by Ambassador Odeen Ishmael of Guyana, Chairman of the Latin American Council
of SELA, at the opening session of the regional meeting: Reform of the International
Financial Architecture and Monetary and Financial Cooperation in Latin America
and the Caribbean
SELA Headquarters, Caracas, Venezuela, 8 April 2010
Posted April 8th. 2010
Permanent Secretary of the Latin American and Caribbean Economic System (SELA), Ambassador Josť Rivera Banuet; Representative of the International Department of the Central Bank of Venezuela; Ambassadors, Members of delegations, Representatives of sub-regional and international organisations, Ladies and Gentlemen.
Over the next two days, this regional meeting of SELA will examine issues relating to the reform of the international financial architecture and monetary and financial cooperation in Latin America and the Caribbean, and, at the same time, assess the implications for developing countries.
This meeting also aims at encouraging an exchange of ideas and proposals among the government representatives of the member states of SELA, in order to assess potential responses to the reform of the current international financial architecture.
In addition, it will examine the innovative proposals and projects for monetary and financial cooperation in Latin America and the Caribbean, being developed within the framework of bilateral and sub-regional cooperation programmes, as well as in the new integration processes within the region.
I do not need to remind you that the proposal to reform the international financial architecture is not in any way a new idea. However, when it was raised since the early 1990s, it received little active support, but eventually picked up momentum and won approval at the UN through three successive General Assembly resolutions on the establishment of a New Global Human Order, presented by Guyana in 2000, 2002 and 2007 with the support of 75 other countries.
Since those early days, reform of the Bretton Woods institutions like the IMF and the World Bank was seen as a necessity since it was felt that they had to institute reformed regulations to help poor countries manage their debt problem and eventually lead to debt forgiveness.
Through continuous agitation by many developing countries, the IMF and the World Bank agreed in October 1996 to grant debt relief to a number of poor countries. My country, Guyana, was a beneficiary of this decision. It will be recalled that three years before - in 1993 - when Guyana's President Cheddi Jagan, at that time, first pushed the idea that the multilateral financial institutions (MFIs) should look at the possibility of debt relief and debt forgiveness, there were many in the international arena, and even specialists working in these MFIs, who declared that the idea was not feasible. It was utopian and not practicable to them. But we eventually saw a turn-around from these very multilateral institutions. Surely, they must be continuously pressured to do even more.
Just last month, at the Caricom Heads of Government conference in Dominica, Guyana made another call for reform of the international financial institutions in order to support efforts by the sub-region to combat the debt situation. Attending that meeting was World Bank President Robert Zoellick, who, after being informed of the problems facing the sub-region, agreed to establish a special team to work with Caricom to create a debt management strategy.
Without doubt, the debt situation has serious implications for Latin America and the Caribbean, since there is fear that bankruptcy is the likely consequence, unless there is reform. Many of the countries simply are under severe pressure since they cannot meet recurring costs and pay their debts. Unless there is radical restructuring or increased sources of revenue, the situation will certainly become worse.
The problem has been compounded by the global financial crisis which has now declined somewhat but not sufficiently to sustain the large quantity of accumulated debts. At present, there is no multilateral initiative for debt relief or debt restructuring to middle income countries. For this reason, Guyana is proposing a special provision in the structure of the international financial institutions to provide debt relief to small vulnerable middle income countries, aside from the larger middle income countries.
An examination of the debt situation in most countries of the Caribbean would show that many borrow money to finance their budgets from domestic sources such as the banking system, pension funds, etc. As a result, debt relief in these instances could affect the integrity of the banking and pension systems in those countries. Undoubtedly, many of these countries will not have a good future unless the debt problem is tackled.
I should mention that Guyana has managed to keep its debt under control to the extent that debt servicing, wages and salaries account for about 40 percent of the country's revenue where only about 4 percent of that 40 percent goes to servicing the debt.
The reform of the international financial architecture was emphasised again late last month in Cancun, Mexico, at the annual Inter American Development Bank (IDB) meeting. There the Caribbean countries urged the IDB to provide continued development support to ensure a transformation of their economies to reduce fragility and vulnerability, and to promote sustained growth and prosperity.
The Caribbean region is extremely vulnerable to the problems associated climate change and thereby exposed to the changes in external economic conditions. This situation is made all the more difficult by the various dimensions of acute vulnerability, including the limitations of economic size, which reduce the policy responses and options available to them.
For this reason, the small middle income developing economies of the Caribbean require policies formulated specifically in response to their unique structural and institutional characteristics and economic circumstances. If this is to be achieved, it is important to look beyond the illusion of their per capita income, which masks both the extent of their macro-economic fragility and the existence of persistent pockets of poverty in these countries.
The recent catastrophes in Haiti and Chile are stark reminders of this region's exposure to natural disasters. This circumstance has affected in very significant measure the pace and quality of development in Latin America and the Caribbean over the years.
At the same time, the global financial crisis continues to be a stern test to the buoyancy of economies of the Caribbean; it is straining social safety nets, and threatening to erode the gains that have been made in poverty reduction.
The impact of the global crisis has also highlighted the acute helplessness of small developing economies to the external economic environment. The decline of export earning, and lower tourism receipts, remittances and foreign investment flows have severely affected economic growth. This crisis has cost some Latin American and Caribbean economies as much as eight percentage points of real growth over the past two years.
It is certainly necessary to develop a new financial architecture that would include multilateral mechanisms of crisis prevention and management. This is now crucial since national policies like banking supervision, imposition of international standards, and increased trade integration may be inadequate to protect the countries of this region from the risks associated with international financial crises.
A reformed financial architecture must focus on reducing the instability of external financing. The first objective should be the establishment of mechanisms to protect countries with good economic development prospects from speculative attacks. This should involve facilities by the multilateral financial institutions to provide, among other actions, automatic financial backing to countries facing a liquidity crisis.
And since our countries all aim at hemispheric economic integration, a reformed international financial architecture is an essential prerequisite. Currently, the exchange rate fluctuations and the financial and economic crises are especially harmful for the stability of regional integration agreements. If the problems of the international financial architecture continue, some countries will eventually establish obstacles to the movement of capital by limiting capital inflows during periods of economic prosperity and capital outflows during periods of economic crisis. All this could result into a slowing down of growth for the developing countries.
As we examine ideas relating to such reform, as well as the monetary and financial cooperation among Latin American and Caribbean countries, I hope that these views I have expressed will contribute positively to the debate over the next two days.