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Economists call for deep reforms of global financial system

Special Correspondent

World output will reach a meagre one per cent in 2009

Developing world will surpass five per cent growth
Borrowing costs for developing countries will rise

CHENNAI: United Nations economists have called for deep reforms of the global financial system to prevent a recurrence of the current crisis, including stronger regulation of financial institutions, adequate international liquidity provisioning, an overhaul of the international reserve system and a more inclusive global economic governance.

They wanted coordinated global economic stimulus packages, linked with sustainable development measures, beyond liquidity and recapitalisation steps already taken, to counter the worldwide economic meltdown.

“World per capita income is expected to decline next year, export growth and capital inflows will fall, borrowing costs for developing countries will rise as contagion spreads from the major economies, and the U.S. dollar is set to resume its decline, with a possible hard landing in 2009,” according to the UN annual economic report, issued at the international Financing for Development review now under way in Doha, Qatar.

The report on World Economic Situation and Prospects 2009 notes that according to the baseline scenario, world output will reach a meagre one per cent in 2009, compared to 2.5 per cent in 2008 and global growth rates of between 3.5 and 4 per cent in the preceding four years. The 2009 projection includes a decline in output of 0.5 per cent in developed countries and 4.6 per cent in the developing world.

Optimistic scenario

“Under a more optimistic scenario, factoring in fiscal stimulus of between 1.5 and 2 per cent of gross domestic product (GDP) of the major economies and further interest-rate cuts, developed economies could post a 0.2-per cent rate of growth, and the developing world would surpass five per cent growth, the economists calculate.

“But given the great uncertainty prevailing today, a more pessimistic scenario is possible.

“If the present credit squeeze prolongs and confidence in the financial sector is not restored in the coming months, developed countries could enter into a deep recession, causing world output to fall and GDP growth in the developing world to drop to 2.7 per cent, dangerously low for the ability of countries to sustain poverty reduction efforts and social and political stability.”

Broad range of steps

To shore up weaknesses which led to the extraordinary damage brought on by the downturn and prevent this from happening again, the UN economists recommend a broad range of steps including: Fundamental revision of the governance structure and functions of the International Monetary Fund (IMF) and the World Bank for enhanced international policy coordination and more inclusive participation of major developing countries; Fundamental reforms of existing systems of financial regulation and supervision to stem past excesses; Reform of the present international reserve system, away from the almost exclusive reliance on the U.S. dollar and towards a multilaterally backed multi-currency system; Reforms of liquidity provisioning and compensatory financing mechanisms backed, among other things, by better multilateral and regional pooling of national foreign exchange reserves, and avoiding onerous policy conditionality, says a United Nations press release.

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