World Bank Seminar Series Session 4 - Global Economy: Financial Stability

1. World Bank Seminar SeriesSession 4 - Global Economy: Financial Stability

2. 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?)

3. NIFA Debate omits historical data: • 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?

4. Domestic vs. international level experience: • 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

5. International standards vs. domestic development? • 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

6. Wide range of developing countries: • 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

7. Not just bad governance: • 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

8. Encouraging democracy: • 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

9. Conditionality and democracy: • What happens if conditionality and adjustment pressures clash with European countries or the US? • Example of Argentina, demands of bondholders, and conditionality

10. National diversity: • National financial systems remain very diverse • Harmonisation or serious convergence in short term unlikely (see conflicts EU) • “Bumpy” integration global process is result

11. Underlying Issue: political legitimacy • If crisis consistently punctuates development process: • Some (medium income) countries may withdraw from system • Consequences likely negative in global terms

12. Regional co-operation? • 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….