Re­vamp the international fi­nan­cial sys­tem to en­sure de­vel­op­ing coun­tries get nec­es­sary re­source trans­fers, write ANIS CHOWD­HURY and JOMO KWAME SUN­DARAM

New Straits Times - - Opinion -

RE­CENT dis­turb­ing trends in international fi­nance have par­tic­u­larly prob­lem­atic im­pli­ca­tions, es­pe­cially for de­vel­op­ing coun­tries. The re­cently re­leased United Na­tions re­port, World Eco­nomic Sit­u­a­tion and Prospects 2017 (WESP 2017) is the only re­cent re­port of a mul­ti­lat­eral in­ter-gov­ern­men­tal or­gan­i­sa­tion to recog­nise these prob­lems, es­pe­cially as they are rel­e­vant to the fi­nanc­ing re­quire­ments for achiev­ing the Sus­tain­able De­vel­op­ment Goals (SDGs).

De­vel­op­ing coun­tries have long ex­pe­ri­enced net re­source trans­fers abroad. Cap­i­tal has flowed from de­vel­op­ing to de­vel­oped coun­tries for many years, peak­ing at US$800 bil­lion (RM3.5 tril­lion) in 2008 when the Asian fi­nan­cial cri­sis erupted. Net trans­fers from de­vel­op­ing coun­tries last year came close to US$500 bil­lion, slightly more than in 2015.

Most fi­nan­cial flows to de­vel­op­ing and tran­si­tion economies ini­tially re­bounded fol­low­ing the 2008 cri­sis, peak­ing at US$615 bil­lion in 2010, but be­gan to slow there­after, turn­ing neg­a­tive from 2014. Such a multi-year re­ver­sal in global flows has not been seen since 1990. Neg­a­tive net re­source trans­fers from de­vel­op­ing coun­tries are largely due to investments abroad, mainly in safe, low-yield­ing United States Trea­sury bonds. In the first quar­ter of last year, 64 per cent of of­fi­cial re­serves were held in US dol­lar­de­nom­i­nated as­sets, up from 61 per cent in 2014.

By in­vest­ing abroad, de­vel­op­ing coun­tries may avoid cur­rency ap­pre­ci­a­tion due to ris­ing for­eign re­serves, and thus main­tain international cost com­pet­i­tive­ness. But such investment choices in­volve sub­stan­tial op­por­tu­nity costs as such re­sources could in­stead be used to build in­fra­struc­ture, or for so­cial investments to im­prove ed­u­ca­tion and health­care.

The African De­vel­op­ment Bank es­ti­mates that African coun­tries held be­tween US$165.5 and US$193.6 bil­lion in re­serves on av­er­age be­tween 2000 and 2011, much more than the in­fra­struc­ture fi­nanc­ing gap es­ti­mated at US$93 bil­lion yearly. The so­cial costs of hold­ing such re­serves range from 0.35 per cent to 1.67 per cent of gross do­mes­tic prod­uct (GDP). In­vest­ing about half of these re­serves would go a long way to meet in­fra­struc­ture fi­nanc­ing needs on the con­ti­nent.

This high op­por­tu­nity cost is due to the bi­ased na­ture of the international fi­nan­cial sys­tem in which the US dol­lar is the pre­ferred re­serve cur­rency. As there is no fair and ad­e­quate international fi­nan­cial safety net for short-term liq­uid­ity crises, many de­vel­op­ing coun­tries, es­pe­cially in Asia, have been ac­cu­mu­lat­ing for­eign re­serves for “self-in­sur­ance”, or more ac­cu­rately, pro­tec­tion against sud­den cap­i­tal out­flows or spec­u­la­tive cur­rency at­tacks which trig­gered the Asian fi­nan­cial cri­sis.

Less volatile than short-term cap­i­tal flows, for­eign di­rect investment (FDI) in de­vel­op­ing coun­tries was ris­ing from 2000, peak­ing at US$474 bil­lion in 2011. But since then, FDI has been fall­ing to US$209 bil­lion last year, less than half the US$431 bil­lion in 2015. Most FDI to de­vel­op­ing coun­tries con­tin­ues to go to Asia and Latin Amer­ica, while fall­ing com­mod­ity prices since 2014 have de­pressed FDI in re­sourcerich Sub-Sa­ha­ran and South Amer­i­can coun­tries. Fall­ing com­mod­ity prices are also likely to re­duce FDI flows to least de­vel­oped coun­tries (LDCs), which need re­source trans­fers most, but only re­ceive a small pos­i­tive net trans­fer of re­sources.

Bank lend­ing to de­vel­op­ing coun­tries has been de­clin­ing since mid-2014, while long-term bank lend­ing to de­vel­op­ing coun­tries has been stag­nant since 2008. The lat­est Basel cap­i­tal ad­e­quacy rules also raise the costs of both risky and long-term lend­ing for investments.

Port­fo­lio flows to de­vel­op­ing coun­tries have also turned neg­a­tive in re­cent years. De­vel­op­ing coun­tries and economies in tran­si­tion ex­pe­ri­enced net out­flows of US$425 bil­lion in 2015 and US$217 bil­lion last year. The ex­pected US in­ter­est rate rise and poorer growth prospects in de­vel­op­ing coun­tries are likely to cause fur­ther short-term cap­i­tal out­flows and greater ex­change rate volatil­ity.

Al­though aid flows have in­creased, aid’s share of GDP de­clined af­ter 2009. The re­cent in­crease has been more than off­set by count­ing ex­pen­di­ture on refugees from de­vel­op­ing coun­tries as aid. When refugee ex­pen­di­tures are ex­cluded from the aid num­bers, the 6.9 per cent in­crease in 2015 falls to a mea­gre 1.7 per cent. In five De­vel­op­ment As­sis­tance Com­mit­tee (DAC) coun­tries, aid num­bers fell once refugee costs were omit­ted. Thus, WESP 2017 em­pha­sises the im­por­tance of de­com­pos­ing aid com­po­nents and of sep­a­rately track­ing coun­try pro­gram­mable aid (CPA).

At 0.30 per cent of the gross na­tional in­come (GNI) of Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) DAC mem­bers, of­fi­cial aid falls far short of the 1970 com­mit­ment by de­vel­oped coun­tries to pro­vide aid equiv­a­lent to 0.7 per cent of GNI. Only six OECD coun­tries — Den­mark, Lux­em­bourg, Nether­lands, Nor­way, Swe­den and the United King­dom — met or ex­ceeded the UN tar­get in 2015. But aid to LDCs has been de­clin­ing since 2010; even bi­lat­eral aid de­clined by 16 per cent in 2014.

Mean­while, dis­burse­ments by mul­ti­lat­eral de­vel­op­ment banks only in­creased marginally in 2015 while new com­mit­ments de­clined. Com­mit­ments by the World Bank’s con­ces­sional lend­ing arm, the International De­vel­op­ment As­so­ci­a­tion (IDA), which re­lies on donor con­tri­bu­tions to pro­vide con­ces­sional cred­its and grants to low-in­come coun­tries, de­clined in real terms dur­ing 2014 and 2015.

De­vel­op­ing coun­tries also lost an es­ti­mated US$7.8 tril­lion in il­licit fi­nan­cial flows (IFFs) be­tween 2004 and 2013 through tax avoid­ance, trans­fer-pric­ing, trade mis-in­voic­ing and profit shift­ing by transna­tional cor­po­ra­tions (TNCs). Over the past decade, IFFs were of­ten greater than com­bined aid and FDI flows to poor coun­tries.

Hence, WESP 2017 calls for a com­plete re­vamp of the international fi­nan­cial sys­tem to ad­dress these de­vel­op­ment fi­nance is­sues and en­sure needed re­source trans­fers to de­vel­op­ing coun­tries. Fail­ing to do so will put the SDGs at risk. In­ter Press Ser­vice

Anis Chowd­hury, a for­mer pro­fes­sor of eco­nom­ics at the Univer­sity of Western Syd­ney, held se­nior United Na­tions po­si­tions dur­ing 2008-2015 in New York and Bangkok. Jomo Kwame Sun­daram, a for­mer eco­nom­ics pro­fes­sor and United Na­tions As­sis­tant Sec­re­tary-Gen­eral for Eco­nomic De­vel­op­ment, re­ceived the Wass­ily Leon­tief Prize for Ad­vanc­ing the Fron­tiers of Eco­nomic Thought in 2007


In­ter­nally dis­placed peo­ple at a makeshift camp on the out­skirts of Baidoa in So­ma­lia. Least de­vel­oped coun­tries like So­ma­lia re­ceive lit­tle net trans­fer of re­sources.

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