In the lead up to UNCTAD XIII, the Wall Street Journal interviewed UNCTAD Secretary-General Dr. Supachai Panitchpakdi on his views of the current international economic situation and the ways forward.
Writing in the 26 March 2012 edition of the Wall Street Journal, Paul Hannon noted that UNCTAD has long been critical of what it calls "financially driven globalization" and warned of its consequences ahead of the 2008 crisis. Also noting that the UNCTAD Secretary-General believes many of the flaws in the functioning of the global economy that led to the crisis remain, the Wall Street Journal quoted Dr. Supachai as saying "If we do not do something more drastic with the international financial regime, then this will come back."
The article goes on to say that UNCTAD's argument is that uncontrolled capital flows and associated financial speculation have led to the distortion of exchange rates and other key prices -- including those for many commodities -- which means that many countries are not able to pursue the economic policies that are right for sustainable growth. "Exchange-rate movements are still very much not really reflecting the flows of trade that we're seeing; these distortions are no less damaging than tariff increases," Dr. Supachai was quoted as saying.
Dr. Supachai was also quoted as saying that foreign-exchange trade of over $4 trillion a day does not appear to be related to any real investment and there is no correlation to capital formation.
The article goes on to say that the UNCTAD Secretary-General believes that global policy makers should focus on maintaining real effective exchange rates at levels that reflect the relative competitiveness of economies. Under this scheme, a country that saw a sharp rise in unit labour costs would be allowed to depreciate its exchange rate to maintain its competitiveness, while one that saw a fall in unit labour costs would have to allow its exchange rate to strengthen. Dr. Supachai was also quoted as saying that he believes it is essential for the health of the global economy that the euro zone survives but this can only happen if members are allowed to exit and re-join.
The article notes that ever since exchange rates began to fluctuate after the dollar-anchored Bretton Woods system ended in 1971, it has proven difficult to get agreement among nations on whether their own or other currencies are fairly valued. As a former Director-General of the World Trade Organization, Dr. Supachai was asked whether if the WTO, as suggested by some economists, should perform the role of identifying exchange-rate misalignments just as the WTO highlights unfair tariff or trade distorting measures. Dr. Supachai responded that he does not believe that this would be politically possible. Instead, he believes that a start should be made through regional initiatives, which could then be linked together, citing the Chiang Mai initiative of 2000 which was subsequently expanded from the 10 member countries of ASEAN to include China, Japan and South Korea. The scheme was intended to give individual members access to a large pool of foreign exchange reserves with which to intervene in the foreign exchange markets, and prevent a repeat of the Asian currency crisis of 1997 and 1998. According to the article, Dr. Supachai believes more of these regional mutual-assistance agreements -- especially one for Latin America -- could help manage exchange rates globally.
In addition, Dr. Supachai mentioned the other tool that should be more widely used is controls on short-term capital flows. Such flows can place an impossible burden on monetary policy in many developing economies since any increase in interest rates to tackle high inflation immediately attracts capital flows that lead to an overly rapid appreciation in the exchange rate, he said.
