Rethinking Bretton Woods | Sat, Jun 28, 2008
The Consultation featured a session on Systemic Issues at one of whose panels Jan Kregel, former Director of the Research Branch of the Financing for Development Office, delivered a presentation focused on trade-finance linkages.
In his presentation, Mr. Kregel spoke about the policy coherence in trade and finance as a major systemic issue. The UN Conference on Financing for Development produced the Monterrey Consensus which dealt with Systemic Issues on “enhancing the coherence and consistency of the international monetary, financial and trading systems in support of development.” Since Monterrey, there were a number of efforts to emphasize the importance of coherence and consistency of the monetary, trade, and financial system.
He also referred to the traditional importance of the interdependence of Trade, Governance and Finance, especially in Latin America. Through the history of Latin America’s trade, most of the primary commodities exports were the result of the decisions taken by colonial investors. Thus the composition of exports was the result of the flows of international capital and political competition. After independence, the move to free trade brought about a structural deficiency of fiscal resources. In the 20th century, the region’s primary commodity exporters started losing their ready markets in Great Britain and had to compete with similar primary commodity exporters in international markets. These historical references should be enough explanations of the impossibility of separating trade from financial flows, and both from the shape and structure of the international financial system.
Another example of the trade-finance linkage is the opening to the international trading system that took place in most Latin American countries in the 1990s. As the tariff barriers were lifted with the creation of the WTO, it became possible for foreign manufacturers to use developing countries as simple production sites. The impact of this opening was seen in the composition of exports and the reduced ability of exports to serve as a source of increasing domestic incomes.
In the last part of his presentation, Mr. Kregel discussed the increased importance of Trade and Financial Policy Coordination in the New Millennium. The collapse of the dot com bubble and the mortgage market in the US has led speculative investors to look upon commodities as speculative investments, so the increase in non-commercial demand has been far greater than the increase in commercial demand.
The shift in pricing from commercial to non-commercial users can be seen in the behavior of futures prices creating a profit incentive for speculators to buy the futures contract from the producer. These factors generated not only supply side impacts but also an impact on poverty because of the rise in food prices. As a result of these factors many Latin American countries are experiencing record trade surpluses, much of which is the result of increased capital inflows from international investors.
The bubble in commodity prices is reflected in what should be considered a bubble in real exchange rates throughout the region. To analyze and foresee and to prepare remedies, it is necessary to look at the coherence and consistency of IMF policies and of national policies. Also the follow up should recognize that it is now time to take these problems of the linkage between trade, finance, debt and climate change seriously.For full paper click here.