UNCTAD presses for economic governance reform

Substantial reforms – more than mere "window dressing" – should be pursued nationally and internationally to prevent opaque financial instruments, speculation, and the build-up of large financial imbalances between countries from causing a repeat of the current global recession, UNCTAD's Secretary-General urged last weekend. Secretary-General Supachai Panitchpakdi told the 122nd Assembly of the Inter-Parliamentary Union (IPU) that "the crisis provides a rare opportunity to forge a more balanced and inclusive global economy through two channels: measured government intervention and strategic policy action at the national level, and better coordinated and more inclusive economic decision-making at the international level."

In a statement Supachai said UNCTAD is concerned that with the worst of the financial crisis apparently over, "talk of reforming the financial sector, particularly at the international level, has become a good deal more muted. UNCTAD strongly believes that the crisis could have been prevented if there had been stronger governance mechanisms to regulate financial innovation and the build-up of various imbalances at the national and international levels. Moving forward on this reform agenda to create a new pattern of balanced and sustainable growth will require bold thinking."

Well-defined rules, with a transparent and fair system for judging infractions, should be "orthodoxy" for the international financial system as they are for the international trading system, Supachai said. "[I]t is … imperative to provide for an institutional framework for better international coordination of financial regulation and supervision… Such an agreement would hopefully address the current potential for regulatory arbitrage," he added. "Equally important is to reshape international monetary arrangements that help avoid the build-up of large current-account imbalances and their counterpart – large unbalanced asset positions across countries."

Supachai said that continued global dependence on a single reserve currency is becoming a concern, reviving the idea that an equitable system of special drawing rights (SDRs) might eliminate the need for developing countries to hold vast reserves of dollars as protection against reverses in their capital flows. These reserves "now represent a considerable opportunity cost for development," the Secretary-General said. Countries also could tackle large build-ups of reserves through regional arrangements such as the Chiang Mai Initiative, whose multilateralized currency swap agreement came into effect on 24 March. He also called for reform at the IMF "so that it can focus most properly on what its founders intended: the avoidance of contractionary macroeconomic responses to financial shocks and instability."