11 October 2005

Speakers Stress Need to Increase Capital Flows to Developing Countries, Reverse Debt Cycle as Second Committee Takes up Macroeconomic Policy Questions

Delegates Quiz Under-Secretary-General Following Presentation of World Economic, Social Survey 2005: Financing for Development

NEW YORK, 10 October (UN Headquarters) -- Speakers stressed the importance of increasing capital flows to the developing world, reversing the crippling debt cycle in the poorest countries, and increasing developing-country participation in the international financial system, as the Second Committee (Economic and Financial) took up macroeconomic policy questions.

As the Committee focused on the international financial system, the external debt crisis and their relation to development, Jose Antonio Ocampo, Under-Secretary-General for Economic and Social Affairs, presented the World Economic and Social Survey 2005:  Financing for Development, noting that developing countries had recently been using increased funds to build up international reserves as a guarantee against future crises.  As a result, the net transfer of resources to the developing world had become negative, as those countries transferred increased resources to the developed world.

Quoting the survey, he pointed to several options for reducing outward transfers from developing countries, including local currency financing, as well as financing by international financial institutions in a counter-cyclical (more regular) fashion.  Proposed policies focused on increasing information flows for potential investors, channelling subsidies through donors, as well as insurance and guarantee schemes.

The survey also noted a failure to reduce significantly the rising trend in debt ratios during the 1970s and 1980s, which had burdened developing countries and thwarted development, he said.  Efforts to resolve the debt burden included the Heavily Indebted Poor Countries (HIPC) Debt Initiative, the recent initiative by the Group of 8 industrialized countries to forgive debt owed by the poorest countries, and the Paris Club's so-called Evian Approach debt-rescheduling initiative.  However, discussion was still needed on mediation and negotiation mechanisms for private-creditor debt.

Asked during the ensuing discussion if decreased capital flows posed a major constraint on growth, Mr. Ocampo said the sharp reduction in capital had indeed affected growth in developing countries, citing the 1980s debt crisis and the East Asian financial crisis.  Responding to a comment that the negative transfer of capital from developed to developing nations could indicate increased developing-country integration into the world's capital markets, he said it could also mean they were accumulating more international reserves as a method of self-insurance.

To a query on debt sustainability, Mr. Ocampo said countries could borrow up to 2 to 3 per cent of gross domestic product (GDP) without falling into negative debt dynamics, but the world's poorest countries needed grant financing.  Also, since world currencies were generally from developed nations, developing countries could only borrow in those currencies, which generated additional risks for them.

As delegates subsequently made their country and agency statements, Anh-Nga Tran-Nguyen, of the United Nations Conference on Trade and Development (UNCTAD), introduced the report on external debt crisis and development, observing that many highly-indebted low- and middle-income countries continued to face unsustainable debt burdens, hindering their efforts to attain the Millennium Development Goals by 2015 without substantial additional development assistance.  For the poorest countries, assistance should come in the form of increased grant-based official development assistance (ODA) to ensure debt sustainability.

Addressing the question of private-creditor debt, she noted considerable delays in the restructuring of private debt, which led to costly defaults and worsened economic conditions.  The risk of litigation had also increased due to the lack of collective representation, vulture investors or legal implications in bilateral investment treaties.  But those experiences had also shown that economic recovery resumed quickly, and countries truly exited from debt when restructuring gave them enough breathing space and released resources for development.

Jamaica's representative, speaking on behalf of the "Group of 77" developing countries and China, stressed that debt relief should not replace other sources of financing, and that low- and middle-income countries outside the HIPC Debt Initiative would also need a respite from overriding debt.  Expected global financial-flow patterns had reversed, and resources were increasingly being transferred from developing to developed countries in the form of loan repayments.

Taking that issue further, Indonesia's delegate, speaking on behalf of the Association of South-East Asian Nations (ASEAN), said development had landed "on the horns of a dilemma".  The net transfers of financial resources to developed rather than developing nations diminished the resources available for domestic consumption and investment.  In addition, debt servicing was draining the resources of developing countries and would certainly have an effect on succeeding generations, who would inherit the debt-repayment trap.  More could be done to service the poor when less was being spent paying interest to developed countries, and debt savings could be used to increase spending on better infrastructure, education and health.

India's representative addressed the issue of developing-country participation in financial institutions, observing that the present voting system was weighted against developing countries and prevented them from mustering the 85 per cent majority required to approve important proposals.  If the International Monetary Fund (IMF) management was more equitable and transparent, it should be possible to enhance the voice of developing countries.

Also speaking today were the representatives of Morocco, Bangladesh, Malaysia, China, United Republic of Tanzania and Ecuador.

Other speakers included representatives of the Department of Economic and Social Affairs; Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States; and the International Labour Organization.

Before the meeting was adjourned, Pakistan's delegate expressed his gratitude for the support his country had received in the wake of the devastating weekend earthquake, and expressed his condolences to Afghanistan and India, whose people had also suffered its lethal effects.

The Second Committee will meet again at 10 a.m. Tuesday, 11 October, to consider special economic assistance to individual countries or regions.

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