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On which areas in International finance do we need consensus in the world economy?

Time (GMT +01) 00:00 23:59


Simon Maxwell, ODI.
John Williamson, Institute for Internaitonal Economics
Andrew Lewis, HM Treasury
Marcus Miller, University of Warwick
Stephany Griffith-Jones, Institute of Development Studies
David Lubin, HSBC

1. In this final meeting in the series on Financing for Development, John Williamson presented the recommendations of the High-Level Panel on Financing for Development (the Zedillo Panel), which he coordinated and whose report was being launched in New York. Williamson explained that although the Zedillo Panel shared the same terms of reference as the UN FfD Preparatory Committee i.e. to identify the measures necessary to achieve the 2015 International Development Goals (IDGs), it had been able to be more assertive because it had not shared the same political constraints. Williamson presented the recommendations of the Panel in four main areas:

  • Policies in Developing Countries. Whilst it was acknowledged that the developing countries must take the lead in the achievement of IDGs - the report particularly emphasises the need for good governance and social expenditure - it is also recognised that political will on the part of developing countries must be matched by international will to assist with capacity building. The Panel felt that this aspect required review.

  • Trade. The Panel endorsed the need for a new round of the WTO and felt that it should be a 'development round', focusing on developing countries' needs (in particular the Panel highlighted the implementation and review of the Uruguay Round, liberalisation of agriculture and the elimination of trade barriers in manufacturing). For those countries that are still overwhelmingly dependent on exports of primary commodities, the Panel recommended the restoration of the IMF's Compensatory Financing Facility and the establishment of a Commodity Risk Management Scheme to insure agricultural prices.

  • Public Sector Finance. The Panel identified four areas where public finance would retain a central role: initiating development in countries/sectors that do not attract private investment; responding to humanitarian crises; providing Global Public Goods (GPGs); and dealing with financial crises. The Panel estimated that in order to achieve the IDGs, an additional $50bn ODA per year was required. The success of the Debt Relief Campaign in mobilising public support convinced the Panel that a similar campaign should be initiated around the achievement of the IDGs. More controversial recommendations were the establishment of a Common Pool Programme, as advocated by Ravi Kanbur to manage aid at the country level without excessive donor interference, and support for further debate regarding an international tax to finance GPGs.

  • Systemic Reforms.The Panel was relatively bold in this area. It argued that the world needed an apex economic institution, which ought to take the form of an Economic Security Council of the UN. The Panel also recognised the need for urgent reform of the WTO's decision-making structure and increased funding of the WTO. To further remove pressure from the WTO, the Panel also recommended the strengthening of the ILO and the consolidation of existing bodies to form a Global Environment Organisation. It also advocated the creation of an International Tax Organisation.

2. Whilst David Lubin felt that the Panel had made some useful recommendations such as Commodity Price Insurance for farmers in LDCs, he also thought that some of the recommendations would prove to be more difficult. In particular, Lubin was uncertain that the Common Pool proposal would solve the problem of micro-management of aid programmes; it could in fact have a perverse effect on aid volumes. He was also doubtful that an Economic Security Council would gain any more legitimacy than existing institutions and felt that we should instead concentrate our efforts on strengthening these.

3. However, Lubin's overriding concern with the report was its underlying acceptance of the merits of consensus. He argued that consensus can lead to complacency both in policy and markets. In the 1990s, for example, the prevalent complacency about the Asian policy framework made the world rather insensitive to some of that framework's shortcomings. There was, for example, a high degree of consensus about the acceptability of fixed exchange rates, as well as the idea that a high savings ratio could make a country invulnerable to crisis. The strength of this consensus made crisis particularly severe when it hit. In view of that, Lubin suggested that we should be seeking to create 'permanent doubt'. Areas of consensus that Lubin identified as being potentially dangerous at the current moment included:

  • The belief that FDI is an unambiguous good for developing countries. Areas of doubt exist around sustainability, herding behaviour and the risks associated with the need to service the liabilities which FDI creates.

  • Faith in the ability of rating agencies. Lubin argued that credit worthiness is dependent on both a demand for emerging markets assets and a supply of those assets. Rating agencies only have particular expertise in analysing the supply curve, and until we understand the demand curve there will also be the potential for error.

  • Acceptance of the 'two corners' (fixed-peg-or-pure-float) approach to exchange rate regimes. At a time when Argentina is facing intense pressure, it may be dangerous to push the idea that countries should be perfectly happy with a fixed peg. Equally, the 'fear of floating' which is prevalent among developing countries suggests that exchange rate flexibility has limited attractions for developing countries when capital is mobile.

4. For Lubin, the crux of FfD is the question of demand for developing country assets. He argued that we need to not only shift the demand curve but also change its shape.

5.Marcus Miller's presentation addressed the section of the report on private capital flows and the problems of vulnerability, using the institutional responses of the leading capitalist countries to their past domestic financial crises to draw lessons for the global economy. At a domestic level, banks and corporations are vulnerable to crises, and Miller went through the actions (indicated in italics below) taken to assist these institutions. He drew comparisons at the global level for dealing with sovereign states in financial trouble and pointed out that one of the biggest questions at the international level is who should take action. He identified '8 Ways to Save the World' as proposed in previous literature, in particular an article by Ken Rogoff , recently appointed chief economist at the IMF (and also brought in what the report had to say about particular measures):

  • Supply liquidity. Currently provided by the IMF. The Meltzer Commission took the view that what was missing at the global level was an International Lender of Last Resort (ILOLR). However, a number of doubts exist regarding the feasibility of this proposal.

  • Suspend convertibility. The kinds of cases that could be referred to are those such as Korea where there were forced rollovers/standstills, which can be very effective. However, this is outflow control, rather than inflow control that was acknowledged in report.

  • Provide insurance. This was a proposal made by George Soros during the East Asian Crisis but was not endorsed by many others. The report supported commodity risk insurance but not the global underwriting of sovereign debt, which Miller also expressed doubts about.

  • Impose regulations. Measures in the revised Basel Accord are fairly contentious e.g. role of rating agencies. Miller expressed concern at the possibility of multiple equilibria whereby the rating agencies make self-fulfilling prophecies. Andrew Powell has suggested that there should be a revision of the Basel Accord for emerging market economies.

  • Supervise Workouts. Miller pointed out that there are obviously agencies that already restructure debt and that there have also been a call for an international bankruptcy court to handle problems of sovereign debt and help restructure. Ken Rogoff has proposed that we should avoid the problem of bonds by starting with equities - we need to restructure capital flows ex ante and not just in a crises. This is similar to the suggestion made by Avinash Persaud earlier in the series.

6. Finally, referring to his recent paper on 'Sovereign Liquidity Crises' (Economic Journal, January, 2000). Miller emphasised that institutional structures must be adapted to support capital account liberalisation. Miller suggests that in recent years we have seen some developments that have helped to achieve this. In domestic markets, between bonds and equity, there are bonds that do get restructured - 'junk' bonds. Miller argued that sovereign bond-holders would rather have agreed procedures by which bonds can be restructured, which they could price into the bond, rather than facing the panics and crises associated with bonds which cannot be restructured.

7. As with the other panel members, Andrew Lewis also found much to welcome in the report e.g. the emphasis on IDGs and the call for a new trade round. However, he also stated that whilst we have a greater degree of consensus on broad underlying principles than would have been found a decade ago, once we move past these much intellectual disagreement exists on specific issues:

  • Macro Economic Policy Frameworks. Although there is consensus regarding the need for stability, transparency and measures to accommodate shocks, debate remains regarding the details of implementation e.g. the sequencing of capital account liberalisation.
  • International Development. The UK - through DFID - were among the leading advocates of a new approach to development assistance, which takes its lead from the needs of developing countries identified through PRSP-type processes. But there was resistance from some governments to that approach, and we still needed to explore the full implications for the Multilateral Development Banks.

  • International Financial Architecture. While there is consensus regarding the need for reform there is still much to do e.g. in enhancing IMF surveillance, and building support for the implementation of the best international standards. As with debt relief, the G7 had shown vital political leadership, while recognising the need for a broader consensus and for implementation through the Bretton Woods Institutions.

8. Ultimately, Lewis believes that we need to be realistic about what is achievable and build on the consensus and institutions we already have. Whilst the UK government is giving priority to the UN FfD Programme, it retains a certain amount of caution because - as Clare Short said in her recent speech to the UN General Assembly on AIDS - the UN lacks the mechanisms to ensure the effective implementation of high level political statements. Lewis sees the value of the UN Programme lying more in the inclusiveness of the process leading up to the event and the debate that has been generated - for example through the Zedillo Report - than in the event itself. The day-to-day practical steps to ensure effective implementation of reform would continue to focus on the international financial institutions.

9. A number of issues were raised in the discussion, focusing particularly on the situation of the poorest and most risk-prone countries.

  • Commodity Insurance Scheme. Opinion was divided on the merits of such a scheme with some arguing that the cost of the scheme rendered it impractical and that it was counter-productive because it encourages over-specialisation.
  • International Development Targets. It was argued that the report does not say much on countries that are dependent on donor finance and generally is not very strong on the issue of aid volume. Williamson stated that due to the unwillingness of the US to provide more aid, the Zedillo Panel took the stance that it was more realistic to focus on the campaign element than sequential targets. There was some agreement that the public would be more receptive to the IDGs as they are related to outcomes than to the 0.7% target. Others felt that the real issue is the belief that ODA does not go to the right people and that resolving this issue would increase public support.

  • Common Pool. Some agreed with David Lubin that pooling could lead to a reduction in aid because donors would have less control over their funds. It was suggested that if the PRSP vision is fully achieved, this might override the need for a common pool. However, others felt that PRSPs did not go far enough, and that the common pool was worth pursuing.

  • Tobin Tax. Issues raised included whether the Tobin Tax is able to provide a long-term supply of development finance, whether it is workable and whether it could aid stability. It was pointed out that a functioning global tax framework requires a much higher capacity for global governance than that which currently exists. It was also highlighted that a tax does not necessarily prevent speculation. Others felt that the main issue was political unwillingness.

  • Financial Flows. It emerged that the silence in the report on the issue of exchange rates/capital flows reflected a lack of consensus in the Panel on this issue. However, actions that were recommended during discussion included: (i) Strengthening of domestic markets across the yield curve. (ii) Limitation of regulation. We need a spectrum of risk and return because this brings diverse actors into the economy. It was felt that increased regulation would have a contrary effect by enforcing standardisation, leading to increased herding. (iii) Ameliorate restrictions on long-term investors that we wish to encourage into developing countries.

  • Regionalism. It was suggested that the state-centric model no longer provides an efficient framework with which to view our international system and unless we move away from this we will not be able construct a new international financial architecture.


With the announcement that the UN International Conference on Financing for Development will be taking place on 18 - 22 March 2002 in Monterrey, Nuevo León, Mexico, Financing for Development is set to remain high on the development agenda. ODI tackled the subject of Financing for Development during its Winter 2001 Meeting Series and this meeting will draw together the different strands of the debate identified during the series. A panel of experts from academia, public and private sector will be brought together to identify the areas where consensus is required in international finance. To facilitate the debate, John Williamson will present the report of the UN High-Level Group on FfD.