A New Pact to Re-establish the International Financial System
The present Note, elaborated by the Pontifical Council for Justice and Peace, and approved by the State Secretariat, intends to offer some points of reflection on the present world financial crisis and its repercussion in the financing of development. The Holy See is aware that many of the issues pointed out here are susceptible to being addressed by very different technical means. Hence, the document is above all an effort to promote and animate Governments and the rest of economic agents to seek lasting solutions in solidarity.
Financing and Development: Importance of the Conference
1. The next international conference on "Financing for Development to Review the Implementation of the Monterrey Consensus," which will take place in Doha from Nov. 29 to Dec. 2, 2008, represents the end point of a process of revision, promoted by the United Nations General Assembly with the participation of civil society, of the contents and updating of the Document on Financing for Development, approved in 2002 in Monterrey – the so-called "Monterrey Consensus." That document included six chapters on the great essential questions to finance development: the mobilization of internal resources; the flow of private capital; international trade; the issue of the external debt and last but not least important, the systemic question on the ways to give strength and coherence to the global monetary, financial and commercial system in support of development.
According to United Nations proceedings, the works of revision have led, during the first months of 2008, to outlining the sketch of a new document (the "Doha Draft Outcome Document"), which has been discussed and amended little by little, in order to be able to close the Doha Conference with a text that includes the consensus of all the participants.
In recent months, superimposed on this laborious negotiating process is the precipitation of the global financial crisis that was generated in subprime mortgage loans in the United States. Despite its long gestation, at the beginning of September the crisis spread to the point of affecting other sectors of the financial system and putting into difficulty a growing number of countries, whose financial situation, in the absence of an outside crash, did not seem to present problems of sustainability.
Hence, to the rise of agricultural and energy prices, which took place in the first months of 2008, has been added a financial crisis that is dramatic in certain aspects, with very negative consequences: above all, the subject of financing of development runs the risk of being relegated to second place.
2. In this situation, it is indispensable that governments and financial institutions act to counteract the further spread of the present financial crisis: In fact, many countries have introduced decisions radically opposed to the tendency, preferred up to the recent past, of entrusting the functioning of the financial market to his capacity for self-regulation.
Essentially, the governments of the countries affected by the crisis have adopted a variety of dispositions that entail a massive return of the public sector in the financial markets themselves which, in recent decades, had been deregularized, privatized and liberalized.
Given that a policy action of this nature has probabilities of success if the countries do not proceed in a dispersed manner, but coordinate their initiatives, an urgent summit of the great countries was called on Nov. 15, the so-called G-20, with the participation of significant emerging countries. Given the moment in which the G-20 took place two weeks before the Doha Conference promoted by the United Nations, very many countries did not participate in the summit out of fear, not without reason, that the first event, which entailed only a restricted number of countries, but which attracted the attention of international public opinion, would deprive the Doha Conference of political impact.
As a result, there are two important and very close worldwide meetings, with a similar purpose – finance and its crisis, finance and development – though characterized by very different political meanings and functions. Both meetings are important.
Everyone hopes that all the countries that met in Washington on Nov. 15 will take into account the Doha Conference and favor its success. The latter, in fact, not only has the objective to arrive at a formal inter-governmental consensus on six important topics already present in the "Monterrey Consensus," but also of progressively developing a common sentiment, a shared appraisal of those identified as emerging questions in the matter of the financing of development.
If it is indispensable to address, also on the political plane, the financial emergencies that appear, it is also important to look with attention at the picture as a whole and to the links between the problems, not only from the point of view of the economically important countries, but within a perspective that tends to be global. What is urgent is not always what is most important. On the contrary, it is ever more necessary to re-order the priorities as soon as the situation has become difficult.
Undoubtedly, today's financial emergency came after a long period in which, pressured by the immediate objective to pursue results in a short time, the dimensions of finance itself have been left to one side: its "true" nature, in fact, consists in favoring the employment of the resources saved where they favor the real economy, well-being, the development of the whole of man and all men (Paul VI, "Populorum Progressio," 14). Hence, the Doha Conference is an occasion that the international community should not lose to put back in the center the most important profound questions for the common good of humanity: financing for development is one of these.
The Important Issues Addressed by the Draft Document
3. In reference to the Drat Document, it seems opportune to consider it taking into account the two faces of the present financial crisis, namely, the emergency that has originated in the markets on one hand, and the situation of chronic inadequacy of the resources destined to support development on the other: both bring to the fore an inescapable moral question.
In a moment of crisis, such as the present, is it appropriate to ask oneself questions that, if things had gone well, would have been put aside or forgotten. How have we arrived at this disastrous situation, after a decade in which speeches have multiplied on the ethics of business and finance, and in which the adoption of ethical codes has spread? Why was enough weight not given to the verification of incidents that should have led to reflection?
The answer to these questions cannot but make evident that the ethical dimension of the economy and finance is not something that is accessory, but essential and must be constantly taken into consideration and really make a difference if there is a desire to carry out correct, long-term economic and financial dynamics fruitful in progress.
In this perspective, the Social Doctrine of the Church, with the rich variety of its moral principles, can and must make a contribution of realism and hope both to the questions discussed today, such as the financial crisis, or questions that, though being of vital importance for a large part of the world, do not receive the attention they deserve. There is the need for a new pact to refound the international financial system; the question of offshore financial centers and the nexus between financing for development and taxation; the financial market and norms; the role of civil society in the financing of development.
A New International Financial Pact
3. The present financial crisis is essentially a crisis of confidence. Acknowledged today among the causes of the crisis is both the excessive use of financial "swindles" on the part of operators, or the inadequate consideration of the risk elements that they entail. Acknowledged above all is the relation between the need for finance to fulfill its "real" function of bridge between the present and future, and the operators' temporal horizon of reference, essentially reduced at present. In other words, the global financial crisis has made reflection and action urgent on point 6 of the Draft Document, namely, on the questions of system.
Are we faced with the need for a simple revision or a true and proper re-establishment of the system of international economic and financial institutions? Many individuals, public and private, national and international, are calling for a sort of Bretton Woods. Beyond the expression used, the crisis has undoubtedly brought to the fore the urgency to find new ways of international coordination in monetary, financial and commercial matters.
It seems clear today that national sovereignty is insufficient, even the great countries are conscious of the fact that it is not possible to achieve national objectives counting only on internal policies: agreements, rules and international institutions are absolutely necessary. It is necessary to avoid the start of the chain of reciprocal protectionism; rather, practices of cooperation must be reinforced in the matter of transparency and vigilance of the financial system. It is even possible to reach solutions of "shared sovereignty," as the history of European integration demonstrates, beginning with concrete problems, within a vision of peace and prosperity, rooted in shared values.
Also in the re-designing of international policies and institutions a moral question of great importance arises. In particular, it is important that even the necessary political contrast between the "richer" countries not lead to solutions based on exclusive agreements, but that it re-launch a space of open and tendentially inclusive cooperation. This space is especially important in the matter of financing for development.
The financial flows that connect the developed countries with low-income countries present at least two paradoxical elements, the first is represented by the fact that in the global system, it is the poor countries that finance the rich ones, which receive resources from either the flight of private capital or governmental decisions to corner financial reserves under the form of "secure" financial activities placed in the financially evolved markets or in offshore markets. The second paradox is that the remittances of emigrants – namely, of the less "liberalized" component of the processes of globalization – entail an affluence of resources that, at the macro level, greatly surpass the flow of public aid for development. It is as though saying that the poor of the South finance the rich of the North, and the poor of the South themselves have to emigrate and work in the North to support their families in the South.
Offshore Financial Centers
3.b. To carry out this new international financial pact, the first necessary step is to consider carefully the role, hidden but crucial, of the offshore financial system in the two faces of the global financial problem described above: the emergency of the global crisis and the inadequacy of finances for development.
Offshore markets have been an important link, both in the transmission of the present financial crisis, as well has in maintaining a host of mad economic and financial practices: flight of capital of gigantic proportions, "legal" flows motivated by objectives of tax evasion and also channeled through the of international commercial flows, re-cycling of those stemming from illegal activities. Estimates of the amount of wealth held in offshore centers are difficult to evaluate, but sufficiently impressive if the information in circulation is confirmed: it is said that an ample gamut of groups and individuals hold financial applications in offshore centers that could yield close to US$255,000: more than three times the entire amount of public aid for development on the part of countries of the Organization for Economic Cooperation and Development (OSCE).
Given that public financing for development can only come from fiscal detractions, this becomes a critical minimum in the age of globalization. In fact, the processes of globalization have changed the type of composition of the transaction, not only from direct to indirect (with the probable consequence of a lesser "progressivity" of taxes, namely, of a lesser capacity of weighing more percentage-wise over those that dispose of higher incomes), but above all have entailed a translation of the valuation of the capital to the valuation of the work.
Fiscal detraction is eroded over the most important and mobile business activities in the international field, or that can easily take recourse to the offshore centers. Valued instead primarily are the less "mobile" productive factors, which cannot easily escape from the tax burden, namely, of workers and small businesses.
These points are very complex politically. To address them means to act directly in the sphere of national fiscal sovereignty. The Draft Document speaks of this and, in point 10, proposes reinforcing international cooperation in fiscal matters, above all in view of a drastic redimension of offshore financial practices.
Regulation of the Financial Market
3.c. The present crisis came to a head in a context of taking decisions in which the temporal horizon of financial operators was extremely brief and in which trust – essential ingredient of credit – was placed more in the market's mechanisms than in relations between members. It is no accident that trust has decreased in the exchange that was "secure" above all, namely, inter-bank transactions; however, without this trust all is blocked, including the possibility of the normal functioning of productive enterprises. The financial crisis and its consequences has, in fact, as component the expectation that the financial climate will worsen. All this leads operators to behave in a way that makes more probable the effective worsening of the situation with a foreseeable cumulative effect. The crisis has brought about the fall of fideist confidence in the market, understood as a mechanism capable of self-regulation and of generating development for all.
The present situation is an emergency, because important questions have been avoided: the traceability of financial movements, the proper rendering of accounts of operations in the new financial instruments, the careful appraisal of risk. Many authorities, especially in the more financially evolved countries, have proposed specific choices, moved by the economic profits that derive from housing a strong financial industry, profits that last as long as the phase of financial euphoria.
International financial institutions themselves are not endowed with the mandate and the instruments necessary to answer these questions decisively. In general it was thought that the market was enough to give the correct price to risk.
Financial markets cannot operate without trust; and without transparency and without rules there can be no trust. Hence, the market's good functioning requires an important role of the State and, where appropriate, of the international community to establish the rules of transparency and prudence and have them respected. It must be recalled, however, that no interervention of regulation can "guarantee" its efficacy by dispensing with a well-formed moral conscience and the daily responsibility of the market's operators, especially of the businessmen and the large financial operators.
Today's rules, based on yesterday's experience, do not necessarily prevent tomorrow's risks. Thus, even if good structures and good rules exist that help, it is necessary to recall that they are not enough in themselves. Man can never be changed or redeemed simply from the outside.
It is necessary to reach the most profound moral being of people, a real education in the exercise of responsibility towards the good of all, on the part of all individuals, at all levels: financial operators, families, businesses, financial institutions, public authorities, civil society.
This education to responsibility can find a solid foundation in some principles indicated by the Social Doctrine, which are the patrimony of all and the basis of all social life: the universal common good , the universal destiny of goods, the priority of work over capital.
Deep down, the financial crisis is the result of a daily practice that had as its point of reference the absolute "priority of capital" in relation to work – even of work alienated from the financial operators themselves (very long and stressful working hours, very short temporal horizon of reference for decisions). It is also the result of an erroneous practice of giving loans to those who seem "too big to fail" rather than to those who take the risk of creating real occasions for development.
Role of Civil Society in Financing for Development
3.d. Financing for development requires questioning public aid for development or the role of other actors: individuals, businesses, organizations. In particular, civil society not only carries out an important active role in cooperation for development, but also plays a significant role in financing for development. It does so, above all, through the voluntary contribution of person to person, as the remittances of immigrants, or through relatively simple organizational ways (think of adoption at a distance). Then there are the resources for development mobilized by enterprises in the active exercise of their own social responsibility; and those at times too conspicuous, provided by important Foundations.
Responsible behavior in the matter of consumption and investment is also an important resource for development. The spread of this responsible behavior, from the point of view of the material effects, can make the difference between the functioning of certain particular markets, but their importance lies above all in the fact that they express a concrete participation on the part of persons – in so far as consumers, investors of family savings or decisive for business strategies – to the possibility that the poorest emerge from their condition of poverty.
Financial Crisis and Public Aid for Development
4. Concern over the financial emergency that has taken place in mature markets effectively can obfuscate the need for financing development. It is reasonable to think that public aid for development, which comes from allocations of the budget that each country establishes year after year, will suffer because of the great public resources necessary to cover the emergency of the financial crisis. Undoubtedly, this is an evil. Adequate financing for development requires a long-term horizon: it is necessary that the resources flow in a foreseeable manner, in favorable conditions, to finance works that perhaps require much time before producing benefits for the local population.
However, the financial emergency linked to the brief period and the "normality" of long-tern financing are closely connected, both in the negative but also in the positive sense: there is the possibility, which must be sought for tenaciously, to contribute to a sustainable way out of the financial crisis, also establishing the conditions so that the savings generated are truly dedicated to development, namely, to the creation of occasions of work. Suffice to think of the many existing unsatisfied needs, especially in low-income countries: those needs are the other face of the occasions of work that it is possible, and hence obligatory, to create.
To give other elements that can support the reasonableness of this "royal" way to come out of the financial crisis, we might recall that the three crises of 2008 – the food crisis, the energy crisis and the financial crisis – are closely united among themselves. The expectation of the increasing prices of agricultural and energy products (in a certain sense, a physiological expectation, if we think of the greater demand for food and fuel in countries such as China and India) has produced a race for supply and the purchase of "futures," namely, of promises of future provision at a certain price. This behavior has fueled in turn a rise in prices which has attracted not only the future users of the primary products, but also the financial operators that, from a purely speculative point of view, have betted on the possibility of a further rise in prices.
Now, such risky behavior tends to flourish without control when there is in the financial markets much – too much – availability of credit. It is no accident that the present financial crisis, which is manifested above all in the extreme difficulty to obtain credit, brought with it a fall in the prices of primary products, and above all of oil. It is understood that, if it is necessary to address the problems "one by one," it is dangerous to do so without looking with lucidity at the total picture and the connections among the problems themselves. The financial crisis will probably "take away" resources from public aid to development. However, only by allocating resources – public but also private – for "real" development will a healthy financial system be able to be reconstructed, capable of really producing, because the resources have really sustained work and the economy.
Current Direct Investments in Poor Countries
5. In general, the greater part of direct foreign investments continues to affect advanced countries, both as origin and destiny, though in recent years two decidedly new phenomena have been observed. The first is the affirmation of direct foreign investments arising from "emerging" countries, often motivated by the objective to reinforce the presence of the research enterprise in its own macro-region – hence, they are South-South investments, destined to countries of middle and low income. The second has to do with the significant growth of transcontinental investment flows destined to certain low-income countries, generally endowed with important mining and energy resources; some of these are made from so-called "sovereign funds," hence, they present double the value of economic investment and an important socio-political link.
The object of the second chapter of the Draft Document is how to proceed to increase direct foreign investments. Very opportunely it underlines that it is necessary also to consider carefully the qualitative aspects of investment. Necessary, in fact, is caution before interpreting the flows of capital to countries as an unequivocal positive sign and, consequently, simply increase the amount. In many cases, it is a question effectively of important occasions of economic growth and social development; in others, it is not so. There are, in fact, investments that entail the implication and formation of local workers, the transference of technology, the spread of responsible management practices, but there are also investments that are limited to assessing the mineral resources for the benefit of a few – of the local political or economic elite –in addition, of course, to the foreign investor.
Financial Cooperation for Development
6. In the wake of the Monterrey Conference, some significant steps forward have been taken, in the direction indicated by the "Monterrey Consensus." In "Action Against Hunger and Poverty," promoted initially by some developed and developing countries and subsequently made its own by many other States, different possible innovative sources of financing have been identified: a shared tax on air tariffs; reduction of tax evasion made possible by the existence of tax havens; the mobilization of immigrants' remittances for the local development of countries of destiny with initiatives, for example, of micro-credit; taxing of and/or arms trade; the creation of innovative loan instruments such as the International Financial Facility; the emission by the International Monetary Fund (IMF) of special rights; the voluntary contribution associated with the use of credit cards; financial investment in "ethical funds"; collections through shared lotteries.
Some of these proposals have been carried out partially. It is the case of the pilot project of the shared tax on air tariffs, already in execution in some States and destined to a fund for the purchase of drugs against malaria, tuberculosis and HIV/AIDS, managed directly by the World Health Organization (WHO). Also in 2006, the proposal to create an International Financial Facility, was translated in the activation of Iffi (Iff for immunization) to which a certain number of countries have adhered. Essentially, it was a question of the emission of international public titles which have been placed in the financial markets and have made it possible to gather private resources for financing programs of vaccination. The countries that have issued the titles are responsible for interest surcharges and for the future restitution of the funds received, reciprocally determined to provide resources for development. This determination is effectively credible, in so far as its eventual diminution would expose countries to a loss of reputation in the international financial markets on which they depend for financing of the imbalances in their accounts. All these initiatives have in common the fact of disconnecting the gathering of financial resources for development through taxes, from the public budget decisions of each country.
7. However, despite the progress, financial cooperation for development continues to be a problem. Moreover, many other ambits of action included in the "Monterrey Consensus" have not seen progress; this is true above all when it comes to questions of system and, in particular, of the coherence of international economic policies. Think for example, of the nexus between the aid for development policies and the commercial policies of advanced countries: the different forms of manifest or hidden protectionism, as well as the persistent limitations to access to the exports of poor countries in the markets of rich countries, are an enormous obstacle to development. National policies continue to be strongly inconsistent: one hand gives the other takes away.
One last but important caution: It is necessary to be careful not to confuse the means (the financial resources) and the end, namely, development. It is not enough to predispose an adequate amount of financing to think of obtaining development in a mechanical way. The latter is not so much the "result" that will be seen at the end, but the way that day after day is traced by the concrete choices of multiple actors: Donor and recipient governments, NGOs, local communities. In regard to public aid for development – the main object of the Doha Conference, which will imply in the first place the States – it must be recalled that the international community has recently addressed, in the Accra Conference, the question of aid effectiveness.
Today the preponderant tendency is that of considering the channel "from State to State," the so-called "budget support," as the most effective way to have the resources arrive in low-income countries. This tendency is seen with certain concern, because it carries with it the risk of a "bureaucratization" of national policies to combat poverty and to re-dimension the resources available through different forms of local social initiative, both on the part of organizations of the civil society, as well as on the part of local realities rooted in the territory such as faith-based organizations. "However, these realities are the real protagonists of development understood as the course followed day by day.
Africa and Financing for Development
8. Particular attention is necessary to the African continent, in which the map of development registers hefty disparities. The situation is different in each African country; what is more, noted is a tendency to polarization between successful situations when obtaining resources and making them fruitful, and situations of total marginality. For example, only few African countries attract direct foreign investments not solely interested in exploiting the mineral or energy resources. It depends a lot on the internal situation of each country; in terms of the "Monterrey Consensus": by the capacity to mobilize internal resources and to combat the flight of capital, tax evasion and corruption.
Moreover, it is obvious that in situations of armed conflict – numerous, unfortunately, in Africa – the economic dimension of development simply becomes un-proposable.
In so far as canceling of the external debt, there has been progress; however, the resources for the cancellation of the debt rarely have been additional in relation to the flows of aid and this has entailed effects of recomposition of the public budgets without a real increase of available resources for action to combat poverty.
Two points should be opportunely underlined. One has to do with the choices in international policy of African governments; support must be given to the growing will for South-South international cooperation, in a continent where to acquire a certain custom of international cooperation might contribute to channel preventively the conflicts in a space of bloodless negotiation. The second has to do with the choices in internal policy, in subsidiary material, which appreciates and reinforces the ways of response to the needs of the African society born "from within," which society has a great patrimony of shared culture able to express itself with extraordinary testimonial force.
The experience of international cooperation for development is today sufficiently ample to permit concluding that the policies and resources "coming from on high" can produce immediate beneficial effects, but on their own they do not provide adequate answers to how to emerge, in a sustainable way, from poverty. The principles of subsidiarity and solidarity, so cherished by the Social Doctrine of the Church, can inspire a genuine development in the sign of an integral and shared humanism.
Vatican, Nov. 18, 2008
[Translation by ZENIT]
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