October 5, 2023

Recommendations for Realigning the Global Financial Architecture to Achieve Financial Stability, Boost Productive Investment and Create Better Jobs

"Today, we see setbacks in indicators on poverty, hunger and gender equality, to mention just a few," Rebeca Grynspan, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), wrote in the Forward to The Trade and Development Report 2023: Growth, Debt and Climate – Realigning the Global Financial Architecture. Ms. Grynspan adds that "The
financing gap for the Sustainable Development Goals in the global South – which totaled $2.5 trillion in 2015 – now amounts to $4 trillion. Nearly half of all humanity, or 3.3 billion people, lives in countries that spend more resources on debt servicing than on funding health or education. At this pace, only 15 percent of the Sustainable Development Goals will be achieved by 2030."

Ms. Grynspan points out that UNCTAD's report "identifies three specific global challenges that have crystalized during the year 2023. Weak global growth, divergence between major economies and between developing countries, as well as the increased role of geopolitical factors, indicate that we are witnessing a change in the nature of global interdependence, or a transition from the period of hyperglobalization to one of polyglobalization."

Focusing on how to realign the global financial architecture, the report identifies five core policy priorities:
  1. Reducing inequality. This should be made a policy priority in developed and developing countries. This requires concerted increases of real wages and concrete commitments towards comprehensive social protection. Monetary policy is not to be used as the sole tool to alleviate inflationary pressures. With supply-side problems still unaddressed, a policy mix is needed to attain financial sustainability, help lower inequalities and deliver inclusive growth.
  2. Balancing the priorities of monetary stability with long-term financial sustainability. In light of growing interdependencies in the global economy, central banks should assume a wider stabilizing function within this landscape.
  3. Regulating commodity trading generally, and food trading in particular. This needs to be done internationally, using a systemic approach developed within the framework of the global financial architecture.
  4. Addressing the crushing burden of debt servicing and the threat of spreading debt crises. To do this, the rules and practices of the global financial architecture need to be reformed. The mechanisms, principles and institutions of global finance should ensure reliable access to international liquidity and a stable financial environment that promotes investment-led growth. Given the failures of the current architecture to enable the resilience and recovery of developing countries from debt stress, it is crucial to establish a mechanism to resolve sovereign debt workouts. This should be based on the participation of all developing countries and include agreed procedures, incentives and deterrents.
  5. Providing reliable access to finance and technology transfer to enable the energy transition. This would require not only fiscal and monetary agreements among the Group of 20, but also agreements within the World Trade Organization (WTO) to implement technology transfer, and within the International Monetary Fund (IMF) and World Bank to ensure dependable financing. Without eliminating the incentives and regulatory conduits that make cross-border speculative investment so profitable, private capital is unlikely to be channeled to measures to help adapt to climate change.
UNCTAD's report also presents the following specific policy recommendations for a development-centered global debt architecture:
  • Increase concessional finance through capitalization of multilateral and regional banks, and issuance of special drawing rights.
  • Enhance transparency in financing terms and conditions, using the digitalization of loan contracts to improve accuracy.
  • Revise the UNCTAD Principles for Responsible Sovereign Lending and Borrowing to motivate and underpin the importance of guiding principles throughout the stages of sovereign debt acquisition.
  • Improve debt sustainability analysis and tracking to reflect the achievement of the Sustainable Development Goals and empower country negotiators with improved data on their potential for growth and fiscal consolidation.
  • Enable countries to utilize innovative financial instruments such as sustainable development bonds and resilience bonds. Develop rules for automatic restructurings and guarantees.
  • Enhance resilience during external crises, for example by implementing standstill rules on debtors' obligations in crises, and create a space to enable the avoidance of debt distress.
  • Encourage borrowers to share information and experiences, drawing inspiration from private creditor coordination.
  • Initiate work on a more robust debt workout mechanism and a global debt authority.

With the global economy at a crossroads where divergent growth paths, widening inequalities, growing market concentration and mounting debt burdens cast shadows on the future, I appreciate how the report "outlines an approach based on balancing the pace of disinflation and the impact of high real interest rates not only against inflation indicators, but also in relation to economic activity, employment, income inequality and fiscal stability."

What are your recommendations for how to get the global economy moving in the right direction by using a balanced policy mix of fiscal, monetary and supply-side measures to achieve financial stability, boost productive investment and create better jobs?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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