Global Policy Forum

By Marina Ponti

Thank you Mr. President,

It is my privilege to address you on behalf of Mani Tese, an Italian Non Governmental Development Organization that works to eradicate poverty in both the northern and southern hemispheres.

Also I am speaking on behalf of several national and international networks I have consulted before coming here today, inter alia, Social Watch, ATTAC, Eurostep.

Thus, the issues I am presenting reflect the positions, the expectations and the concerns of several civil society groups in the North and in the South.

Many of us in this room were involved in the UN Conferences and in their follow ups, while others among us were active in monitoring and influencing the Bretton Woods Institutions policies and projects.

As we all know, poor concrete results and changes were achieved in both areas. Despite this fact, we are here again, mainly because this agenda has a great potential and especially because the issues and challenges contained in it need to be finally addressed.

However, we have not forgotten the past and hope we will achieve better results this time. Globalization of the world economy is proceeding at a very rapid pace, particularly in the arena of international finance. In this area, however, the presumed virtues of globalization are far from being materialized.

World's financial crises since mid 1997, and their precedents in the 1980's and in the 1990's, have made it clear that the current international financial system and its institutions are unable to safe guard the stability of the world economy.

The East Asian crisis has shown the threats of volatile and large short-term capital flows to the economic stability of developing countries. Let me give you some concrete evidence. In 1996 US$ 97 billion flooded into Thailand, Indonesia, the Philippines, Malaysia and South Korea. In 1997 these same countries experienced an outflow of 12 US$ billion. In net terms, that was an astonishing US$ 109 billion reversal of fortunes.

Thereafter, in 1998 and 1999 the majority of Latin American countries suffered a severe economic recession that drove corporations into insolvency, forcing many of them to bankruptcy. The recession also caused the deterioration of the banking system, increased the unemployment level and caused the loss of purchasing power among large sectors of population.

Most analysts agree that the trigger of the crisis was, essentially, the enormous weight taken by short-term flows in the financial structure of emerging markets.

From 1990 to 1995, short-term capital inflows to emerging markets tripled. While this flow was positive, emerging markets economies experienced growth, since these capitals financed imports, credits to the private sector, consumption credits and, also, the cash for external debt payments. However, short-term capital has a speculative, volatile character, and massive short-term outflows lead to recession.

If we look at Latin America we notice that it had a growth rate of 5.3% in 1997, falling to 2.3% in 1998 and to a mere 0.3% in 1999. And after the crisis, Latin American countries took rescue loans granted by Multilateral Banks, increasing their foreign debt. In Latin America external debt reaches now US$ 750 billion.

Moreover, rescue loans, originally implemented to bail out the big international creditor investments, resulted in preserving "moral hazard" because international creditors knew that, in case of crisis, the multilateral organizations would rescue them.

The crisis also had an effect on the State budget. In Brazil, for example, soon after the crisis, cuts took place in the agrarian reform budget, social protection, environment, food security and revenues to poor families.

This is the situation we are facing. In this context, let me point out two concrete proposals and two recommendations that could be implemented by this process.

The first is in the area of capital controls. Until recently capital controls were a taboo subject. On September 1st 1998 Malaysia became the first Asian country affected by the economic crisis to announce selective exchange and capital controls in an attempt to recover its economy.

On the academic level, the taboo against capital controls was broken in August 1998 when the M.I.T. economist Paul Krugman advocated that Asian governments should re-impose capital controls as their only way out from the crisis.

On the same lane, this process could officially place a stamp of approval on capital controls in case of risk for financial crisis.

The experience of the past decade showed us very clearly that foreign capital can be very good or very bad for a country. Developing countries desperately need investments, but long term investments not short-term or speculative flows.

This forum could discuss and then provide guidelines on a set of standards for foreign direct investments, in order to allow governments to welcome the good capitals and to feel officially authorized to refuse and stop the bad ones.

Some indicators that could be used are obviously time framework and purpose of the investments, but other dimensions could be explored by this forum and by all the experts from all the UN agencies and the Bretton Woods agencies committed to it.

My second proposal, which was already discussed in this morning session, but which I would like to stress once more, is the pursuit of a small tax on currency transactions.

Briefly a currency transaction tax could: