Enhancing Coherence in Trade and Finance for Development

1. Consulta Regional Preparatoria de la Conferencia Internacional de Seguimiento Sobre La Financiación Para El Desarrollo Encargada de Examinar la Aplicación del Consenso de Monterrey, Tercer panel: Temas sistémicos ProfJanKregelDirector, Programa sobre Política Monetaria y Estructura FinancieraLevy EconomicsInstitute del BardCollege

2. In 1990s Major Systemic Issue: Financial Architecture • Monterrey was dominated by • Concern over negative net transfers of resources • Repeated Financial Crises • Latin American Debt Crisis • Tequila Crisis • Asian Financial Crisis • Brazilian Exchange Rate Crisis • Emphasis in Systemic Issue on Reform of Financial Architecture • These Concerns are Now Past

3. Financial and Trade Conditions Have in LAC have Changed • Little progress on Financial Architecture • Major progress in external stability • Improved external balances • Build up of foreign exchange reserves • Stronger fiscal balances • Reduced external indebtedness • lFA no longer primary problem • The Follow Up Must Respond to Changing Conditions -- Not simply Review Compliance to Monterrey Consensus

4. Policy Coherence in Trade and Finance as a Major Systemic Issue • Addressing Systemic Issues: enhancing the coherence and consistency of the international monetary, financial and trading systems in support of development. • Para 52: In order to complement national development efforts, we recognize the urgent need to enhance coherence, governance, consistency of the international monetary, financial, and trading system. • To contribute to this end, we underline the importance of continuing to improve global economic governance and strengthen the UN leadership role in promoting development. • …reform of the international financial architecture… to enhance financing for development and poverty eradication

5. Reflects the Importance of Holistic Approach … But • Reflects a basic lack of coherence in the Consensus. • The prior chapters discuss the various sources of development finance considered independently • trade is discussed without reference to the impact of foreign direct investment; • debt is discussed without reference to the lending that brings it into existence, • domestic governance and corruption are discussed independently of the interests of foreign direct investors in attaining market access in developing countries. • Yet, the inter relations among these factors are precisely the things that should be considered in an analysis of coherence and consistency in trade and finance. • Coherence in trade, money and finance is the area in which least progress has been made

6. Current Trade and Financial Linkages • Improved Trade Balance -- Improved Commodity Prices • Due to Commodities Becoming an Asset Class • Commodity Index Funds • Financial Demand dominates Commercial Demand • Low Interest Rates to Sub Prime Crisis • International Imbalances – weak $ • Environmental Policy --Subsidies to Bio Fuels • Spreads to Commodities in General • Subsidies to Energy Consumption in Developing Countries • E.g. In China gasoline and diesel prices have been kept steady since 11/2007 and electricity prices since 6/2006 • Improved Capital Balance – Foreign Direct Investment • Natural Resources • Bio Fuel Sources

7. Impact of Lack of Trade-Finance Coherence • Exchange Rate Overvaluation – loss of Industrial Competitiveness • Restores Primary Commodity Dependence • Differential Impact on SIDs, LLDCs, LDCs • Increased transport costs impact tourism -- cf. 9/11 • Increased transport costs impact geographic dispersion of production – special export zones • Increases Volatility of Export Prices and Earnings • Shift from Final Products (food) to Intermediate Inputs • Negative Impact on Food Security • Increases Poverty • Use of Monetary Policy to Fight Inflation • Reduces Global Demand • May Reverse Speculative Capital Flows

8. Is Market Coordination Possible? • Commodity Markets are the Least Competitive • Government controls and subsidies • Market is Monopsonistic • Small number of Large Transnational Intermediaries • And Monopolistic • Large Intermediaries Can Control Final Market Supply • In Financial Markets no Limit to Demand • Derivatives supply additional liquidity • Leads to Instability and Pro Cyclical Movements • Cf. Dot Com Bubble, Sub Prime Mortgage Bubble • Private Financial Crises Replace International Crises – Risk of Financial Deleveraging

9. What Has Been Happening in Commodity Markets? • Financial Demand • Environmental Demand

14. Shift From Backwardation to Contango • Hedging of Commodities Produces “Natural Backwardation” Future Price is Below Cash Price • Producers of Commodities Seeking to Hedge by Selling Futures Exceeds Demand for Future Delivery • When Financial Institutions wish to Hold Commodities to Profit from Rising Prices Demand for Futures Exceed Supply from Producers • A Speculative Market had Future Price Above Cash: A CONTANGO • Increased Financial Institution Demand Has Brought Contango to most Commodity Markets

16. NYMEX Crude Oil Nearby Future January 2001 to June 2008

19. But, Substitution Drives Up Other Prices • More Corn Planted Means Less Wheat, Soybeans, Rice • And excess demand shifts to all substitutes • Reinforces Financial Investment which further increases excess demand • Brings shift in other crop allocations • Increased Soy Acreage in Argentina and Brazil • Shift to Grain Fed Beef and Lack of Beef • Clearing of Land in Amazon – increases Carbon emissions

21. Are Improvments In Latin America ……. • Due to Financial Commodity Speculation? • Due to Speculation in Oil? • Due to Response to Climate Change? • Due to return to Monocommodity or Primary Commodity Dependence? • Are Over valued Exchange Rates and Capital Inflows Simply a Reflection of a Commodity Bubble? • What is the Impact on Poverty and MDGs?

22. Para 52 : encourage policy and programme coordination of international institutions and coherence at the operational and international levels to meet the Millennium Declaration development goals of sustained economic growth, poverty eradication, and sustainable development. Para 56 The multilateral financial institutions, in particular the IMF, need to continue to give high priority to the identification and prevention of potential crises and to strengthening the underpinnings of international financial stability. We encourage the Fund to facilitate the timely detection of external vulnerability through well-designed surveillance and early warning systems and to coordinate closely with relevant regional institutions or organizations, including the UN regional commissions.

23. What is Being Done? • To Reduce the Poverty resulting from the interaction between Environment, Trade and Finance? • To Reduce the Potential Instability of the Commodity and Energy Bubbles? • To Deal With the Overvaluation of Most Regional Currencies? • To Provide a Response to the Damage that Would result from a Collapse such as that in the US Sub Prime Market? • Control Potential Market Manipulation? • Where is the Support Equivalent to the Federal Reserve support of Financial Institutions?

24. New Conditions – New Concerns • The Follow Up • Should Raise these New Issues of Coherence and Consistency Between Trade and Finance • Should note the importance of taking into account the implications of the Changing Conditions • Should note the Different Responses Required for the New Conditions