A partnership with academia

Building knowledge for trade and development


Three Russian Vi member universities, the Higher School of Economics of the Moscow University (HSE), the Moscow State Institute of International Relations (MGIMO), and the St. Petersburg State University (SPSU), joined Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies (GDS), for a videoconference presentation of the Trade and Development Report 2009 on December 3.

Moderated by Vi Chief, Vlasta Macku, Tatiana Isachenko (MGIMO), and Olga Trofimenko (SPSU), the conference was attended by a Dmitry Lyakishev, counselor for commercial affairs at the Permanent Mission of the Russian Federation in Geneva.

Opening remarks were made by Victor Lukashevich, Associate Professor of the World Economy Department at SPSU, and Anna Sidoruk, Deputy Head of the WTO division of the Russian Ministry of Economic Development.

The presentation of the TDR focused on causes of and the immediate reactions towards the current financial crisis as well as its medium and long term consequences. Flassbeck commented on three common misunderstandings:

• The current crisis is not a crisis of the market economy in general. It is rather is a crisis of the financial market system.
• The crisis was not caused by excessive liquidity but by deregulation of the financial markets. Monetary policy should therefore provide effective regulation.
• The crisis is not related to the "saving glut" of countries like China.

Flassbeck said that the crisis was not exclusively caused by the decline of the housing/real estate market in the USA. Bubbles existed in all financial markets, including equity markets and currency markets. He noted that commodity markets have become financialized, as commodity futures have gained in importance in the recent past. According to Flassbeck, the subprime credit collapse highlighted the exposure to risk in many areas and triggered the sudden unwinding of speculative positions in different markets. In this manner, it triggered a simultaneous burst of bubbles, causing a sharp price fall in all these markets. Over-indebtedness and highly leveraged contracts led to a debt-deflation that forced many agents to correct their balance sheets. In consequence, returns fell dramatically. The excessive withdrawal of money threatened to pull down the whole banking system. The real economy suffered from sharp falls in demand for consumer durable goods and investment goods. However, governments were able to stabilize the banking system and the real economy by providing liquidity and fostering aggregate demand.

Looking at daily price movements in commodity, equity and currency markets, Flassbeck pointed out that markets are no longer driven by supply and demand in real terms but that financial speculations cause price movements and lead to highly correlated fluctuations. Oil prices, for instance, are no longer determined by supply and demand but rather by futures markets. Their demand has become inelastic. According to Flassbeck, the financialization of markets has a number of effects:
• It causes repercussions on the real economy because prices are not determined by real factors (supply and demand) anymore.
• Exchange rates become unrelated to the economic fundamentals of an economy, leading to false evaluations of currencies. This in turn causes the misallocation of resources and distortions in international trade flows.
• New bubbles will emerge and burst eventually. Some countries like Brazil and Russia seek to prevent the inflow of "hot money". However, as long as no global monetary system is in place, this will remain a question of self-defense.

Summarizing the findings of the TDR 2009, Flassbeck drew the following policy conclusions:
• Global economic policy making has failed at large. Deregulation has given rise to speculative bubbles that will re-emerge if no solutions for the effective regulation of international financial markets are found.
• Recovery of the real economy will take time. Government programmes have contributed to the stabilization of the economy in many countries but their overall effects have been small. One positive example is China, where investments in infrastructure have stimulated growth. Wages are still growing by approx. 8%, while domestic demand is growing by approx. 9% to 10%. In other developing and emerging countries, trade flows have contracted and a quick recovery is unlikely. According to Flassbeck, the economy in Europe has just bottomed out, while Japan is threatened by deflation. Both regions will need time to get back on a stable growth path. In the USA, wages stagnate and unemployment is on the rise. The situation in Eastern Europe is fragile and the appreciation of currencies should not be seen as a sign of recovery. On the contrary, over-valuation of currencies could lead to an even more unstable situation.
• The deregulation of the financial markets has to be addressed consequently and insistently. As Mervyn King, Governor of the Bank of England, said, it is necessary to separate the normal banking business, which has a utility for the real economy as an intermediator between savings and investments, from the so called "investment banking", which creates only "fictional returns" that are not related to the real economy. According to Flassbeck, the bailout of hedge funds by governments should be forbidden by international law, in order to avoid moral hazard. As these markets do not yield any social returns, but even have the potential to negatively impact the whole economy, they need to be controlled and separated from beneficial financial markets such as commodity and currency markets.

The presentation of the TDR was followed by a lively discussion with professors and students from Russia. Regarding climate change mitigation, Flassbeck said that oil prices are de facto driven by the financial markets, which constitutes a challenge for the ongoing UN Conference on Climate Change in Copenhagen, Denmark. The dependence of the oil price on financial markets could lead to high volatility in prices and high volatility in demand. This could have adverse effects on environmental policies that aim at promoting environmentally friendly technologies. The success of the conference will thus depend on the governments' ability to find solutions for the determination of the oil price. Flassbeck stressed that no country could afford to miss the technological developments that accompany the greening of the economy. Developing countries should use this opportunity for development, while developed countries should support them by licensing green technology and taking more forceful measures.

With respect to the WTO, Flassbeck identified one major shortcoming of the institution, namely that it cannot separate trade in monetary and real terms. Free trade, as promoted by the WTO, may not even be the most efficient system, as economies still suffer from monetary shocks. Moreover, tariffs and trade barriers may be efficient means of trade regulation in specific cases, although they are banned under the WTO framework. Hence, a more efficient institution for global governance is needed. This should be truly representative of all countries (following the principle "one country, one vote") and could thus be based on the existing UN system. According to Flassbeck, dealing comprehensively with trade questions is not so much a matter of proficiency but rather a matter of will.

Representatives from the Russian Ministry of Economic Development (Department of Trade Negotiations), the WTO Information Center in Russia, the Chamber of Commerce, and the Russian Sberbank used the opportunity to listen to Heiner Flassbeck, an established economist and expert in the fields of monetary policy and employment. Among the academic guests were professors from the Financial Academy in Moscow who joined the event at HSE.

The videoconference ended with the presenter, the moderators, and the audience expressing their hopes that policy makers will act upon the report and strengthen their political will with a view to effectively reforming the international financial regulatory framework. Macku and Flassbeck thanked the audiences in Moscow and St. Petersburg for their interest in the TDR and their qualified questions. Isachenko and Trofimenko thanked the presenter and the Vi for the organization of the event.