UN ISSUES ANNUAL WORLD ECONOMIC AND SOCIAL SURVEY

Press Release
DEV/2128
PI/1177

UN ISSUES ANNUAL WORLD ECONOMIC AND SOCIAL SURVEY

Finance Too Important To Be Left To Chance, Study Says

NEW YORK, 16 September -- Left to themselves, private financial institutions and markets have taken excessive risks and left important business and population segments under-serviced, says the UN World Economic and Social Survey 1999, launched this afternoon at United Nations Headquarters.

The new report -- which will inform preparations for an unprecedented United Nations global meeting on financing for development in the year 2001 (see below), says that it is "positively dangerous to expose underdeveloped domestic financial structures to the ebbs and flows of global finance." Oversight, regulation and a progressive strengthening of financial institutions, especially banks, will be critical if the world finance needs of the near future are to be safely and effectively met.

The annual United Nations economic report observes that 1980s and 1990s liberalization has brought about significant advances in the capacity of the financial sector to amass and allocate capital. However, it states, "well-functioning private financial systems embody important roles for government."

"Public oversight is needed to make financial systems fair as well as effective", Secretary-General Kofi Annan stresses in his preface to the Survey.

Global Meeting on "Financing for Development"

On 27 May 1999, a General Assembly working group issued recommendations (in doc. A/AC.255/L.1) to the Fifty-Fourth session on plans for a high-level global meeting on "financing for development," to take place no later than the year 2001.

The open-ended working group, co-chaired by Ernst Sucharipa (Austria) and Kamalesh Sharma (India) indicated consensus "so far" on the unprecedented step of involving the World Bank and the International Monetary Fund (IMF), as well as all United Nations Member

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States and specialized agencies in both the final event and the preparatory process. It also called for innovative modalities for the participation of civil society and the private sector, and an agenda that would attract national ministries of finance, commerce, development and foreign affairs. The working group recommends that the scope of the event involve five main categories of issues: a) domestic financial resources; b) trade, foreign direct investments and other international flows of private finance; c) official development assistance and debt relief; d) ensuring sufficient "coherence and mconsistency of the international monetary, financial and trading systems" to promote development and avoid global financial crises; and e) the special needs of Africa, least developed countries, small island developing states and landlocked developing countries.

Recommendations

Governments are advised to curtail excessively risky behaviour, and to fill gaps in the availability of financial services through direct provision (e.g., through development banks or postal savings schemes), by functioning as a catalyst (by paying for set-up costs or training) and through policy incentives (such as tax benefits, guarantees of lending or guidelines). The report observes that non- governmental organizations (NGOs) also have an important role to play, in such areas as establishing microfinance lending institutions for the poor.

According to the report, there was a rush to establish stock markets in many developing and transition economies, as possessing such institutions became a matter of national prestige. However, the benefits yielded by those markets in the allocation of finance and improved corporate governance have been limited.

The first focus of financial reform should be on strengthening the banking sector, the Survey says. Banks need to be adequately capitalized before full liberalization and the opening of domestic markets to foreign competitors. Provisions should be made to compensate for the effects on local populations of the withdrawal of subsidies for local institutions, and there must be zero tolerance of discrimination in lending. Capital markets should be encouraged to play an increasing role in the mobilization and allocation of resources apace with the strengthening of the overall financial system.

Such an approach might have avoided or ameliorated the effects of recent financial contagions, in which billions of dollars of wealth disappeared virtually overnight and the livelihoods of millions of people were destroyed, the report suggests. It recalls that international policy makers were caught completely by surprise at the outset of each of the recent crises. The Survey calls for "reflection, analysis and policy experimentation, so that the advantages of the new

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global financial industry can be captured for development, and dangers can be held at bay".

Even the very dynamic venture capital sector can benefit from the support of the public sector, and a government-entrepreneurial sector partnership can deliver impressive benefits for development, the Survey says. It points to benefits arising from strategic decisions by the United States to allow pension funds to invest a portion of their funds in risky ventures, to allow extra tax benefits on capital gains from long-term investments and to maintain an open policy towards the entry of foreign research talent. Supportive government policies in other countries, including Singapore, China, India and Israel, are also analyzed in the Survey.

A briefing on the Survey for national delegations and the United Nations community will be chaired by Under-Secretary-General for Economic and Social Affairs, Nitin Desai, on 17 September at 3:00 p.m. in the ECOSOC Chamber at United Nations Headquarters. Journalists are invited to attend the briefing.

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For more information, to obtain a review copy of the Survey or to arrange an interview with one of the authors, contact Tim Wall at the Development and Human Rights Section of the United Nations Department of Public Information, telephone 212-963-5851; e-mail