10th April 2009
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.
9th April 2009
The dramatic world food price spikes in 2007-08 were largely a result of speculative activity in global commodity markets, enabled by earlier financial deregulation measures and the flight from Wall Street. Despite the recent fall in agricultural prices in world trade, the food crisis has exacerbated in many developing countries where food prices remain high and even continue to increase. The financial crisis increases food insecurity by constraining fiscal policies and food imports in balance of payments constrained developing countries, causing exchange rate devaluation through capital flight, and adversely affecting employment and incomes, thereby reducing the ability to purchase food.
10th February 2009
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).
9th February 2009
Facing the deepest financial crisis since the Great Depression, governments and monetary authorities around the world have acted swiftly and forcefully to coordinate their policy responses. Yet, traditional macroeconomic remedies, such as looser monetary policy, are weakened in a global credit crunch and situations of excess capacity in many industrialized countries. Fiscal stimulus packages which are being advocated as a complement to monetary policy are also likely to be ineffective: on the one hand, many emerging countries may not be in the position to afford counter-cyclical policies due to their lack of fiscal space or constraints on foreign exchanges. On the other hand, industrialized countries may face the issue of Ricardian Equivalence (i.e., government deficits are anticipated by individuals who increase their saving because they realize that borrowing today has to be repaid later).
As the crisis now becomes a self-fulfilling prophecy, there is a major risk of global deflation. Drawing from lessons of history, this note discusses possible steps for avoiding a long, protracted recession. It proposes a bold new recovery plan for global development that would make fiscal stimulus packages work by channeling funding from developed countries to projects and programs that release bottlenecks to growth in developing countries. Such a facility would provide business opportunities for industrialized economies and stimulate both their domestic demand and exports. For countries with large foreign exchange reserves, it would be a mechanism to restore stability in global trade and manage their surpluses in the most efficient way possible. For poor countries, it would provide the much needed resources for domestic or regional projects that meet the market test—i.e. those projects with good returns
10th December 2008
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.
10th November 2008
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.
10th September 2008
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.
8th September 2008
Much higher food prices are putting the health and lives of the world’s poorest at severe risk. This paper proposes a mechanism to compensate for the effects of higher import prices on the poor, which can be implemented immediately. Help against hunger must be without conditions. Historical experience suggests that in order to avoid undue conditionality creeping in, any meaningful compensation mechanism must be based at the UN, rather than the Bretton Woods institutions or any other organization dominated by the North. Finally, to emulate a successful feature of the Marshall Plan, self-monitoring by recipients preparing and implementing anti-hunger programs is proposed.