Toward a holistic view of trade, debt and finance

The Center of Concern held a side event on 29 November to address a core issue in reviewing the Monterrey Consensus: linkages between trade and finance to promote development. UNCTAD Chief Economist Heiner Flassbeck said “if you don’t talk about trade and finance together you are talking about nothing, you are negotiating fiction.”

The fragmentation in analysis and policy development in trade and finance was viewed by the many experts and government officials attending the meeting as a major reason for the current development crisis. It creates false assumptions, such as that trade liberalization is beneficial irrespective of the terms of trade, or that trade is an engine of growth rather than the outcome of effective financing of productive capacities.

“To believe that any breakthrough in the Doha Round of trade negotiations can play a significant role in dealing with the crisis is to live in a world of fiction,” one speaker said. The enormous gyrations in exchange rate volatility due to the crisis and years of currency speculation are having a much more profound effect on trade flows than any tariff cuts that would result from conclusion of the Doha Round. “Yet no one is seriously addressing the need for an effective multilateral approach to orderly exchange rate management.”

South Centre Executive Director Yash Tandon said there needs to be a radical policy shift where trade and finance are made “the servant” of production. There can be no trade if the capacity to produce has been undermined by three decades of misguided policies imposed by the Bretton Woods Institutions, he said. This change had to involve better reliance on domestic capital accumulation, which one financial expert from the German government said was the great lesson from the experience of the past decades. The assumption, he said, was that development finance should come from importing foreign capital (the so-called “savings gap”), but in retrospect this has created a high degree of vulnerability to the whims of financial markets, exacerbated by the current financial turmoil. Many speakers called for the reintroduction of capital controls as a necessary step to regain the policy space needed to put in place new regulatory frameworks capable of reorienting finance toward real productive investments.

One senior diplomat from Latin America said that only the UN was capable of bringing integrated analysis of these interrelated issues, which he said were dealt with in a compartmentalized way by the IMF, the World Bank, and other institutions. He noted that the draft FFD Outcome Document makes reference to a possible future UN Summit to review the international financial and monetary architecture and global economic structures. He suggested that the UN should convene such a Summit, but it was important to avoid it being portrayed as just a UN meeting attended by foreign ministries. It had to be a truly international conference that would bring line ministries that are represented at the Bretton Woods institutions and the WTO, as well as the heads of these organizations, as it was the case at Monterrey. “It has to be their conference too.” This has implications for the follow up mechanism after Doha. “We need to establish an intergovernmental mechanism,” he said, “but it has to be broader than just a UN follow up. It should have an integrated, holistic approach, and for that it needs to keep all actors in.”