To: Organizations addressing Trade-Finance Linkages

1) US Dollar Reserve Status an "Exorbitant Privilege," IMF study says

2) Financial Crisis and Trade: Consultation with Latin American/ Caribbean

governments

3) SOAS Briefing: Financialization of International Commodity Markets

4) Aid for Trade: Is It Helping Small Producers?

5) Gaps in statistics for trade in banking services: New Paper

 

1) US Dollar Reserve Status an "Exorbitant Privilege," IMF says

Last month IMF staff released "The Debate on the International Monetary System,"
a Staff Position Note SPN/09/26 ("the IMF paper").[i]
Though the paper is conspicuously not a Board paper, it represents an important
development in the context of an international policy debate where the dominant
voices had generally ignored the need for tackling the monetary system in a
significant way.
Even at the most recent G20 Leaders meeting, in Pittsburgh, the attending leaders
had shied away from tackling deep reform of the monetary system that could
compromise the central status the US dollar enjoys in it. This was in spite of the
progress on this question made at the UN World Economic and Financial Crisis
Conference, at the UN. Following on some recommendations by the UN
Commission of Experts on the International Financial and Monetary System
("Stiglitz commission") the emerging global consensus at that conference
recognized the insufficiencies of the current world reserve system and "calls by
many States for further study of the feasibility and advisability of a more efficient
reserve system, including the possible function of SDRs in any such system and
the complementary roles that could be played by various regional arrangements."[ii]

The IMF paper says the current international monetary system is something of a
"non-system" and recognizes the reliance of that system on one country as a key
supplier of global reserve assets gives that country an "exorbitant privilege",
because of the greater liquidity of its markets and ability to borrow in its own
currency abroad at a lower cost, while earning the seignorage from issuing a global
currency.

An uncomfortable implication of a system giving primacy to one country's currency

is that the world is "in a sense, hostage to the reserve issuer's ability to preserve its
currency's value."
The paper explores possible responses both on the demand and the supply side.
On the "demand" side, it argues for some alternatives to self-insurance. These
include the possibility of changes to the existing credit lines, though the authors
recognize the "existence of these instruments cannot be seen as a direct substitute
for reserves."[iii] Another alternative that is assessed is that of increasing access to
unconditional resources.

But the most far-reaching aspects of the paper can, undoubtedly, be found in the
section that focuses on the "supply side" where, after declaring that the solutions to
attenuate demand for reserves would at best address only a part of the problem, it
analyzes potential of alternatives to the current dollar-based monetary system.
Alternative systems, the paper argues, would have to be assessed against several
criteria among which trade-offs are inevitable, and it mentions "stability, efficiency,
political feasibility, ease of implementation, and fairness." It does not mention that,
to make matters more complex, the trade-offs are not just among these criteria, but
that each criteria will affect developed and developing, more or less trade-
dependent economies, to different degrees. Systems that are more beneficial to
some from, say, a stability perspective, will be less so to others, the implication
being that trade-offs that can be beneficial to some will not be to others.

A first possible alternative the paper explores is a system where different

currencies can act as reserve assets, but it mentions historical evidence that bi-
currency systems tend to converge to dominant-currency ones. A second
alternative is an SDR-based system. Some advantages of this system the paper
mentions are that it would "spread the exorbitant privilege" across the countries
whose currencies make up the SDR basket, more broadly and faster than in a
multi-currency system, and that it would reduce the need for emerging and
developing countries to export capital to reserve issuing countries as a way to
accumulate reserves, as is the case today. On the other hand, an SDR-
denominated reserve asset would be as good store of value as the stability of the
component currencies, and moving to an SDR-based system would require
considerable global policy coordination, including with the US. Finally, a third
possibility the paper considers is a Global Reserve Asset and Currency. In this
regard, the paper repeats some of the reasoning behind Keynes' proposal for a
'Bancor' and the impact this could have on reducing asymmetric adjustments.

The paper may represent just one more interesting staff paper, but it could also
represent a first step towards official work in the Fund to assess groundbreaking
alternatives to the US dollar-based monetary system. Even in this case, one
wonders if the IMF is the right place to hold this discussion. First, the institution
may not accurately assess the value of regional initiatives which are perceived -
fairly or unfairly-as competition to the global approach that the IMF itself embodies
(the merely cursory mention that regional initiatives deserve in the staff paper are a
clear sign of this bias). Second, the trade-offs among criteria that are, in the end,
considered acceptable enough to justify endorsement of a new system may not be
in the best interest of developing countries. In the IMF they will be outvoted even in
a scenario where the promised governance reforms materialize to their best, not to
mention the veto that the main country benefitting from the current system enjoys
and may use to extract concessions in any new system.
Nonetheless, it is undeniable that the fresh input and momentum that the paper
brings into the debate is a sign that should be welcome.

[i] The paper is available http://www.imf.org/external/pubs/ft/spn/2009/spn0926.pdf

[ii] A/CONF.214/3, para. 36.
[iii] IMF Paper, p. 10.

2) Financial Crisis and Trade: Consultation with Latin American/ Caribbean

governments

On September 2009, in Caracas, Venezuela, the Hemispheric Working Group on

Trade-Finance Linkages, in cooperation with UNCTAD and Sistema Economico
Latinoamericano y del Caribe (SELA) held a regional consultation on the theme
"Financial Crisis and Trade: Towards an Integrated Response in Latin America and
the Caribbean." This is the third in a series of regional consultations on this theme
that Center of Concern has been carrying out this year (previous consultations on
the same topic were held this year with Asian and African governments, see
respective documentation at http://www.coc.org/node/6444 and
http://www.coc.org/node/6416).

The consultation relied on the generous support of the Ford Foundation and the
Swedish Ministry for Foreign Affairs, as well as in kind contributions of SELA and
UNCTAD. The meeting brought together near forty participants from governments,
intergovernmental organizations, academics and civil society, including Ministers
and senior officials from Latin American and Caribbean governments.

Goals of the meeting were to assess the role that trade structures and their
linkages with finance have played in the unfolding of the crisis in Latin American/
Caribbean countries and ensure such assessment is included in the responses and
to explore the practical applications that an integrated approach to trade and
financial policies could have on improving specialised policy-making on both the
trade and the macroeconomic and financial fields, domestically and internationally.

In his opening words for the event, the head of SELA, Amb. Jose Rivera, after
referring to the 6 years of uninterrupted high growth in the region that preceded the
crisis, expressed concern that, "in contrast with the encouraging situation in our
countries before the crisis, recent estimates point to a less than 2 percent average
GDP growth for our region in 2009. Social impacts will be severe and the region
will be poorer and more unequal."

The concerns were certainly echoed in the Outcome Document adopted by the
participants. This document is divided in six sections that correlate with the six
areas addressed in the consultation (Financial and Exchange Rate volatility and
Trade; Financial markets and specialization in international trade; The role of Aid
for Trade in addressing trade disadvantages; The role of trade and investment in
capital accumulation for development; Fiscal space for infrastructure, indebtedness
and trade; Trade capacity and access to credit).

Among other recommendations, the document highlighted the potential of regional

policies to face the crisis on the financial front, support development and reduce
external vulnerability in the region; the need for the public sector to continue to
play a fundamental role as supplier, investor and regulator in infrastructure
investment projects and the urgency for developing countries to neutralize the
impacts that third country markets and financial regulations play in prices of
exported commodities via monetary, exchange rate and taxation tools.

For the full Outcome Document visit

http://www.coc.org/system/files/InformeFinal-eng.pdf

For a Spanish version visit http://www.coc.org/system/files/InformeFinal.pdf)

For the agenda of the meeting visit http://www.coc.org/system/files/Agenda_0.pdf

For more documentation and available papers delivered at the meeting visit
http://www.sela.org/sela2008/CrisisFinanciera2009.asp (or http://www.coc.org/node/6476)

3) SOAS Briefing: Financialization of International Commodity Markets

Below is a link to a brief "The Downside of the 'Financialisation" of International

Commodity Markets," appeared as Development Viewpoint #32 of the Centre for
Development Policy and Research of SOAS.

Focusing on the international coffee market, the author, Susan Newman,

Department of Economics, SOAS, and University of Witwatersrand, Johannesburg,
reveals how increased futures trading by financial investors has distorted the
relationship between prices and conditions of supply and demand in international
commodity markets. As a consequence, large international trading companies,
having the financial capacity to engage in such speculation, have gained
considerable market power while local producers and traders in developing
countries have suffered from unstable and relatively low prices.

To download go to: http://www.soas.ac.uk/cdpr/publications/dv/file52180.pdf

4) Aid for Trade: Is It Helping Small Producers?
Please find below link to a publication by the Fair Trade Advocacy Office (FTAO)
and the Interchurch Organization for Development Cooperation (ICCO), "Aid for
Trade: Is the EU helping small producers to trade their way out of poverty? "

KEY CONCLUSIONS

Aid for Trade needs to support growth that is pro-poor

To help reduce poverty, growth must be pro-poor. This means growth must benefit
the poorest sections of society proportionally more than it benefits the better off.
Aid for Trade should focus on developing local, national, and regional markets,
first, rather than further enhancing export-oriented growth.

Supporting small producers is key

Small producers are an important part of local communities and can play a key role
to significantly reduce poverty while contributing to sustainable development. Small
producers experience numerous supply side constraints and there are many pro-
poor policy measures and interventions that can help them overcome these
difficulties. These range from support to developing and strengthening producer
organisations, access to pre-financing and micro-financing, access to information
to monitor changes in processing and consumer demands, to access to cost
effective transport and improved technology.

A role of small producers in policy making is essential

Small producers need to be included in the bottom-up design of policies, projects
and programmes to make sure that these are effective and pro-poor, meaning that
they benefit the poorest proportionally more than they benefit the better off.

There is a lack of consistent focus on small producers by the European

Commission (EC) and key European Union Member States
EC and EU Member States policy and communication documents on Aid for Trade
recognise the importance of growth being pro-poor and of supporting small
producers. Still, there is not always a consistent implementation of the focus on
small producers across policies and projects. This is shown in the publication
through an analysis of the past allocation of Aid for Trade funding, where it shows
that only some few, small and sporadic commitments and projects are specifically
targeted at small producers.
To download the full publication visit
www.fairtrade-advocacy.org/images/aid_for_trade_publication_ftao.pdf

5) Gaps in statistics for trade in banking services: New Paper

In a study produced for UNCTAD (Discussion Paper 194), "STATISTICS FOR

INTERNATIONAL TRADE IN BANKING SERVICES: REQUIREMENTS,
AVAILABILITY AND PROSPECTS,"Andrew Cornford provides a comprehensive
overview of the existing gaps in statistical data for this important sector and
proposes some ways to address them.

Please find below a quick summary of the paper.

To access the full paper visit http://www.unctad.org/en/docs/osgdp20092_en.pdf

Summary

This paper addresses the availability of statistical data for international trade in
banking services. Such data are required for WTO negotiations and work on other
aspects of the General Agreement on Trade in Services (GATS). Assessment
exercises for trade in banking services, valuation of offers and commitments in
negotiations, the proposed extension of GATS rules to cover emergency safeguard
measures and subsidies, and decisions on compensation in dispute settlement for
services under the WTO agreement are all currently handicapped by the lack of
pertinent data. However, international initiatives directed at the development of
statistics for international trade in services have so far failed to fill this gap.

Following a discussion of areas of work for which data on international trade in

banking services are required and of the outcome so far of international initiatives
directed at the development of statistics for international trade in services, the
availability of statistics relevant to the different GATS Modes of Supply is reviewed.
These statistics include cross-border trade in financial services as classified in IMF
balance-of-payments statistics, supply through the temporary presence of natural
persons, local lending by international banks; FDI and cross-border mergers and
acquisitions (M&A) in financial services, financial output and other indicators of
aggregate financial activity in national accounts and FATS statistics, and numbers
and assets of foreign banks in selected countries.

None of the currently available statistics under these headings provides a

satisfactory measure of trade in banking services under Mode of Delivery 1 of the
GATS nor one corresponding to such trade under Mode of Supply 3. The
remainder of the paper focuses on two other more promising categories of
information, namely the income statements of banks, which depend on data
already generated by private-sector entities and data on trading in financial
markets. The paper shows how information in banks' income statements can be
approximately matched to the activities specified in the definition of financial
services in the Annex on Financial Services of the GATS, and exemplifies the
potential of this information with recent income statements of Jordanian banks. An
advantage of these income statements (as well as of the trading data) is that the
measurement would depend on pre-existing work by banks and other financial
systems themselves.

Aldo Caliari
Director
Rethinking Bretton Woods Project
Center of Concern