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THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT

THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT. Heiner Flassbeck Director Division on Globalization and Development Strategies, UNCTAD. PER CAPITA GDP GROWTH BY REGION AND ECONOMIC GROUP, 1981-2007 (Per cent). WIDENING OF THE GLOBAL IMBALANCES Size and pattern.

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THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT

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  1. THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT Heiner Flassbeck Director Division on Globalization and Development Strategies, UNCTAD

  2. PER CAPITA GDP GROWTH BY REGION AND ECONOMIC GROUP, 1981-2007(Per cent)

  3. WIDENING OF THE GLOBAL IMBALANCES Size and pattern Size (2006): US, -6.6%GDP, $870 bl, China: +10%GDP $240 bl, Japan: +4%GDP $170 bl. pattern: large surplus economies -> recurrent depreciations Japan, Germany, Switzerland and Malaysia deficit economies -> recurrent appreciations Euro area, Hungary, New Zealand UK, Australia, Turkey, India, South Africa. Is the international adjustment mechanism working? Is the RER relevant? What are the sources of divergence?

  4. Interest rate differentials and relatively stable currencies induce short terms speculation as in the pre-90s crisis scenario. • Floating exchange rates can move in the wrong direction • Market price determination in the international capital markets • "False pricing" in the international product markets • Widening of the imbalances and worldwide financial fragility DESTABILIZING SPECULATION • CARRY TRADE: a “species” of a broader “genus” • A source of imbalance for some economies. • An amplifying factor in the divergent pattern of global imbalances.

  5. YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND BRAZILIAN REAL, 2005-2007 Note: A positive change in the exchange rate means an appreciation of the corresponding currency vis-à-vis the yen.

  6. YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA, 2005-2007

  7. Interest rate differentials induced by anti-inflation monetary policies drive nominal appreciations + inflation differentials = real appreciations undermining international competitiveness in exchange rate sensitive exports. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1996-2006LATIN AMERICA

  8. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1996-2006SUB-SAHARAN AFRICA Speculation opportunities are fading and appreciation trend leveled off, but volatility persist

  9. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1996-2006EASTERN EUROPE Speculation opportunities, appreciation trend and volatility persist despite the reduction in interest rates.

  10. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1996-2006ASIA Little speculation opportunities, moderate average appreciation and volatility.

  11. REAL COSTS: EXCHANGE-RATE VOLATILITY AND REAL INTEREST RATE DIFFERENTIALS, 1995-2006 (per cent) Real exchange rate changes and uncovered interest returns in selected economies, 1995-2006 (per cent)

  12. DOMESTIC POLICIES, OPEN CAPITAL MARKET AND EXCHANGE RATE MANAGEMENT: BEYOND STANDARD TRILEMMAS • National policiesto prevent speculation and overvaluation: • Explore non-monetary anti-inflationary policies and resilience to depreciation • Temporary measures to prevent speculative flows • while moving towards structurally lower interest rates differentials • Globally coordinated policies to reduce global imbalances: • Floating and unilateral hard pegs "no panacea" • Intermediate or regional cooperative schemes • Code of conduct • Multilateral oversight and negotiations • Identification of the size of the deviation and • enforcement of the necessary correction by a multilateral body Multilateral monetary system as necessary as the multilateral trading system

  13. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1995-2007BRAZIL

  14. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1995-2007TURKEY

  15. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1995-2007MEXICO

  16. UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE DIFFERENTIALS, 1995-2007CHINA

  17. SELECTED ECONOMIES PER REGION Asia: China, Hong Kong (China), India, Indonesia, Rep. Korea, Malaysia, Pakistan, Philippines, Singapore, Taiwan (Province of China) and Thailand.Latin America: Argentina, Bolivia, Brazil, Colombia, Dominica, Mexico, Uruguay and Venezuela.Eastern European Countries: Czech Republic, Hungary, Lithuania, Poland, Russian Federation and Bulgaria.Sub-Saharan Africa: Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Kenya, Mali, Mauritius, Niger, Senegal and South Africa.

  18. CURRENT ACCOUNT BALANCE AS PER CENT OF GDP, 1995–2006

  19. UNIT LABOUR COSTS, 1993–2006(United States dollars, 1993 = 100) Note: Unit labour costs: whole economy excl. Slovakia and Taiwan Province of China (industry), and the United States (non-agriculture). Eastern European economies refer to Czech Republic, Estonia, Hungary, Lithuania, Poland, Slovakia and Slovenia. Asia refers to Indonesia, the Philippines, the Republic of Korea, Singapore, Taiwan Province of China, and Thailand. Latin America refers to Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru. Developed economies refer to Australia, Austria, Belgium, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and Switzerland.

  20. REAL EFFECTIVE EXCHANGE RATES, 1995–2006(1995 = 100)

  21. REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1986–2006(Per cent) Note: South and South-East Asia: Bangladesh, India, Indonesia, Malaysia, the Philippines, the Republic of Korea, Singapore, Taiwan Province of China, and Thailand. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

  22. REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1986–2006(Per cent) Note: Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay and Venezuela. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

  23. REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1997–2006(Per cent) Note: Eastern European Economies: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

  24. REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1986–2006(Per cent) Note: Sub-Saharan Africa: Burkinga Faso, Côte d'Ivoire, Mauritius, Niger, Senegal, South Africa, Togo, Cameroon, Central African Republica, Chad, Republic of Congo, Gabon, Lesotho, Malawi, Nigeria, Sierra Leona, and Uganda. Trend: polynom 5 grades.Real short-term interest rates are GDP weighted.

  25. REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1970–2006(Per cent)

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