Financial stability is an international concern with so many countries joining the global economy. It is a public good because everyone benefits yet no one is responsible for maintaining it. How stable are global financial systems? Do they support social and environmental sustainability? How do they affect developing countries? What initiatives would ensure global financial security in the long term?

Short term financial volatility and long term insecurity are a threat to many countries that have embraced globalisation. During the Asian crisis in 1997 to 1998 the standard of living in Thailand fell by 14 percent, in Korea by 22 percent, and Indonesia by 25 percent. In the event of economic collapse, governments can tighten public spending and raise interest rates, but developing countries also need time to renegotiate their debts and secure new lines of credit to pay off existing borrowing. International back-up for developing countries has been based on a model of ‘borrow, invest, export, repay’, but has failed to bring many countries out of debt and insolvency. There have been several initiatives to improve long-term financial insecurity, but structural adjustment plans, bilateral assistance and long-term development programmes are failing to help many countries.

The briefing argues that global financial security is not about stability and wealth generation for their own sake, but creating structures that enhance the livelihoods of people and the natural environment. It points to the following disturbing trends:

• There is widespread alienation and dissatisfaction with current international trading and financial systems, vividly expressed by the demonstrators in Seattle and Prague.
• Heavy debt burdens make some developing countries particularly vulnerable to financial volatility. In developed countries, currency turmoil and domestic financial disruptions do not reinforce one another.
• Long-term financial security is improbable in the current climate of short-term volatility, poor governance, weak social and environmental inclusion and debt imbalance.
• The current financial system has not improved poverty eradication, social equity and environmental sustainability.
• Studies of financial insecurity ignore social and environmental factors and focus on financial and macroeconomic conditions.

Without constructive proposals for reform and open dialogue whole-sale change remains a remote prospect. The briefing urges policymakers to consider the following initiatives:

• Consensus is needed to define when public intervention is prudent and identify which institutions/groups need to be protected from crisis by safety nets.
• The moral hazard involved in mechanisms to deal with financial insecurity can be avoided by independent assessment of domestic finance.
• Effective means need to be found to counter corruption. A legal global compact against corruption could set minimum standards for combating money laundering and tax evasion.
• New global institutions could be developed to create more balanced international architecture, including a World Financial Authority or central bank, and International Bankruptcy Court, a World Development Organisation and a World Environment Organisation.
• Various forms of global taxation could be introduced to fund long-term sustainability goals. Possibilities include: a currency transfer tax (Tobin Tax), a carbon tax, a surcharge for international car registration, charges for air wave frequencies, seabed mining and the Internet.

Source(s):
‘Sustainable finance: Seeking global financial security - towards Earth Summit 2002', Economics briefing #2 by Rosalie Gardiner Full document.

Funded by: RICS Foundation, European Commission, Heinrich Boell Foundation, UN Foundation, BP, Government of Canada, Finland, Germany, Netherlands, United Kingdom

id21 Research Highlight: 18 April 2002

Further Information:
Rosalie Gardiner
Stakeholder Forum for Our Common Future
c/o UNA
3 Whitehall Court
London SW1A 2EL
UK

Tel: +44 (0) 20 7839 1784
Fax: +44 (0) 20 7930 5893
Contact the contributor: rgardiner@earthsummit2002.org

Stakeholder Forum

Other related links:
See also the International Conference on Financing for Development

'Finance matters: Financial liberalisation: too much too soon?' Insights #40