Bulletin 09 Oct 28

To: Organizations addressing Trade-Finance Linkages 1) Trade and Finance Linkages for Promoting Development: New Book 2) IMF backtracks on constraints to trade-led development -but how much? 3) Experts debate WTO services rules' impact on financial crisis 4) WTO, Financial Services and Global Financial Reform 5) G20 restrict - but also liberalize-trade and investment in the face of the crisis, report finds 6) Basle II relaxing urged to foster trade credit 7) It is the exchange rate, Mr. President- Article 8) FFD General Assembly High Level Dialogue - Registration open until November 9

1) Trade and Finance Linkages for Promoting Development: New Book

Trade, debt and finance are all important components in the development strategy of any country. It is not surprising that the need for more coherence among trade, debt and finance policies has been recognized in countless official statements.

However, the tendency towards issue-specific specialization often results in the conduct of fragmented economic policy-making without a holistic perspective in relation to trade, debt and finance. That is, what tends to happen in practice is that policy-making on trade, debt and finance tend to be pursued in separate, frequently compartmentalized ways. This is a reality at the global level, where the systemic architecture and institutional design of global institutions are guided by a paradigm based on functionality and division of labour along these different policy areas. But it is also very much a reality at the national level where different Ministries or departments are in charge of each different policy area and, in turn, liaising with the

respective institutions at global or, if existing, regional level. But what does such a coherent approach entail in practice? And how can it be balanced with the justifiable need for specialized policy-making without leading to fragmented responses?

Trade and Finance Linkages for Promoting Development, a book co-published by Center of Concern, South Centre and the German Marshall Fund of the US, sets out to propose a methodology for academics, practitioners and policy-makers searching for ways to integrate a more holistic and integrated approach in their everyday activities.

The publication tries to capture the main contributions by the panelists, as well as summarizes the rich discussion that took place at each of the sessions in a Policy roundtable co-organized by the three publishing organizations, with the support of the Forum for Environment and Development, the Heinrich Boell Foundation, the Swedish Ministry of Foreign Affairs and the United Nations Foundation. This publication was edited by Aldo Caliari and Vicente Paolo Yu III. Section I is focused on the general question of the division of responsibility among various international organizations and venues working on trade and finance issues, including the WTO, UNCTAD, the International Financial Institutions and the UN Financing for Development follow-up process. Acknowledging the tension between the need for specialized policy-making on trade and finance, on the one hand, and the need for a more holistic approach to trade, finance and development, on the other, it explores feasible options for improvement. The second section examines trade and investment rules, and trade policies, from the perspective of whether they contribute to the process of accumulating capital for development in developing countries. Trade rules and policies can be oriented to increase trade and investment flows but, from a financial perspective, what matters is whether they are oriented towards processes that accumulate capital needed for development purposes. This is, obviously, a vast area, so the section only focuses on. The questions explored are how rules and policies affecting commodities and investment would impact the export and investment profile of those countries and how such rules would impact the process of price formation in goods and services. The third section looks holistically at the balance between financial and trade measures. It addresses the terms of the Aid for Trade package linked to trade negotiations at the WTO and long term measures that should be addressed through complementary reforms of the international financial system. It also asks questions regarding the balance between Aid for Trade measures and problems that should be addressed through trade rules, as well as the balance between Aid for Trade proposals and deeper issues of functionality of the international financial system that may require a different response.

Finally the fourth section enters is focused on the impact of exchange rate and financial volatility on the trade performance of developing countries. For the table of contents please visit http://www.coc.org/system/files/TOC.pdf For the full book, as well as information on how to order your own copy, visit http://www.coc.org/node/6428

2) IMF backtracks on constraints to trade-led development -but how much? Over the summer, in an IMF Board discussion that was not reported through a Public Information Notice, the IMF revised its Guidance Note on how staff should apply the Decision on Bilateral Surveillance over member Policies ("2007 Decision"). While the new Guidance Note -as IMF staff hastened to clarify -does not overrule or change the 2007 Decision, the move clearly softens its requirements. The 2007 Decision 2007: Background and Issues The IMF 2007 Surveillance Decision was one of the pillars of the strategic reform that former IMF Managing Director, Mr. Rodrigo de Rato, was trying to promote during his time. It came to reform the Decision on Bilateral Surveillance that had been in force since 1977, which regulated the Fund's role in exercising surveillance over the exchange rate policies of member countries. The Decision, opposed by several developing countries, including through the G24, was the target of criticism because of the way it would constrain the space for developing countries attempting to profit from a trade-led development model. At the same time it was not clear that its approach would contribute to solve the then growing global trade imbalances-a forecast that would soon be confirmed. A growing body of research -growing both before and after 2007-- militates in favor of exchange rate management as a key factor in strategies to use trade for development. The importance of this tool is particularly underscored in the current crisis situation. For developing countries, traditionally more reliant on trade than developed countries, trade and their trade profiles have acted as primary channels for the impacts of the crisis in their economies. Low diversification of export products has contributed to the woes of developing countries. The management of the exchange rate is a crucial tool to boost diversification into non-traditional export sectors. It may also prove critical to the competitiveness and capital accumulation, by enabling cross-subsidies to other sectors of the economy and the build up of buffers that bolsters resilience to crisis times that make the economy more resilient.[1] Two were the most substantive changes stemming from the 2007 revision that altered the balance in the implementation of Bilateral Surveillance by the IMF.[2]

First, it added as principles that should guide the Fund's assessment of what constitutes "manipulation" that "A member should avoid exchange rate policies that result in external instability."[3] The intention of a member's currency intervention -a central element under the old decision-was given minimal importance. This tilted towards the IMF the balance of power in the assessment of whether a member was in violation. Second, there was a list of events that would prompt deeper scrutiny from the IMF and might warrant a discussion with a member. The 2007 Decision added to these developments "fundamental exchange rate misalignment" and "large and prolonged current account deficits or surpluses."[4] The former was so close to the language in legislation to punish China that was being debated in the US Congress at the time, that the implicit reference was hard to deny. The new Guidance Note In an introduction to the "Revised Interim Guidance Note" issued during the summer ("new Guidance Note") the IMF provides as one of the justifications for the changes that a "fear of labeling" had led members to engage in intense discussions with staff on the issue which operated as a distractive factor from the broader macroeconomic policy issues.[5] In line with some critics of the 2007 Decision, it recognizes the difficulty to achieve an objective judgment on exchange rate issues. "Uncertainty is particularly great when it comes to attributing outcomes to exchange rate policies or other policies," says the IMF since it is always the policy mix that matters.[6] The new Guidance Note states that "cases where a member would be deemed to be in nonobservance of [avoiding exchange rate policies that result in external instability], in particular, are likely to be very rare."[7] Another change in the new Guidance Note is that it removes the requirement to use specific terms such as "fundamental misalignments."[8] In a measure that makes application of the 2007 Decision closer to its predecessor, the new Guidance Note allows the assessment of exchange rate policies to take into account the authorities' intentions.[9] Interpreting the changes and putting them in context Though the changes seem to respond to critics, it is most likely that external criticisms were not what the IMF was responding to. In fact, both the 2007 Decision and its 2008 Guidance Note -that the new Guidance Note changes-- were passed at a very different time. What is more likely is that the changes were forced by a new geopolitical scenario with a new US administration and a post-financial crisis situation where emerging markets, and particularly China, are called to play a bigger role in sustaining the global economy, both through their reserve management and support to established financial institutions.

On the other hand, any assessment of the Bilateral Surveillance Decision should now be subsumed into an assessment of implementation of the Framework for Balanced Growth approved by the G20 Leaders in Pittsburgh.[10] Given this context, the fact that it is not the Decision that has changed, but only the Guidance Note on its implementation for the staff, becomes a more conspicuous indication. Just as the pressure through the 2007 Decision is softened, a counterbalancing move seems to be emerging in the decision by the IMF policymaking committee. This committee requested, at the Annual Meetings in Istanbul, that the IMF "building on the success of the FCL and high access precautionary arrangements, ... consider whether there is a need for enhancing financing instruments and whether this can offer credible alternatives to self-insurance, while preserving adequate safeguards."[11] The buildup of self-insuring reserves may pose some problems from a systemic perspective but there is no doubt that, from the individual perspective of a number of emerging markets, it has been a crucial tool in allowing them to escape misguided IMF advice for several years now. Furthermore, there is no conclusive evidence that increasing those countries' reliance on the IMF is the best way to generate the expected solution to the systemic problem (or even be a positive influence on it). Such has been the impact of emerging markets policy approach to self-insurance on the IMF's visible loss of relevance before the crisis that it is surprising that the request for the Fund to make this study ignores the large vested institutional interests the Fund has at stake in this discussion. Neither are preliminary results offered by the IMF Research department throwing any surprises about the direction in which these interests are expected to orient the discussion at the Fund. Unsurprisingly, the findings downplay the impact that reserve accumulation strategies had on the better performance of developing countries in this crisis[12] and foresees there may be a ratcheting up international reserves in the aftermath of the crisis but this, "while understandable, ... could well dampen the recovery."[13] Thus, there is a risk that this exercise could become the basis of an institutional decision that seeks to force member countries' reduced reliance on both trade surplus and reserve holdings, which would be tantamount to increasing their reliance on the IMF, hence the IMF's sphere of influence. As far as the 2007 Decision is concerned, should countries be advised against reserve accumulation this would logically impact the capacity of developing countries to implement their own strategies for exchange rate management. If this is the case, the softening of the implementation of such Decision might not mean much. [1] For a more complete critical assessment of the 2007 Decision on Bilateral Surveillance see Caliari, Aldo 2007. Closing All Paths to Trade-led Development? The IMF Revises Guiding Principles on Surveilance (available at http://www.coc.org/node/6291)

[2] Ib., for more detail. [3] IMF 2007. Bilateral Decision over Members' Policies, June 15. [4] IMF 2007. Bilateral Decision over Members' Policies, June 15. [5] IMF 2009. The 2007 Surveillance Decision: Revised Operational Guidance. June 22, 2009. [6] Ib. [7] Ib. [8] Ib. [9] Ib. [10] For a longer analysis of the agreement reached at Pittsburgh on this subject, see Caliari, Aldo 2009. Can the G20 Have it Both Ways? Addressing global imbalances without reform of the world monetary system (available at http://www.coc.org/node/6441) [11] International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund 2009. Communique. October 4. For more detail on the implications of this decision, see Caliari, Aldo 2009. Brave New World Emerges from IMF / World Bank Istanbul Meetings (available at http://www.coc.org/node/6446) [12] Blanchard et al 2009. Did Foreign Reserves help weather the crisis? (available at http://www.imf.org/external/pubs/ft/survey/so/2009/NUM100809A.htm) [13] Ib.

3) Experts debate WTO services rules' impact on financial crisis See below background and links to a debate held at the sidelines of the WTO 2009 Public Forum.

Proponents of open trade in services argue that the GATS, the General Agreement on Trade in Services, holds the potential to enhance efficiency and innovation around the world. But critics counter that market opening can also increase risks, especially in the financial system. Has the WTO's services agreement contributed to the crisis or is it a tool which can help create a more stable environment for international financial services? Myriam Vander Stichele, senior researcher at the Amsterdam-based Centre for Research on Multinational Corporations, and Sergio Marchi, senior fellow at the International Centre for Trade and Sustainable Development, discuss this topic with Keith Rockwell, WTO Spokesperson.

To watch the webcast visit http://www.wto.org/english/forums_e/debates_e/debate17_e.htm (a transcript of the debate is also available at that URL).

4) WTO, Financial Services and Global Financial Reform

Find below abstract and link to a paper by Chakravarthi Raghavan, Editor Emeritus of South-North Development Monitor SUNS, commissioned by the Group of 24.

Abstract

The ongoing global financial systemic crisis and the "Bretton Woods II" processes under way in various fora seem likely to result in reformed national and global regimes for governance, stronger regulations in public interest, and their stricter enforcement. However, these will be incomplete and may not even be successful unless there are parallel efforts in the WTO and its ongoing Doha Round, in particular on "Trade in Financial Services," where lacking data, negotiations are being conducted on faith and failed theory. A reformed global regime on finance will be incompatible with a trading system outcome of liberalised trade in financial services and capital movements. This is an area needing attention at the highest levels of developing-country governments.

Full paper is available at http://www.g24.org/cr0909.pdf

5) G20 restrict - but also liberalize-trade and investment in the face of the crisis, report finds In response to a request of the G20 to monitor and report publicly on G20 adherence to undertakings on "Resisting protectionism and promoting global trade and investment," the WTO, UNCTAD and the OECD prepared a "Report on G20 Trade and Investment Measures." The Report covers developments in the period from April to August 2009.

In a first section, on trade and investment developments, the report restates previous forecasts that world trade is projected to contract in 2009 by 10 per cent, and foreign direct investment (FDI) flows, which fell by 14 per cent in 2008, are projected to fall by 30-40 per cent this year.

Reporting on the conditions of trade finance it mentions that there is evidence that additional capacity was mobilized in the 6 months preceding the report, but reports "do not provide confirmation that accessibility and affordability of trade finance has returned to normal."

In a section on trade-related measures, the report finds that, in spite of commitments to avoid trade protectionism, there has been "policy slippage" since the crisis began and even after the London Summit, last April. G20 members raised tariffs and introduced new non-tariff measures to protect domestic production, and they have continued to use trade defence mechanisms, in these and other sectors too. It singles out agricultural export subsidies for the dairy sector as measures that "are generally acknowledged to be among the most highly tradedistorting." The report says two G20 members have re-introduced them (but one of them is the European Commission and the other the United States).

However, countries such as Brazil, China, India, Indonesia, Mexico, the Russian Federation and Saudi Arabia announced cuts in import duties, fees and surcharges and the removal of non-tariff barriers on various products. China removed some restrictions on trade in certain services sectors. Further looking at the services sector the report finds "no indication...of a generalized introduction of additional restrictions to trade in services" in the countries under assessment.

The report mentions concerns about "buy/invest/lend/hire local" requirements that have, officially or unofficially, been attached to some stimulus and the competitiondistorting effects of the subsidy components of these programmes.

Finally, in a section on investment -related measures, the report notes that 11 countries introduced measures to facilitate foreign investment but it counts also 11 countries that took measures that, in words of the report, might restrict or distort worldwide capital movements, some of them with "varying degrees of potential discrimination against foreign investors." But, according to the report, 14 new Bilateral Investment Treaties as well as 20 FTAs with investment provisions were signed by G20 members.

The full document can be read at http://www.unctad.org/en/docs/wto_oecd_unctad2009_en.pdf

6) Basle II relaxing urged to foster trade credit The article below is reproduced from Financial Times, October 15 of this year. Regulators urged to loosen credit restrictions on banks By Alan Beattie in London

An alliance of private and official financial institutions is calling on regulators to loosen restrictions on banks offering trade credit, claiming that overly strict rules could hamper a global economic recovery. The campaign, which is being backed by the multilateral Asian Development Bank, is seeking to create flexibility in the Basel II framework, which determines how much capital banks have to hold against different types of lending. Steve Beck, head of trade finance for the Asian Development Bank, said: "Basel II rules ignore the extremely low loss record of trade finance and discourage banks from offering it." The campaign follows a sharp rise in cost and drop in volume for trade finance over the past year, which has sparked alarm among companies and led to a flurry of support programmes from multilateral development banks. Trade finance helps to ease the flow of global trade by ensuring that exporters get paid. Global trade dropped sharply late last year and early in 2009, though few estimates suggest that a shortage of trade finance was responsible for more than 10-15 per cent of the fall. Trade has begun to pick up in recent months, but some bankers warn that a diminished capacity for trade-related lending could create bottlenecks that will slow or stop the recovery. Banks complain that the Basel II capital framework in effect dissuades them from offering trade finance by requiring them to treat it as a one-year loan, when in practice most letters of credit and other trade finance instruments last for no more than 90-120 days. They add that the "credit conversion factors" used to determine the riskiness of lending unfairly penalise trade finance, which is historically a safe business with few losses. The International Chamber of Commerce is collecting data from banks about their past trade finance deals to assemble a "loss register", which it will use to lobby national regulators and the Basel committee on banking supervision. Since it is a low-profile field where big problems are rare, there is a dearth of information about many aspects of trade finance, though Mr Beck said some informal estimates suggested losses were as low as 77 cents per $1m of trade. A spokesman for the Basel committee on banking supervision said Basel II did not discriminate against trade finance. Copyright The Financial Times Limited 2009.

7) It is the exchange rate, Mr. President- Article

The article below by Prof. Bresser Pereira appeared in Folha de S. Paulo, August 17, 2009. It is the exchange rate, Mr. President

Luiz Carlos Bresser-Pereira

Brazil will only achieve high growth rates when it managed its exchange rate. The newspaper Valor Econômico of last August 11 informed, in its front page headline, that the automobile industry experiences its "3rd. wave of investment", whereas on the same day the newspaper Folha announced that"the fall in exports prevents automakers from recovering" and added: the accumulated slowdown of automobile industry exports in this year reaches 12.9%. The two news are contradictory. Why would the enterprises plan major investments when their exports are falling? And what if one of the causes of this decrease is the exchange rate appreciation that is now taking place? One could answer: to primarily orient the intended expansion to meet the demands of the domestic market. But, even though automobile industry is one of the few protected sectors, the exchange rate appreciation opens the domestic market to imports. I can only see one explanation for this contradiction. The investment plans probably exist, but they were conceived in the setting of another exchange rate the rate that was defined after the crash of October 2008. Investment plans take time to conceive and even more to implement. I wouldn't be surprised, therefore, if a good portion of such projects is abandoned or postponed, given the new exchange rate.

President Lula, however, does not seem willing to face the problem. In the same newspaper Folha, Kennedy Alencar informs that "despite being concerned with the negative effect of the appreciation of the real on exports, president Luiz Inácio Lula da Silva dismisses intervening in the floating exchange rate system". How to explain this fact? I can only see two answers: first, president Lula is satisfied with the performance of Brazilian economy and is unwilling to take stronger measures in the sector second, the president is not yet aware of the severity of the Brazilian exchange rate problem he presumes that the overvaluation that is showing up again is related to the economy - to the high interest rate -when it is a structural issue.

I think that the president is content with little, but I understand his satisfaction. It reflects the contentment of Brazilian population, who, after 14 years of high inflation and low growth, understood that a low inflation and a slightly better growth are the best we can expect. If my constituents are satisfied, why would I intervene in the market? he probably thinks. I respect the president's political genius, but the fact is that this exchange rate is incompatible with Brazilian economic development. It already was so before the crisis, but it was then temporarily compensated by the increase in the domestic market caused by his distributive measures ("Bolsa Família" [family allowance] and increase in the minimum wage). There is, however, no more room in this area. And the exchange rate is once again following its structural tendency to overvaluation. This tendency has two basic causes: the moderate but real Dutch disease existing in Brazil and the attraction that foreign capital has for the higher profit and interest

rates existing in the country. This is the reason why we cannot let the exchange rate be run by the market. The market makes it not only volatile, as acknowledged by all economists, but this volatility has a tendency to overvaluation that results, in the short run, in reduced investment opportunities and, in the medium term, in balance-of-payment crisis. Brazil has only achieved high growth rates when it managed its exchange rate. It is only by doing it again that those high rates will reappear.

8) FFD General Assembly High Level Dialogue - Registration open until November 9 The General Assembly, in its decision 63/564 of 14 September 2009, decided to hold its fourth High-level Dialogue on Financing for Development on 23 and 24 November 2009 at United Nations Headquarters in New York. It is proposed that the overall theme of the fourth High-level Dialogue be the following: "The Monterrey Consensus and Doha Declaration on Financing for Development: status of implementation and tasks ahead".

The meeting will likely take the form of a plenary meeting, three thematic roundtables as well as an informal interactive dialogue.

Representatives of non-governmental organizations are invited to participate in the multi-stakeholder round tables and the informal interactive dialogue, in accordance with the rules of procedure of the General Assembly. Registration, through the United Nations Non-Governmental Liaison Service and the Financing for Development Office of the Department of Economic and Social Affairs of the United Nations Secretariat, will be open to: (a) all non-governmental organizations that are in consultative status with the Economic and Social Council; and (b) all nongovernmental organizations and business sector entities that were accredited to the Monterrey Conference on Financing for Development and its follow-up process, including the Doha Review Conference. Social Council; and (b) all nongovernmental organizations and business sector entities that were accredited to the Monterrey Conference on Financing for Development and its follow-up process, including the Doha Review Conference.

Each multi-stakeholder round table will include three, and the informal interactive dialogue five, representatives of accredited civil society entities and the same numbers of accredited business sector entities. Their participation in the round tables and the informal dialogue will follow the practice established at the International Conference on Financing for Development and its follow-up process.

To register, please go to http://www.un-ngls.org/ffd.

Participants may also apply for limited number of roundtable seats. In this regard, special consideration will be given to the following criteria: · Expertise · Active participation in the FfD process · Geographic balance · Gender balance Completed registration forms must be received by 9 November 2009. Please note that the UN Secretariat cannot provide funding for participants in this event.

More information regarding the High-level Dialogue can be found in the Note by the UN Secretary-General on the Proposed organization of work of the High-level Dialogue on Financing for Development http://www.un.org/ga/search/view_doc.asp?symbol=A/64/377&Lang=E

Aldo Caliari Director Rethinking Bretton Woods Project Center of Concern