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Audioblog: Ask the experts – how can the international financial architecture work for development?

Date: 
6 February 2014

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Leah Worrall is a Project Officer at ODI working on the European Report on Development 2014.

Ghana stock exchange - World Bank (Creative Commons licensed via Flickr)

Experts from the public and private sector gathered at the Overseas Development Institute on the 31 January 2014 to discuss how the international financial architecture can be made to work for development, and in particular for the poorest and most vulnerable countries. The session was chaired by Dr Dirk Willem te Velde, Head of the International Economic Development Group and team leader of the European Report on Development 2014 on the role of finance in the post-2015 context.

The experts interviewed outline a number of positive trends in international finance, including increases in cross-border private capital flows (particularly FDI) to low income countries (LICs). However, some elements of the international financial architecture are still incoherent with the aim of a global partnership for development, or the Millennium Development Goal (MDG) 8, which has slowly dropped by the wayside of the MDGs agenda. In the podcasts below, experts highlight a number of actions that can help to promote policy coherence in the international financial and economic architecture for development in the poor and most vulnerable countries.

Prospects for cross-border capital flows

Professor Stephany Griffith-Jones – ODI Research Associate and Financial Markets Director at the Initiative for Policy Dialogue, Colombia University

Stephany argues that despite increases in cross-border capital flows to developing countries (including FDI and more recently portfolio flows) there are signs for concern over US monetary policy. Though US tapering has not yet hit LICs (apart from through interest rates) it will be likely to do so through a slowdown in trade with emerging economies and contagion.

https://audioboo.fm/boos/1896887-professor-stephany-griffith-jones-odi-r...

Dr Valpy Fitzgerald – Professor of International Economics and Finance, Oxford University

Valpy highlights that overall the prospects are good, demonstrating that both direct investment and lending to poorer countries have increased again post-crisis. However there are two problems to address: (1) most FDI is asymmetrical, going into extractive industries rather than sectors more important to development, and (2) short-term capital flows tend to be very volatile, with a risk of contagion creating instability in capital flows to poor countries.

https://audioboo.fm/boos/1896915-dr-valpy-fitzgerald-professor-of-intern...

Avinash Persaud – Chairman of Intelligence Capital Ltd and Elara Capital Ltd, and Executive Fellow at the London Business School

Avinash identifies two forces behind recent decreases in cross-border private capital flows: (1) increased banking regulation and increased host country regulation, and (2) rising interest rate expectations in developed countries. He concludes that the next couple of years will be difficult period for LDCs to attract international private sector capital flows.

https://audioboo.fm/boos/1896949-avinash-persaud-chairman-of-intelligenc...

Pieter Stek – Member of the Commission on Coherence of the International Economic and Financial Architecture, at the Advisory Council on International Affairs, The Hague

Pieter identifies factors that need to be addressed within the poorest and most vulnerable countries to attract capital flows, including civil strife, missing structures to attract external finance, weak institutions and weak policies. If countries work on these elements (including through drawing on assistance from multilateral institutions) their prospects will improve.

https://audioboo.fm/boos/1896985-pieter-stek-member-of-the-commission-on...

Positive elements and risks in the international financial architecture for mobilising and using finance effectively for development

Thierry Philliponnaux – Secretary General of Finance Watch

Thierry argues that the priority is to get the financial system back on track, as large banks are currently providing very little capital to society and the productive economy. There are two steps to achieving this: (1) Large banks need to direct necessary capital to the real economy, and (2) Basel III needs to be addressed, which provides a big disincentive to lend to developing countries/entities. He argues we need to start discussing a potential Basel IV and convince regulators to change the way loans to developing countries are accounted for in terms of capital requirements.

https://audioboo.fm/boos/1896971-thierry-philipponnat-secretary-general-...

Judith Tyson – former investment banker and incoming Research Fellow at ODI, specialising in international finance

Judith details that cross-border capital flows have been quite strong post-crisis, particularly FDI, and there have been positive trends in bond issuances. However risks exist through withdrawal of capital from emerging markets, and markets overplaying their reaction to quantitative easing, leading to strong and damaging capital outflows. To help mobilise flows developing countries need to improve business prospects and develop supportive policy (in capital account management and in relation to the senders of capital flows).

https://audioboo.fm/boos/1896936-judith-tyson-former-investment-banker-a...

Avinash Persaud – Chairman of Intelligence Capital Ltd and Elara Capital Ltd, and Executive Fellow at the London Business School

Avinash argues the principle challenge for emerging markets and LDCs is that private capital tends to come in only two forms, feast or famine. There are two main solutions: (1) developing countries themselves can use a wide range of instruments, such as macro-prudential controls to disincentive capital inflows in the time of feast, and (2) international arrangements for insurance at times of famine.

https://audioboo.fm/boos/1896963-avinash-persaud-chairman-of-intelligenc...

Professor Stephany Griffith-Jones – ODI Research Associate and Financial Markets Director at the Initiative for Policy Dialogue, Colombia University

Stephany highlights a large proportion of FDI flows to developing countries, a positive trend as FDI tends to be more stable than other flows and can bring technology and access to markets. However the risk of reversibility of major capital outflows remains, which tends to happen very quickly and leads to depreciating exchange rates, forcing banks to tighten monetary and fiscal policies, leading to lower growth and employment and higher poverty, posing the risk of crisis. A stronger international financial architecture is needed to help compensate these countries during times of external shocks, either through their trade accounts or capital accounts.

https://audioboo.fm/boos/1896899-professor-stephany-griffith-jones-odi-r...

Dr Valpy Fitzgerald – Professor of International Economics and Finance, Oxford University

Valpy identifies that as the BRICS have moved up in the global economy, the World Bank and IMF has shifted to doing more business with poorer and more vulnerable countries. The consequence is that these institutions will have to adapt their policy models to more difficult circumstances. Bodies such as the G20 now have increased representation from the BRICS but the poorer countries are still not really represented. He argues this is of concern because private sector finance will become increasingly important for poorer countries, requiring regulatory institutions to support that process.

https://audioboo.fm/boos/1896928-dr-valpy-fitzgerald-professor-of-intern...

Pieter Stek – Member of the Commission on Coherence of the International Economic and Financial Architecture, at the Advisory Council on International Affairs, The Hague

Pieter identifies a greater level of competition between countries because more knowledge is available (through the internet and availability of mobiles phones) that applies pressure to the authorities in these countries to create opportunities. Public sector initiative is also important, with the need to tap into existing knowledge and experience, through advice from multilaterals and from their own institutions.

https://audioboo.fm/boos/1896991-pieter-stek-member-of-the-commission-on...

International action on policy coherence

The experts raise important issues that need to be tackled for policy coherence in the international economic and financial architecture, and also highlight some recent positive trends and risks in private finance to poor and vulnerable countries. These are also some important actions for consideration by the international community in the lead-up to the post-2015 agenda, including: the need for reform of Basel III, the development of business prospects and supportive capacity in developing countries (including macro-prudential controls), the need for international shock compensation mechanisms, increasing the voice of poorer and more vulnerable countries in the international community, and increasing access to and use of knowledge and expertise from multilaterals and domestic institutions in developing countries.

Leah Worrall is Project Officer for the International Economic Development Group at ODI.