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Towards a New Development Paradigm What does a responsible financial system look like? . Aniket Bhushan Researcher- Finance for Equitable Growth Korea University July 8, 2010. About The North-South Institute. Canada’s oldest research institute on international development (35yrs)

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towards a new development paradigm what does a responsible financial system look like

Towards a New Development ParadigmWhat does a responsible financial system look like?

AniketBhushan

Researcher- Finance for Equitable Growth

Korea University

July 8, 2010

about the north south institute
About The North-South Institute
  • Canada’s oldest research institute on international development (35yrs)
  • Research for a fairer world
  • Independent policy analysis & dialogue, emphasizing southern partners & perspectives
  • Thematic areas:
    • Finance for Equitable Growth
    • Trade, Natural Resources
    • Employment and Migration
    • Peacebuilding and conflict prevention
    • Governance and Effective Development
introduction
Introduction
  • Why should we be concerned about crisis, policy responses and the changing dynamics of global economic governance?
  • What failed and why? Story of three imbalances
  • A New Development Paradigm: what a responsible financial system looks like
widest engagement of civil s ociety
Widest Engagement of Civil Society
  • Financial markets serve real economy (not other way round)
  • Markets without democratic oversight are inherently prone to exaggerations (bubbles & collapses): gains privatized, risks socialized
  • Finance & economics is ultimately political
  • Economic, political, social, environmental interconnectedness
e asia s experience
E. Asia’s experience
  • This crisis goes back to last crises episode
  • Asian crisis experience (late 90s) enough to warrant high degree of attention to reform debates & G20
  • But key differences:
    • Shift in balance of global economy from West to Asia
    • Emerging economies well prepared, vindicated
  • Asia’s leadership role & influence on global reform never more important
  • BUT: cannot be restricted to official/commercial interest. Informed civil society engagement critical
interaction of three imbalances
Interaction of Three Imbalances
  • Financial imbalances
    • Capital/assets (leverage)
    • Short/long-term (mismatches)
    • Pro-cyclical
  • Macroeconomic imbalances
    • Chronic deficits, savings surpluses
    • Incoherent monetary adjustment & currency system
  • Real, political economy imbalances
    • Widening income inequality, unprecedented debt levels (not since great depression)
    • Regulator/regulated (capture)
understanding the development model
Understanding the Development Model

Banker and consumer of last-resort: US/W Europe

Free-floating, capital-liberal interest rates target

Emerging market: capital attractive

Export competitive: China, E.A, Jap, Ger,

Managed-float, managed cap opening; int rates +

Informal pegs, cap ambiguous, wider policy tool-kit

Aid, other transfer (remit, tourism), poor resource-rich

Formal pegs, monetary unions;

limits of development paradigm
Limits of Development Paradigm
  • Narrow market efficiency paradigm
  • Excessive reliance on overextended households in advanced economies to support global demand
  • Excessive reliance on USD as store of purchasing power and incoherent monetary system
  • Excessive reliance on unrestricted private capital flows to smooth imbalances
  • An international financial architecture (IFIs) that lacks credibility, democracy, influence over policies of major advanced countries
why a development crisis and towards a new development paradigm
Why a “development” crisis and Towards a New Development Paradigm
  • Aid levels decline/stagnate in donor crises
  • Small revenue impact has big social impact
  • Food, fuel crisis received little attention: LIC no real voice in key global debates
  • LIC, LMIC more open than ever before: trade linkages
  • Capital flight makes poorest regions (SSA) net creditors

Therefore:

  • Articulating the purpose of the financial system
  • Financial regulation
  • Macroeconomic adjustment and monetary system
what does a responsible financial system look like
What does a Responsible Financial System Look Like?
  • Basic retail function: turning savings into productive investment; turning short term into long-term; meeting liquidity needs of households, govts, businesses
  • Behavioural function: creating incentives to move change in direction of sustainable (environmentally and socially stable) growth. Shifting bias –short speculative to long-term productive investment
  • Balanced interconnectedness: different needs in different contexts. Poorest most affected. Meeting developmental commitments (MDG)
new development paradigm
New Development Paradigm
  • Financial system must foster growth with equity: imbalanced growth breeds instability. Different countries will have diff balance of domestic/external orientation (pace, desire for liberalization). Investment in social safety, human capital, harnessing productive capacity in emerging/developing regions
  • Desirable financial innovation: in service of long-term change
  • Not just regulation: regulators must get the definition of ‘efficiency’ right; tools only good if used
  • Not institutions, but markets: no individual institution can be more imp than the underlying market
  • Clear state-role: stabilizing force in financial system; map the market genome; regulation vs. structuring (e.g. securitization)
  • Cross border regulation: weakest link; we do not have “global financial regulation” all we have is minimum standards
new development paradigm1
New Development Paradigm
  • Broader view of stability: cannot be limited to price stability. Containing asset bubbles, speculative volatility (graduated capital gains taxes, margins etc.). Pragmatism over dogmatism
  • More coherent monetary system: interconnected global economy needs to move beyond sys dominated by nationally based reserve/trade currencies (inherently unstable)
    • Building on Special Drawing Rights (SDR)
    • Financing facility for countries lacking fiscal space: going against the cycle
    • Protection vs. protectionism, recognizing importance of preserving systemic integrity: capital controls, curbs on asset bubbles, regional & multilateral swap arrangements
    • New revenue raising mechanisms to finance public goods: Currency Transaction Taxes