THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT

1

Heiner Flassbeck Director

Division on Globalization and Development Strategies, UNCTAD

THE INTERNATIONAL FINANCIAL SYSTEM AND

CONSEQUENCES FOR DEVELOPMENT

2

PER CAPITA GDP GROWTH BY REGION AND ECONOMIC GROUP, 1981-2007

(Per cent)

-5

0

5

10

1981-1989 1990-2002 2003-2007WorldDeveloped EconomiesEconomies in transitionDeveloping Economies

-5

0

5

10

1981-1989 1990-2002 2003-2007AfricaAmericaWest AsiaEast and South Asia

Developing Economies

3

Is the international adjustment mechanism working?

Is the RER relevant? What are the sources of divergence?

Size (2006): US, -6.6%GDP, $870 bl,

China: +10%GDP $240 bl,

Japan: +4%GDP $170 bl.

pattern:

large surplus economies -> recurrent depreciations Japan, Germany, Switzerland and Malaysia

deficit economies -> recurrent appreciations

Euro area, Hungary, New Zealand UK, Australia, Turkey, India, South Africa.

WIDENING OF THE GLOBAL IMBALANCESSize and pattern

4

CARRY TRADE: a “species” of a broader “genus”•A source of imbalance for some economies.

•An amplifying factor in the divergent pattern of global imbalances.

DESTABILIZING SPECULATION

•Interest rate differentials and relatively stable currencies induce short terms speculation as in the pre-90s crisis scenario.

•Floating exchange rates can move in the wrong direction

Market price determination in the international capital markets

"False pricing" in the international product markets

Widening of the imbalances and worldwide financial fragility

5

Uncovered interest returnNominal exchange-rate changeInterest rate differential

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND BRAZILIAN REAL, 2005-2007

Krona

-10

-8-6

-4

-20

24

6

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Dollar

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Real

-10

-8-6

-4-2

02

46

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Note: A positive change in the exchange rate means an appreciation of the corresponding currency vis-à-vis the yen.

6

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA, 2005-2007

Krona

-10

-8-6

-4

-20

24

6

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Dollar

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Turkey New Lira

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Hungarian Forint

-10-8-6-4-20

2468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

7

UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE

DIFFERENTIALS, 1996-2006

LATIN AMERICALatin America

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

60

70

80

90

100

110

120

130

140

Real exchange-rate change

Inflation rate differential

Real exchange-rate trend (right scale)

Latin America

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

Uncovered interest return

Interest rate differential

Nominal exchange-rate changeInterest rate differentials induced by anti-inflation monetary policies

drive nominal appreciations + inflation differentials = real appreciations

undermining international competitiveness in exchange rate

sensitive exports.

8



SUB-SAHARAN AFRICASub-Saharan Africa

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

60

70

80

90

100

110

120

130

140




Sub-Saharan Africa

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3Uncovered interest return


Nominal exchange-rate change

Speculation opportunities are fading and appreciation trend leveled off, but volatility

persist

9



EASTERN EUROPEEastern-European Countries

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

0

20

40

60

80

100

120

140

160

180

200




Eastern European Countries

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3




Speculation opportunities, appreciation trend and volatility persist despite the reduction in interest

rates.

10



ASIAAsia

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

60

70

80

90

100

110

120

130

140




Asia

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3




Little speculation opportunities, moderate average appreciation and volatility.

11

REAL COSTS: EXCHANGE-RATE VOLATILITY AND REAL INTEREST RATE DIFFERENTIALS, 1995-2006 (per cent)

Asia

y = 0.8253x + 0.0766-5

0

5

10

15

-5 0 5 10 15

Real exchange-rate appreciation

Un

cove

red

inte

rest

ra

te

Latin America

y = 0.9588x + 2.7056-5

0

5

10

15

-5 0 5 10 15


Un

cove

red

inte

rest

ra

te

Sub-Saharan Africa

y = 1.0552x + 1.3406-5

0

5

10

15

-5 0 5 10 15


Un

cove

red

inte

rest

ra

te

Eastern-European countries

y = 0.6289x + 2.6447-5

0

5

10

15

-5 0 5 10 15


Un

cove

red

inte

rest

ra

te

Real exchange rate changes and uncovered interest returns in selected economies, 1995-2006 (per cent)

12

DOMESTIC POLICIES, OPEN CAPITAL MARKET AND EXCHANGE RATE MANAGEMENT:

BEYOND STANDARD TRILEMMAS

National policies to prevent speculation and overvaluation:

•Explore non-monetary anti-inflationary policies and resilience to depreciation

•Temporary measures to prevent speculative flows

while moving towards structurally lower interest rates differentials

Globally coordinated policies to reduce global imbalances:

•Floating and unilateral hard pegs "no panacea"

Intermediate or regional cooperative schemes

•Code of conduct

•Multilateral oversight and negotiations

•Identification of the size of the deviation and

enforcement of the necessary correction by a multilateral body

Multilateral monetary system as necessary as the multilateral trading system

13



BRAZIL

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

40

60

80

100

120

140

160

Real exchange-rate changeInflation rate differential


-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Uncovered interest returnInterest rate differentialNominal exchange-rate change

14



TURKEY

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

20

40

60

80

100

120

140

160

180



-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


15



MEXICO

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

60

70

80

90

100

110

120

130

140



-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


16



CHINA

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

60

70

80

90

100

110

120

130

140



-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


17

Asia: China, Hong Kong (China), India, Indonesia, Rep. Korea, Malaysia, Pakistan, Philippines, Singapore, Taiwan (Province of China) and Thailand.

Latin America: Argentina, Bolivia, Brazil, Colombia, Dominica, Mexico, Uruguay and Venezuela.

Eastern European Countries: Czech Republic, Hungary, Lithuania, Poland, Russian Federation and Bulgaria.

Sub-Saharan Africa: Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Kenya, Mali, Mauritius, Niger, Senegal and South Africa.

SELECTED ECONOMIES PER REGION

18

19

CURRENT ACCOUNT BALANCE AS PER CENT OF GDP, 1995–2006

-8

-6

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005

G7Developing economiesGermanyJapanUnited States

'06-8

-6

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005G7Developing economies: AsiaDeveloping economies: AmericaDeveloping economies: AfricaEconomies in transition

'06

20

UNIT LABOUR COSTS, 1993–2006(United States dollars, 1993 = 100)

Note: Unit labour costs: whole economy excl. Slovakia and Taiwan Province of China (industry), and the United States (non-agriculture). Eastern European economies refer to Czech Republic, Estonia, Hungary, Lithuania, Poland, Slovakia and Slovenia.Asia refers to Indonesia, the Philippines, the Republic of Korea, Singapore, Taiwan Province of China, and Thailand. Latin America refers to Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru.Developed economies refer to Australia, Austria, Belgium, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and Switzerland.

60

70

80

90

100

110

120

130

140

150

160

1993 1995 1997 1999 2001 2003 2005

G7Other developed economiesGermanyUnited StatesJapan

'06

60

80

100

120

140

160

180

200

220

1993 1995 1997 1999 2001 2003 2005

Eastern European economies

Latin America

Asia

China

'06

21

REAL EFFECTIVE EXCHANGE RATES, 1995–2006(1995 = 100)

40

50

60

70

80

90

100

110

120

130

1995 1997 1999 2001 2003 2005

Japan Germany

Switzerland China

'0640

50

60

70

80

90

100

110

1995 1997 1999 2001 2003 2005

Republic of Korea Malaysia

Thailand Indonesia

'06

22

REAL SHORT-TERM INTEREST RATE AND REAL GDP GROWTH, 1986–2006

(Per cent)

Note: South and South-East Asia: Bangladesh, India, Indonesia, Malaysia, the Philippines, the Republic of Korea, Singapore, Taiwan Province of China, and Thailand. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

South and South-East Asia, incl. China

-8

-6

-4

-2

0

2

4

6

8

10

12

1986 1990 1994 1998 2002 2006

Real short-term interest rate, 1998–2006

Real GDP growth

Real GDP growth, trend

South and South-East Asia

-8

-6

-4

-2

0

2

4

6

8

10

12

1986 1990 1994 1998 2002 2006

Real short-term interest rate

Real GDP growth

Real short-term interest rate, trend


23


(Per cent)

Note: Latin America: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay and Venezuela. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

Latin America

-8

-6

-4

-2

0

2

4

6

8

10

12

1986 1990 1994 1998 2002 2006

Real short-term interestrate, trendGDP growth, trend

Latin America, excluding Brazil

-8

-6

-4

-2

0

2

4

6

8

10

12

1986 1990 1994 1998 2002 2006

Real short-term interestrate, trendGDP growth, trend

24


(Per cent)

Note: Eastern European Economies: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. Trend: polynom 5 grades. Real short-term interest rates are GDP weighted.

Eastern European economies

0

2

4

6

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


Real GDP growth



25


(Per cent)

Note: Sub-Saharan Africa: Burkinga Faso, Côte d'Ivoire, Mauritius, Niger, Senegal, South Africa, Togo, Cameroon, Central African Republica, Chad, Republic of Congo, Gabon, Lesotho, Malawi, Nigeria, Sierra Leona, and Uganda. Trend: polynom 5 grades.Real short-term interest rates are GDP weighted.

Sub-Saharan Africa

-8

-6

-4

-2

0

2

4

6

8

10

12

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Real GDP growth



26


(Per cent)

United States

-8

-6

-4

-2

0

2

4

6

8

10

12

1970 1976 1982 1988 1994 2000 2006



European Union 6

-8

-6

-4

-2

0

2

4

6

8

10

12

1970 1976 1982 1988 1994 2000 2006



Documents

THE INTERNATIONAL FINANCIAL SYSTEM AND CONSEQUENCES FOR DEVELOPMENT