Financing for Development: Time for the UN to Take Centre Stage Again

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

Little progress has been made since the last conference of the United Nations Financing for Development (FfD) process, held in Addis Ababa in July 2015, which agreed the Addis Ababa Agenda for Action (AAAA) – the framework for how the world would finance the Sustainable Development Goals (SDGs). Since Addis, however, there has been little headway and last year’s UN FfD Forum was disappointing, with few concrete outcomes achieved. As the FfD Forum outcome document highlighted, that current policies are not delivering the economic step-change needed to achieve the SDGs.

Given the slow rate of reform since Addis, it is clear that global leaders need to work towards a major new set of concrete actions on financing for development. The European Network on Debt and Development (Eurodad) recently launched a short paper setting out three key tests that this year’s UN FfD Forum should pass if it is to be regarded a success:

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Carbon Pricing: The Price is Wrong

Gar W. Lipow, Guest Blogger

For U.S. climate activists to succeed, they must demand serious government spending on energy efficiency and renewables—spending comparable to the current war budget. Calling for hundreds of billions in annual green public investment has potential for the popular appeal needed to build a powerful grassroots climate movement. That investment would be the best policy as well. Massive clean energy spending would not only provide jobs and economic growth on a grand scale. It is the most effective way to reduce greenhouse gas pollution.

It is widely, though not universally, acknowledged that solving the climate crisis will require public investment and subsidies, efficiency regulations and clean energy requirements, plus a price on greenhouse gas emissions. (The idea behind a carbon price: polluters pay per unit of greenhouse gas pollution released.) But, in practice, policy advocates tend to fetishize the carbon price and drop other requirements. For example, James Hansen, perhaps the world’s leading climate scientists says “If we would put this price on carbon it would favor renewables, and it would favor energy efficiency, and it would favor nuclear power—it would favor anything that is carbon-free… ”[i] Charles Komanoff and James Handley of the Carbon Tax center describe a carbon tax as the “sine qua non of effective climate policy”.[ii] Mainstream environmentalism tends to favor cap-and-trade over carbon fees, which indirectly results in a price on carbon. Between carbon tax and cap-and-trade advocates, most climate change opponents prioritize carbon pricing. Few join Komanoff in referring to such pricing as the “sine qua non” of carbon policy. In policy discussions, however, most environmental economists start with cap-and-trade or a carbon fee, and many never discuss anything else.

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G20 Counter Summit in St. Petersburg

Dale Wiehoff, Guest Blogger

On September 3 and 4, a large-scale international Counter Summit, intended as an alternative to the September Summit of the G-20, will be held in St. Petersburg, Russia. It is taking place at the Международный Деловой Центр, nab.reki Smolenki 2, and is organized by the Post Globalization Initiative. The Summit’s ambition is to develop new principles of economic and social policy which are not based on the Washington Consensus. As part of the Summit, world renowned experts, economists, politicians and social scientists from Europe, Asia, Africa and the Americas will come together for panel discussions, seminars, and public lectures, including Dr. Steve Suppan of IATP. Dr. Suppan will address speculation in commodity markets.

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Panics in India

Sunanda Sen, Guest Blogger

A panic of unprecedented order has struck the crisis-ridden Indian economy. It brings to the fore what led to this massive downturn, especially when the country was touted, not long back, as one of the high growth emerging economies of Asia.

Volte-faces, from scenes of apparent stability marked by high GDP growth and a booming financial sector to a state of flux in the economy, can completely change the expectations of those who operate in the market, facing situations with an uncertain future. Possible transformations as above, were identified by Kindleberger in 1978 as a passage from manias, which generate positive expectations, to panics, which head toward a crisis. While manias help continue a boom in asset markets, they are sustained by using finance to hedge and even speculate in the asset market, as Minsky pointed out in 1986. However, asset-markets bubbles generated in the process eventually turn out to be on shaky ground, especially when the financial deals rely on short-run speculation rather than on the prospects of long-term investments in real terms. With asset-price bubbles continuing for some time under the influence of what Shiller described in 2009 as irrational exuberance, and also with access to liquidity in liberalised credit markets, unrealistic expectations of the future under uncertainty sow the seeds for an unstable order. The above leads to Ponzi deals, argues Minsky, with the rising liabilities on outstanding debt no longer met, even with new borrowing, since borrowers are nearing insolvency. Situations as above trigger panics for the private agents in the market, who fear possible crisis situations. These are orchestrated with herd instincts or animal spirits in the market as held by Keynes in 1936. In the absence of actions to counter the market forces, a possible crisis finally pulls down what in hindsight looks like a house of cards!

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The Next Federal Reserve Chairperson

Thomas Palley, Guest Blogger

Some months ago it became known that Federal Reserve Chairman Ben Bernanke was likely to step down as the end of his second term of appointment drew near. Initially, Federal Reserve Vice-Chair Janet Yellen appeared the favorite to succeed Bernanke, but now it seems as though Larry Summers has become the Obama administration’s preferred candidate. Summers’ candidacy raises grave political and policy concerns.

The case for Larry Summers rests on claims that he is a seasoned, crisis-tested, and known policy maker. His experience includes a stint as treasury secretary in the late 1990s and a stint as director of the National Economic Council from 2009-2011, where he oversaw the stimulus and recovery program. He is also a known quantity on Wall Street, where he has earned millions in speaking and consulting fees. Add in his academic credentials as an economics professor at Harvard, and Summers appears to be a model candidate – experienced in government and trusted by financial markets.

But digging deeper, the flaws begin to show. Many critics have pointed out that Summers led the charge for financial deregulation in the 1990s. Worse yet, he opposed updating regulation to deal with financial innovation, as exemplified by his opposition to derivatives regulation in 1998.

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Crying for Argentina, again?

Martin Rapetti, Guest Blogger

Not so long ago, Argentina was considered a case of economic success. In 2001-02, the country suffered a severe crisis — a triple crisis involving the financial sector, the public debt and the balance of payments — that ranks as high as the worst crisis in Argentina´s history. However, in early 2002, soon after the devaluation of the peso, the default of the public debt and the collapse of the financial system, the economy began a sustained and very strong recovery that later on evolved into strong economic growth. By the end of 2006, GDP was 46% higher than the trough of 2002 and 17% higher than the previous peak of mid-1998; unemployment had shrunk from 22% to 8.7%, poverty from 58% to 28%, and extreme poverty from 28% to 9%. It is not difficult to understand why the experience became a very successful example of crisis resolution, especially for countries in the periphery of the European currency union like Greece.

Argentina’s post-crisis experience also represented a successful reference in terms of its macroeconomic policy regime. In the first years following the crisis, the authorities pursued macroeconomic policies that aimed to maintain a stable and competitive real exchange rate (RER) as a means to promote the expansion of dynamic tradable activities and thus promote economic development. The competitive RER was a key factor behind Argentina’s recovery and growth. Many economists consider a macroeconomic framework targeting a stable and competitive RER more development-friendly than the conventional inflation targeting.

Unfortunately, Argentina’s successful economic experience gradually began to fade away. As in the plot of Mario Vargas Llosa’s classic book Conversación en La Catedral, it is hard to determine at what precise moment this experience “f—d itself up”. A possible turning point was in early 2007, when the government fired civil servants of the National Bureau of Statistics (INDEC) and began to manipulate the official Consumer Price Index to openly hide the acceleration of inflation (since then the official inflation rate has been below 10% per year when actual inflation oscillated around 20-25% per year. The manipulation was later extended to other official statistics, including GDP). But regardless of the precise date, the issue is that the government gradually turned to an increasingly populist path based on excessively expansive fiscal, monetary and wage policies that fueled inflation. Instead of moderating the pace of aggregate demand, the government increasingly relied on the exchange rate as the main nominal anchor to curb inflation. This strategy was especially intense in 2010 and 2011. During these two years, domestic prices rose 54% whereas the nominal exchange rate (i.e., the domestic price of US dollar) only 12%. As a result the RER appreciated significantly.

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Green Keynesianism: Beyond Standard Growth Paradigms

Jonathan M. Harris, Guest Blogger

In the wake of the global financial crisis, Keynesianism has had something of a revival.  In practice, governments have turned to Keynesian policy measures to avert economic collapse.  In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New Classical theories.

This theoretical and practical shift is taking place at the same time that environmental issues, in particular global climate change, are compelling attention to alternative development paths.  Significant potential now exists for “Green Keynesianism” : combining Keynesian fiscal policies with environmental goals.

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Democratizing Finance

Sasha Breger Bush, Guest Blogger

Back in 2003, Yale economist Robert Shiller noted in his book The New Financial Order, “We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart” (1).  More recently, Shiller’s 2012 article in The New York Times connects suggestions to “democratize finance” to the Occupy Wall Street Movement: “Finance is substantially about controlling risk. If risk management is suitably democratized, and if its sophisticated tools are better dispersed throughout society, it could help reduce social inequality.” Among Shiller’s proposals, in the older book and more the recent article, are for income insurance based on occupational derivatives and financial innovations to manage old age risks, thereby reducing pressures on welfare based entitlements like Social Security. Efforts to democratize finance in the advanced industrial economies are mirrored in development policy circles, where officials from the World Bank and UNCTAD, among other agencies,  have been recommending for many years now that certain kinds of derivatives markets (largely for commodities and the weather) be re-tooled to better meet the needs of the agrarian poor.

On the surface, such efforts appear to be rather successful. As I detail in my recent book, derivative exchanges have proliferated across the developing world over the past several decades, with 23 of the top 50 derivatives exchanges (by volume) located in the global South in 2010.  This same year, the most rapidly growing derivatives exchanges in the world were located in Asia and Latin America.  Between 2003-06, commodity derivative contract volume outside of the OECD well surpassed that within. And, in 2009, China’s Securities Regulatory Commission announced that China had become the largest commodity derivatives market in the world, contributing over 40% of global volume. On the micro level, commodity and weather derivative contracts are being transformed into retail products, designed for use by smaller and poorer actors who have traditionally been excluded from global derivatives trading—e.g. retail crop insurance based in weather derivatives markets (“weather-index insurance”), agricultural producer bonds with built-in price insurance (like Brazil’s rural product bonds), and other mechanisms for passing on the risk management services of derivatives to those unable to participate directly in the markets.  What could be more democratic?

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Paying Dexia’s Debts: The Risks of Globalized Finance

François Chesnais, Guest Blogger

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

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Paying Dexia's Debts: The Risks of Globalized Finance

François Chesnais, Guest Blogger

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

Read the rest of this entry »