According to the 2015 Trade and Development Report, launched today by the United Nations Conference on Trade and Development (UNCTAD), urgent measures must be taken to address critical issues in the global financial architecture to establish a more stable and inclusive international monetary system.
The report suggests measures to avoid a further global economic stagnation and calls for reforms in fiscal and monetary policies to manage capital flows and a more diversified International Monetary System (IMF).
“There remains a critical need for government support for long-term development finance, at both the international and domestic levels. This need has not been met, even by the emergence of innovative mechanisms for harnessing finance or by official development assistance (ODA), said UNCTAD Secretary-General Mukhisa Kituyi in the report’s overview.
The report examines a series of interconnected challenges facing the international monetary and financial system including liquidity provision, banking regulation, debt restructuring and long-term public financing. The measures suggested by the report are likely to produce progressive results only through the dedicated and collaborative action from the international community.
In addition, it argues that developing countries that have been integrated into the global financial markets have had adverse effects on their long-term development goals. According to studies conducted in 11 countries, private capital flows to developing countries have increased since early 2000s. The proportion of gross national income increased from 2.8 per cent in 2002 to a historic 6.6 per cent in 2007.
Coupled with the economic slowdown of 2008 and a decrease in the influx of capital, the financial markets of developing countries remained volatile and stagnant.
The resulting policy decisions made in advanced economies were also applied to in developing markets dude to its dependence on capital flows and economic pricing.
“Managing the persistent volatility of financial short-term flows requires an internationally coordinated policy response,” Mr. Kituyi said, not merely a financial correction with few serious consequences for the real economy. “With developing countries contributing over 60 per cent of global growth since 2011, the knock-on effects of recent emerging market difficulties could be widely felt,” he added.
The report suggests that a monetary and fiscal policy mix aimed at better managing private capital flows would help developing countries to face the challenges and to enhance the gains made overall from integrating into global financial markets.
The report further notes that advanced countries are currently facing a ‘secular stagnation’ where there is a long-term economic growth slowdown which is unrelated to normal economic cycles. It also noted that despite taking compliant monetary policy measures, the developed economies still seem to rely on its former policies of mounting debt and asset bubbles.
On the contrary, public investments such as infrastructure have had multiple positive effects in stagnating economies in developed countries. This is because of the resultant effect it has on creation of demand which creates outlets for private investment thereby increasing further benefits. This leads to higher wage incomes, which reduces financial pressure on pension schemes and increasing consumption without adding to household debts, according to the report.