Mon Dieu! French Way to Weaning World Off USD

And so France takes the helm of the G20. A few months ago, French President Nicolas Sarkozy--like his predecessor Charles de Gaulle of "exorbitant privilege" fame (see Barry Eichengreen's new book that uses this term for its title)--was calling for an international monetary system not so biased towards the US dollar. However, in his recent visit to the capital of subprimelandia, Washington DC, he had to soft-pedal this message somewhat:

French President Nicolas Sarkozy assured President Barack Obama on Monday he recognized the U.S. dollar's role as the world's "No. 1 currency," as the two leaders pledged to coordinate ideas for reforming the international economic system. Sarkozy, pushing France's goals as the new head of the Group of 20 powers, came to Washington with an agenda that included broaching the sensitive subject of blunting the dollar's longtime status as the top global reserve currency.

But he was quick to try to defuse any tensions with his hosts over the growing international challenge to dollar dominance, which has been backed by emerging giants like China but has gained little traction in Washington. Treading cautiously, Sarkozy spoke to Obama about his proposals for reforming the international monetary system but did not press for any moves that would reduce the dollar's value, a U.S. official said after the leaders' joint statements.

Awww...ain't that sweet. Gotta love that back-slapping and euphemism:

"I've always been a great friend, a tremendous friend of the United States and I know how important a role the U.S. plays in the world, how important the U.S. dollar is as the world's No. 1 currency," Sarkozy told reporters as he sat beside Obama after White House talks.

Sarkozy did not publicly repeat his call for starting to wean the world off decades of dollar-dependence, but talked more generally of the need for forge ahead with "new ideas for a new century" to promote economic stability. The U.S. official, who spoke on condition of anonymity, said both leaders agreed the dollar's role in the world should be determined by international markets and investors.

Let's just say that the hyperactive Sarkozy has his work cut out for him as he sets about his (many, self-imposed) tasks:

Sarkozy wants to use his run at the G20 helm in 2011 to start, if not finish, reforms of the monetary system at a time when many countries are tempted to let their currency drop to promote exports and growth after the worst downturn since World War Two, even if that can be at each other's expense.

Paris is also pressing for international efforts to impose greater transparency in commodity markets trading and pricing, and for tougher regulation of trading in commodity derivatives along the lines pursued for other investment derivatives in the wake of the financial markets crisis that preceded the economic downturn of 2008-2009...

Sarkozy is trying to rally the G20 to the idea of a more diversified monetary system after decades in which the U.S. dollar has served as the world's reserve currency and a major unit of international trade settlement.

Perhaps in the same way that the Chinese would be more receptive to Singapore than the US about revaluing the yuan, the United States would be more receptive to France than China about loosening its asphyxiating embrace on the international monetary system. Part of rebalancing the world economy will result in alternative reserve and trade settlement instruments. Mutual accommodation is the name of the day.

G-20 Cops Out on Currencies, CA Balances

Continuing from the previous post, there has been some lip service paid to what must be done about "international currency war" and global economic imbalances in the G-20 communique. For the former, currencies have been mentioned for the first time, though chronic surplus-running countries have repeated my point that helicopter dropping paper money alike what's being done by a certain North American country is indeed tantamount to declaring currency war. For the latter, there were no numerical percentage targets given to running a current account deficit or surplus as suggested by US Treasury Secretary Tim Geithner (plus/minus 4%). Supposedly, they're to be investigated and discussed further, but there's no definitive timetable. In other words, it's been left alone for now. As for using the IMF for beefed up macroeconomic surveillance, that unsurprisingly went untouched.

So, it's likely same old, same old. Continue as you were--America certainly appears to have no intention of laying up on "quantitative easing," while chronic surplus-running countries take it as a reason not to take US overtures seriously. Market News International offers a thoughtful analysis on what happened at the gathering. Recession in the heartland of subprime has actually reduced the US external deficit to below 4%, making China and Germany the main parties in American crosshairs with such a figure. Unsurprisingly, neither are very happy about it:

As expected, the G20's final communique did pledge to move towards market-determined exchange rates, to avoid competitive devaluations, and to use "the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels." But the group failed to agree on any concrete plan for reducing global imbalances and prevent growing unilateralism from harming the world economic recovery.

A U.S. proposal to set numerical limits on current account balances was shunted to the International Monetary Fund for further study, leaving the G20 delegates saying that "indicative guidelines to be agreed" would provide a framework for addressing global imbalances at some indeterminate point in the future.

The woolly nature of the communique, and the at times confrontational briefings held by G20 delegates following its publication, left the impression that the world's major advanced and emerging market economies failed to make any real progress in arriving at an agreement that will meaningfully tackle imbalances.

Financial Stability Board Chairman Mario Draghi said that U.S. Treasury Secretary Timothy Geithner's proposal, which would seek to limit current account surpluses and deficits to 4% of GDP by 2015, is "on the table" and deserves "close attention, consideration and discussion." Instead of that proposal, the final communique saw the G20 asking the IMF to study the causes of large imbalances and the range of policies needed to correct them.

In any case, the "indicative guidelines" won't be ready by the time G20 leaders meet for the summit meeting in Seoul in November, Japanese Finance Minister Yoshihiko Noda said, without indicating when they would be ready. While it all might have sounded like passing of the buck, most officials here have not hesitated to talk up the level of cooperation and agreement reached during these recent days of talks.

But German Economic Minister Rainer Bruederle, in the best blunt German fashion, provided some corrective to the very public cordiality on display here when he lashed out Saturday at both the proposed fresh round of quantitative easing by the U.S. Federal Reserve and Geithner imbalance proposal.

While Fed Chairman Ben Bernanke has said that such a move would be motivated by fears of a fresh U.S. recession, "I have tried to make clear in my contribution that I think this is the wrong way," Bruederle told reporters.

Moreover, the Fed's policy belied the U.S. charge that some emerging countries were manipulating their currencies, he argued. "An excessive increase in (the quantity of) money to me represents indirect manipulation" of the exchange rate toward a weaker dollar, he charged, arguing that major emerging countries shared this view. "This was also the criticism of the BRIC states (Brazil, Russia, India and China), he continued. "They say that (the United States is) also manipulating exchange rates because (it is) pumping so much liquidity (into the markets)."

Bruederle also said that Geithner's proposal to cut imbalances smacked of "planned economic thinking." The IMF is forecasting Germany's current account surplus to rise to 6.055% of GDP this year from 4.890% last year before shrinking to 3.884% by 2015. Speaking later, U.S. Treasury Secretary Timothy Geithner claimed that he hadn't heard Bruederle's comments. Although he wouldn't comment directly, he did reaffirm the U.S. government's support for a strong U.S. dollar. "We recognize our responsibility for financial stability that comes with the dollar," he said.

But Germany's wasn't the only opposition to the Geithner plan. As early as late Friday, Noda noted the level of caution -- if not outright opposition -- among G20 countries to the Geithner proposal. Noda was more diplomatic about the Geithner proposal than his German colleague, but also noted that Japan's current account surplus as a percentage of GDP stood at 2.8% last year "and is likely to stay well within the range through 2015." He said Friday that the current account balance is a useful reference point for measuring imbalances, but also argued that various factors affect current account flows and that the causes of surpluses and deficits vary from country to country.

One mystery of the Korea meetings was the position of China, now set to replace Japan as the world's second-largest economy. Chinese officials were out in force, but weren't talking to the media and, apparently, weren't doing much talking to their fellow delegates either.

An official Xinhua News Agency report filed in the hours after the G20 meetings said that Geithner's proposal was "met with negative sentiment...There was doubt across the board about Geithner's proposal. China, Russia, Germany and Saudi Arabia's trade surpluses are way above Geithner's proposed limit, while the U.S.'s trade deficit stands at 3% of GDP," it said, suggesting that the Xinhua reporters had been briefed by otherwise inaccessible Chinese government representatives.

Geithner told reporters after the release of the communique that "China has played a constructive pragmatic role and is very supportive of finding a multilateral framework." But Noda said late Friday that China hadn't made its position on the proposals clear, and there was no indication of any more clarity by the end of the talks on Saturday.

(The Chinese at least did better than the Brazilians, whose central bank governor Henrique Meirelles and Finance Minister Guido Mantega -- who bears responsibility for being the first to publicly label the current situation a global "currency war" -- didn't even show up at the G20 meeting. They sent their deputies.)

Still, the Chinese may just have been letting the advanced countries argue among themselves to sideline the Geithner plan. The IMF is forecasting China's current account surplus as a percentage of GDP to fall to 4.697% this year from 5.96% in 2009, and then to gradually rise over the following years to 7.796% by 2015, which would make China one of the biggest targets if something like the Geithner plan were ever agreed.

The current account surplus lies at the heart of a sharp disagreement between the Chinese government and the IMF, and specifically the fund's assertion that the surplus points to a "substantially undervalued" yuan. Beijing argues that the IMF's assessment is flawed in that the current account surplus has been falling and, according to its forecasts, will continue to do so.

There are interesting details in the proposal like natural resource exporters Russia and Saudi Arabia being given more leeway in running external surpluses. The absence of Brazilian finance bigwigs is noteworthy, too. As ever, though, we seem to return to the G-2:

As with previous meetings of this nature, there was also little progress on the row over currencies and currency intervention. Bruederle may have attacked the U.S.' "indirect manipulation," but there was little public comment on China's very direct manipulation of the yuan. Many believe it's a primary cause of global imbalances and Geithner believes it is prompting other countries to intervene in foreign exchange markets to hold down the value of their currencies.

The G20 communique included a vow to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." But the statement also bears the hallmarks of the Chinese leadership, with a pledge by the advanced economies -- particularly those of reserve currencies (ie. the U.S. dollar, euro and yen) -- to "be vigilant against excess volatility and disorderly movements in exchange rates."

It's not a question of China sharply appreciating the yuan, Beijing argues, but of the U.S. stabilizing, rather than debasing, the dollar and getting its own house in order. That's an argument that Washington and Beijing have been having for several years now. The Chinese argument appeared to at least hold its own -- if not win more converts -- at this weekend's G20.

The cooperation which marked the world's response to the global financial crisis has all but evaporated in favor of a very public row among the world's major economies which sounds much like the one that the U.S. and China have been having for all these years. And the G20 talks which just ended here leave the impression that row is set to continue, perhaps for some time.

To be continued when the leaders meet next month in South Korea. Certainly, there is much that's been left unresolved despite the lip service.

Today's US G-20 Gimmick: Geithner on CA Limits

Here's more from the white man & forked tongue department: Perhaps unsurprisingly, the Yanks are first out of the chute prior to this weekend's G-20 gathering in South Korea with yet another plan to get its way. Instead of focusing on undervalued currencies--which it in any case is wont to let go of as you'll soon see in the second paragraph below--their latest tack is calling for limits on the external imbalances participating states can run (got that, China?) There's also a continuation here of the longstanding call to use the IMF as a tool to beat other countries into submission via enhanced surveillance that, surprise, developing countries are not particularly keen on. Aside from having limited participation because of limited IMF reform of voting rights, where's the joy in giving the America a multilateral stick to bash your head with over "currency manipulation"?

At any rate, here is the text of the letter Geithner sent to other G20 member economies in its entirety since it's relatively brief:

First, G20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand. Since our current account balances depend on our own policy choices as well as on the policies pursued by other G20 countries, these commitments require a cooperative effort.

Second, to facilitate the orderly rebalancing of global demand, G20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing the appreciation of an undervalued currency. G20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals. G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates. Together these actions should reduce the risk of excessive volatility in capital flows for emerging economies that have flexible exchange rates.

Third, the G20 should call on the IMF to assume a special role in monitoring progress on our commitments. The IMF should publish a semiannual report assessing G20 countries progress toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward meeting those objectives.

With progress on these fronts, we should reach final agreement in an ambitious package of reforms to strengthen the IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies.

I obviously don't think this will work. I needn't go into why the US is the biggest currency manipulator of them all since no one else in the G-20 is running a fiscal deficit as big as America, clogging its central bank's balance sheet with junk assets with similar gusto, or has interest rate targets in a range including zero. As for using the IMF to police currency manipulation and other dastardly deeds, forget it. Even LDCs competing with China in export markets will not agree to equipping the IMF with powers to do America's dirty work for it.

Apparently, this characteristic Yankee double talk is not being received very well by most of the others:

Group of 20 finance chiefs conclude talks today with the U.S. running into resistance as it pushes targets for current account imbalances as a new way of prodding China and other Asian nations to let their currencies rise...

“Setting numerical targets would be unrealistic,” said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a “command economy” approach. Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify. In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a “step in the right direction” and Australian Treasurer Wayne Swan called it “constructive.”

By turning the focus to current accounts away from currencies, Geithner is hoping China will be more agreeable to accelerating the yuan’s appreciation after limiting its gain to about 2 percent against the dollar since June... The U.S. recommended deficits or surpluses of no more than 4 percent of gross domestic product, Noda said. The International Monetary Fund this month estimated China’s surplus will swell to 7.8 percent of GDP in 2015 from 4.7 percent this year. A current account is the broadest measure of trade because it includes investment and transfer income and it would be hard to achieve any correction in one without a currency shifting...

The G-20 officials are trying to end what Brazilian Finance Minister Guido Mantega calls a “currency war” as next month’s Seoul summit of leaders nears. China’s restraining of the yuan even as it runs a trade surplus and builds currency reserves has been attacked for distorting markets as has the recent slide of the dollar as the Federal Reserve shifts toward easier monetary policy.

Nations caught in the middle such as Brazil and South Korea are embracing capital controls or intervening themselves to stay competitive with China and limit inflows of speculative cash from North America and Europe. This has raised concern from policy makers and investors that the friction will spark a round of devaluations and retaliatory protectionism, derailing an already fragile global economic recovery.

“If we fail to reach an agreement now and delay it to next time, the global economy will face a serious risk and it will unnerve people,” South Korean President Lee Myung Bak told the meeting. The G-20 has long sought ways to rebalance the world economy away from its reliance on excess U.S. demand and Chinese savings. Limiting those talks to foreign exchange is too inflexible for nations with trade surpluses, a South Korean official said. Looking at the current account allows countries to decide on which tools to adopt to reduce imbalances, including currency changes, he said...

The G-20 policy makers are also debating whether to make their first joint comment on currencies since their leaders began meeting in 2008, having previously resisted remarks for fear of alienating China. A draft statement included a pledge to avoid “competitive undervaluation” of exchange rates. The final text is scheduled for release at about 5 p.m. local time.

It should be interesting at least. As the World Bank has noted, the trail of international currency war begins with the United States. To stop the rot, the world needs to clamp down more on America than America needs to clamp down on the world.

South Centre Statement on the Impact of Economic Crisis on Developing Countries

South Centre Executive Director Martin Khor made the following statement (3/25) to a special UN General Assembly dialogue on the world financial and economic crisis and its impact on development:

1. The extraordinarily serious global economic crisis has its origins in the developed countries. Developing countries are not responsible, but they are severely affected, and in ways that are worse than the developed countries, as they also lack the means to counter the effects.

2. Developing countries are only in the past few months beginning to feel the effects of the crisis, due to the lag time in transmission. The crisis will certainly last longer than originally expected, and then it may take even more time before a full recovery.

3. There is thus growing anxiety in the developing world. When he met the British Prime Minister Mr. Gordon Brown, last week, as part of the preparation for the G20 Summit, the Ethiopian Prime Minister Mr. Meles Zenawi warned that African countries could face political chaos if the recession hits at full force. In developed countries such as Britain, the worst problem being faced in the downturn was unemployment. But in Africa, the recession means that "people who were getting some food would cease to get it and instead of being unemployed they would die", said Mr. Zenawi, as quoted in the Financial Times.

4. The developing countries are being hit through two transmission levels—trade and finance. The first transmission channel is through trade. There has been a sudden and steep fall in manufacturing exports, the fall being 30 to 50 percent in many Asian countries. Then there is the fall in demand, prices and export earnings for commodities, affecting especially low-income commodity-dependent countries. On 17 March, The Economist's commodity-price dollar index for all items had fallen by 40 percent compared to a year ago (with declines of 29 percent for food, 44 percent for non-food agriculture products and 56 percent for metals). Earnings from services are also falling, for example in tourism (in the Caribbean tourist arrivals are expected to fall by one third this season) and migrant workers' remittances (a 6 percent drop is estimated by the World Bank for 2009).

5. The second transmission channel is through finance. There is a rapid decline of bank loans to developing countries, whose companies may find it difficult to roll the many hundreds of billions of dollars of foreign loans due this year. There is a reversal of portfolio investment into developing countries, from large inflows in recent years to a sudden huge exit. Net capital flows to emerging markets fell from $929 billion in 2007 to $466 billion in 2008 and will fall further to $165 billion in 2009, according to the estimates by Institute of International Finance. Even FDI is rapidly slowing down because of difficulties in access to credit and economic contraction. If the past record is a guide, aid flows can also be seriously affected in the near future. Trade financing has also been affected by risk aversion, and is choking trade flows; a shortfall of $25 billion in trade financing was reported at a recent WTO meeting.

6. These trade and financial shocks are leading to stresses on the overall balance of payments, with a fall in foreign reserves, and a depreciation of the local currency in some countries. All these together threaten developing countries' ability to service their external debt and avoid a debt default situation. There are already 10 countries that have had to go to the IMF for emergency loans and many other countries are likely to be lining up in the near future.

7. All of the above are causing a stress on the real economy, with declines in GNP and industrial output, a reversal in poverty eradication and a slowdown in social development, as governments face reduced revenues and budgetary stress. Most developing countries are constrained from taking the fiscal expansion measures similar to those of developed countries.

8. There is a need for developing countries to examine the options for national policy on each aspect of the economic crisis and to seek the appropriate policies. However, only some policy measures can be taken at national level, especially if the country is too small to rely on the boosting of domestic-led growth. Regional-level measures are important. And most critical are the reforms, actions and cooperative measures required at the international level.

9. The South Centre views the two issues of reform international actions needed to counter the recession from the perspective of the problems and interests of the developing countries. What are the priority issues for the developing countries, on which action is urgently required?

10. Among the priorities for the South are (1) establishing an international system that fosters financial stability for developing countries; (2) having access to adequate and stable financial resources, as private flows and exports decline; (3) avoidance of financial and debt crises and proper management of crises if they occur; (4) unimpaired access to markets for goods and services; (5) avoiding collateral damage from policies taken by developed countries in response to the crisis; (6) formulating policies for the short and long term for recovery and development, and being able to maintain and expand policy space to implement these policies.

11. There is need to review and reform the international financial and economic systems to ensure the problems that led to the crisis are not repeated and that the international system does not prevent but positively encourages developing countries to have the adequate policy space to deal with the crisis nationally.

12. There are dangers that some crisis measures taken by developed countries may have adverse effects on the South, and thus a need to prevent or offset these actions. For example, developed countries' agriculture subsidies used to be the main distortion in world trade but these are now accompanied by huge subsidies to financial institutions and emerging subsidies to manufacturing (the auto industry). Developing countries lack funds to match these subsidies; they should be allowed to take measures to prevent subsidized service providers like banks and subsidized goods from overwhelming their domestic markets. In the area of tariffs, developing countries should be allowed to exercise their right to use the policy space to raise their applied tariff if it is below the bound tariff. A moratorium against raising applied tariffs would be imbalanced because there is little difference between the applied and bound rates in developed countries, unlike the developing countries.

13. Private investors and public agencies in some developing countries invested in or lent to private and public institutions in developed countries. Developed countries' governments should assure that the assets of developing countries are protected. Pressures from interest groups that exclude developing countries' assets or loans from bailout plans (for example, the suggestion that AIG should only honor claims from nationally owned institutions) should be resisted.

14. New forms of trade protection that affect developing countries should not be introduced. The fiscal stimulus programs should not exclude goods and services from developing countries, as has happened with the Buy American clause in the recent US stimulus package. Developed countries are mainly exempted from the clause due to their membership of the WTO plurilateral procurement agreement, of which most developing countries are not members. There is also need to guard against a new trade protectionist element being proposed in the climate policies and legislation of some developed countries; if this is introduced, it could have a further adverse effect on developing countries' exports and add more stress in this crisis period.

15. A high priority for developing countries is to establish international measures to foster financial stability and avoid activities driven by speculation. The crisis originated from banking deregulation and excessive liquidity creation, causing speculation to be rife in capital and currency markets. Developing countries have been hit by these speculative activities leading to violent fluctuations in capital flows. But because of highly costly self-insurance taken in large stock of reserves, these swings have not created the kind of dislocations seen in 1997 in Asia. An important part of the solution is to reinstall firewalls and regulations to avoid speculative capital flows unrelated to real economic activities (trade and investment) and to establish a system of currency exchange where currency rates reflect underlying fundamentals. This should be a major priority in the reform of the international financial architecture.

16. In the absence of reform and an international system regulating these flows, developing countries must have the policy space and be allowed to undertake national policy measures to regulate capital flows and to defend themselves from speculation. However the required policy space to take the required measures is hindered by (1) IMF-World Bank conditionality that mandates an open capital account; (2) Many North-South free trade agreements that (a) mandate the free and unregulated inflow and outflow of funds; (b) liberalization of financial services, including the entry of foreign institutions for "new financial instruments;" (c) liberalization and deregulation of investments. These barriers (the loan conditionality and the FTA provisions) to the required regulation should be reviewed. Existing FTAs should be reviewed to consider amending clauses that prevent the required regulation. Current negotiations on FTAs such as the EPAs between the EU and the African and Pacific countries should fully take this into account.

17. A major plank of the new financial architecture is the reform of the IMF. Its policy conditionalities have previously not been appropriate in assisting developing countries deal with crises. These include: (1) the policy of an open capital account system, that deregulates capital flows (increasing financial vulnerability) and discourages or prevents capital controls over inflows and outflows; (2) pro-cyclical monetary and fiscal policies that have magnified contractionary conditions; (3) trade policy linked to extreme liberalization of imports and industrial policy based on non-state intervention, which have damaged domestic agriculture and industry in many developing countries. A preliminary review of recent crisis loans to 10 countries (including some developing countries) by the IMF show that contractionary financial and fiscal policies (such as a significant increase in interest rates, and a reduction of government spending) are still maintained as part of the loan conditions.

18. A reform of the IMF is thus crucial. Without the reform, it is premature to expand its resources. The IMF should not impose or promote an open capital account or prevent regulation of capital flows. It should not deal with trade and industrial policies and other development-related policies. The reform process should lead to its creditor role being confined to providing short-term loans to countries to deal with temporary balance of payments difficulties. In that area, its policies should be counter-cyclical and not pro-cyclical. Countries should not be requested to provide loans to the IMF to augment its resources because this would compromise the ability of the IMF to carry out its surveillance function and to discipline the policies of countries that provide the loans. It can obtain resources from the market or from the issuance of SDRs, instead of obtaining loans from governments. The imbalances in the system of governance, with its present serious imbalance in voting rights and decision-making, should also be addressed.

19. One major source of financial instability is that the international reserve currency is the currency of a single country (the United States). This causes instability as availability of reserves for the world economy depends on the reserve currency country (the US) having growing current account deficits. This problem is worsened under the present crisis because of: (a) the absence of multilateral discipline over exchange rate and macroeconomic policies of the US; (b) developing countries' increased vulnerability to fluctuations in capital flows and exchange rates; (c) pro-cyclical behavior of financial markets; (d) developing countries holding large stocks of foreign reserves at very high costs. As an alternative, an international reserves system based on the SDRs could be established. The IMF could distribute SDRs to itself to make it available to members, and there should be greater automaticity in access to it.

20. The new financial architecture should include establishment of a multilateral fund or funds. This could be similar to the two oil facilities set up in the 1970s to assist countries cope with the oil price increases and to prevent a global recession. The fund can assist developing countries counter the recession and to offset the multiple losses of financing caused by reduced exports, migrant remittances, service payments, loans, investments, trade financing, etc. The shortfall facing developing countries may total many hundreds of billions of dollars a year. The fund should thus be of a major amount. The channels of funding and its multiple uses should be determined together by the international community.

21. Developing countries should also be encouraged to explore and expand regional financial cooperation. Examples of this are the Chiang Mai Initiative and its extension in Asia, and the Bank of the South in Latin America.

22. The new financial architecture should also deal with the threat of new debt crises facing developing countries. The current account and overall balance of payments of many developing countries and their foreign reserves are or will be coming under increasing stress, due to a crisis that was not of their doing. The reform process should establish as a priority an international system of debt standstill and debt workout for countries that face debt servicing difficulties. Proposals on this (which originated at UNCTAD) had been rather extensively discussed, including at the IMF, but did not lead to any conclusions. Given the present crisis, this should again be a priority proposal. A new round of debt elimination and debt relief should also be looked at now.

23. For many of the poorer countries, dependence on commodities has revived as a serious problem because the positive conditions and high prices of the past several years have vanished. The stabilization of commodity prices and fair remuneration to producing countries has thus become a priority crisis issue for developing countries. International cooperation on resolving commodity issues should thus be on the reform agenda.

24. The crisis provides an opportunity to address the deficits and imbalances in the governance of global finance and economic issues. The United Nations used to play a central role in policy formulation and in reaching and implementing agreements. However in recent years, too much faith and power had been given instead to the markets and to international financial institutions which supported the drive towards "marketization" and "financialization." At the national level, in developed countries in the centre of the storm, the pendulum has swung, with the leadership and interventionist role of the state being emphasized. The international counterpart of this national-level development should be the strengthening of the role of the United Nations, including its General Assembly and its economic arms, particularly ECOSOC. Greater authority provided to a strengthened and more effective UN should be a crucial element of the new global economic architecture.

25. The UN General Assembly high-level conference in June is an important opportunity for discussion and follow-up actions on the wide range of issues of the crisis and how it affects development, and the remedies required. The South Centre is willing to contribute to the success of this very important event.