SAIIA/UNCTAD Financing development experiences of regional monetary - PDF document

SAIIA/UNCTAD Financing development – experiences of regional monetary and financial South-South cooperation – the role of multilateralism in the current global economy” Johannesburg 10 May 2017 Opening statement, Diana Barrowclough, UNCTAD 1 Good morning, dear colleagues and participants, I must begin by greeting warmly and thanking deeply the South Africa Institute of International Affairs, for having facilitated this significant event. We are grateful for your efforts organising and hosting what we anticipate will be a substantial and important exchange of research findings and practical experiences of South-South monetary and financial cooperation. UNCTAD appreciates the close ties we have been building with Government ministries, development institutions and academia in South Africa over the years and we look forward to continued collaboration and cooperation on these important topics for development. I should make the point also that this week’s event is not a stand -alone for either SAIIA or UNCTAD, nor indeed for several of our speakers who have joined us from near and far. We will hear later today more about the work of SAIIA with respect to national banking systems in Africa. From UNCTAD ’s side , this seminar is one of a series of research activities and policy discussions on this theme that is specially authorised and financed by the General Assembly of the United Nations – for the reason of improving understanding about how regional financial and monetary mechanisms can help support development. The topic has become increasingly important for two reasons. One recognises the potential of south-south mechanisms in the light of failures and limitations in the global institutions and financial architecture. Ultimately we really need to reform those institutions and systems, but in the meantime regional mechanisms are proving to be an attractive and useful complement. Secondly, the topic is important because regional integration offers many positive benefits in other senses, including reducing vulnerability to external shocks, increasing resilience, and boosting growth because they also increase the potential for local production, consumption and regional trade – 1 Diana Barrowclough is Senior Economist, Division on Globalization and Development Strategies, UNCTAD. She is currently leading the multi-year, multi-country research project of which this seminar is a part. Prior to joining UNCTAD, Dr Barrowclough was a lecturer in economics at the University of Cambridge and Fellow of St John’s College. She holds a PhD degree in Economics and a Masters of Philosophy in Economics from the University of Cambridge, UK. She was formerly educated in Auckland, New Zealand. 1

among others. So there are both push and pull factors supporting regional integration that we will be hearing about over the next two days. As part of this project, UNCTAD has been working closely with governments, academics and development institutions in Latin America, Asia and Africa. Several of those who have been directly involved are in the programme later today and tomorrow and we look forward to hearing from them later. In our research we have focused on four main policy areas of South-South financial and monetary cooperation, including: (i) mechanisms for short-term (foreign currency) liquidity provision to support the balance of payments, in particular the use of regional funds such as Latin America ’s FLAR and Asian responses such as the Chiang Mai Initiative; (ii) the role of regional payment systems to mitigate exchange rate volatility and facilitate the expansion of intra-regional trade, including currency union such as West Africa’s CFA and the Eurozone, alongside very different mechanisms such as the “virtual” SUCRE and other innovative systems introduced in Latin America. (iii) A third tranche examined some of the new mechanisms emerging to provide long- term financing for development, such as the new regional and multi-regional development banks including New Development Bank, Banco del Sur and Asian Infrastructure funds alongside long-standing development banks at national and regional levels, many of which are adapting and changing to meet the new circumstances. (vi) Finally we examined the role of macroeconomic co-ordination and co-operation to stabilize and expand regional and domestic aggregate demand, promote the creation of dignified jobs and facilitate 'climbing up the technology ladder' to achieve higher value added productivity growth. During this process, we have learned that all four categories of macroeconomic function of governments are inter-dependent and inter-related. We should not confine consideration of financial or monetary mechanisms for development without also considering other aspects of macroeconomics that can support or hinder their effectiveness. The need for reserve fund support in the first place may be related to exchange rate volatility, trade-related payment systems, methods of production and trade, for example. Inter-regional infrastructure investment also needs supportive political institutions and policies. Industrial policy is needed to help create demand for the long-term development finance that is becoming available, to support new enterprise and structural transformation that cannot come from the private sector alone, despite the fact that finance may be readily available. Labour market policies are needed to promote employment and aggregate demand. Tax policies are needed to address base- shifting and tax ‘caves’ which divert finances away from domestic investment and future production and trade, as well as undermining government’s ability to finance 2

development banks, and so on. For obvious reasons, experts and practitioners usually focus on just one of those four categories but UNCTAD is striving to show that we need to consider all these integrated aspects of pro-growth macroeconomic policies together, and I look forward to learning more about these elements during our days together now. I will pick up these issues again in my own presentation tomorrow. For my remaining moments, I want to highlight four wider political economy issues that are important for the development potential of regional financial and monetary integration in the developing world, because they impact the “space” that exists for putting in place the policies needed. The first concerns the current global economic environment – which we in UNCTAD believe makes regional integration both more necessary and more difficult to achieve. It remains far from settled – gyrating between seeming good news and bad news; the world economy swings according to frequently changing market sentiment. Deep macroeconomic imbalances remain, reflecting the failure of the lead economies to orchestrate a durable recovery from the global financial crisis and subsequent recessions. The flipside of this is stagnation caused by a continued lack of demand in the advanced economies. According to UNCTAD's latest estimates, global output decelerated to 2.2 per cent in 2016, down from 2.6 per cent experienced in both 2014 and 2015. A number of large emerging economies, in particular, suffered setbacks, registering weak or negative growth. Meanwhile, global trade continued to disappoint, growing at about 1.3 per cent over the year in volume terms, but marked by a general decline during the first half of 2016. Some have found cause for cautious optimism in signs such as an uptick in commodity prices and weak growth in manufacturing production; others gain comfort from a hint of tightening in labour markets in advanced economies. However UNCTAD ’s view is that these are more reflections of short-term financial herding rather than any change in the underlying fundamentals; they are not evidence of economic recovery nor the start of a robust growth path. As my colleagues put it “q uarterly capitalism with a happy face does not equal a break from the new normal”. In the USA for example, renewed optimism rests heavily on expectations of growth based on an expansionary fiscal policy and infrastructure support plus measures to protect employment – but there remains little in terms of concrete detail. Net fiscal injections may come from the lower corporate and high-income tax rates, but these are likely to produce only weak multiplier effects and not the significant boost to consumption, investment and aggregate demand needed. Turning to Africa, current macro data is scarce but it suggests a rebound from the very low growth rates of 1.7% last year, especially if commodity prices and global trade continues to rise. However, as most African countries have not diversified their economies, financing for the required pace of investment to sustain economic growth 3