Development in international financial policies

The currency and financial crises of the late 1990s generated a broad consensus that fundamental reforms in the international financial system are needed to appropriately address the challenges of the 21st century. The rationing of poor countries from private capital flows, even when these are booming to emerging countries, the drastic reversals of capital flows that trigger crises, the significant drought of private flows to all developing countries for five years after the Asian crises (which began to be overcome only fairly recently) implies that besides the objective of international financial stability, an equally important objective –to which insufficient attention has been given- is the provision of sufficient and sufficiently stable private and public flows to different categories of developing economies. It is therefore essential for the international financial system to be coherent with development that it both: (a) prevents developmentally costly crises and better manage them when they occur and (b) supports adequate net private and public flows to support poverty reduction and sustainable development. Whilst much of the international discussion has been on the former, much of this paper will focus on the latter, somewhat more neglected point. This paper aims to explore certain options for reform that are being debated by the international community which, if adopted, could considerably improve development policy coherence of OECD member countries and thereby contribute to meeting the challenges mentioned above. It will focus on new forms of encouraging more and more stable private and public flows to developing countries, involving public-private linkages, so that these countries can grow faster and reduce poverty, thereby moving closer to the Millennium Development Goals. It will also discuss key obstacles to reform, and the challenges for overcoming these. Following this introduction, section 2 provides a brief background analysis of recent trends in capital flows. The purpose is to show that these flows, although starting to recover from the extremely low levels seen since 1998, may still be easily reversible, which calls for the need of further reforms in the international financial architecture (IFA). Section 3 asks how much progress has been made so far, and argues that progress to date has been limited, and suggests areas in which further advances are needed. It highlights in particular the need for more vigorous action for implementing the Monterrey agenda on development finance, which includes a range of options for encouraging more and more stable capital flows to developing countries; and the need for more developing country representation in international fora. Section 4 addresses the issue of capital flows, sections 5 and 6 discuss the issue of developing country representation. More specifically, section 4 explores new public-private mechanisms that might be considered for adoption, to encourage more stable private flows to middle-income countries, and aid flows to the poor countries. Three possible proposals will be discussed: the creation of partial counter-cyclical guarantees, public incentives for encouraging socially responsible investment (SRI) in developing countries, and the International Finance Facility (IFF) put forward by the UK Treasury. The section will lastly discuss the current proposal put forward by the Basel Committee on banking regulation and supervision, on modifying the regulatory capital charge of banks. The reason for discussing the Basel proposal is that we believe that as currently designed it may have an unintended negative impact on capital flows to developing countries. Next, section 5 discusses obstacles to progress on reform of the IFA, from a political economy perspective. It will argue that insufficient or no developing country representation in the Basle Committees and other international fora as well as in the IFIs can be identified as a major, although not the only, reason why international financial policies seem to be lacking development coherence. Section 6 in turn discusses the challenges facing the international community for increasing developing country representation in the international fora. Section 7 concludes and indicates areas for further research