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Systemic issues of the international monetary and financial system Contribution to the informal revi

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Since 2003, EE market index has jumped more than fourfold in $ terms (America's ... EE as group run a BOP surplus; however, there are large differences between ... – PowerPoint PPT presentation

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Title: Systemic issues of the international monetary and financial system Contribution to the informal revi


1
Systemic issues of the international monetary
and financial systemContribution to the
informal review session on Chapter VI of the
Monterrey Consensus
  • Mojmir Mrak
  • University of Ljubljana
  • New York
  • 11 March 2008

2
Objectives of the presentation
  • Objective A To present new trends in
    international finance after the Monterrey
    Consensus with an important influence on
    international monetary and financial system
  • Substantially increased role of emerging
    economies in the global economy
  • Growing current account imbalances
  • New generation of financial crises
  • Continued marginalisation of IFIs, especially of
    BWI

3
Objectives of the presentation (II)
  • Objective B To discuss a selected number of
    systemic issues (old and new) that are of high
    importance for the international monetary and
    financial system
  • Instability of exchange rates
  • Current account imbalances
  • Reform of IFIs, especially of BWI
  • Financial crises prevention and management

4
A/1. Substantially increased role of emerging
economies in global economy
  • EE economies are growing in recent years much
    faster than developed economies their share in
    global economy increased to over 50 in PPP terms
  • Source Economist, 15 November 2007
  • EE exports equivalent to 45 of the world exports
  • EE have strongly influenced global demand for
    food, energy and raw materials

5
A/1. Substantially increased role of EE in
global economy (II)
  • Since 2003, EE market index has jumped more than
    fourfold in terms (Americas SP index has, for
    example, increased for 70 only)
  • Certain decoupling of EE from developed ones
    has been happening (exports to other EE grows
    much faster than to developed high increase of
    domestic consumption and investment)
  • EE as group run a BOP surplus however, there are
    large differences between two groups
  • EE with large BOP surpluses (they are strong net
    capital exporters and have large foreign exchange
    reserves this group is rather resistant to
    shocks
  • EE with BOP deficits (more dependent on foreign
    capital) this group is more vulnerable to
    potential shocks

6
A/2. Growing current account imbalances
  • In recent years, CA imbalances have increased
    substantially in nominal terms and as of GDP
  • Source Raghuram Rajan . Current account
    imbalances, hard landing or soft landing, 2005
  • Very large CA deficit of the US (over 6 of
    GDP) large CA surplus of emerging Asia, Japan
    and oil exporting countries Euro zone CA roughly
    in balance with large deficits / surpluses in
    individual countries

7
A/2. Growing current account imbalances (II)
  • In the past, CA deficit of the US was mostly
    associated with surpluses in Europe and Japan
    now, EE are important creditors of the US
  • CA imbalances are complex subject, but their
    increase from 2000 onward is a combination of the
    following savings / investments trends
  • Growing insufficiency of savings in the US caused
    mainly by highly increased budget deficits
  • Persistent surplus of savings over investment in
    emerging Asia (strong fall of investment after
    the Asian crises accompanied by stagnated
    savings) China an exception
  • Surplus of savings over investment in oil
    exporting countries caused by an increase of oil
    prices

8
A/3. New generation of financial crises
  • While the 1980s and 1990s crises were crises of
    EE, the current crisis is largely the developed
    world event even more, EE are for the first time
    considered as a kind of a safe havens
  • While the 1980s and 1990s crises were
    geographically concentrated on a country /
    region, the current crisis is spread across the
    globe and with a strong spill over into global
    slow down
  • While IFIs had rather important role in managing
    EE crises in the 1980s and 1990s, this is not the
    case during the current crisis

9
A/3. New generation of financial crises (II)
  • While the 1980s and 1990s crises were addressed
    with practically no involvement of central banks
    from developed countries, this time they have
    been key players in managing the crisis
  • Entirely new players, such as sovereign funds,
    have entered into the crisis resolution process
    this time while others, such as rating agencies,
    have performed an increasingly contradictory role
  • While EE were the main victims of 1980s and 1990s
    crises, in the current crisis this role is being
    taken over by financial institutions in the
    developed world (losses of over 400 bn are being
    mentioned)

10
A/4. Continued marginalisation of IFIs,
especially of BWI
  • A growing number of member states has prepaid
    existing obligations to both BWI in recent years
    due to their improved economic standing (some of
    them have substantial BOP surpluses) and/or good
    access to international capital market
  • Steep decline of new commitments of BWI in
    middle-income countries also some regional banks
    find it more and more difficult to continue
    lending to this group of countries (EBRD in
    Central Europe)
  • As a consequence, financial problems have emerged
    in some of the IFIs, especially in the IMF
    (deficit of 400 mn / year)

11
B/1. Instability of exchange rates
  • Key facts and problems
  • Since the BW systems break up, we live in a
    world of flexible exchange rates the rates are
    to be determined through coordination of foreign
    exchange policies
  • Coordination of exchange rate policies has been
    conceptually accepted, but in practice it has not
    been working well (a clear confirmation are
    growing CA disequilibrium)
  • Being aware of this fact, IMF Board has recently
    adopted a new decision on exchange rate
    surveillance which formally opens the way for the
    Fund to play a more productive role

12
B/1 . Instability of exchange rates (II)
  • What may be done to address this issue
  • It is of utmost importance that the multilateral
    exchange rate surveillance procedure of the IMF
    starts to be implemented in practice
  • For this, full political commitment and support
    from the membership at large and in particular
    from the large members with substantial CA
    disequilibrium would be needed
  • It remains to be seen whether such a political
    commitment is to be achieved there are some
    indications that do not confirm this

13
B/2. Current account imbalances
  • Key facts and problems
  • Symmetry in BOP adjustment is a characteristic of
    a good international monetary / financial system
  • In contrast to the gold standard system, the
    current international system does not have a
    mechanism for automatic BOP adjustment
  • As a consequence, BOP adjustment process today is
    strongly asymmetrical
  • There is no real pressure on CA surplus countries
    to adjust (they simply pile foreign exchange
    reserves) there is also no pressure on the US as
    the country with the largest BOP deficit and debt
  • On the other side, strong pressure on CA deficit
    countries

14
B/2. Current account imbalances (II)
  • What may be done to address this issue
  • Expenditure changing policies through changing
    the level of macroeconomic aggregates
  • CA deficit countries, especially US, through
    reduction of consumption and an increase of
    savings
  • CA surplus countries through an increase of
    consumption (China) and / or a decline of savings
  • Expenditure switching policies through the
    already mentioned multilateral exchange rate
    surveillance process of the IMF
  • CA deficit countries through exchange rate
    depreciation
  • CA surplus countries through exchange rate
    appreciation

15
B/3. Reform of IFIs, especially of BWI
  • Key facts and problems
  • Mission problem in the changing worlds The BWI
    have largely lost their relevance for all but
    low-income members EBRD faces challenges upon EU
    accession of 10 Central European states
  • Governance problem Governance structures of BWI
    continue to be largely unadjusted to structural
    changes in the global economy (voting rights,
    executive boards structures) though certain
    changes should not be neglected
  • Other problems They, for example, include
    funding problems (IMF case), or credibility
    problems (BWI after the failure of the
    Washington consensus)

16
B/3. Reform of IFIs, especially of BWI (II)
  • What may be done to address mission problem
    issue Efforts should be intensified to
    articulate new roles for IFIs in the changed
    global economy
  • IMF (i) multilateral foreign exchange
    surveillance, (ii) funding role of the
    institution
  • WB (i) concentration on low-income countries
    (ii) strengthening of its knowledge bank
    concept, and (iii) policy advise to middle-income
    countries
  • EBRD (i) in should remain an independent IFI for
    transition economies with strong cooperation with
    the EIB

17
B/3. Reform of IFIs, especially of BWI (III)
  • What may be done to address governance problem
    issue LDC / EE must get a stronger say in both
    BWI this is absolutely necessary for legitimacy
    reasons
  • Continued adjustment of quotas in favor of LDC /
    EE in the IMF (to be agreed as soon as possible)
  • Basic votes in the IBWI should be increased so as
    to reflect a similar share that these votes had
    when these institution were created
  • No veto power for any individual member state
  • Number of LDC / EE constituencies should increase
    vis-a-vis the EU member state constituencies

18
B/4. Financial crises prevention and management
  • Key facts and problems
  • Financial flows are increasingly globalised while
    their control remains largely under national
    jurisdiction
  • Role of IFIs in managing crisis situations is
    today smaller than it was a decade ago
  • Inadequate risk assessment of complex structured
    instruments
  • Weaknesses in supervision of financial
    transactions
  • Conflict of interest in activities performed by
    the rating agencies

19
B/4. Financial crises prevention and management
(II)
  • What may be done to address this issue
  • Chances for a kind of a global financial reform
    are now smaller than a decade ago (now, crisis is
    focused on developed countries role of IFIs in
    the management of the current crisis is very
    limited)
  • Domestic reforms in developed countries are of
    crucial importance for crisis prevention and
    management (similar as were the reform in EE
    during the crises in 1980s and 1990s)
  • There is a strong need to improve cooperation of
    among national regulators and to encourage them
    to adopt common standards, like the Basel II, in
    various areas (bank liquidity, valuation of
    complex debt structures, activity of credit
    rating agencies)
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