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World Bank Seminar Series Session 4 - Global Economy: Financial Stability. New International Financial Architecture (NIFA): danger of market fundamentalism. Debate rather narrow, focusing on market-based standards for developing countries Narrowness stems from lack of political dimension

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World bank seminar series session 4 global economy financial stability l.jpg

World Bank Seminar SeriesSession 4 - Global Economy: Financial Stability

New international financial architecture nifa danger of market fundamentalism l.jpg
New International Financial Architecture (NIFA): danger of market fundamentalism

  • Debate rather narrow, focusing on market-based standards for developing countries

  • Narrowness stems from lack of political dimension

    • System serves some interests better than others

    • Financial instability endogenous (original sin?)

Nifa debate omits historical data l.jpg
NIFA Debate omits historical data: market fundamentalism

  • Most successful historical cases of development involve financial repression and protection

  • European post-war developmental successes took place under Bretton Woods, with national policy making discretion and capital controls

  • Hong Kong as exception?

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Domestic vs. international level experience: market fundamentalism

  • Interference with market occurs systematically at domestic level with beneficial results (US and gold clause)

  • Can be duplicated at international level

  • Aim is better compatibility between national development objectives and international obligations

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International standards vs. domestic development? market fundamentalism

  • International standards imply that developing countries (original sin) must simply adjust

    • Adjustment often indeed necessary

    • Compatibility of adjustment with broad development goals not always clear

  • NIFA designed and executed by developed countries with specific interests

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Wide range of developing countries: market fundamentalism

  • Needs of different developing societies not always similar

    • Medium level developing countries

    • Least developed countries

  • Two tier system for developed vs. developing countries?

    • Would cost little

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Not just bad governance: market fundamentalism

  • Political constraints at national level are real for all, developed or developing

    • Bad governance does exist in developing and developed countries

    • But (democratic) constraints on good governance also real

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Encouraging democracy: market fundamentalism

  • To encourage democracy, we need a system which takes political constraints seriously

    • Which provides political and economic stability for successful development processes

    • Adjustment and conditionality should not clash with democratic choice, within reason

    • “Ownership” of programmes not enough

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Conditionality and democracy: market fundamentalism

  • What happens if conditionality and adjustment pressures clash with European countries or the US?

  • Example of Argentina, demands of bondholders, and conditionality

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National diversity: market fundamentalism

  • National financial systems remain very diverse

  • Harmonisation or serious convergence in short term unlikely (see conflicts EU)

  • “Bumpy” integration global process is result

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Underlying Issue: political legitimacy market fundamentalism

  • If crisis consistently punctuates development process:

    • Some (medium income) countries may withdraw from system

    • Consequences likely negative in global terms

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Regional co-operation? market fundamentalism

  • Regional co-operation as neglected option:

    • Integration on a smaller scale?

    • Respect for different levels of development?

    • Optimal level for co-operation? More accommodation development<->adjustment

    • Enhances legitimacy?

  • Let us be realistic: EU, NAFTA, Asia….