Bulletin 09 Sep 11

To: Organizations addressing Trade-Finance Linkages 1)

Big banks good for international trade, says BIS

2)

Is a good investment climate relevant to development in Africa?

3)

Export -led growth: Is the Financial Crisis Revealing its Limits?

4)

Follow-up to Financial Crisis Summit begins

5) World Bank/ IMF Annual Meetings: Registration open until September 21

1)

Big banks good for international trade, says BIS

In the controversy over the viability and desirability of big and global banks, the Bank of International Settlements takes clearly a side in their favor. Surprisingly, the effects on trade are mentioned as a primary reason. In its latest Annual Report, the BIS argues that "By reducing the need to have lenders located physically near borrowers, international banks facilitate trade in goods and services as well as the cross-border movement of capital." [1] As host country governments become more cautious about allowing foreign banks to operate in their soil the result would be that of reducing the ease with which capital moves across borders. This "would shrink trade in goods and services and thus moderate growth and development." [2] As the pre-crisis global banking model comes increasingly under challenge, several voices are warning about the potential that such measures may have in hindering international trade in the future. Last July, the head of the WTO, Mr. Pascal Lamy said that bank bailouts had "constrained risk-taking" outside the familiar territories of national markets and this was already affecting foreign direct investment, now forecast to fall 50 per cent this year.[3] The calls are echoed by the industry. The head of the Institute of International Finance, Mr. Joe Ackerman, warned that the response of regulators may lead to the refragmentation of markets. In such a structure "Banks would not be able to manage their risk, capital and liquidity on a consolidated basis. This would make the allocation of capital in the economy less efficient in normal times and render an efficient response more difficult in times of tension. It would also have severe implications for the growth prospects of smaller countries with a limited deposit base."[4]

But the purported benefits of global banking for trade are much less clear than such statements would suggest.

In its response to the review conducted by Lord Turner the UK Association of Corporate Treasurers reportedly states that there could be minor conveniences in dealing with a very large bank providing a good range of service across the globe but this was not usually the key selection criterion. They "welcomed a diversity of providers in order to access a diversity of products, ideas and expertise. And [were] sufficiently worried about competition policy issues to suggest that there could be a case for breaking up big banks. There would also be advantages in terms of escaping from diseconomies of scale and scope and, most importantly, reducing systemic risk." The idea that global banking has necessarily led to reductions in cost of credit is certainly at odds with the findings of a number of recent studies.[5]

The views on the efficiency of global banks, or the lack of margins to adjust without increasing the cost of credit, are a matter of challenge. Noting that the financial industry represents between 30% and 40% of the aggregate profits of the quoted corporate sector in the US, UK and globally-compared with 10 % forty years ago-- one analyst states "It seems strange that an industry whose role is that of intermediation rather than the production of consumption goods and services should command such a high share of capital, profits and brains."[6]

There is also evidence that low barriers to cross-border banking have been used by banks largely to evade or avoid taxes. A recent OECD study found that most of the aggressive tax planning solutions are designed by structured finance departments and involve cross-border transactions.[7] In many cases, the transactions lack economic substance independent from the tax benefits. "Complexity does not necessarily indicate tax abuse; nor does the use of SPVs" says the OECD, but "some aggressive arrangements are designed to obscure the real economics of the transaction."[8] These conclusions would suggest that tax evasion and avoidance, rather than efficiency, are responsible for a good portion of the profits made by banks. If this is the case, not only efficiency gains are not being transferred to the consumer, but gains could well be coming at the expense of taxpayers, rather than being a result of banks' efficient management of risks and capital at a global level. Host supervisors should be concerned about the role of foreign banks in their countries' trade. But they would be wrong to assume such role is always a benign one. Their active intervention could do a lot to restore the broken link between trade and the building of domestic capital.

[1] BIS Annual Report 2009, 120. [2] Ib. [3] Hollinger, Peggy 2009. Lamy in warning over bank bail-outs. In Financial Times, July 6. [4] Ackerman, Josef 2009. Smaller banks will not make us safer. July 29. [5] Rules liberalizing financial services, an obstacle to anti-crisis efforts, available at http://www.coc.org/node/6366

[6] Woolley, Paul 2007. Financial Sector Disfunctionality: Is society well-served by its financial institutions?, Transcript of Public Lecture given on 31 October 2007 at the University of Technology, Sydney and subsequently broadcast on ABC Radio, Australia. [7] OECD 2008. Study into the Role of Tax Intermediaries, Chapter 9. [8] Ib.

2) Is a good investment climate relevant to development in Africa? Is a good investment climate relevant to development in Africa? A chapter in a recently published book, "Reflecting on Economic Questions: Papers presented at the Inaugural Conference of the Institute for Social and Economic Studies," attempts to answer this question. Below is a summary of the book chapter by Aldo Caliari: "Is a good investment climate relevant to the African development experience?" For a link to the full chapter visit http://www.coc.org/node/6433 For a link to the cover and table of contents of the book visit http://www.iese.ac.mz/lib/publication/img/ref.pdf

Summary As of late, the World Bank has placed an increasingly heavy emphasis on investment climate reforms to promote growth, development, and poverty reduction. However, their initiatives related to this endeavor suffer from many shortcomings, and they have failed to give provide proof that investment climate reform is as important as they claim. The WB became involved in reform of the investment climate as early as the 1980s. Three-quarters of the Bank's adjustment operations in 1989-1990 were aimed at improving the business environment. In the late 1990s the Bank shifted to second generation reforms, targeting the administrative, legal, and regulatory functions of the State. In 2002, the World Bank adopted the Private Sector Development (PSD) Strategy. It is comprised of two main pillars: private sector participation in infrastructure and reform of the investment climate. Over the past few years, investment climate reform has become central to WB operations. Two important tools for diagnostics and measurements of the investment climate have been created - the Doing Business Indicators and the Investment Climate Assessments. The WB isn't the only group giving lots of attention to PSD. A number of similar initiatives have sprung up in recent years. For example, the Policy Framework for Investment (PFI) was endorsed at OECD Ministerial level in May 2006. It is intended to serve as a reference for donors on ODA, as well as a platform for peer review. Additionally, there are the G-8 Endorsed Climate Facilities - OECD/NEPAD and AU/NEPAD. OECD/NEPAD is a joint initiative, based around the PFI. It has no money "attached" to it, but does exert influence over the policies of OECD donors. AU/NEPAD is a private-public sector funded

trust with a life-span of 7 years. Its aim is to raise 550 million dollars in order to fund investment climate reform projects. WB initiatives on investment climate reform are one aspect of a drive by developed countries to push through investment liberalization in multilateral, regional, and bilateral agreements, despite Southern governments' opposition. Such liberalization would facilitate foreign investors' access to developing countries. While the World Bank is a strong advocate for investment climate reform, they have failed to back-up their claims that adherence to investment climate guidelines is necessary or crucial for growth or success in development. For example, a WB evaluation which promised to determine the relationship between investment climate and domestic/foreign investment flows failed to do so. Instead, the evaluation became an exercise in comparing promoted reforms with implemented reforms, without questioning the assumptions underlying promoted reforms. However, such assumptions need to be questioned. There is substantial evidence indicating that the role of the investment climate in attracting FDI is not significant. While different studies name different factors as significant determinants of FDI flows - market size and growth, resource endowments and infrastructure development, and national income are some - most agree that investment climate is not one of them. Sanjaya Lall argues that a healthy investment climate is not the first priority in increasing Africa's competitiveness, and, in fact, liberalization of investment may have counter-productive effects. Furthermore, the Bank's assumption that more FDI is always better also needs examining. Such an assumption ignores the potential negative pressure that FDI may put on the balance of payment through profit repatriation and royalties. Additionally, emphasis on high rates of FDI can lead to reckless downsizing of government in the name of increasing foreign capital inflows - a process that doesn't match the experience of East Asian countries, and won't necessarily lead to growth and development. According to UNCTAD, policy-makers must ask hard questions about FDI, and avoiding such questions "in favor of easy recipes of rapid liberalization in the hope of attracting FDI will neither achieve economic development goals nor maximize potential gains from hosting it". The Doing Business Indicators project compiles indicators concerning specific regulations on a country-by-country, year-by-year basis. DBIs have the power to influence policy in several ways. First, they provide an incentive for countries to introduce specific reforms, so as to appear more attractive to IFIs and donor countries. Second, DBIs influence conditions and criteria used in loans and grants by the Bank, as well as other donors. Finally, DBIs shape a body of research that encourages governments to adopt "appropriate" climate reforms. The Doing Business Project is plagued by issues. DBIs are developed on the basis of criteria that rated countries had no input in shaping. Survey questions do not always elicit meaningful responses. Indicators abound in inconsistencies of measurement. Overall, the DBIs promote a standardized approach to reform, flying in the face of country-specific processes that recognize policy space. Instead, DBIs seem to be yet another tool to promote changes that universally benefit foreign investors. Reforms promoted by DBIs are designed so that local companies or investors don't have any sort of advantage over foreign parties. The harmonization of standards for investment promoted by DBIs has

more benefit for companies operating on a global scale than for local, small and medium enterprises. The World Bank's other major tool concerning investment climate reform comes in the form of the Investment Climate Assessments (ICAs). Designed to systematically analyze the conditions for private investment in a country, ICAs are broader and more detailed than DBIs, and underpinned by a survey administered to firms. It is unclear what value ICAs have, as similar surveys have often already been conducted, and the nature of investment climate constraints and actions required are often already known. ICAs are too generalized to adequately describe investment climate conditions by geographic area and industry. ICAs result in long lists of required reforms, with no priorities given. They don't offer suggestions concerning intervention or action, and they don't promote an understanding of the root cause of the problem. In addition to the WB initiatives mentioned above, Foreign Investment Advisory Services, a joint program of the IFC and World Bank, utilizes DBIs and ICAs to advise governments on how to improve their investment climate. FIAS may have a large influence on policy reforms, however, FIAS projects are not disclosed. FIAS seems more blatant in its attempts to remove barriers that foreign investors may encounter. Before moving forward, the World Bank must re-examine its initiatives, as well as its assumptions concerning FDIs, investment climates, and growth. If their assumptions and initiatives remain faulty, the influence of the World Bank may prove damaging to development and growth in developing countries.

3) Export -led growth: Is the Financial Crisis Revealing its Limits? The widespread adoption of export-led growth since the mid-1980s has had mixed results. The majority of countries that have achieved and sustained rapid growth have made export promotion an important component of their economic policies, but a number of countries that follow export-led policies have experienced low growth rates. Today, the global economic crisis is making painfully evident to the developing world the limitations of overdependence on a narrow set of exports and markets. Many countries are rightly worried about the merits of a growth process built on export-led growth. In the case of successful export-led growth strategies, the global economic crisis is revealing an additional limitation: the large exposure of exporting countries to financial vulnerability. Last summer, the Carnegie Endowment, the United Nations Development Programme, and the Center of Concern hosted a conference examining the future of export-led growth. A brief report, as well as presentations delivered at the event, is now available at http://www.carnegieendowment.org/events/?fa=eventDetail&id=1370&prog=zgp&proj=zdrl For a program of the event visit http://www.coc.org/node/6400

4) Follow-up to Financial Crisis Summit begins As agreed in the outcome to the World Conference on the Financial and Economic Crisis and its Impact on Development held in June, an Ad hoc open-ended Working Group will provide follow up to the issues emerging from the conference. The out-going General Assembly President, HE Miguel D'Escoto Brockmann, has named two Co-Chairs for the Working Group, who are: H.E. Mr. Lazarous Kapambwe, Permanent Representative of Zambia and H.E. Mr. Morten Wetland, Permanent Representative of Norway. . The first meeting of the Working Group has reportedly taken place on the morning of Friday September 11. Please watch this space for information on upcoming meetings and activities surrounding them.

5) World Bank/ IMF Annual Meetings: Registration open until September 21

Please find message below circulated by the IMF and World Bank Civil Society Teams. Dear Colleagues, The 2009 World Bank and International Monetary Fund Annual Meetings will be held on October 6 and 7, 2009 in Istanbul, Turkey. All CSO representatives interested in participating in the Annual Meetings must obtain individual accreditation. The online accreditation system (accessible at https://wwwamsweb-ext.imf.org/cso-ext/) is accepting applications for civil society accreditation opened today (August 3, 2009) and will close on September 21, 2009.

As in previous years, the Civil Society Policy Forum, a program of policy dialogues for civil society organizations (CSOs) will be organized on October 2 - 7, 2009. Information about the schedule of policy sessions for the Forum will be posted on our website closer to the date of the meetings. More information about the 2009 Annual Meetings, accreditation procedure, as well as the Civil Society Policy Forum can be found at: http://www.worldbank.org/civilsociety.

Sincerely, World Bank and IMF Civil Society Teams

Aldo Caliari Director Rethinking Bretton Woods Project Center of Concern