The Growth and Reducing Inequality Working Paper Series is a joint effort of the G-24 and Friedrich-Ebert-Stiftung New York to gather and disseminate a diverse range of perspectives and research on trends, drivers and policy responses relevant to developing country efforts to boost growth and reduce inequality. The series comprises selected policy-oriented research papers contributed by presenters at a Special Workshop the G-24 held in Geneva (September 2017) in collaboration with the International Labour Organization and the Friedrich-Ebert-Stiftung, as well as relevant sessions in G-24 Technical Group Meetings.
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.
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
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 ongoing global financial systemic crisis and the “Bretton Woods II” processes under way in various fora seem likely to result in reformed national and global regimes for governance, stronger regulations in public interest, and their stricter enforcement. However, these will be incomplete and may not even be successful unless there are parallel efforts in the WTO and its ongoing Doha Round, in particular on “Trade in Financial Services,” where lacking data, negotiations are being conducted on faith and failed theory. A reformed global regime on finance will be incompatible with a trading system outcome of liberalised trade in financial services and capital movements. This is an area needing attention at the highest levels of developing-country governments.
The current financial crisis shows that pro-cyclical behavior is inherent to financial markets. Regulation reform needs to be comprehensive, to avoid regulatory arbitrage, and counter-cyclical, to manage the effects of boom-bust cycles. Policy makers now agree on implementing counter-cyclical regulation for financial regulation reform to improve capital, provisions, and liquidity requirements. The paper discusses different instruments that can be used in parallel, referring to the successful Spanish central bank use of counter-cyclical dynamic provisioning. Arguments in favor of implementing counter-cyclical regulation through rules, rather than discretion, as well as the trade-offs between stronger regulation and access to credit are highlighted
Climate change is an increasingly serious threat to lives and livelihoods in every part of the world. It is also a crisis for economic development, which has historically been synonymous with high-carbon growth. By now the earth’s atmosphere is filled, almost to its sustainable limit, primarily by the past emissions from today’s developed countries. It is essential, therefore, to make the transition to a new, low-carbon style of economic growth.
The efficient solution is to find the least-cost opportunities to reduce emissions, regardless of location. Responsibility for funding these reductions is a separate question; developed countries might be expected to pay a large share of total global costs, due to current ability to pay and to historical responsibility for creating the problem. What new institutions and mechanisms are needed to finance the least-cost global solution to the climate crisis?
According to recent UNFCCC estimates, two-thirds of the world’s greenhouse gas emission reduction potential through 2030 is located in developing countries. More than half of the opportunities to reduce carbon emissions in developing countries are in forestry, including reduction of emissions from deforestation and forest degradation (REDD). Separate funding and new institutions to address REDD measures could be a part of a new climate agreement.
More broadly, emission reduction in developing countries will require substantial investment in energy, transport, and other sectors; hundreds of billions of dollars per year will be needed to realize the full potential of emission reduction. One of the easiest ways to obtain financing for these investments may be the sale of offsets to developed countries – roughly speaking, expanding the opportunity created by the Clean Development Mechanism (CDM). The value of such opportunities depends both on the scope of a future trading system, and on the initial distribution of carbon allowances.
Adaptation to the unavoidable damages from climate change is an additional financial burden on developing countries, and cannot be addressed through carbon markets. Adaptation measures, however, may have more direct synergy with development plans, since they often involve improvements in infrastructure, public health, and disaster preparedness. Estimates of global adaptation needs are very uncertain, but may be in the tens of billions of US dollars annually.
Existing financial flows and institutions fall far short of what is needed. Climate funding available under the UNFCCC and the Kyoto Protocol is less than $10 billion per year, most of it provided through CDM; this funding has been heavily concentrated to date in China and a few other large emerging economies. Additional funding is provided by the World Bank’s Climate Investment Funds, which are likely to provide $1.5 billion per year for four years; and by 1 Senior Economist, Stockholm Environment Institute-US Center, e-mail Frank.Ackerman@sei-us.org. 2 bilateral aid from Japan, Norway, Germany, and others; the annual total of all multilateral and bilateral climate funding is less than $15 billion. This is too small, by more than an order of magnitude, to meet the needs for climate investments in developing countries.
Existing climate funding mechanisms and investment flows are not only dangerously small, thereby risking failure to address the problem before it is too late to solve it. They are also, in part, channeled through institutions such as the World Bank that stand outside the existing multilateral UNFCCC process; past World Bank aid has involved strict conditionality, requiring tight fiscal discipline and structural reforms in exchange for funding. Donor preferences frequently distort bilateral and some multilateral aid efforts; funding for climate investments could be weighted down by the reappearance of similar obstacles. Streamlined and improved institutional arrangements, such as a much-simplified replacement for CDM, will be needed to address the climate problem in a timely manner. Some observers have suggested the need for a new World Environment Organization (or World Environment and Development Organization) to manage international cooperation on climate and related issues.
Finally, it is worth remembering that success in international environmental cooperation is a real possibility, as shown by the example of the Montreal Protocol for reduction of ozone-depleting substances (ODSs). A number of lessons can be learned from the success of the Montreal Protocol: it paid nearly all the net costs of compliance for developing countries; its governance structure put developed and developing countries on an equal footing, requiring agreement from both groups for all decisions; it successfully addressed concerns about trade distortions; and it set a threshold for per capita emissions, above which developing countries “graduated” into responsibility for meeting the developed-country standards. With this cooperative structure in place, the parties to the Montreal Protocol moved rapidly toward reduction of ODSs, finding that costs were lower and benefits were higher than had been anticipated in advance. Could the same turn out to be true for the reduction of greenhouse gases?
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 international financial crisis is spreading. Most governments are searching for means to protect themselves and some are using "unconventional tools" of monetary and financial policy, alongside more "conventional" ones. Should policies to control international capital flows be a part of the government "toolkit" in these difficult times? This essay answers: YES. It describes the economic arguments for and against using capital controls, prudential regulations and other "capital management techniques" to manage international financial flows, presents empirical evidence on their impacts, and describes the variety of policies that many countries have successfully applied to enhance macroeconomic and financial stability, create policy space, and achieve other national development goals.