Towards a Global Finance System at the Service of Sustainable Development

The global debate over financial reform is still ongoing. In the European Union (EU), some reforms have now been implemented, but these frequently are only half-measures and, thus, do not offer adequate protection against future turbulence. However, EU financial reforms must facilitate progress towards global sustainable economic development. Furthermore, reforms will not only affect the EU; they will also strongly impact on developing countries. Consequently, the EU should prioritise the following goals:

• Considering sustainability and the precautionary principle in all reforms.

• Ensuring full transparency of EU financial operators and markets.

• Comprehensively regulating all financial actors to prevent shadow banking.

• Deleveraging the financial system, especially the banks.

• Introducing restrictions on speculators and speculative products, especially in commodities markets.

• Supervising European banks operating in developing countries.

• Permitting prudential capital controls in free trade and investment agreements.

• Tackling tax evasion and tax avoidance, and increasing progressive taxation of wealth.

• Facilitating innovative development financing via a Financial Transactions Tax.

• Pushing for greater international cooperation on exchange rates, trade imbalances and capital flows.

• Giving developing countries a greater say in international decision-making processes and in supervision.

1. Introduction

The financial crisis is truly global in scale. It will have a lasting impact on growth, jobs and debts, and will be a long-term burden for economies all over the world. Although it originated in the developed world, the subsequent fallout has been keenly felt in developing countries. For example, reduced lending, foreign direct investment and aid, along with weaker export revenues, have resulted in increased poverty, unemployment and indebtedness.

The crisis is a consequence of the global rise of neoliberalism. An unwavering belief that markets are efficient and banks are self-regulating, resulted in excessive privatisation, liberalisation and deregulation. Financial markets are now predominant, and traditional economic activities, such as classic production and services, are slowly being sidelined. This system engenders inequality, uncertainty and the concentration of power in the hands of the few.

Short-term speculation and excessive risk-taking are rewarded, despite their destabilising effects on the wider economy. Furthermore, the current crisis is not an isolated event, as demonstrated by the 1997 Asian Financial Crisis. However, markets can facilitate development, provided sensible limits are imposed. It is simply unbridled capitalism that one must guard against. Many countries are now taking steps to restructure the system and restore stability. However, the debate over which reform measures are most appropriate is still ongoing. In the European Union (EU), some reforms have now been implemented, but these frequently are only half-measures and, thus, do not offer adequate protection against future turbulence. Additionally, many important reforms have been completely omitted, or are only just at the concept phase. For example, the European Union is not scheduled to reach a conclusion on areas such as derivatives regulation until 2011, despite this having been a key issue for many years. Thus, whilst many existing EU reforms are promising, there is still much work to be done. The overall goal must be a global finance system that serves sustainable development, both in developing and developed countries.

This brochure, which is part of the EU funded project “Towards a Global Finance system at the Service of Sustainable Development”, first looks at the impact of the crisis on developing countries. It then gives an overview of several legislative proposals launched by the European Union since the financial crisis began. Where negative effects are identified, possible solutions are outlined and discussed. Without substantial, widespread financial reform, history will repeat itself. We have a responsibility to ensure the financial system aids, rather than hinders, sustainable development.

Proposals and abstracts

Contents

Summary

1. Introduction

2. The financial crisis and developing countries

2.1 Capital flows

2.2. Financialisation of commodity markets

2.3. Real-economy channels: trade and remittances

2.4. The social and economic effects of the crisis

3. EU financial reforms

3.1. Reforming the banking sector

3.2. Credit rating agencies (CRAs)

3.3. EU regulation of investment funds

3.4. Derivative trading, and food and commodity speculation

3.5. The new supervisory architecture

3.6. Trade and investment agreements

3.7. Tax havens

3.8. The Financial Transaction Tax (FTT)

3.9. Currencies

3.10. Capital controls

3.11. Trade imbalances

4. Conclusion: Towards a global finance system at the service of sustainable development

General resources and further information

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