NO SOLUTION TO FINANCIAL CRISIS WITHOUT PAIN, SECOND COMMITTEE HEARS FROM PANEL ON CRISIS IMPACTS

22 October 1998

Press Release
GA/EF/2833

NO SOLUTION TO FINANCIAL CRISIS WITHOUT PAIN, SECOND COMMITTEE HEARS FROM PANEL ON CRISIS IMPACTS

19981022 Joint Committee/UNCTAD Panel Talks of Institutional Reform, Dispute Settlement Mechanisms, Better Financial Regulation

The international community did not have adequate institutions to handle the risks and volatility of globalization, the Second Committee was told this morning as it held a panel discussion in a joint session with the high-level segment of the Trade and Development Board of the United Nations Conference on Trade and Development (UNCTAD), via video link with Geneva.

The topic of the joint session was the impact of the financial crisis on trade, investment and development: regional perspectives.

Jose Antonio Ocampo, Executive Secretary for the Economic Commission for Latin America and the Caribbean (ECLAC), said that the international community had learned that it could not predict or manage economic crises. To mitigate future economic turmoil, there was a need for: changes in macroeconomic coordination, an increase in information about international financial flows, the creation of a dispute settlement mechanism, and better financial regulation and supervision.

Efforts to liberalize and privatize without the necessary back-up institutions lead to disaster, said Yves Berthelot, the Executive Secretary of the United National Regional Commission for Europe (ECE). The reform policies and proper sequencing of reform must take hold. Countries in crisis should develop a multi-year plan for institutional reforms, for privatization and for restructuring. The international community should give support to those efforts.

There were no solutions to the global financial crisis that were immediate or without pain, said Robert D. Hormats, Vice-Chairman, Goldman Sachs International. In some countries, the restructuring of banks and the restructuring of corporations might be necessary. The restructuring of the world financial system was unlikely to come about as a result of the crisis.

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Alternatively, a system of peer review had been proposed. In that system, banking regulators could judge the quality of a given country's regulatory system before enabling certain investment strategies.

On the effects of the Asian financial crisis, Andre Van Heemstra, Vice President for Asia and the Pacific for Unilever, said the severity of the impact of the crisis had been felt throughout millions of households in South-East Asia. The jobless rate went from 3 per cent to 6 per cent in Malaysia and similar increases in unemployment had occurred around the region. Despite that, there was incredible resiliency among people in South-East Asia.

On development in Africa, Ali Gader Ali, Director of the Economic and Social Policy Division for Economic Commission for Africa (ECA), said the continent's marginalization in the world was evident in the fact that 31 out of the 44 least developed countries in the world were African countries. While the eradication of poverty was the primary goal of development efforts, there was little chance that Africa could meet that goal alone. The financing of Africa's economic development needed to be taken seriously in the future to bring about real change in the region.

Joyce Cornell, Managing Director of Scudder, Kemper Investments, Inc., said Egypt had a desirable investment climate and was one of the largest recipients of her firm's investments. The country was characterized by sound economic management and a low fiscal deficit that was declining. In addition, Egypt had been systematically privatizing poorly-run state business and had created liberal rules for setting up small businesses.

The joint session was co-chaired by Supachai Panitchpakdi, Deputy Prime Minister of Thailand and chairman of the high level segment of the Trade and Development Board; and Bagher Asadi (Iran) Chairman of the Second Committee.

The Committee will meet again at 3 p.m. today to continue its consideration of operational activities for development. Under that general heading, the Committee will discuss: protection of global climate for present and future generations; implementation of the outcome of the Global Conference on the Sustainable Development of Small Island Developing States; the Convention on Biological Diversity; and implementation of the United Nations Convention to Combat Desertification.

Committee Work Programme

The Second Committee (Economic and Financial) met this morning to hold a panel discussion in a joint session with the high-level segment of the session of the Trade and Development Board of the United Nations Conference on Trade and Development (UNCTAD) in Geneva via video link. The topic of the videoconference is "The Impact of Financial Crisis on Trade, Investment and Development: Regional Perspectives". The joint session will be co-chaired by Supachai Panitchpakdi, Deputy Prime Minister of Thailand, and Chairman of the high-level segment of the Trade and Development Board, and by Bagher Asadi (Iran) Chairman of the Second Committee.

The panellists participating at the event from Geneva are the following: the Executive Secretary of the Economic Commission for Europe (ECE), Yves Berthelot; the Executive Secretary of the Economic and Social Commission for Western Asia (ESCWA), Hazem El-Beblawi; the Executive Secretary of the Economic Commission for Latin America and the Caribbean, Jose Antonio Ocampo; the Director, Economic and Social Policy Division (ECA), Ali Gader Ali; Vice- President for the Asia and Pacific for Unilever, Andre van Heemstra. New York panellists are: Managing Director, Scudder Kemper Investments, Inc., Joyce Cornell; and Vice-Chairman, Goldman Sachs International, Robert D. Hormats.

Introductory Statements

RUBENS RICUPERO, Secretary-General of UNCTAD, made an introductory statement to begin the second joint session of the Second Committee and the Trade and Development Board. He said that the goal of the joint meeting was to convey a proactive message. The world economic crisis should not be accepted passively -- it should be faced with determination. The intent of the meeting was to be action-oriented and even modest actions would be useful. It was hoped that governments and institutions would take good note of proposals made in this meeting.

BAGHER ASADI (Iran) Chairman of the Second Committee, said the joint meeting would make a contribution to the dialogue on the ongoing world financial crisis. Discussions today would also make a significant contribution to the work of the Second Committee for the rest of the General Assembly session. No remedy for the financial crisis was yet within grasp. In seeking ways to address the financial crisis, the international community must first understand what was happening, and that had been elusive.

SUPACHAI PANITCHPAKDI, Deputy Prime Minister of Thailand, and Chairman of the high-level segment of the Trade and Development Board, said the purpose of the segment was to look at measures to respond to the crisis. At the morning session in Geneva, the Trade and Development Board had heard a number of views on the financial crisis. Each of the speakers had provided valuable

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lessons on how to respond to the current crisis and offered practical suggestions for governments and those in the private sector. The impact on business in Malaysia was significant. The devaluing of Asian currencies increased costs and led to situations similar to an earlier financial crisis.

He added that measures were needed to minimize the impact of the crisis on the poorest groups in society. The solution to the crisis for Asia might be in realizing that the crisis had a generational emphasis. There was a need for more complete sets of rules to govern social relations. Also, there was a need for institutions to help the weakest segment of society. Core labour standards would also play an important role in improving the framework for social stability.

Panel discussion

JOSE ANTONIO OCAMPO, Executive Secretary for the Economic Commission for Latin America and the Caribbean (ECLAC), said that the international community had learned that it could not predict or manage economic crises. It did not have adequate institutions to handle the systemic risks inherent in financial globalization.

He said that at a recent meeting of heads of States of the Iberian and Latin American countries, the group identified the urgent need for: expansionary policies by industrialized countries; contingency funds on a more significant and permanent basis than were available on an ad hoc basis in response to the Mexican crisis of 1995 and the Asian crisis of 1997; and an overhaul of the international financial architecture.

Also necessary to mitigate future economic turmoil, he said, were the need for: changes in macroeconomic coordination, an increase in financial surveillance and information about international financial flows by the International Monetary Fund (IMF), the creation of a dispute settlement mechanism of the IMF, and better financial regulation and supervision. The development of an orderly debt workout programme involving the private sector was also necessary.

He further called for tighter controls of short-term flows at both the source and in recipient countries and noted the need for regional mechanisms to support short-term programmes. It was no time to think about further liberalization, he added, because the international community needed stronger institutions before further liberalization in this area could be addressed. In addition, it was necessary to strengthen domestic macroeconomic management and to build strong buffers between the boom periods and crises which all countries experience.

ANDRE VAN HEEMSTRA, Vice President for Asia and the Pacific for Unilever -- an Anglo-Dutch business with manufacturing facilities in 90 countries, said the severity of the impact of the financial crisis had been

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felt throughout millions of households in South-East Asia. The jobless rate went from 3 per cent to 6 per cent in Malaysia and similar increases in unemployment had occurred around the region. The combined effects of inflation and loss of income had hurt many families. There was also a crisis in consumer confidence. Yet there was incredible resiliency among people in South-East Asia.

He said Unilever had noticed a boom in tiny retail shops. Individuals had responded with innovation and creativity -- corporations must do the same. Unilever was dedicated to fulfil everyday needs of people in whatever way it could. In times of economic crisis neither small nor large companies could claim superiority because each was dependent upon the other. Today in Asia, companies must reassess their internal and external business practices.

ALI GADER ALI, Director of the Economic and Social Policy Division for the ECA, said Africa's marginalization in the world was an established fact. One example of that was that 31 out of the 44 least developed countries in the world were African countries. The continent was extremely vulnerable to external shocks. Africa had failed to begin an effective development process. There were also no viable development strategies that African countries could follow. Private capital flows were not coming into the region due to that lack of development. Access to markets was a basic competitiveness issue and competitiveness was based on the extent of development. It was necessary to have systems in place to help poor countries access various markets.

On financing African development, he said there was general agreement that poverty in southern Africa was widespread, deep and severe. The eradication of poverty in the long run was the primary goal of development efforts. Poverty should decline at an annual rate of 4 per cent. To achieve poverty eradication goals, median income must increase by 5.8 per cent per year in African countries. There was little chance that Africa alone could meet that goal. The financing of Africa's economic development would need to be taken seriously in the future to bring about real development change in the region.

JOYCE CORNELL, Managing Director, Scudder Kemper Investments, Inc. said that her firm continued to invest pension and retirement funds in emerging markets which had and would continue to escape the worst of the negative effects of the crisis, which had resulted from the downside of a global credit cycle.

She said her firm had invested a lot of money in North African countries such as Morocco, Tunisia, Egypt, and a bit of money in Bahrain and Oman. In Central Europe, her firm had invested in Poland, Hungary, Estonia, Greece and, to a lesser degree, in Croatia. In addition, it had investments in sub-Saharan Africa. All of those countries were characterized by policies which were investment-friendly, and the rules her firm used to determine where to invest were consistent throughout the world.

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She said Egypt, one of the largest recipients of the firm's investments, had a desirable investment climate, characterized by sound economic management. She cited statistics relating to a low fiscal deficit, declining inflation and rising productivity. In addition, she noted that Egypt had been systematically privatizing poorly-run state business and had created liberal rules for setting up small businesses. As a result, new companies were being formed, allowing those who were laid off from the state sector, to be employed in small business service economies. In addition to having similar conditions in a given country, she noted that sound bank regulation was key to the prevention of future problems.

YVES BERTHELOT, the Executive Secretary of ECE, said that one cause of the Russian financial crisis was the drop in the price of raw materials due to the Asian crisis. Also, institutions in the Russian Federation were not duly changed and that was a major cause of the crisis. Laws for the banking system led to situations where privatization actually benefited only some insiders who had no incentive to make changes. The absence of progress in tax collecting had led to a budgetary deficit, which was financed by short-term borrowing, mainly from international markets. That led to great fragility and eventually to the Russian Federation crisis. Budget deficits and the lack of liquidity available to finance investment meant that the investment rate dropped in the Russian Federation. That was a major concern for the future there.

On the Commonwealth of Independent States (CIS), he said that many of those countries had managed to reroute their trade towards Western Europe and away from the Russian Federation. Those that did so fared much better than the countries which had continued depending on trade with the Russian Federation. What was encouraging for the future was that foreign direct investment had not dropped badly for Central Europe as a whole. Those foreign direct investments did not stop because they were based on long-term decision-making.

Concerning the crises in the Russian Federation, as well as the rest of the world, he said many problems were due to the timing and sequencing of social and political reforms. Efforts to liberalize and privatize without the necessary back-up institutions led to disaster. Reform policies and proper sequencing of reform must take hold. Countries in crisis should develop a multi-year plan to organize institutional reforms, privatization and restructuring. The international community should support those efforts.

ROBERT D. HORMATS, Vice-Chairman, Goldman Sachs International, said that there were no solutions to the global financial crisis that could be made immediately or without pain. He noted, however, that in some countries, the restructuring of banks and the restructuring of corporations was necessary.

He said that the restructuring of the world financial system was unlikely to come about as a result of the crisis, and that a world central

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bank, or one giant regulatory institution, was not likely to be created. As an alternative, Canada's Minister of Finance had proposed a system of peer review, wherein banking regulators could judge the quality of a given country's regulatory system before enabling certain investment strategies. Regional development banks such as the Asian Development Bank and the African Development Bank, might be able to manage that function. Also, United States Treasury Secretary Robert Rubin had discussed the possibility of creating a programme of precautionary financing, which shared certain similarities with the peer review proposal.

Question and Answer Period

In response to a question on volatile capital, Mr. HEEMSTRA said an outflow of capital could occur if confidence deteriorated. There was no perfect way of dealing with that. However, when investors felt they did not have enough information about a country, they tended to pull their money out. If investors did not have the facts, they became very nervous. Better transparency was one way of addressing that problem. Countries needed to take steps to make sure foreign investors felt comfortable with the country's domestic situation.

In response to a question on Asian debt problems, Ms. CORNELL said that, for a long time, Asia was seen as an optimal place to invest. Asia basked in that praise for so long that many, including foreign investors and Government officials, forgot to look closely at what was going on in the region. Some people began to see problems in Asia two years ago, but no one wanted to pay attention. One key factor was bank debt and that was a frightening problem. It was hoped that the current debt crisis would teach the world some lessons it would remember for a long time.

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