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Contributions from
the Column
Studies and reports
AIDS drugs could soon be a lot cheaper in Africa
NGOs concerned about automony of development policy
Working together to protect the rainforest
Failing states: in search of a development policy concept
A new international financial architecture not in sight
1/2004 |
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[ Taking stock six years after the Asian crisis ]
A new international financial architecture
not in sight
The financial crises of the 1990s provided graphic evidence of the instability of unregulated international financial markets. In the wake of the 1997/98 Asian crisis in particular, a global debate ignited on the need and scope for a “new financial architecture”. In the meantime, that debate has lost momentum. At the same time, private capital flows to the developing world have largely dried up: since 1996, new inflows have been overtaken by debt repayments and interest paid. How should this trend be appraised? At a conference of the organisation World Economy, Ecology and Development (WEED) staged at the end of November in Berlin, opinion was divided. Most participants saw the lack of private capital as harmful; others spoke of an opportunity for poor countries to reflect on their own strengths.
Stephany Griffith-Jones from the University of Sussex belonged to the former group and called for action to increase private capital flows to developing countries. At the same time, however, she said the stability of international financial markets needed to be improved to alleviate harmful side-effects. Four requirements had to be met, she told the conference: anticyclical regulation of capital flows (i.e. action to curb the development of speculative bubbles and boost capital inflows in the face of impending outflow), provision of (publicly financed) liquidity in times of crisis, a standard procedure for solving debt crises and sustainable financing of development, partly from newly created sources such as international taxes. Griffith-Jones complained that only one of the building blocks of a new financial architecture – the Basel II equity rules for banks which operate internationally – had so far been negotiated, and that was a step in the wrong direction: the foreseeable impact of Basel II, she said, would be to throttle back private capital flows to developing countries even more.
Martina Metzger of the Berlin financial market research institute BIF went even further, asserting that Basel II cannot even be seen as an instrument for preventing crises. On the contrary, she said, tighter equity rules would make banks’ behaviour even more procyclical (generous loans when economic and financial figures are good, withdrawal of capital as soon as figures deteriorate). What’s more, she added, Basel II lends extra weight to the judgements of rating agencies, because the amount of equity that needs to be deposited in future will depend on the borrower’s rating. In the past, rating agencies drew repeated criticism for having aggravated financial crises by their actions. Consequently – Metzger concludes – Basel II is more likely to increase, rather than decrease the instability of the financial markets.
Erich Harbrecht of the German Bundesbank, however, defended the new equity rules. As regards the possible implications for private development finance, he said, Basel II was never designed to be a development policy tool. The Bundesbank representative also disagreed with the majority of other conference participants about the causes of financial crises in recent years. Harbrecht sees the biggest problems in the countries concerned, whereas most of the other participants primarily blame shortcomings of the international financial system. Simone Giger
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