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11 Apr, 2010

“Casino Capitalism” Will Ensure that the Cycle of Crises Never Stops Turning

Originally Published: 11 April 2010

As the global financial crisis recedes into a distant memory, the Geneva-based UN Conference on Trade and Development (UNCTAD) is ratcheting up warnings that the next crisis is only a matter of time unless action is taken to curb “casino capitalism” and reform the world financial system to make it more balanced, democratic and sustainable.

UNCTAD Secretary-General Supachai Panitchpakdi, a former Thai Deputy Prime Minister who played a major role in cleaning up the mess left by the 1997 Thai financial crisis, has called the recent financial crisis a “mega event” that ended an era. He is challenging all aspects of conventional wisdom in pushing for an overhaul of international economic governance in order to ensure lasting stability and prosperity.

In a speech at the EximBank of India, in Mumbai on March 18, Dr. Supachai said the recent crisis was caused, among other factors, by overreliance on market forces and macroeconomic imbalances that might have been prevented had there been greater international monitoring and regulation. He warned of the dangers of continuing “business as usual” and ignoring the lessons that could be learned.

At the national level, he said, perhaps the greatest lesson was that trade liberalization and market reform do not automatically lead to sustainable growth for the developing world; the most successful countries were those that had also ensured an enabling economic role for the State while encouraging innovative private-sector investment in productive capacities and job creation.

Dr. Supachai advocated action to avert a recurrence of the disastrous effects of the removal of capital controls, the unsupervised proliferation of “innovative financial instruments”, and the financialization of commodities. While countries should be given more autonomy over their own use of capital controls, a multilateral framework was also needed to manage exchange rates, he said.

“Real exchange-rate changes that determine the competitiveness of the whole economy cannot be left to the market”, he warned, observing that most of the financial crises in the post-Bretton Woods era of floating exchange rates had been characterized by nominal interest rate differentials that triggered large short-term capital flows. The experience of the current crisis similarly illustrated the need to “stabilize trade and financial relations by reducing the potential for gains from speculative capital flows”.

The crisis, which ultimately stemmed from “poor governance and a structural inability in the world economy to correct systemic imbalances”, had turned mainstream economic thinking “on its head”, inducing a “radical change” in government policy and international economic governance, said the UNCTAD chief.

The crucial task ahead, he insisted, was to keep that impetus for change alive, ensuring that economic governance works primarily “to achieve the goals of prosperity, security and stability, which are the prerequisites for sustainable poverty alleviation”.

Dr Supachai took the same message to world parliamentarians at the 122nd Assembly of the International Parliamentary Union in Bangkok on March 29.

He told the legislators that 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.

He said 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.”

Dr. 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.”

He added, “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, Dr. Supachai said.

“It 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.”

Dr. 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.”

To convert these ideas into action, UNCTAD has been organising expert-group meetings to discuss how regulations and the setups of government institutions can help developing countries improve their infrastructure services sectors (ISS) which provide such key functions as comprehensive banking and financial operations, energy, telecommunications, and transportation. ISS forms the backbone of national economies by supporting markets for agriculture, manufacturing, and service industries in developing countries.

According to UNCTAD, regulation aimed at correcting market failures and meeting other policy objectives such as universal access to essential services has been widely recognized as fundamental in ensuring the provision of quality infrastructure services and maximizing their contribution to economic and social development.

However, building and maintaining workable regulatory and institutional frameworks (RIFs) poses challenges for all national governments. There is no single prescription: RIFs need to be adapted to individual countries’ specific needs and circumstances, as well as to evolving economic, social, technological and environmental developments.

A recent UNCTAD survey of 87 respondents from regulatory agencies indicates that in many cases the challenges faced by regulatory agencies are similar. However, least developed countries (LDCs) face special constraints. They often are short of appropriate personnel, financial resources, and equipment.

The expert-group meetings are providing an opportunity for governments to explore regulatory and institutional frameworks that are the “best fit” for individual countries, and review the experiences and lessons learned by others that have already modified their regulations and frameworks.