The Monterrey Consensus: the half-full glass?

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The Monterrey Consensus the half-full glass?

• Rogerio Studart
• Executive Director for Brazil, Colombia,
  Dominican Republic, Ecuador, Haiti, Panama,
  Phillipines, Suriname, and Trinidad Tobago
• The World Bank Group
• rstudart_at_worldbank.org

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Some principles behind Monterrey

• Additionality
• More resources for sustained inclusive
  development and poverty reduction, thus to meet
  the Millenium Development Goals
• net real resources transfers from developed to
  developing countries
• Stability and enabling environment
• To promote a fair and inclusive trade system
• To promote orderly flows of capital to
  developing countries
• To avoid uneven distribution, and especially,
  volatility of capital flows

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Additionality...

• Trade Sustainable growth of developing countries
  exports (which in turn would allow a sustainable
  increase of imports of essential goods for
  development)
• Capital flows Orderly and even expansion of net
  capital flows to developing economies, which
  again lead to sustainable increase of imports

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Stability and enabling environment

• Sound macroeconomic policies and appropriate rule
  of law in developing (assuming developed
  economies would also follow this principle)
• Enabling international economic environment,
  including fair trade system and stable and
  inclusive international financial architecture

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Monterrey Consensus key commitments(by whom?)

• Domestic resources
• Supportive enabling environment
• Good governance
• Control of corruption
• Sound macroeconomic policies
• Public resources/budgeting
• Sound banking systems
• Micro-finance/SMEs including women and rural
  areas
• Capacity building, with special focus

• International resources
• Transparent, stable, and predictable investment
  climate
• Promoting and protecting investment through
  economic policy and regulatory frameworks
• Increase support for private foreign investment
  in infrastructure and other priority areas
• Support for new public/private financing
  mechanisms
• Improve transparency of financial flows
• Debt management, strengthening prudential
  regulations, orderly capital flow liberalization

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What have we achieved?
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Additionality I

• Net exports from developing countries have
  increased fast, but
• For the great majority of developing countries it
  was partly a result of a hike of commodity
  prices, as a side-product of a rapid increase in
  demand in developed economies (and in secondary
  demand coming from those developing economies
  which supplied labor-intensive consumer goods to
  developed economies)
• For most developing economies, a significant part
  of such expansion ended up as accumulated
  reserves, or was used to repay debt
• In many developing economies this reserve
  accumulation led to exchange rate appreciation
  which stimulated demand (of the rich) rather than
  expansion of infrastructure, productive capacity
  or consumption of the poor

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Additionality II

• Net capital flows have also increased but
• North-South FDI has been directed to a limited
  number of developing countries, which
• Happened to be the fastest growing ones, with
  expansion led by net exports, not always faring
  well when it come to the conventional doing
  business and other investment climate
  indicators
• Therefore to developing economies that did not
  require more capital flows in order to finance
  their domestic investment
• Other North-South financial flows went after
  arbitrage gains, created either by excessively
  high domestic interest rates (particularly if
  exchange rate appreciation was occurring) and
  where securities markets provided cyclical,
  speculative, investment opportunities

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Stability

• Trade growth was only partly the result of trade
  liberalization it was more the outcome
  significant and unsustainable disequilibria in
  world macro economy (consumption in the North
  and export-related infrastructure investment in
  the South)
• Financial flows have also been the result of the
  rapid and unsustainable increase in liquidity
  partly based on highly speculative expansion in
  the main developed financial markets (including
  the mortgage and consumer credit markets)
• Note South-North flows went primarily to finance
  increasing public debts in the developed World,
  as a result of a clearly unsustainable
  macroeconomic policies. Only recently South-North
  and South-South FDI has increased (interestingly
  this phenomenon has been significantly criticized
  in multilateral fora).

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In sum

• Since Monterrey
• We moved very little towards a trade system which
  facilitated the sustainable increase of net
  exports for all the developing world
• We have failed to establish an international
  financial architecture that led to the
  sustainable increase of productive capital flows
  to the developing world, and allowed for
  expansion of financial fragility in developed
  countries markets (which ended up in the crisis
  we see now)
• Macroeconomic policies in the developed economies
  did not warrant a enabling international
  environment and did stimulate fragility (and
  instability) in some countries those policies
  were clearly not sound and/or sustainable.
• In the developing world, many of us counted too
  much on globalization as an engine of growth and
  prosperity, underestimating
• the need to enhance domestic mechanisms of
  resources allocation,
• the necessity to invest in infrastructure and
  increase domestic markets (as engine of growth)
  and
• the advantages in fostering regional integration
  and South-South cooperation (again as engines of
  growth and development)

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Filling the glass possible ?
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Developed economies (I)

• Use all instruments available to avoid a
  deepening of the current financial crisis
• Move on with the trade agenda, prioritizing
  developing economies access to markets and
  technology
• Reestablish sound macroeconomic policies (but
  cautiously), with particularly attention to
  sustainable growth of demand (that would be good
  for the environment too, by the way).

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Developed economies (II)

• Commit to a rapid increase to ODA
• Fully support a widening of the role of
  Multilateral institutions, and keep your minds
  open and flexible
• Institutions such as the IMF, the World Bank,
  the Asian Development Bank, the African
  Development Bank, Inter-American Bank, CAF etc
  should be ready to use all their existing
  instruments (and to create new ones) to expand
  their support their developing economies in the
  years to come
• Promote a review of culture, business environment
  and conditionalities
• Understand that more equitable Voice, Quota and
  Representation Structure is a matter of justice,
  but also a matter of efficiency (you serve the
  clients better and more promptly if your can hear
  them more)
• Work harder on the other parts of the
  international financial architecture, such as
  regulations, transparency and controls, in order
  to avoid another crisis is 5 years

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Developing economies (I)

• Sound macroeconomic policies important, but not
  enough the challenge now is how to achieve
  sustained inclusive growth
• Expanding trade is good, but focus on expanding
  domestic markets through
• social and economic inclusion (not to mention
  that this is a question of equity and justice
  too)
• Infrastructure for growth and for the poor
• Regional integration

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Developing economies (II)

• Improving governance and business climate is
  good, but not enough
• develop appropriate domestic financial
  architecture (or risk-sharing mechanisms, as
  mentioned by Professor Kahn yesterday)
• Replicate and scale up experiences of developing
  countries
• Be pragmatic (rather than dogmatic) and deal with
  risk-sharing problems with what you have in hand
• Create appropriate incentives to attract
  productive foreign capital, but be cautious of
  short-term, potentially destabilizing capital
  flows

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Thank you.