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Old global finance models have failed
PARISTA YUTHAMANOP
DHAKA : Global regulators need to change the framework of financial globalisation as existing laissez-faire market mechanisms have failed to prevent crises, said Supachai Panitchpakdi, the secretary-general of the United Nations Conference on Trade and Development (Unctad). In a speech to the Dhaka Chamber of Commerce and Industry, Dr Supachai called for worldwide endorsement of ''new globalisation'' to spell out a new financial architecture.
''The current post-Bretton-Woods framework of essentially floating exchange rates has not prevented the buildup of worrying global imbalances, continuing carry trade and devastating exchange-rate crises,'' said the former Thai deputy prime minister.
''In the world where tariffs and international trade are increasingly governed by a set of rules to prevent beggar-thy-neighbour policies and to foster trade liberalisation, it is incomprehensible that similar rules do not exist for the global financial system.''
Dr Supachai said oil prices would have been much lower without massive speculative activity. Unctad has found that globally traded grain futures and options increased by 32% in the first quarter of 2008.
''The new financial architecture should discuss what the role of an anaemic state is in the market mechanism. We may need to return to an enabling state. If governments don't want to be interfering, they can fortify the private sector,'' Dr Supachai said.
He said financial regulators should also rethink the role of credit-rating agencies, which seem to have failed to alert investors of risks in the sub-prime mortgage securitisation but worsened the crisis when it emerged.
The Bank for International Settlements should revise the Basel II capital adequacy framework because it placed unjustifiably high dependence on the credit-rating agencies in banks' internal risk assessment.
''Emerging market regulators should also find ways to mobilise their foreign reserves for developing their countries without sinking the US dollar,'' said Dr Supachai. ''The so-called 'Tobin Tax' might be the idea whose time has come. Given the large systemic risk of engaging in currency speculation, this relatively low tax might help make speculators bear a greater share of the potential social cost of a bailout.''
The Tobin tax, named after economist James Tobin, would be a tax on all trade of currency across borders.
Unctad has downgraded its forecast of world economic growth to 2% in 2009 with a risk of downward revision. Under this scenario, it expects the US to contract 4% and Europe to shrink 2% in 2009.
''There is likely to be a mild recession in emerging economies with growth slightly above 4% in 2009. If China is to grow less than 8% in 2009, Asian economies will be on the brink of a recession. The collateral damage will be deeper than many have anticipated,'' said Dr Supachai.
In Asia, stock markets' loss of half their capitalisation over the last few weeks and tepid foreign direct investment trends pointed to weak growth in domestic demand, he said. Meanwhile, exports _ which account for 60% of Asia's gross domestic product _ would be affected by the global recession.
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