The Guardian | November 26, 2001 | Stephany Griffith-Jones | Debate
The deal to launch a new trade round, struck at Doha, was a sign of a new willingness by Washington to seek multilateral solutions, which began with coalition-building in the war against terrorism but is now spilling into the economic sphere. However, further steps on the road to better global economic governance are urgently needed. In international finance, institutions such as the International Monetary Fund and the World Bank provide some basis for cooperation. These bodies need to be strengthened, significantly adapted to meet the challenges of the 21st century and made far more inclusive to better represent the voices and interests of developing countries.
Fault lines opened up in the international financial system. In the early 90s, private flows to developing countries grew very rapidly. This offered the hope that they could increasingly replace official flows, and support speedier growth in developing countries.
Unfortunately, only foreign direct investment, or FDI, has contributed to fulfil that promise. All other private flows were shown to be volatile, sparking off developmentally costly crises.
Private capital flows to developing countries are heavily concentrated on a few countries, and non-FDI capital flows to developing nations have fallen significantly since the Asian crisis.
The need for change in the international financial system has been clear for years.
The economic slowdown and further falls in private flows increase the urgency of that need. It is to be hoped that the new commitment to global cooperation will increase their political feasibility.
First, imaginative measures are urgently needed to encourage a return of sufficient private flows to developing countries, especially of a more stable type.
To help catalyse private flows, creation or better use of guarantee and co-financing mechanisms by multilateral banks can play a valuable role.
Second, measures that could further inhibit private flows to developing countries need to be rapidly revised.
A crucial example of such measures are the proposed changes to the Basle capital accord. There are serious concerns that some of these changes could further signifi cantly discourage international lending to developing countries, as well as further increasing the cost of any remaining lending.
This could be very negative for developing countries' growth prospects. Fortunately, the existing proposals are being revised - and it is important that the revisions include changes that reduce, or even eliminate, excessive bias against bank lending to developing countries.
Third, it is important to ensure that sufficient official liquidity is available to developing countries when private liquidity temporarily falls, or when external shocks hit such countries. This would require continued willingness by the IMF to supply large loans to countries in crisis, as well as some adaptation of IMF facilities. An improvement of the so-called contingency credit line of the IMF could facilitate speedier and more automatic disbursement of loans from the fund to all countries following very good policies but hit by capital account crises caused by contagion.
For countries heavily dependent on commodity exports - especially heavily indebted poor ones - better IMF lending mechanisms should exist to provide automatic temporary liquidity when their terms of trade deteriorate.
Recent events have shown the importance of preparedness for exceptional and unforeseen circumstances, such as the possible rapid slowdown of the world economy. Measures that help encourage higher and more sustained growth in the developing world would not only help poor people, they would also increase the dynamism of developed country economies.
Stephany Griffith-Jones is professor at the Institute of Development Studies, Sussex University
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