Financial crisis and the South: UNCTAD officials say UN should be involved

The United Nations and a wider variety of countries should play a significant role as the international financial system is reshaped to cope with spreading turmoil and a looming worldwide recession, UNCTAD's Secretary-General and the director of its globalization division said on 16 October, after the organization's monthly consultation with the president of its governing body, the Trade and Development Board (TDB). UNCTAD officials warned that the likely impacts of the crisis on the world's poor nations are not receiving sufficient attention as global economic giants deal day to day with the tumult.

UNCTAD Secretary-General Supachai Panitchpakdi expressed concern for what he called "innocent bystanders." "The impact on developing countries will be much deeper than was anticipated," he said. "'Real' sectors" of their economies "are beginning to suffer, and this is only the beginning." Volatile exchange-rate movements affecting some of these countries "certainly will not help," the Secretary-General said. "Trade will suffer, and the commodities boom that has helped developing countries for a number of years now is ending."

* Capital-flow paradox intensified

Mr. Supachai said four issues need to be addressed:

* Global liquidity is being "sucked away" as banks in industrialized nations are bolstered by huge government infusions of funds, leaving the question of whether any cash will be left for credit and development aid needed for efforts such as achieving the Millennium Development Goals, enhancing productive capacities in poor countries, and coping with such problems there as climate change.

* The fate of smaller private banks, especially in developing countries, has to be considered; they are not among the large institutions now "effectively being nationalized" around the world, and they may not be able to compete for limited funds or receive sufficient help in coping with the current turmoil.

* More has to be done to keep capital from fleeing from developing countries. The so-called "capital-flow paradox" has intensified, meaning profits earned in poor nations often end up overseas rather than helping these countries to further their development.

* And liberalized global markets need to be regulated so that they continue to energize the world economy but have less volatility and risk, especially for small nations that are at the mercy of such factors as large investment and currency shifts.

Refashioning the global financial system "must be a global effort," should include the participation of all countries, and should include significant UN participation, Mr. Supachai concluded.

* Speculation: Major threat to small countries

Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies, which produces the organization's flagship Trade and Development Report, summarized the current turmoil as "a global de-leveraging, a global going out of risky positions. That is all right on its own - in fact we have said for several years that this was going to happen - but it can go too fast. It must be slowed down by government intervention."

Flassbeck said currency fluctuations, driven to a great degree by speculation, are proving now to be a major threat to small countries. Widespread speculation known as the "carry trade" for some time has driven currency values in the wrong direction from standard economic patterns, he said. As these now unwind, "there is overdone flight out of currencies perceived to be less secure." "The next row of dominoes to fall in this crisis could be from speculation in currencies," he warned, "and this is not being talked about enough. Countries with appreciating currencies must step in and help stop the process on behalf of countries with depreciating currencies. We have to avoid more cases of what is happening in Iceland."

Flassbeck also warned of a "huge slowdown in trade due to the global recession that is looming”. “The current malaise is that we have built a huge casino next to the real economy, and given too many people the means to play there, and now that casino has collapsed. We need to realize, to learn the lesson, that this kind of casino is not productive, is not helpful. We must go back to balanced and real economic relations and to balanced relations between currencies."