Addressing development’s black hole: Regulating capital flight

Eurodad making sense once again:

In the aftermath of the Asian financial crises ten years ago the international community recognised the importance of financial stability. Today new troubles infect the global financial system, leaving governments and financial analysts uncertain how to react. The media is full of the credit crunch, write-downs by private banks and dramatic price rises. … Very little attention is given to the specific impacts in the world’s poorest countries. Yet global financial stability – like climate change – is a key global challenge and one that the current financial and regulatory system is ill-equipped to handle.

The sub-prime crisis that started in the U.S. and spread through contagion has shown that market-based solutions and conventional crisis management are completely insufficient. Central bankers and finance ministers have tried injecting liquidity, lowering interest rates, and even nationalising a bank. Yet regulators and central banks are largely playing catch up…

The crisis is not just due to individual misbehaviour. There are deep flaws in the international financial system. Finance has become an end in itself: to make money out of money in the shortest possible time. This speculation leads to instability and widens the gap between rich and poor. Recurrent crises are inevitable. We are very far from achieving what the world’s governments signed up to at the Monterrey Financing for Development conference in 2002. There they pledged to encourage “the orderly development of capital markets aimed at addressing development financing needs and foster productive investments”. They agreed, correctly, that this “requires a sound system of financial intermediation, transparent regulatory frameworks and effective supervisory mechanisms”. Finally they said they would introduce measures “that mitigate the impact of excessive volatility of short-term capital flows” and to strengthen “prudential regulations and supervision of all financial institutions, including highly leveraged institutions”.

Full text here

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Filed under Capital markets, Development, Globalization

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