PRESS BRIEFING ON NEW INTERNATIONAL FINANCIAL ARCHITECTURE

Press Briefing

PRESS BRIEFING ON NEW INTERNATIONAL FINANCIAL ARCHITECTURE

World events since mid-1997 had made it painfully clear that the current international financial system was unable to safeguard the world economy from financial crises of high intensity and frequency and devastating real effects. So began the report introduced at the noon briefing at Headquarters today, by the Under-Secretary-General for Economic and Social Affairs, Nitin Desai, and the Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), José Antonio Ocampo.

The report, entitled "Towards a New International Financial Architecture", was the product of the Task Force of the Executive Committee on Economic and Social Affairs. Mr. Desai explained to correspondents that the report represented an exchange of views and a common position, which would then be reflected in the work done by various United Nations secretariats in New York and Geneva, and in the headquarters of the various regional commissions. The report was the first articulation of the considered view of all of the entities involved in economic and social work in the United Nations. Others would follow on development finance and social and economic consequences of macroeconomic policy. He then introduced Mr. Ocampo, who, he explained, had headed the Task Force that had produced the report.

Three different financial issues had been identified that the Executive Committee would study and on which it would probably prepare reports, Mr. Ocampo said. The first, considered in the report he was discussing today, was the prevention and management of international financial crises. The second was development finance, and the third was the outstanding debt issues of poor countries.

The report asked how the international financial system could be better organized to enable international financial crises to be avoided or better managed, he continued. The issues of lack of control of the international financial system, and of contagion, had been the focus of the attention of the international community for the last 18 months. The report began, he said, by stating that many of the issues were the result of the enormous discrepancy between the sophistication of the financial world and the international institutions which regulated it.

For the short term, he said, the report supported two ideas that had been proposed by some institutions, and also by the "Group of 7" industrialized countries in its October communiqué. The first was the need to face the risk of world recession. The world economy had been slowing down. There was a risk that it could continue, and the world could enter into recession. The second was that there was a need for a specific mechanism generally, called "contingency funds", to face the crisis. As for the first of these, Brazil had faced it in late 1998. As for contingency funds, it was of particular importance that they be available

before a country's international reserves were depleted. In the past, funds came after reserves were depleted, so their effectiveness was lower than expected.

The long-term proposals in the report encompassed six basic areas, Mr. Ocampo continued. The first was the need to develop more consistency in macroeconomic policy at the global level. Policies needed to be coordinated, but they did not need to be identical. Surveillance should be strengthened. Mechanisms of regional and subregional surveillance of macroeconomic policies needed to be developed. The report stressed that the United Nations could play a role through the Economic and Social Council.

The second issue was the provision of adequate liquidity in times of crisis, he continued. Contingency financing must become a permanent feature of the international financial system, and it had to be adequately financed. In the past, the difficulty in collecting funds had been a feature of those packages. The report recommends the use of the special drawing rights of the International Monetary Fund (IMF) as a way to finance contingency funds in times of crisis.

The third issue was the need for international codes of conduct in financial and monetary areas, sound corporate governance, improved information and enhanced financial supervision and regulation, Mr. Ocampo said. International financial institutions needed to be on top of the situation in that area, but there was also a need to widen international financial regulation to include hedge funds and off-shore institutions.

The fourth area was the preservation of the autonomy of developing and transitional economies with regards to capital fund issues, he said.

The report proposed, as its fifth topic, the establishment of internationally sanctioned standstill provisions for companies facing difficulties with debt, Mr. Ocampo said. The development of such mechanisms was essential for the adequate sharing of adjustments.

Finally, he told correspondents, the report stressed the need to develop an international financial system which, aside from a strong IMF and international development financing, had a network of regional and subregional institutions to support the management of financial issues and development finance. Such a system would provide better stability and more equitable power relations than a system that relied entirely on one or few international institutions.

Mr. Desai said that the report was available in Spanish and English and would shortly be available in French. The report could be seen on the internet at www.un.org/esa/coordination/ifa.htm.

Responding to a journalist's question about what would happen to the recommendations, Mr. Desai explained that the General Assembly's Second

Press Briefing on World Economy - 3 - 29 January 1999

Committee (Economic and Financial) was considering the issue of financial volatility. There was also the dialogue between the Economic and Social Council and the Bretton Woods institutions, the next meeting of which would take place on 29 April. Additionally, all the members of the Executive Committee in some way serviced intergovernmental processes that were addressing the issue. They would ensure that the United Nations entities presented a common position to those processes.

Asked whether the Group of 7 countries would accept the idea of developing countries maintaining autonomy over their capital accounts, Mr. Ocampo explained that there was no international lender of last resort. In the absence of such a lender, countries should at least retain some control. The lack of an international instrument appropriate for a totally liberalized world was the basic reason for the need to maintain autonomy.

Asked about the effect of the introduction of the euro, Mr. Ocampo said he did not believe that it would change things. However, it was an example of how convenient regional institutions were for supporting the international financial system. Largely by strengthening their own institutions, Europeans had been able to finance their regional issues by themselves.

Asked whether the IMF would need more funds, Mr. Ocampo said yes. There were several proposals for this in the report, including the use of special drawing rights. Normal systems for contingency funds, based on contributions from countries, had proven an obstacle.

Mr. Desai explained that crises arrangements could not just be established when crises had occurred or were imminent. There must be something more predictable, and that was the context in which the contingency fund recommendation was made.

* *** *