SECOND COMMITTEE HEARS IMF ON FINANCIAL CRISIS, MEMBERS CITE FALLOUT,
Press Release
GA/EF/2819
SECOND COMMITTEE HEARS IMF ON FINANCIAL CRISIS, MEMBERS CITE FALLOUT,
19981009 The appropriate response to the current financial crisis was not to turn the clock back on opening markets, but to more effectively to address vulnerabilities, a representative of the International Monetary Fund (IMF) told the Second Committee (Economic and Financial) this morning, as it concluded its general debate on the world economic situation.In an increasingly integrated and interdependent global economy, market contagion was a challenge to policy makers, he said. The international community must make tough decisions on the rights, risks, and obligations of governments, citizens, private corporations and international institutions.
He said a key lesson was the need to address promptly any signs of weakness in policies and institutions likely to provoke sharp revisions in investor perceptions of a country's economic prospects. Countries needed to limit potential damage from shifts in investor sentiment by fostering robust financial systems.
The representative of Thailand said the IMF and the World Bank were indispensable, but they must improve their predictions and delivery. The IMF needed $90 billion to function meaningfully. The $18 billion called for from by the United States was indispensable as seed money. The G-7 countries had the financial and political power to prevent financial volatility, stimulate growth, and prevent global recession. They also had a duty to modernize the international financial system. If nothing was done soon, globalization would only be an opportunity for the strong and a challenge for the weak.
The representative of Malaysia said there was need for a global regulator of world capital markets, and for access to funds of last resort for countries that were fundamentally sound, but required temporary liquidity support to weather a run on their economies. The recent bailout in the United States of the Long Term Capital Management Fund showed that the contagion was having a serious impact, even in the developed economies. Malaysia had been criticized for announcing foreign exchange controls; it did not want to isolate itself from the global economy, it just strongly believed that it should be free to act.
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Rampant speculative activities by a few individuals and groups in the financial community were slowing progress made through painful economic reforms and restructuring in most of the developing world, the Ghanaian representative said. It was irrelevant how developed or poor a country was, the contagion of stabilization struck all nations that were part of the modern economy. Global surveillance and regulatory mechanism for short term capital flows and currency trades were needed, similar to those for global mechanisms for regulating trade in goods.
Statements were also made by Singapore, Zimbabwe, Saudi Arabia, Nepal, The former Yugoslav Republic of Macedonia, Nicaragua, Malta, and the Democratic Republic of the Congo.
The Committee will meet again this afternoon at 3 p.m. to begin its consideration of macroeconomic policy questions.
Committee Work Programme
The Second Committee (Economic and Financial) met this morning to continue its general debate on the world economic situation.
Statements
KISHORE MAHBUBANI (Singapore), said that the dangers faced today were real but also clear, and therefore it was possible to identify opportunities. Developed countries had made some token positive gestures to pursue North- South dialogue, he said, but had little motivation to carry it out.
He compared North and South to a fleet of modern cruise liners, and a group of ageing, rudimentary shipping vessels, respectively. From time to time, the modern liners would send limited assistance to the ageing, overcrowded vessels, he said, but felt no need to do much more. The current financial crisis had demonstrated that those separate vessels have been fused into one, and that all were now in the same boat. The financial crisis currently rocking the developing countries had started in East Asia, and what had seemed last year a small crisis in a distant country now appeared to be a leak in the common boat. Central bank and treasury officials had become concerned about the huge capital flows that could destabilize the developed world with the speed of a click of a computer mouse.
Singapore, he said, despite the economic crisis, had not changed its fundamental approach to economic development. But Singapore did believe in strong regulatory systems.
MACHIVENYIKA T. MAPURANGA, (Zimbabwe), said he believed that it was the greatest tragedy and irony of our time that an exceedingly high level of affluence coexisted with abject poverty. In the modern economy, developed countries were the dominant consumers, but developing countries had paid the price with the pollution of their land and water.
Mozambique did not share the belief that the progress of one part of humanity could be possible when basic needs of people in the developing world remained unmet. Solidarity and partnership, he said, rather than cut-throat competition, were necessary to international cooperation and development. Yet despite long-standing proposals to democratize and make accountable the international financial institutions, the Bretton Woods institutions had exhibited pernicious rigidity and were slow in responding to the financial crisis.
Over the years, he said, those institutions had increasingly performed functions similar to those traditionally carried out by United Nations development agencies and programmes. Instead of being in competition, he called for greater cooperation in pursuing the common goal of promoting
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sustained human development. That could not be achieved without transparency in the trading system.
The situation in Africa -- with regard to terms of trade and commodities -- remained bleak, he said, and the African continent continued to require special attention from the international community.
J. B. ZULU, Director of the International Monetary Fund (IMF) at the United Nations, said the Committee and the Fund were preoccupied with the same issues and searching for the same global objectives: a reasonably stable world economy, combating poverty and the establishment of a level playing field for economic and social agents. He then highlighted policy considerations emanating from the recent Interim Committee and IMF/World Bank Annual Meeting discussions. The focus was on developments in the world's economy; strengthening the architecture of the international monetary system and operational issues under implementation.
He said the seriousness of the Asian and Russian crises and the contagion effects had underscored the vulnerability of the international financial system and the need for increased vigilance by member countries and the IMF. A key lesson was the need to address promptly any signs of weakness in policies and institutions likely to provoke sharp revisions in investor perceptions of a country's economic prospects. Countries needed to limit potential damage from shifts in investor sentiment by fostering robust financial systems. As the global economy was increasingly integrated and interdependent, market contagion would be a challenge to policy makers. The appropriate response to the current crisis was not to turn the clock back on opening markets, but to more effectively address vulnerabilities.
While the IMF had no quick fixes, it had been working on identifying key initiatives to minimize risks of further crises and better manage them, he said. It aimed to create a global system that was stable, sound, open, transparent, and fair. The starting point was domestic policy environment. Countries needed to move expeditiously in adopting best practices in financial supervision, regulation and accounting. Capital account liberalization had to be accompanied by -- and preferably preceded by -- the strengthening of bank supervision and regulation, as well as accounting. Such issues impinged directly on the health of the international financial system.
The search for effective solutions and the reforms and actions under consideration in the architecture of the new monetary and financial system was the easy part of the challenge, he said. So was the designing of fiscal, monetary, and financial policy codes of conduct. Countries needed to address domestic as well as systemic issues and that process was likely to be extensive, demanding and perhaps even intrusive. The challenge before the international community required shareholders to take tough decisions on the rights, risks, and obligations of a wide range of actors, including
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governments, citizens, private corporations and international institutions.
ADBULLATIF AL-MOURSHID (Saudi Arabia) said a just and equitable economic environment required cooperation and the removal of trade barriers and economic obstacles. Then there could be prosperity for all. Economic and social development were essential for security. Developed countries should foster fruitful cooperation and aim to be active partners with developing countries in attacking stagnation and achieving prosperity. His Government was working to expand its investment and industrial bases and assist developing countries, particularly the least developed countries. It aimed to participate in fashioning the future economic development process and wished to be a member of the World Trade Organization (WTO) as soon as possible.
He said his country was committed to protecting the environment. It emphasized the importance of developing natural resources without affecting the environment and the interests of future generations. He called on industrial countries to improve the transfer of technology to developing countries. Sustainable development required protection and improvement of the environment and the prevention of pollution. Political and social polarity had to be respected. The King of Saudi Arabia, he said, attached great importance to the problems of desertification and drought and was working with countries that suffered from those phenomena, particularly in Africa. His country was also participating in various development projects in countries of the Arab League and approved World Bank programmes to combat drought. He called on the industrialized nations to help countries suffering from drought and desertification.
DATO SALLEH SAID KERUAK (Malaysia) said that while Malaysia had enjoyed the benefits of the inflow of capital and investment, it was severely affected by the current global financial crisis. Malaysia had attracted significant foreign investment, had a steady industrialization programme since the mid-1980s, had growth averaging 8 per cent for 10 years up to 1997, and became the world's 19th largest trading nation. However, that progress had been interrupted and curtailed by the devastating effect of destabilizing capital flows. There was need for a global regulator of world capital markets, and for access to funds of last resort for countries that were fundamentally sound, but required temporary liquidity support to weather a run on their economies.
The recent bailout in the United States of the Long Term Capital Management Fund showed that the contagion was having a serious impact, even in the developed economies. He said work was underway to address shortcomings in the international financial system. It included banking supervision, establishment of universal principles for securities regulation and development of strong global standards in the insurance industry. Also, a mechanism was needed for making rating agencies responsible for their actions and it was time to set up an international lender of last resort.
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When his Government announced controls on foreign exchange, he said, it was immediately criticized. His country did not want to isolate itself from the global economy, it just strongly believed that it should be free to act.
ASDA JAYANAMA (Thailand) said comprehensive national economic reform was not sufficient to bring back investor confidence and regain economic growth. Thailand had continued to reform its political, economic and social systems, at times in a draconian way, for the past 14 months. But the country was still in recession and was expecting minus growth for 1998. Although the hope of bringing investors back to Thailand had been partially realized, foreign exchange debt obligations still caused capital outflows. Thailand had devalued its currency, but others had also done so, and demand was not picking up enough as the country's major trading partners, such as Japan, were still in recession. A speedy recovery depended on the external environment, which unfortunately was getting worse.
He said the roles of the International Monetary Fund (IMF) and the World Bank were indispensable: they had played their roles well in some cases, not so well in others. They needed to improve their predictions and delivery. The IMF could not function in a meaningful way without an additional $90 billion. The $18 billion called for from the United States was indispensable seed money for the new amount required. The G-7 nations had the financial and political power to prevent financial volatility, to stimulate growth, and to prevent global recession. It also had a duty, and it was in their national interest, to modernize the international financial system. The suggestion, by the Prime Minister of the United Kingdom, to redesign the Bretton Woods institutions and United States President Bill Clinton's call for meetings of the G-22 should be seriously studied and implemented. Huge hedge funds were also responsible for the current financial volatility. If nothing was done soon, globalization would only be an opportunity for the strong and a challenge for the weak.
GHANSHYAM LAL DAS, (Nepal), said that despite opportunities to reap the peace dividend, which had once appeared unprecedented, and despite the spectacular progress in technology and economic liberalization, the majority of the world population, particularly in less developed countries, was becoming further marginalized. Despite the efforts made, the population was divided into two worlds, one of poverty, the other of luxury and extravagance. It was, therefore, the responsibility of the world to mount collective efforts and launch an all-out war on poverty, especially in least developed countries.
The net flows to least developed countries had been niggardly, he added, despite the existence of investment opportunities in those countries. With surging population, environmental degradation, depletion of natural resources, chronic food shortages, mounting third world debt, an energy crisis, youth unemployment and issues pertaining to women and children, the situation in the least developed countries required management at a global level.
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NASTE CALOVSKI (The former Yugoslav Republic of Macedonia), said his country was preoccupied with better access to European and other markets; finalizing of the economic system, primarily privatization; reduction of unemployment; direct private foreign investments; higher growth; currency stability and low inflation. His Government had adopted liberal foreign economic policies and had concluded many bilateral free-trade agreements. Although the Government was happy with the results, the region was still burdened by many political and security difficulties.
The establishment of free trade areas was very important for the integration of many economies into the regional and global economy, he said. Both bilateral or multilateral arrangements could enhance market access. The World Trade Organization (WTO) should be open to all States that accepted its obligations and rules. While the importance of strengthening international cooperation, obstacles -- some irrational and difficult to understand -- were being created. The Committee should stress the need for Member States to become WTO members and no countries that wanted to join should be prevented from doing so.
He said the concept of interdependence was outdated and was largely misleading. Although there was interdependence in economic cooperation among countries, the partners were not equal and their capacity and their strengths were different. The Committee should promote the attitude that no economy should grow to the disadvantage of others. Dependence should not be seen as an obstacle, but, rather as an important reality to be taken into account in endeavours against monopolistic behaviour in international relations.
CARLOS A. GOMEZ, (Nicaragua), said that the United Nations must deal with the new challenges to global society. His Government had policies to promote development and the private sector did its part as well. His country had also received assistance from the United Nations Development Programme. As a result of those and other factors, Nicaragua would soon have the most open economy in Central America.
He said that his country believed in globalization, but not as a panacea. It could only help development if it were used with caution. Globalization's hurricane-force winds were felt most by the disadvantaged; their vulnerability must be safeguarded.
Moreover, he added, any development model must take into account both the private sector and civil society. His country would contribute to the process of reform, and would help make the United Nations better able to meet the challenges of the twenty-first century.
PIERRE HILI (Malta), called for a coordinated global effort to promote market confidence and support in the face of the looming economic crisis. The international community must take into consideration the widening gap between developing and developed countries. Failure to do so threatened to lead to a
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world divided by a curtain of poverty. Therefore, the United Nations must explore new avenues and embark on ambitious actions which would lead to a new environment governed by global rules. It was imperative, moreover, that economic growth and development were translated into social justice.
The outcome and assessment of the Assembly's special session on the review and implementation of Agenda 21, he said, indicated that the state of the environment was worse than at the beginning of the decade. In the urgent concern to promote economic growth and social development, environment should not be overlooked. Growth, therefore, must be truly sustainable. On the eve of the twenty-first century, both developed and developing countries must embark on a course based on equilibrium between the requirements of an open world economy and human needs.
ATOKI ILEKA, (Democratic Republic of the Congo) said that despite his country's state of war, the priority of his government was not just to support the war effort, but to improve the lives of its citizens. He said his country had begun to address new institutions for Congolese citizens, had held its second free elections and had planned, before the conflict, to address economic issues as well. Its efforts included restoring industries such as food and agriculture, reforming the Congolese franc and restoring the Congo's decaying economy. Public finances were in total disarray, a lack of maritime traffic had ruined the flow of imports and exports, and no significant income was coming in from parts of Congolese territory affected by fighting. He hoped that diamond production would return to normal levels.
He said that his country was bringing inflation down from 1000 per cent to what optimistic estimates said were close to 100 per cent, but still, due to conflict, his country had been obliged to suspend payments to the IMF. He wished to point out that the population of the Congo had tripled in a short time, that public investment was low, and a large urbanization movement and the failure of public enterprises added up to difficult times. Facing all those difficulties, the presence of the United Nations system in the Congo was particularly appreciated. His country had repeated its appeal to participate in and support a financial assistance program for the Congo to meet urgent needs. The Congo would like to benefit from international technological support as well as the reduction or cancelling of debt, or permission to pay debt in local currency.
His country intended to present two draft resolutions on the economic recovery of the Congo and on the problems faced by populations of the Great Lakes Region which had been subjected to conflicts uninterruptedly for several years.
JACK WILMOT (Ghana), said rampant speculative activities by a few individuals and groups in the financial community were slowing progress made through painful economic reforms and restructuring in most of the developing world. Those activities could reverse economic gains in all parts of the
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world. One of the most important lessons for the international community was the symbiotic nature of global interdependence. It was irrelevant how developed or poor a country was; the contagion of stabilization struck, as one, all nations which were part of the modern economy. Another lesson was the urgent need for a global surveillance and a regulatory mechanism for short-term capital flows and currency trades, similar to the global mechanism for regulating trade in goods.
While new theories of development and accounting come and go, the reality of growing poverty within States and growing inequality between nations kept getting worse. Discussions on development financing must resist the tendency to sacrifice the objective of poverty eradication on the altar of economic idealogies. As Ghana's experience had shown, policies, which some developing countries had been urged to pursue, to reform and restructure their economies, had exacerbated poverty in the short term. In the face of low direct foreign direct investment to such countries, official development assistance (ODA) would be critical. He deplored the overall decline in ODA, although credit should be given to a few countries, including Denmark, Norway, Sweden and the Netherlands which had met, and, in some cases even exceeded the United Nations aid target of 0.7 per cent of gross domestic product (GDP) set in the early 1970s. All donor countries should emulate that example.
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