UNCTAD for rules-based currency regime, tough market norms
Terming the current financial turmoil as a "wake up call" for the international community, an UN agency today suggested financial reforms, including a rules-based floating currency regime and stricter market regulations, to deal with the problem.
September 06, 2011 / 20:38 IST
Terming the current financial turmoil as a "wake up call" for the international community, an UN agency today suggested financial reforms, including a rules-based floating currency regime and stricter market regulations, to deal with the problem.
The rules-based floating currency regime was necessary to curb "excessive speculation", said the Trade and Development Report 2011 (TDR 2011) of the United Nations Conference on Trade and Development (UNCTAD) released globally today. It also suggested measures for restructuring of national banking systems and a stricter regulation of financial markets, including for commodity derivatives."The new financial turmoil should be a wake up call for the international community and its institutions. It remains imperative to address the unfinished elements in the global financial reform agenda more vigorously than has been the case so far," said the TDR 2011.UNCTAD said that after several decades of experience it has become clear that monetary shocks, particularly in a system of flexible exchange rates, are much more significant and harmful.According to the report, there are two approaches for the design of a rules-based floating currency regime -- under which the central bank of a country maintains a broader range in which it allows the currency to fluctuate and beyond which it intervenes to check any greater appreciation/depreciation of the currency."Such a system could be built on the adjustment of nominal exchange rates to inflation differentials or to interest rate differentials."The first principle addresses more directly the need to avoid imbalance in trade flows, while the second one is moredirectly related to limiting financial speculation of the kind of carry trade which typically leads to currency misaligment," UNCTAD said.According to it, such a regime would be able to achieve sufficient stability of real exchange rate to enhance international trade and facilitate decision-making on fixed investment in the tradable sector."...it would be sufficiently flexible to accommodate differences in the development of interest rates across countries," UNCTAD said, adding that such a practice could be adopted by countries either unilaterally or through bilateral and regional agreements.Release the report, economist and professor in Jawaharlal Nehru University Jayati Ghosh said that a lot of liquidity is moving into developing countries, where interest rates are high, from developed economies like US and Japan."This pushes up the exchange rate and damage the economies of the developing nations, making imports cheaper and making exports expensive. This is happening in Brazil currently... We need a system to control this inflow and leaving currency entirely to market forces is not good," Ghosh said.The TDR 2011 also pointed to the volatility in the global commodities market and called for increase in transparency in physical and derivatives markets."UNCTAD suggest a number of policy responses to improve commodity market functioning, increasing transparency in physical and derivatives markets, as well as internationally coordinated tighter regulation of financial investors -- for instance, by imposing position limits or a transaction tax," the report said.The UN agency also suggested that market surveillance authorities could be mandated to intervene directly in exchange trading on an occasional basis by buying or selling derivatives contracts with a view to avert price collapses or price bubbles.It also said that financial deregulation has been one of the main factors leading to the global financial and economic crisis of 2008.According to UNCTAD, financial deregulation led to "emergence of a large, unregulated and under-capitalised shadow banking system, while traditional banking shifted from reliance on deposit to financing from capital markets, and from lending to trading".Calling for "re-regulation" of the financial system to prevent any repetition of the crisis, the report said the shrinking of difference between investment banking and commercial banking led to the crisis."In addition to a better regulation, the financial sector needs to be restructured in order to reduce the risk of systemic crisis and to improve its economic and social utility."Financial restructuring should aim at more diverse national financial systems, with a bigger role for public and cooperative institutions, a sizing down of giant institutions and a clear separation between the activities of investment and commercial banking," UNCTAD said.It, however, warned that such measures may be hindered due to provisions of international agreements like the General Agreement on Trade and Services (GATS) and bilateral agreements between countries and provisions related to payments, transfers and financial services. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
