FINANCIAL INSTABILITY, DEBT PROBLEMS MAJOR TOPICS IN SECOND COMMITTEE
Press Release
GA/EF/2821
FINANCIAL INSTABILITY, DEBT PROBLEMS MAJOR TOPICS IN SECOND COMMITTEE
19981012 The international community should take steps to reduce the instability and risks caused by fluctuating financial markets, the Second Committee was told this morning, as it continued its consideration of macroeconomic policy questions.Major developed countries and international financial institutions should take measures to reinforce world financial and monetary stability, the representative of China said. The speculative and unstable nature of short-term private capital could trigger financial and monetary crises that could inflict heavy losses on developing countries. The international community should help to strengthen the capacity of developing countries to prevent crises from occurring, and to respond to them effectively when crises arose.
The representative of New Zealand said the international community must work together towards a long-term solution to instability in financial markets. Domestic reforms to improve the operation of markets were needed. Also, in reforming the international system, a careful balance was needed to design improvements which could help to stem unwarranted panic. The system should avoid the moral hazard of bailing out investors who had given insufficient regard to risk factors, thereby encouraging excessive risk-taking in the future.
There were also discussions on the problems of heavily-indebted countries. The representative of Sudan said that eliminating debt was an important element in the development of Africa. He pointed out that African debt was about 60 per cent of African exports, and that Africa's rate of indebtedness was increasing by five per cent annually. He called for a regional conference to be held between debtors and credits in the future.
External debt problems had been a burden in the development attempts of the least developed countries, most of which were in Africa, said the representative of Nigeria. The vicious cycle of indebtedness had contributed in no small measure to the inability of most developing countries to implement International Monetary Fund prescribed structural adjustment programs.
Second Committee - 1a - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
The Committee also held a panel discussion on the state of the world economy. Speaking in that discussion were: Jan Kregel, Professor at Johns Hopkins University in Italy; Arturo O'Connell, Director of the Centre for International Economy in Argentina; and Shafiq Islam, President of BRN Associates. Nitin Desai, Under-Secretary-General for Social and Economic Affairs, moderated the panel.
Statements were also made by the representatives of Pakistan, Switzerland, Nicaragua, Benin, and Venezuela.
The Committee will meet again at 3 p.m. to continue its discussion of macro-economic policy questions.
Committee Work Programme
The Second Committee (Economic and Financial) met this morning to resume its consideration of macroeconomic policy questions. Under that item, it will focus on the topics of financing of development and external debt. (For background information see Press Release GA/EF/2820 of 9 October.)
Panel Discussion
The Second Committee began its discussions this morning with a panel on "The State of the World Economy." NETIN DESAI, Under-Secretary-General for Economic and Social Affairs, introduced the panellists.
JAN KREGEL, Professor at Johns Hopkins University in Italy, said it was predicted in 1990 that the cost of financial liberalization and privatization could be quite high. With the economic crisis today, there was an increasingly substantial risk of a recession on the global level that could resemble the deterioration of the 1930s. It was once predicted that the Asian financial crisis would have a minimal impact on the world economy as a whole. Breakdown of the financial system brought to a halt interregional trade and did not allow the normal economic adjustments. It had also resulted in the loss of income and wealth similar to that of the 1930s. The crisis had also been marked by falling commodity prices. International investors that relied on those commodity prices had increased their assessments of the risk involved in loaning to developing countries. In response to the loss of capital, most countries had increased interest rates, which had an adverse impact on the ability of those countries to stabilize.
ARTURO O'CONNELL, Director of the Centre for International Economy in Argentina, said that trade relations differed among the countries in Latin America. Those that depended on trade with Asia were hurt the most in the current crisis. In 1998, the situation began to look as though it would stabilize. However, balances of trade in the area had deteriorated greatly due to a number of factors including the loss of outside capital flows. The International Monetary Fund (IMF) predicted 4 per cent world economic growth for 1998, but it had now lowered to 2 per cent. That continued downward revision meant that the world was becoming more aware of the seriousness of the crisis. Latin America was looking at the current crisis as a replay of the Mexican crisis of 1995. Latin Americans had a feeling of sympathy for East Asia because its crisis also went unheeded for too long. One lesson of the Mexican crisis was that massive financial support was needed from the larger economies. There was also a need to organize the debt situation in those countries.
SHAFIQ ISLAM, President, BRN Associates, said that 1999 would probably go down in history as the year that brought the world economy closer than ever before to 1929. An imminent depression or global crisis was going to be triggered not in Asia, the Russian Federation, or Brazil, but in the United
Second Committee - 3 - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
States, and he characterized it as more of a Wall Street virus than an Asian flu. He identified one of the clearest elements for foretelling those difficulties, as the United States personal savings rate dropping to 0.5 per cent of total personal income. This was a sign of a consumption boom, which had been sustained by overspending, borrowing and by individuals feeling that since had made a great deal of money in the stock market, they could spend as much as they wished.
Success breeds confidence and overconfidence, he noted, while fear becomes contagious, and individual self-defense spreads distress. When the United States economy comes down, he added, it would hit the rest of the world very hard. He noted, however, that consumption was already slowing down, future perspectives were negative, and the United States stock market had already taken a big hit. He also noted that despite a severe export drag in the United States, export was a minuscule percentage of United States gross domestic product (GDP). The non-financial sector profits had been falling since late last year, and there was a profit squeeze going on. Equity prices had fallen and corporate debt rates had risen.
There are two reasons why this slow-down and market collapse might lead to global depression, he noted. During the long boom, the system suffered from many excesses. Therefore, when an economy went from boom to bust, the bust would last longer. Secondly, he noted, there was a lack of strong leadership, both in Europe and the United States, and with the political problems of United States President Bill Clinton, no one in the United States was in a position to take on such a role.
Question and Answer Session
The panellists were asked if the current economic crisis was comparable to the situation in the 1920s and 1930s?
MR. KREGEL said commodity prices played a crucial role in the world economy. Budgets depended heavily on commodity prices and that was different from the 1920s. The fall-off of commodity prices had a particular impact on the economy of the Russian Federation and the trade balance and deficit became worse due to that. The inflows in terms of hard currency revenues declined and the Russian Federation became more dependent on foreign capital. With the decline in the price of raw materials, foreign investors were reluctant to lend any money. Decline in commodity prices hurt the economies of all commodity producers and also caused governments to take policies that slowed economic growth.
MR. O'CONNELL said comparisons with the 1920s and 1930s were dangerous. The world could learn from the experience of Mexico's financial crisis. The world outlook was not completely bleak -- economies would eventually break out of the downturn. One problem was that the United States was a buyer of last resort. That was where products were sold, while most economies were based on
Second Committee - 4 - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
exports. But there was a need for more balance in consuming; the United States should not be the only purchaser and the only growing economy. Struggling countries might not be able to export their way out of recession, because the United States could not absorb all the exports from around the world.
MR. ISLAM said the duration and depth of the crisis in 1999 would be determined by policy responses today. The United States was heading for a recession which had already been indicated by major brokerage houses. In comparison with the past, this year was similar to 1928, not 1929. There might not be a repeat of the depression because institutions were stronger and there was more awareness in Washington. Talk of doom and gloom was good news, because it meant that people were aware of what was happening. The best news from Washington was that people were very depressed.
MICHAEL POWLES (New Zealand) said the international community must work together towards a long-term solution to the instability in financial markets. One key area where action was needed was in domestic reforms to improve the operation of markets. In reforming the international system, a careful balance was needed to design improvements which helped stem unwarranted panic, but also avoided the moral hazard of bailing out investors who had given insufficient regard to risk factors and thereby encouraged future excessive risk-taking.
He added that, in light of responses to the financial crisis, questions needed to be asked about the involvement of development banks in providing large quick-disbursing loans if such lending placed long-term operations at risk. Given the pressures placed on development bank resources, measures needed to be taken to ensure financial soundness for them and to ensure that sufficient funds were available for the core activities of the banks. It might be necessary for borrowers to face some increased costs, provided that there was equitable burden sharing and that all donors met their replenishment obligations.
AHMAD KAMAL (Pakistan), said that over many years, resources allocated to the cause of development had declined to their lowest level ever, hurting a large number of countries in the process, particularly in Africa. Africa, he noted, was a net transferor of resources abroad. His country supported the proposal of the Organization of African Unity (OAU) for an international agreement to clear the entire debt stock from the poorest countries in Africa within a reasonably short period of time.
Since the beginning of the 1990s, he added, private capital flows had been presented as a panacea for economic development, while official development assistance (ODA) had declined. But private funds were very volatile and highly undependable.
Second Committee - 5 - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
SHEN GUOFANG (China) said that the Committee's discussions on financing of development should focus on the important question of inter-governmental international cooperation. The economic and social development of a country could only be achieved by relying on its own strength and resources. However, discussions on financing of development should naturally concentrate on actions that should be taken at the inter-governmental level. Many developing countries were faced with the problem of not being able to meet their development needs by solely relying on their own domestic market. It was a responsibility incumbent upon countries and governments to reverse the downward spiral of official development assistance and to provide developing countries with much-needed financial help.
He added that, while private capital was important, there were limitations and risks involved in such capital. Motivated by profits, private capital flows very often bypassed countries that needed them most, and tended to concentrate in sectors that promised to produce instant profits. More often than not, private capital would not move to priority areas of economic and social development in the developing countries. The speculative and unstable nature of short-term private capital could also trigger financial and monetary crises that could inflict heavy losses to developing countries. Therefore, major developed countries and international financial institutions should take necessary measures to reinforce world financial and monetary stability. They should also help strengthen the capacity of developing countries to prevent crises from occurring and to respond to them effectively when they arose.
A. P. ETANOMARE OSIO (Nigeria), said that in the 1980s, the discussion of financial and monetary issues had been transferred from the United Nations to the Bretton Woods institutions, where not even the abundance of high-level technical experts could determine the best way to tackle the social and political consequences of the international financial system.
While overall gross resource flows to developing countries surged in the 1990s from $100 billion to $250 billion in 1996, it was pertinent to note that almost all of the increase was made up of private capital. In many cases, those private financial inflows, he noted, came from nearly the same countries from whence official development assistance flows had decreased.
Debt problems had also been a burden on attempts to develop least developed countries, most of which were in Africa. The vicious cycle of indebtedness, he said, had contributed in no small measure to the inability of most developing countries to attempt further implementation of IMF-prescribed structural adjustment programs for fear of causing social unrest.
DINO BETI, the observer for Switzerland, said there was need for an effective programme of action to settle the problem of external debt world- wide. Financial constraints weighed heavily on initiatives to help reduce the burden of external debt however, and there were limits to such initiatives.
Second Committee - 6 - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
Those countries helped with their debt problem should play an increasing role in improving their own debt situation. The analysis and management capacity of countries should be improved and it was vital that countries developed a strategy to reduce their debt. The international community should continue to examine lasting economic policies that reduced and eliminated poverty, particularly for the heavily indebted poor countries. Greater help should be given to those countries that were willing to take serious steps to improve their financial situations.
CARLOS GOMEZ (Nicaragua) said debt service payments had hurt economic and social development, which had not met the needs of his country. By the end of 1997, external debt had been reduced to $6 billion. This year, his Government had focused on the implementation of IMF plans for fiscal correction in order to stabilize the economy and foster savings and investment. However, his country needed support to fulfil its commitments and develop its competitive ability. Nicaragua had reduced its debt to less than half of what it was in 1990; however, that was at a very high cost to the people, who had suffered from poverty for over 10 years. Despite the economic restructuring, his country could not reduce poverty and economic stagnation. The payment of debt service had put a stop to economic growth, which was the only way to get rid of Nicaragua's current economic situation.
MUBARAK HUSSEIN RAHMTALLA (Sudan) said that eliminating debt was an important element in the development of Africa. African debt was about 60 per cent of African exports, and its rate of indebtedness was increasing by 5 per cent annually, from $270 billion in 1990 to $322 billion in 1995. Sudan was trying to comply with its multilateral financial obligations in the face of arbitrary unilateral measures. He noted that an International Monetary Fund report of 13 April 1998, had described the satisfactory fiscal performance of Sudan. His country would move towards normalizing financial relationships with creditors and supported holding a region-wide conference of debtors and creditors in the future.
CHARLES TODJINOU (Benin) said that last year, most African countries had been spared the financial crisis of Asia, but currently those countries needed financial support to cope with the loss of investment in Africa. In order to stimulate growth to developing countries, there was a need for increased flow of resources. Developing countries needed to develop measures that attracted foreign capital. Also, they needed to reduce development efforts that could lead to further debt. Development aid required international cooperation and effort. The level of resources for such efforts, however, were decreasing. Developed countries should fully assume their obligations for (ODA) and the circle of donating countries should be expanded. There was also a need for closer cooperation between the United Nations and the Bretton Woods institutions.
MARIO GUGLIELMELLI (Venezuela) said the issue of financing for development was a major item on the international agenda this year. In order
Second Committee - 7 - Press Release GA/EF/2821 9th Meeting (AM) 12 October 1998
to achieve sufficient aid for development, there must be an adequate financial base. Unstable situations seen in Asia and the Russian Federation unfortunately did not create a suitable environment for sustainable development. The necessary condition to guarantee successful development was the achievement of international financial stability. Official financial flows, private income flows and other such subjects should be examined to improve financial stability. There was also a need to increase ODA and reduce the debt of highly-indebted poor countries.
* *** *