UNCTAD Calls for Reform to International Monetary System
“For most developing economies, integration into global financial markets has up to now had only weak linkages to their long-term development goals...Coupled with increasingly large and volatile capital flows that have expanded vulnerabilities to external shocks, the effectiveness of the policy tools designed to manage growth and development is also being limited,” the UNCTAD said in a press release on its 2015 Trade and Development report.
Since the early 2000s, private capital flows to developing countries has increased, to 5% in 2013 from 2.8% in 2002. They peaked in 2007 when they hit 6.6%, according to the report. With the economic slowdown in 2008, the financial markets in these developing countries has remained fairly stagnant. The UNCTAD calls for regulations that better manage these private capital flows to help developing countries respond to, and gain from, global financial markets. Any challenge these developing countries face could be “widely felt,” the UNCTAD said, considering they have contributed more than 60% of global growth since 2011.
Trade Financing Matters believes that alternative financing models based on tech-enabled receivables financing and payables financing offer strong potential to serve developing markets. “The arbitrage between the cost of capital for Western suppliers and those in developing markets is significant,” Jason Busch, analyst, Trade Financing Matters, suggests. “If financing costs for approved invoices or other triggers can be based on the borrowing costs of larger corporates, developing market SMBs will be able to compete more effectively and have alternatives to local lending and banks.”
Yet the UNCTAD is skeptical. “Solutions are available, but dedicated action by the international community will be needed if finance is to become the servant of a more dignified, stable and inclusive world,” the report said.
The report also called out how trade growth is slowing. Developing regions around the world started to feel this last year and the stagnation is only expected to continue or expand through 2015. The significant drop in oil prices has not helped developing countries, the report said.
The report looks at liquidity provision, banking regulations and debt restructuring, among other challenges facing the international monetary financial system. The UNCTAD makes some possibly radical suggestions, including a new global currency.
“Effective multilateral arrangements should remain the long-term objective of any comprehensive reform agenda,” the report states. “However, they imply wide-ranging institutional changes, from a new agreement on rules for multilateral exchange-rate management, to the creation of a global central bank and even a new global currency. Even with a less ambitious agenda, their effective functioning would require comprehensive macroeconomic policy coordination.”
Or, alternatively, Trade Financing Matters might suggest, the UN could look to support tech-enabled alternative financing programs.
You can download the full report here.