Stiglitz Commission finds lack of trade-finance coherence (March 2009)

Rethinking Bretton Woods | Mon, Mar 30, 2009

By Aldo Caliari

The Commission of Experts on Monetary and Financial Reform, appointed by the President of the General Assembly last year and chaired by Nobel Prize-winner economist Joseph Stiglitz, released its preliminary report.
Coming on the eve of the Interactive Dialogue on Monetary and Financial Reform that took place at the UN (March 25-27), the report is expected to provide substantive input into the UN Conference on the World Financial and Economic Crisis and its Impact on Development. (See separate item in this same bulletin)
Faithful to its terms of reference, which called on the Commission to bear in mind that "in an interdependent world, multilateral rules and regulations in trade, debt and finance will have to be mutually reinforcing," the report places on the agenda crucial and usually overlooked issues that lie at the intersection between trade, debt and finance.
Most visibly, the report calls for the lack of coherence between policies governing trade and finance to be rectified. In paragraph 37, the report says:
"Many bilateral and multilateral trade agreements contain commitments that circumscribe the ability of countries to respond to the current crisis with appropriate regulatory, structural, and macro-economic reforms and rescue packages, and may have exposed them unnecessarily to the contagion from the failures elsewhere in the global economic system. Developing countries especially need policy frameworks that can help protect them from regulatory and macro-economic failures in systemically significant countries. Developing countries have had imposed on them not only deregulation policies akin to those that are now recognized as having played a role in the onset of the crisis, but also have faced restrictions on their ability to manage their capital account and financial systems (e.g. as a result of financial and capital market  liberalization policies); these policies are now exacting a heavy toll on many developing countries."
The Commission vindicates, thus, a long held demand of civil society coalitions. Notably, a statement in the context of the Doha FFD Review Conference last year had stated that many provisions in trade and investment agreements "are not consistent with the flexibility needed to successfully implement pro  development fiscal, monetary and banking policies, such as employment or exchange rate targeting, where governments may deem them necessary. " [i]
In its paragraph 37, the report contains a call for more policy space for developing countries: "Conditionality attached to official lending and support for international financial institutions has often required developing countries to adopt the kinds of monetary and regulatory policies which contributed to the current crisis. In addition, these conditionalities contribute to global asymmetries, disadvantage developing countries relative to the developed, and undermine incentives for developing countries to seek support funding, contributing to global economic weakness."
The asymmetry recognized in this language is also one that civil society groups had long denounced, adding last year that "Trade and investment agreements should urgently operationalize effective mechanisms to redress the asymmetric impact that development finance institutions and agencies have had on the negotiating space of recipient countries."
The Commission's report says that a successful completion of the Doha trade round "would be welcome," but is doubtful on its impact on the crisis and its development dimension. (para. 39) This is an important departure from the line held by the Group of 20 Summit, which continues to insist on emphasizing conclusion of the Doha Trade Round as a key element of the crisis response. The Group of 20's position on this matter has been found troubling by civil society groups. This is especially so because it may involve deepening of financial liberalization measures whose wisdom the crisis is calling into question, in exchange for gains for developing countries that are poised to be negligible at best.
On the other hand, the report refers to a number of measures that have been already agreed in multilateral trade negotiations and could, if rapidly implemented, support developing countries in the crisis: duty free, quota free market access for products from LDCs, elimination of all forms of developed country export subsidies which, though envisioned to happen by 2013, could be implemented immediately, abolition of domestic cotton subsidies and the preservation of the "long recognized principle of special and differential treatment of developing countries." (para. 39)
Among its recommendations the document says "There is a need for a true development round, to create an international trade regime which truly promotes growth in the developing countries. It is essential, that in all trade negotiations, the long recognized principle of special and differential treatment of developing countries be preserved." (para. 74)
In an implicit recognition that special and differential treatment may call for reversals in market access, the report calls only on "advanced industrial countries" to observe their pledges not to undertake protectionist actions. It adds to this the need to ensure that stimulus packages and recovery programs do not further distort the economic playing field. (para. 16) An example, mentioned in the following paragraph, are "developed country subsidies to financial institutions" that have been accompanied by a sharp reduction in flows of capital to developing countries. "Financial subsidies" states the Commission, "can be just as detrimental to the efficiency of a free and fair trading system as tariffs." (para 17) The excesses not only in deregulation of financial markets but also "in international trade" are held as responsible for the crisis. (para. 18)
An important issue that the experts also highlighted is the connection between trade and the world monetary system. "The global imbalances which played an important role in this crisis can only be addressed if there is a better way of dealing with international economic risks than the current system of accumulating international reserves." A single-country reserve system presents dangers, but two- or three-country reserve systems are unstable, they warn, calling, instead, for a new Global Reserve System.  (para. 47)
As a remedy to this situation, civil society groups had proposed a greater role for regional and sub-regional monetary arrangements. This path could constitute, also, the building blocks to a more balanced currency basket on which to base the Global Currency. Indeed, in a reference worth developing, the Commission does say "regional cooperation arrangements can be particularly effective because of greater recognition of cross -border externalities and greater sensitivities to the distinctive conditions of neighbouring countries." (para. 28)
A less obvious, but not less important, connection between trade and finance is addressed by the report. According to an analyst, financial investors rushing in and out of commodities made price risk management instruments in commodity exchanges too expensive for commodity processors and traders, particularly in developing countries.[2] In this regard, he says, "Price volatility, and resulting food and energy insecurity associated with riots in at least 60 coun­tries, was caused in part by the OTC "weight of money" that overwhelmed the sup­ply/demand price signals of regulated exchanges."[3] The Commission tackles the "large scale use of unregulated, unsupervised OTC derivatives." (para 63) and, among other measures, call for the use of these contracts to be discouraged and ensure that these instruments are held on balance sheets, valued at independently audited real transaction prices, with appropriate capital provisioning and clarity of purpose. (para .64)
Full report by the Commission is posted at

[i] CSO Statement at the Informal Review Session on Chapter III of the Monterrey Consensus

[2] Steve Suppan, "The G20's Opportunity on Commodities Exchanges Regulation"

[3] Ib.