity of its subject-matter, its global scope and the moving target of what regulatory rules are expected to achieve in rapidly changing conditions. These features of Basel 2 are mutually related: its complexity reflects the challenge of designing global rules suitable for institutions of different levels of sophistication in countries at different levels of development as well as of responding to continuing financial innovation and, most recently, to a cross-border financial crisis triggered by inadequate control of risks, malpractice and regulatory failures in countries with the most sophisticated financial systems.

Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements

10th May 2010 Abstract

Do nations have the policy space to deploy capital controls in order to prevent and mitigate financial crises? This paper examines the extent to which measures to mitigate this crisis and prevent future crises are permissible under a variety of bilateral, regional and multilateral trade and investment agreements. It is found that the United States trade and investment agreements, and to a lesser extent the WTO, leave little room to manoeuvre when it comes to capital controls. This is the case despite the increasing economic evidence showing that certain capital controls can be useful in preventing or mitigating financial crises. It also stands in contrast with investment rules under the IMF, OECD and the treaties of most capital exporting nations which allow for at least the temporary use of capital controls as a safeguard measure. Drawing on the comparative analysis conducted in the paper, the author offers a range of policies that could be deployed to make the United States investment rules more consistent with the rules of its peers and the economic realities of the 21st century

Financing the Climate Mitigation and Adaptation Measures in Developing Countries

10th December 2009 Abstract

Climate change creates a crisis for economic development, which has historically been synonymous with high-carbon growth. It is essential for the world economy to make a rapid transition to a new, low-carbon style of growth. Developed countries might be expected to pay a large share of the total global costs of this transition, due to their ability to pay and their historical responsibility for causing the problem.

Two-thirds of the world’s greenhouse gas emission reduction potential through 2030 is located in developing countries. More than half of that is in forestry, including reduction of emissions from deforestation and forest degradation (REDD), a top priority for near-term reductions. Beyond REDD, achieving the full potential of emission reduction in developing countries requires investment of hundreds of billions of dollars in energy, transport, and other sectors. One source of funding is the sale of offsets to developed countries – expanding the opportunities created by the Clean Development Mechanism (CDM). The value of such opportunities depends on the scope of a future trading system, and on the initial distribution of carbon allowances.

The 2008 Food Price Crisis: Rethinking Food Security Policies

10th June 2009 Abstract

This paper examines the 2008 global food price crisis, identifying long- and short-term causes as well as the two factors which distinguish the 2008 food price increases from earlier episodes – speculation and diversion of food crops to biofuels. The paper contends that while most attention has been focused on factors including higher energy costs, decline in growth of agricultural production and increased demand from emerging economies, it is essential to examine the structural causes of growing food insecurity to understand what is really behind the food price crisis. It then explores the impact of several factors including systemic decline in investment in agricultural productivity; state’s reduced regulatory role in agricultural production and trade; indiscriminate opening of agricultural markets which has resulted in import surges, and emphasis on cash crops, on food security of developing nations.

The paper also examines both national and international responses to the crisis and goes on to propose several short-term and long-term measures to address the crisis. The implementation of the proposed policies, the paper argues, however depends on several prerequisites based on the principle of food sovereignty which would allow policy space for developing countries to protect their agriculture, markets, and livelihoods of farmers.

The Contemporary Reform of Global Financial Governance: Lessons from the Past

10th April 2009 Abstract

As the world experiences its worst financial crisis since the 1930s, policymakers are increasingly calling for a “Bretton Woods II”. This paper argues that officials will need to think more creatively and ambitiously about international financial reform than they have done so far if they are to claim the mantle of the 1944 Bretton Woods conference.

The first section of the paper describes how the global financial crisis of the early 1930s generated bold thinking about the need to assert public authority more centrally into the realm of international finance. This thinking culminated in three sets of proposals discussed during the Bretton Woods negotiations which were genuine innovations in global financial governance: (i) those designed to regulate international financial markets more tightly, (ii) those designed to address global imbalances, and (iii) those designed to promote international development.

Post-War Experiences with Developmental Central Banks: The Good, the Bad and the Hopeful

10th February 2009 Abstract

In the last two decades, there has been a global sea change in the theory and practice of central banking. The “best practice” now commonly prescribed by the international financial institutions such as the International Monetary Fund (IMF), as well as by many prominent economists, is best characterized as the “neo-liberal” approach to central banking. The main components of this recipe are: (1) central bank independence, (2) a focus on inflation fighting (including adopting formal “inflation targeting”) and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings).

Carbon Markets and Beyond

10th December 2008 Abstract

The climate policy debate has advanced from science to economics, with a growing focus on creating carbon markets and getting the prices right. This is necessary but far from sufficient for an effective and equitable response to the climate challenge. While market-oriented forces such as the IMF and the World Bank have focused almost exclusively on carbon markets, others, such as the Human Development Report and the Stern Review, have emphasized the need for complementary, non-market climate initiatives to promote energy conservation and above all, to create and adopt new low-carbon technologies.

Global Liquidity and Financial Flows to Developing Countries

10th November 2008 Abstract

After a slump in cross-border financial flows of capital in the years following the East Asian financial crisis, capital flows to developing countries have seen a robust revival in recent years. This paper attempts to examine: (i) the factors responsible for this revival and surge in capital flows into developing countries; (ii) the qualitative changes in financial integration that are accompanying this surge; and (iii) the impact that this surge is having on financial volatility and vulnerability, macroeconomic management and growth, in countries that have been “successful” in attracting such flows.

It argues that in the wake of financial liberalization that facilitates cross-border flows of capital, supply-side factors rather than the financing requirements of developing countries, explain the surge. Financial liberalization and the globalization of finance, have also resulted in changes in the financial structure – the markets, institutions and instruments that define the global financial architecture. Increasingly a small number of centralized financial institutions intermediate global capital flows and the investment decisions of a few individuals in these institutions determine the nature of the “exposure” of the global financial system. This has implications for the accumulation of risk and vulnerability to financial crisis in markets where agents tend to herd.

Associated with this increasing risk, are changes in the business practices and motivations of financial firms that reduce the role of finance in ensuring broad-based economic growth. Together with the constraints on fiscal, exchange rate and monetary policy set by large capital flows, this can limit the prospects of long-run, noninflationary growth as well.

The External Debt Contentious, Six Years After the Monterrey Consensus

10th September 2008 Abstract

This paper has three objectives. It discusses the main developments and new issues that have arisen after the Monterrey Conference. It critically reviews the Monterrey Consensus on external debt. It provides a set of recommendations for reviewing the implementation of the Monterrey Consensus, to take place in Doha, Qatar, in December 2008. In doing so, the paper discusses the shortcomings of standard debt sustainability exercises; it presents new results on the additionality of debt relief; and discusses the need for developing new financial instruments and institutions aimed at reducing the risks of sovereign and external borrowing. The paper also briefly discusses issues related to the definition of external debt and touches on the odious debt debate.

Enhancing the Role of Regional Development Banks

10th July 2008 Abstract

Access by emerging market countries to private capital markets can be unreliable, limited and costly, and thus lending through multilateral development banks (MDBs) needs to continue playing an important role in the international development architecture. At the same time there are a number of important reasons why lending by regional and sub-regional development banks (RDBs, SRDBs) can and should play an important and valuable complementary role to multilateral lending and institutions.

The main issues and conclusions discussed in our paper are the following. Firstly we analyse the successful experiences of the European Investment Bank (EIB) and the Andean Development Corporation (CAF). European integration offers very valuable precedents and lessons; the EIB was central to the process of European integration since the beginning, as it was especially created to support this process. An interesting question is whether EIB lending to developing countries could not be expanded more. The CAF on the other hand is unique in being almost exclusively owned by developing countries. A noteworthy feature is also the exponential growth of its loans since 2000 and the great average speed at which their loans are approved, with an average period of around 3–4 months. These, and other positive features of the CAF provide very good lessons for potential new development banks.

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