Info Service on Finance and Development (Feb12/01)
14 February 2012
Third World Network
From finance-driven to development-led globalisation
Published in SUNS #7305 dated 9 February 2012
Geneva, 8 Feb (Kanaga Raja) -- The head of the United Nations Conference
on Trade and Development (UNCTAD) on Tuesday urged a shift from finance-driven
globalisation, characterising "the dominant pattern of international
economic relations during the past three decades", to one that
is development-led in order "to turn tentative recovery into an
inclusive and sustainable future".
In his report to the upcoming UNCTAD-XIII quadrennial conference, to
be held in Doha, Qatar from 21-26 April 2012, Secretary-General Dr Supachai
Panitchpakdi said that reforming the global financial system would be
the place to begin, and that this time around, the rebalancing will
need a "global new deal" that can "lift all boats"
in both developed and developing countries alike.
According to UNCTAD, the report by Dr Supachai, titled "Development-led
globalisation: Towards sustainable and inclusive development paths"
and contained in document UNCTAD(XIII)/1, is intended as a substantive
contribution to the UNCTAD-XIII conference, whose theme is "Development-centred
The report has been set out in three parts, the first on finance-driven
globalisation and its limits, the second on rebalancing the global economy
through sustainable and inclusive development, and the third on the
political economy of development.
The report argues amongst others that finance-driven globalisation (FDG)
has failed to harness the creative forces of markets in support of broad-based
growth, while giving greater sway to their more destabilizing and destructive
Noting that for long periods of FDG, most developing countries posted
lower per capita growth than advanced countries, the report says that
these trends give little support to calls to stick to business-as-usual,
since one of the paradoxes of FDG is that emerging success stories have
adopted proactive development strategies which are, in many respects,
at odds with the dominant strand of economic thinking.
The challenge for policymakers is to put inclusive development firmly
at the forefront of the policy agenda. The inter-related nature of the
components of inclusive development will add significantly to the burdens
of this task. Still, it remains possible to set out policy measures
at the national, regional and global level to rebalance the world economy,
transcend FDG, turn recent growth spurts into sustainable development
paths, and ensure that the gains are enjoyed by all sections of society,
particularly the poorest and most vulnerable. This, in essence, is the
challenge of development-led globalisation (DLG), says the report.
The report further says that the rebalancing challenges at the heart
of DLG will need a global new deal involving a large and diverse group
of economies, and must reflect the ongoing shifts in the distribution
of economic power and political influence among countries.
"Unfortunately, the degree of trust among countries that is needed
in order to manage appropriate collective responses and actions and
deliver reliable development cooperation for the most disadvantaged
members of the international community has been gradually eroded during
FDG and has been hit even harder as a result of the financial crisis,
and is in urgent need of repair."
The report notes that the idea of a global New Deal alludes to the rebalancing
efforts that a number of countries undertook during the 1930s in response
to a deeply destructive financial crisis. In the case of the United
States, a series of interconnected public investments in energy, agriculture,
and social infrastructure, along with strong regulation of financial
and labour markets and expansionary macroeconomic policy, laid the foundation
not only for a return to full employment but for a strong industrial
take-off in some of the most underdeveloped parts of the country, crowding
in substantial private investment and building local markets through
a virtuous growth circle.
"Today's global New Deal should also look to lift all boats, through
support for productive investment, economic diversification and expanding
markets... It is imperative, therefore, for international measures to
be designed in such a way that they complement or strengthen state capacities
to deliver on national objectives and meet the needs of their constituencies,"
the report stresses.
With respect to a global new deal, the report says that "taming
finance" is the place to begin rebalancing the global economy.
A much more ambitious reform agenda for the international financial
system is clearly necessary if it is to bring about lasting stability
and support the shift to a truly development-led globalisation, it adds.
According to the report, this reform agenda should include elements
such as measures to align and stabilize exchange rates, particularly
among the G-3 currencies, which are urgently needed. This will likely
involve moving away from a dollar-based payments system, stronger surveillance
of the macroeconomic policies of reserve currency countries, the promotion
of capital controls, and the possible use of exchange rate target zones.
Furthermore, a more balanced approach to sovereign debt restructuring
is needed, including arrangements spreading the burden of adjustment
more equitably between borrowers and private sector creditors, as well
as a pruning back of the policy conditionalities that have mushroomed
around adjustment and crisis lending. These have imposed a deflationary
bias on borrowing countries and reduced the policy space to manage crises
and launch sustainable recoveries.
On dealing with debt, the report proposes a temporary standstill, whether
debt is public or private, and regardless of whether the servicing difficulties
are due to solvency or liquidity problems (a distinction which is not
always clear-cut). In order to avoid conflicts of interest, the standstill
should be decided unilaterally by the debtor country and sanctioned
by an independent panel, rather than by the IMF, since the countries
affected are among the shareholders of the Fund, which is itself also
a creditor. Sanction should provide an automatic stay on creditor litigation.
In a preface to his report, Dr Supachai noted that in his report to
(2008, Accra, Ghana), he had warned that despite an unprecedented global
boom over the previous five years, significant risks and vulnerabilities
threatened growth prospects and could undermine moves towards a more
equitable and effective global partnership for development. In particular,
he said he had argued that "putting liberalized markets and flexible
prices at centre stage has proved to be insufficient in the light of
the complex challenges that the new generation of globalization poses".
At that time, said Dr Supachai, "I was swimming against the tide
of conventional thinking. Even though there were clouds on the economic
horizon, notably the housing market in the United States and (closely
related) concerns about global imbalances, the consensus forecast was
for fair economic weather sustained by strong market fundamentals. Indeed,
at the time that I was writing, the International Monetary Fund (IMF)
was raising its global growth projections."
Financial turbulence hit in August 2007, and the collapse of Northern
Rock in February 2008 and Bear Stearns in March 2008 revealed serious
stresses in the financial markets. Concerns over sub-prime lending in
the United States housing markets intensified in the middle of 2008.
But it was the bankruptcy of Lehman Brothers in September that triggered
a crisis that few had anticipated or even imagined possible, exposing
the full extent of global financial fragility. Credit markets froze
and equity prices collapsed. Leading financial institutions failed,
while many others turned to their governments for support. The speed
of contagion was breathtaking, and the sense of panic in the financial
markets and among policymakers was palpable.
According to the UNCTAD Secretary-General, the first lesson to draw
from the crisis is that leaving markets to regulate themselves is both
ineffectual and costly. Bailing out financial institutions has already
run into trillions of dollars, and despite unprecedented fiscal and
monetary responses, the global economy experienced its first contraction
since the Great Depression. An estimated 10 per cent of global output
was lost between 2008 and 2010, and tens of millions of jobs were destroyed.
According to estimates by the International Labour Organization (ILO),
200 million people are currently unemployed worldwide.
"A second lesson is that when a large number of economies collapse
so dramatically, there must have been underlying weaknesses and fragilities
missed or ignored by policymakers prior to the crisis. No one doubts
the creative impulse of market forces, but the private pursuit of short-term
gain can sometimes result in insufficient productive investment and
concentrate the rewards with the favoured few. The risks are particularly
pronounced when financial markets detach themselves from the real economy,
tying wealth creation to the rapid accumulation of debt and rising asset
prices rather than to steady productivity improvements and increasing
incomes, and channelling innovation to financial engineering rather
than to technological progress. Such a growth strategy is likely to
be neither stable nor fair."
A third lesson, said Dr Supachai, is that when things do fall apart,
the state remains the only institution capable of mobilizing the resources
needed to confront large and systemic threats.
"The idea that the nation state had somehow outlived its usefulness
in a borderless world was never very serious. Since the state is pivotal
to establishing an inclusive social contract and strengthening participatory
politics, it is both imprudent and unrealistic to reduce or bypass its
role in managing economic development and change. The more worrying
trend in recent years has been the growing influence of financial markets
in bending public policy and resources to their own needs and interests
- leading a former IMF chief economist to warn of ‘a quiet coup' - including
in the post-crisis period."
He added that even as a tentative recovery has set in, the imbalances
that arose during the previous boom, particularly in advanced countries,
have proved very difficult to overcome. The private debt overhang remains
a drag in many countries, while the combined effect of financial bailouts
and recession has led to rising public deficits, triggering sovereign
debt crises in some countries and stalling the recovery in others. Everywhere,
employment creation has lagged behind, raising the threat of jobless
growth and the spectre of protectionist responses.
"This provides a fourth lesson from the crisis, namely that in
an interdependent world, countries cannot be expected to tackle destabilizing
threats and imbalances on their own. And yet, to date, effective rebalancing
strategies have not materialized at the multilateral level."
The extensive deregulation of the financial sector in the advanced countries,
the dismantling of controls on cross-border financial activities, and
the ensuing surge in capital flows marked a radical break with the post-war
international policy framework. The rapid ascent of financial interests
has eroded the checks and balances that had previously helped channel
market forces into the kind of creative and productive activities needed
for long-term growth, and has instead encouraged short-term, and at
times destructive, behaviour by banks, businesses, and households. Ideological
support came from the efficient market hypothesis, which made the case
for a hands-off policy approach applicable to all economic circumstances
Since the early 1990s, against the grain of conventional economic wisdom,
Dr Supachai said that UNCTAD has been arguing that the risks from the
premature liberalization of trade and capital flows are significant,
that the benefits are not simply there for the taking, and that a more
pragmatic approach to development strategy is essential.
He noted that in 1993, UNCTAD warned of an emerging financial crisis
in Mexico, in 1995, it flagged the systemic risk from growing derivatives
markets, and in 1997, it was not only alert to the dangers of rapid
financial liberalization in East Asia but also suggested that a combination
of repeated shocks and growing inequalities could produce a backlash
against globalization. In 2008, it argued that the financialisation
of markets of strategic interest to developing countries had reached
dangerous levels, and that it had become a more significant influence
on trade and development than real economic fundamentals.
"With all this in mind, I have chosen the term finance-driven globalisation
(FDG) to characterize the dominant pattern of international economic
relations during the past three decades. This is intended to convey
the idea that financial deregulation, concerted moves to open up the
capital account, and rapidly rising international capital flows have
been the main forces shaping global economic integration since the breakdown
of the Bretton Woods system. Financial markets and institutions have
become the masters rather than the servants of the real economy, distorting
trade and investment, heightening levels of inequality, and posing a
systemic threat to economic stability."
According to the Secretary-General, the latest crisis has served as
a further reminder that FDG is a political project and is, therefore,
the subject of legitimate discussion and debate. To date, the response
has largely been one of muddling through, with ad hoc measures to mitigate
the damage from economic shocks, informal partnerships to tackle global
imbalances, and impromptu alliances to push for greater market transparency.
There has been progress: the G20 has added a new and more focused layer
of coordination in international economic matters, and has helped to
nudge the multilateral financial institutions towards (marginally) more
representative governance structures and (slightly) less dogmatic advice.
However, said Dr Supachai, divisions have emerged among the advanced
economies on how to reform the international financial system, with
alarming signs of a reversion to "business as usual".
"Indeed, their financial sectors have already returned to many
of the old practices, even as public finances deteriorate and the recovery
stalls. Austerity measures are back on the agenda, and resistance to
financial regulation has begun in earnest."
The UNCTAD Secretary-General noted that the rise of new growth poles
in the South also heralds a significant shift in the global economic
and political landscape. China has already become the world's second-largest
economy and its largest exporter. India has now posted two decades of
strong growth and is steadily climbing the export ladder. Growth in
other large developing countries, such as Brazil and Indonesia, picked
up in the second half of the last decade.
Since the Accra conference, the share of developing countries in world
income has risen by more than 3 percentage points, to 30 per cent. Trade
and investment patterns have shifted accordingly, and new political
alliances and groupings have emerged, suggesting that a new world order
is already taking shape. The resilience to, and rebound from, the crisis
in parts of the developing world certainly marks an important break
with the past and has raised hopes of a prolonged period of convergence
According to Dr Supachai, UNCTAD has always looked to an emerging South
as being key to a more balanced global economy. "However, a degree
of caution is warranted. To date, this shift has been uneven, with large
differences between developing regions and among individual countries;
many of the least developed countries (LDCs) have seen the income gap
between them and other countries widen further during the past two decades,
suggesting that polarization pressures continue to shape global economic
Moreover, many emerging markets remain dependent on the leading economies
and vulnerable to changes in policy and in economic conditions there.
The impact of the Northern debt crisis on developing countries will
need to be monitored carefully. The emerging South is still work in
progress, and new forms of cooperation and partnership will be needed
to consolidate recent gains and to meet the challenges ahead, he added.
Against a backdrop of economic imbalances and political tensions in
interwar Europe, John Maynard Keynes called for "new policies and
new instruments to adapt and control the working of economic forces,
so that they do not intolerably interfere with contemporary ideas as
to what is fit and proper in the interests of social stability and social
A new deal did eventually emerge, but only after a push for "business
as usual" had left a trail of currency disorders, wasted resources
and shattered communities. Today's global economic landscape bears some
unnerving similarities to the interwar years; "as then, neither
muddling through nor a return to business as usual will get things back
on track. The challenge is to rebalance economies in a way that is timely,
sustainable and just."
This time around, said Dr Supachai, rebalancing will need a global new
deal that can "lift all boats", in developed and developing
countries alike. It is a basic truth that people everywhere want much
the same thing: a decent job, a secure home, a safe environment, a better
future for their children and a government that listens and responds
to their concerns.
"UNCTAD has consistently suggested a battery of policy measures
and institutional reforms at the national and the international level
to support rising living standards in developing countries, build their
resilience to external shocks, and help them pursue a balanced integration
with the global economy. The challenge, as I outlined in my report to
UNCTAD XII, was less about ‘getting prices right' and more about ‘getting
development right', through a pragmatic, proactive and socially inclusive
approach to macroeconomic, trade and industrial policies."
Dr Supachai stressed: "Finding the appropriate mixture of reflation,
redistribution and regulatory measures to achieve these goals is now
the urgent task of policymakers, at the international as much as the
national level. I have chosen the term development-led globalization
(DLG) to describe the principles, priorities and policies that need
to be pursued to turn tentative recovery into an inclusive and sustainable
Reforming the financial system is the place to begin, he said. "Even
before the crisis, it was clear that stable and inclusive development
was incompatible with speculative market behaviour, boom-and-bust cycles,
and the austerity programmes to which they invariably lead. It is telling
that the emerging success stories from the South have, in large part,
pursued policies that have avoided these dangers."
"Finance needs to get back to the business of providing security
for people's savings and mobilizing resources for productive investment.
Reforms are also needed to replace unruly and pro-cyclical capital flows
with predictable and long-term development finance, to regain stability
in currency markets and to support expansionary macroeconomic adjustments.
Surveillance and regulation will need to be strengthened at all levels,
and new institutional arrangements may need to be considered. Regional
financial cooperation, despite the current difficulties in the eurozone,
will, in particular, have a much larger role to play in a more balanced
Stable monetary and financial arrangements are a precondition for making
trade and investment work for inclusive growth and development. But
rebalancing requires that financial and other resources be channelled
towards the right kind of productive activities, said the UNCTAD head,
adding that industrial development remains a priority for many developing
countries because of the opportunities it provides to raise productivity
and incomes, and to get the most from international trade.
"But a wider sectoral approach, including a focus on the primary
sector in many LDCs, is needed in order to ensure that measures to diversify
economic activity are consistent with job creation, the security of
food and energy supplies, and effective responses to the climate challenge."
Talk of "picking winners" has been given an unexpected boost
by the exigencies of the financial crisis, but the real challenge is
to make sure that industrial policy, broadly conceived, is properly
aligned with other measures needed to build inclusive development paths.
Since diversified economies are the building blocks of a dynamic trading
system, it is essential that trade policies and rules - at all levels
- support this agenda.
An inclusive development agenda cannot depend on economic policies alone,
said Dr Supachai. Under FDG, the stresses and burdens of unregulated
markets have, all too often, been shifted to individuals and households
and, in countries where social welfare systems exist, to government
budgets. In many cases, unprecedented increases in income inequality
have gone hand in hand with underfunded public services and rising levels
of household indebtedness. The resulting cost to economic security and
social cohesion has been enormous.
A balanced economy depends on a strong social compact which, in turn,
requires a range of universal and targeted social policies, tailored
to specific circumstances, to ensure that the benefits of growth are
widely enjoyed and its risks are shared fairly.
According to the Secretary-General, the crisis has confirmed UNCTAD's
long-standing insistence on the importance of policy space. Its role
in building new and more inclusive development paths cannot be understated.
"This is needed to allow governments - particularly but not only
in developing countries - to correct market failures, promote collaboration
among enterprises in areas of long-term investment, manage integration
with the global economy, and ensure that the rewards from doing so are
evenly shared. In order to do so, states must forge a coherent and inclusive
developmental vision and build a strong compact with different interest
groups to better manage the conflicts and trade-offs that change inevitably
He noted in his report that in order to establish a successful development
path, it is essential to ensure the space to introduce a range of policies
for building domestic productive capacities and local technologies,
and to establish the institutions and support measures to spread the
resulting gains. However, for many developing countries, policy space
has been reduced under FDG and through a variety of channels.
Dr Supachai stressed the critical role of the developmental state in
building balanced growth paths in an economy where the mobilization
and allocation of resources relies on market forces.
"Responsibility for the choice of policies to secure a prosperous,
fair and stable future remains to a large extent with national governments,
institutions and constituencies. However, in our interdependent world,
a more secure and inclusive global economy requires strong international
leadership and carries collective responsibilities. There are hard questions
to answer about whether current arrangements can help to build socially
inclusive alternatives to FDG, and what governance structures might
"UNCTAD XIII in Doha provides an opportunity for the international
community to discuss these challenges in a frank, open and constructive
manner," Dr Supachai concluded. +
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