ECLAC PROPOSES EXPANDING INERNATIONAL FINANCIAL REFORM AGENDA

Press Release
REC/82

ECLAC PROPOSES EXPANDING INERNATIONAL FINANCIAL REFORM AGENDA

SANTIAGO, 5 November (ECLAC) -- The agenda for much-needed reform of the architecture of the international financial system should be broadened, says José Antonio Ocampo, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), in his paper, International Financial Reform: An Expanded Agenda, soon to be published in CEPAL Review N° 69.

Over the past year, economists have reached a consensus on the need to carry out changes to prevent global financial crises and to respond to them in a more appropriate way. The recent period of financial instability, which began in Asia, spread through Russia and affected Latin America, provided clear evidence of the enormous discrepancy between an increasingly sophisticated, dynamic but unstable financial market, and the institutions that regulate it.

Ocampo suggests that, in the first place, the debate should include issues like financing the development of poor and small countries, in order to overcome the excessive concentration of private and official financing in a handful of emerging economies, and the ownership of economic policies by some countries. To date, debate has focused almost exclusively on issues related to preventing and solving financial crises. Secondly, this broader agenda should consider not only the role of world-level institutions but also regional ones, and should explicitly define the areas in which it is best to preserve national autonomy.

These issues should become part of a process of representative and balanced negotiation, capable of overcoming some of the negative elements associated with economic policy that characterize current debate, he says.

In terms of preventing and solving financial crises, Ocampo proposes seeking a balance between the current debate's emphasis on the need to perfect the institutional framework in which financial markets operate, and the insufficient attention now being paid to designing appropriate structures to guarantee the coherence of world-level macroeconomic policies, greater provision of emergency financing during periods of crisis and the adoption of adequate procedures for suspending payments with international consent and the orderly re-negotiation of debt.

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He suggests placing a higher priority on increased financing for low- income countries. This must include mechanisms that allow multilateral financing agencies to provide smaller, poor and middle-income countries with greater access to private capital markets. There should also be more emphasis on the contribution of multilateral development banks to the financing of social protection networks during periods of crisis.

It is also important to achieve a new international agreement on the limits to conditioned financing, and fuller recognition of the developing countries' central role in owning their own macroeconomic and development policies. This aspect of conditioned financing is the most controversial within international emergency financing. Its reach has expanded and its legitimacy become questioned, especially when macroeconomic imbalances do not stem from policies adopted by any particular country, but rather are due to an international crisis or contagion.

Ocampo holds that regional and subregional institutions should play a fundamental role in the greater provision of global public goods and other services in the area of international financing. The new financial architecture required should consist of a network of institutions providing complementary services in areas like emergency financing, supervision of macroeconomic policies and the prudent regulation and supervision of domestic financial systems. In other cases, competitive organizations are preferable, particularly in the area of development financing.

Any new order will continue to provide an incomplete financial security net. This means not only that domestic policies will continue to play a disproportionate role in preventing crises, but also that certain areas should remain under the exclusive control of autonomous domestic decision-making, in particular the regulation of the capital account and the choice of an exchange regime.

Ocampo states that regional institutions and national autonomy are particularly important to participants with less control over the international environment, who would benefit noticeably from competition for the services provided to them and the conservation of freedom of action within a context of an imperfect supply of global public goods.

[This document is available in English and Spanish on our Web site, www.eclac.org, or www.eclac.cl. It will be published, in Spanish, in the forthcoming issue of CEPAL Review N°69, which can be requested from ECLAC's Document Distribution Unit, Casilla 179-D, Vitacura, Santiago, Chile, Fax: (56-2) 208-0252, e-mail: publications@eclac.cl. Each issue costs US $15. An annual subscription is US$30 (Spanish) and US$35 (English). The English version has also been published in the series Temas de Coyuntura, N°6.]

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