Stabilizing Finance and Economy

This is the 2007 draft on finance. You will get the newest version here.

International debt and other instabilities of the finance system put social and economic development at risk. Moreover, debt of the global South constrains its options for poverty eradication, public health, education, etc.

Affected people and foundations of life: Debt problems and other poorly secured financial transactions induced the Asia crisis, the Argentina crisis, the dying of dot-coms, the U. S. (United States) subprime crisis, etc. (and so on) The Counterparty Risk Management Policy Group (CRMPG) in its "Corrigan report", that was prepared by senior officials from a number of private financial institutions, came to the conclusion, that the statistical probabilities of the occurrence of major systemic financial shocks have decreased. But the damage caused by such a shock would be greater because of the enormous rise in speed and complexity and the tightening of linkages in the global financial system. In addition to that CRMPG concluded, that the financial world's capacity to anticipate systemic shocks is nil. (CRMPG 2005.) 117 systemic banking crises (defined as much or all of bank capital being exhausted) have occurred in 93 countries from the late 1970s to 2002 (WB [World Bank] 2003). Fiscal costs of financial crises in emerging markets in the 1980s and 1990s topped US$ (United States dollar)1 trillion (WB 2006).
Countries of the global South have a total debt burden of US$ 2.7 trillion to industrialized countries (WB 2007, 187), which, on the other hand, themselves have public and private foreign debts of more than US$ 30 trillion (CIA [Central Intelligence Agency] 2006). While the less developed debtor countries – at least the poorest of them – have practically no prospects of paying off their debts, their debt service constrains their options to develop economically and to undertake social tasks. The debt service paid in 2005 by less developed countries to industrialized countries amounted to US$ 513 million (WB 2007, 187), in average 4.6% of their gross domestic product or 13.0% of exports and net income from abroad. Latin America pays 6.6% respectively 22.9%. The debt service of the South is five times the received development assistance and nearly double the direct investments. During the acute debt crisis in the eighties the debt service ratio was much higher, but it still is a chronic burden to the economies of the South. (UNDP [United Nations Development Programme] 2007, 293.)

Targets/goals: a debt relief for heavily indebted poor countries, and a cancellation of all bilateral debts (goal of Millennium Summit: UN [United Nations] 2000, § 15.2).

Trend:

• Financial crises: − From the late 1970s to 2002 the number of systemic banking crises has increased (WB 2003).
• Debt of poor countries: + see measures.

Measures:

• Improved risk management by private actors and a far-sighted regulation of financial markets could reduce risks for economic and social development. Such regulations may include: special jurisdiction regarding offshore finance centres, and regulations on transactions with them; stronger obligations regarding equity, margins and leverages, as well as better surveillance of hedge fonds; a tax on foreign exchange transactions (Tobin tax); strengthening of boards like the Financial Stability Forum; reform of international finance institutions, etc. (EK [Enquete-Kommission "Globalisierung der Weltwirtschaft – Herausforderungen und Antworten"] 2002, 115f.).
• Initiatives for debt relief for poorer countries amounting to US$ 59 and 50 billion were started in 1996 and 2005, which should reduce the annual debt payments by about US$ 1 billion each (Highly Indebted Poor Country Initiative and Multilateral Debt Relief Initiative, UN 2006, 23). In 2006 there was a cumulative debt relief of US$ 59 billion committed under these initiatives (UN 2007b, 15).

---

Annotations: For numeric names the short scale is used:
1 billion = one thousand million = 10⁹ = 1 000 000 000
1 trillion = one thousand billion = 10¹² = 1 000 000 000 000

Sources

• CIA 2006 – Central Intelligence Agency: The World Factbook 2005. Debt – external. 
• CRMPG 2005 – Counterparty Risk Management Policy Group II: Toward Greater Financial Stability: A Private Sector Perspective.  
• EK 2002 – Enquete-Kommission " Globalisierung der Weltwirtschaft – Herausforderungen und Antworten": Schlussbericht der Enquete-Kommission Globalisierung der Weltwirtschaft – Herausforderungen und Antworten.    Deutscher Bundestag, 14. Wahlperiode: Drucksache 14/9200.
• UN 2000 – United Nations, General Assembly: United Nations Millennium Declaration.  
• UN 2006: The Millennium Development Goals Report 2006. New York, 2006.   [Published by the United Nations Department of Economic and Social Affairs DESA – June 2006.]
• UN 2007b: The Millennium Development Goals Report 2007; Statistical Annex, Current Indicators.  
• UNDP 2007 – United Nations Development Programme: Human Development Report 2007/2008; Fighting climate change: Human solidarity in a divided world.  
• WB 2003 – World Bank: Episodes of Systemic and Borderline Financial Crises.   By Gerard Caprio and Daniela Klingebiel.
• WB 2006 – World Bank: Financial Crises.  (No date of publication given [probably December 2006], retrieved in 2007.)
• WB 2007 – World Bank: World Development Indicators 2007; Section 4: Economy.  

Draft (2007)