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

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?)

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?

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

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

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

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

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

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

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

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

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….