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Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System

September 21, 2009

Chapter 1: Introduction

The Crisis: Its Origins, Impacts, and the Need for a Global Response

1. The current financial crisis, which began in the United States, then spread to Europe, has now become global. The rapid spread of the financial crisis from a small number of developed countries to engulf the global economy provides tangible evidence that the international trade and financial system needs to be profoundly reformed to meet the needs and changed conditions of the 21st century. The crisis has exposed fundamental problems, not only in national regulatory systems affecting finance, competition, and corporate governance, but also in the international institutions and arrangements created to ensure financial and economic stability. These institutions have proven unable to prevent the crisis and been slow to design and implement adequate responses. Indeed, some policies recommended by these institutions have facilitated the contagion of the crisis around the world.

2. The crisis emanated from the centre and reached the farthest limits of the periphery. Developing countries, and especially the poor in these countries, are among the hardest hit victims of a crisis they had no role in making. Even emerging market economies and least developed countries that have improved their economic management suffer declining output and employment. Indeed, those countries that have had the best performance in the recent past, and that have been most successful in integrating into the global economy, have been among the most badly affected.

3. Past economic crises have had a disproportionate impact on the living standards of the world's poor. Those who are least able to bear these costs will bear consequences long after the crisis is over. Infants who suffer from malnutrition will be stunted for life. Children who drop out of school are not likely to return, and they will never live up to their potential. Future growth and employment prospects may be impaired if small firms are forced into bankruptcy. Economic policies must be particularly sensitive to these hysteresis effects.

4. It is important to recognize that what began as a crisis in the financial sector has now become an economic crisis. But, it is not only an economic crisis, it is also a social crisis. According to the International Labour Organization, some 200 million workers, mostly in developing economies, will be pushed into poverty if rapid action is not taken to counter the impact of the crisis. Even in some advanced industrial countries, millions of households are faced with the threat of losing their homes, their jobs and access to health care. Economic insecurity and anxiety is increasing among the elderly as their life savings disappear with the collapse of asset prices. The ILO estimates that unemployment in 2009 could increase by some 30 million compared to 2007, and reach more than 50 million if conditions continue to deteriorate.

5. While the crisis began in the financial markets of advanced industrial countries, and then spread to the real economy, in many developing countries the initial impact of the crisis has been felt in the real sector, but is now spreading through the financial system. Developing countries are being affected through falling export demand and prices, accompanied by reversals of capital flows and reductions in remittances. While developed countries have the fiscal flexibility to respond, to stimulate their economies, to shore up failing financial institutions, to provide credit, and to strengthen social protections, most developing countries have tighter budget constraints, and resources directed towards offsetting the impact of the crisis must be diverted from development purposes. Money spent to extend social protection may be at the expense of future growth.

6. While it is important to introduce structural changes to adapt the international system to prevent future crises, this cannot be achieved without significant immediate measures to promote recovery from the current crisis. To the extent possible, these measures should promote, or at least be consonant with, the needed long-run structural changes.

7. The welfare of developed and developing countries is mutually interdependent in an increasingly integrated world economy. Short-term measures to stabilize the current situation must ensure the protection of the poorest in the least developed countries, many of whom are in sub-Saharan Africa and will bear a heavy burden of adjustment. Long term measures to make another recurrence less likely must ensure sustainable financing to strengthen the policy response of developing countries. Without a truly inclusive response, recognizing the importance of all countries in the reform process, global economic stability cannot be restored, and economic growth, as well as poverty reduction worldwide will be threatened.

8. At the same time, the international community cannot focus exclusively on immediate measures to stimulate the economy if it wishes to achieve a quick robust recovery. This crisis is, in part, a crisis in confidence, and confidence cannot be restored unless steps are taken to begin the more fundamental reforms required, for instance through improved regulation of the financial system.

9. Any solution—short term measures to stabilize the current situation and long term measures to make another recurrence less likely—must be global, and must pay due attention to impacts on all countries and all groups within society.

10. Any inclusive global response will require the participation of the entire international community. To respond to this need, the President of the General Assembly created the present Commission of Experts to identify measures needed to meet the crisis and to recommend longer term reforms, giving explicit attention to the needs of developing countries. Recognizing work undertaken by the G-7/8 and G-20, and others, the Commission sees its own work as complementary, seeking to focus on impacts and responses to the crisis on poverty and development.

11. Reform of the international system must have as its goal the improved functioning of the world's economic system in support of the global good. This entails simultaneously pursuing long-term objectives, such as sustainable and equitable growth, the creation of employment in accordance with the "decent work" concept, the responsible use of natural resources, reduction of greenhouse gas emissions, and more immediate concerns, including addressing the challenges posed by the food and financial crises. As the world focuses on the exigencies of the moment, long standing commitments to the achievement of the Millennium Development Goals and protecting the world against the threat of climate change must remain overarching priorities; indeed, both the immediate steps taken in response to the crisis and the longer-term global reforms should provide an opportunity to accelerate progress toward meeting these goals. While the world will eventually recover from the global economic crisis, the resolution of other challenges, including that posed by global warming, and those posed by the potential shortage of food and water, will require additional measures. The conjunction of huge unmet global needs, including responding to the challenges of global warming and the eradication of poverty, in a world with excess capacity and mass unemployment, is unacceptable.

12. Ten years ago, at the time of the Asian financial crisis, there was much discussion of the necessity for rapid reform of the global financial architecture if the world were to avoid the occurrence of another major crisis. Little— too little, it is now evident— was done. It is imperative to provide an adequate immediate response to the current crisis, but also to begin the long run reforms that will be necessary to have a more stable, prosperous and balanced global economy. The aim must be to avoid future global crises.

13. Both developed and developing countries must recognize that globalization must meet the needs of all citizens of the world. While it promised to help stabilize global financial markets and reduce the scale of domestic economic fluctuations, it failed to do so. Rather it served to facilitate contagion from one country to another. A failure in one economy is now leading to a global recession or depression. And unless something is done, and is done quickly, those in developing countries are likely to be among those who suffer most.

14. This report presents an analytical framework for understanding what has gone wrong and possible remedies. It presents both broad perspectives on policies and specific recommendations. This introductory Chapter provides an overview of some of the key issues and policy frameworks and perspectives. As noted, the crisis is both a financial crisis and an economic crisis. It has both macro- and micro- aspects. It began as a failure in the financial sector, but the problems in that sector were in part a result of underlying macroeconomic problems, such as growing global imbalances and growing income inequalities within and between countries. The fact that existing global institutions did little to prevent the crisis, and the delays in developing adequate responses to the crisis, suggest that there are important institutional problems that the international community needs to address. The frequent crises that have accompanied globalization, with problems in one country quickly spilling over creating problems in others, suggests the need for reform of the international financial system to meet the needs of an increasingly interdependent world economy. The fact that a major impact of these crises has been on the poor and the developing countries makes it clear that there are inadequacies in global market and non-market mechanisms for managing financial risks.

15. The current economic crisis should provide an opportunity to reassess global economic arrangements and prevalent economic doctrines. Large changes have occurred in the global economy in recent years, e.g. in the sources of global savings, foreign exchange reserves and GDP, and these are not fully reflected in our global economic institutions and arrangements. In trying to resolve the problems of the short run crisis it is important to seize the opportunity to make deeper reforms that enable the world to enter the twenty-first century with a more equitable and stable global financial system, one which could usher in an era of enhanced prosperity for all countries.

Download: Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (PDF, 1.27 M)

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