To: Organizations addressing Trade-Finance Linkages

1) Trade and Finance Linkages for Promoting Development: New

Book

2) IMF backtracks on constraints to trade-led development -but

how much?

3) Experts debate WTO services rules' impact on financial crisis

4) WTO, Financial Services and Global Financial Reform

5) G20 restrict - but also liberalize-trade and investment in the

face of the crisis, report finds

6) Basle II relaxing urged to foster trade credit

7) It is the exchange rate, Mr. President- Article

8) FFD General Assembly High Level Dialogue - Registration open

until November 9

1) Trade and Finance Linkages for Promoting Development: New Book

Trade, debt and finance are all important components in the development strategy
of any country. It is not surprising that the need for more coherence among trade,
debt and finance policies has been recognized in countless official statements.

However, the tendency towards issue-specific specialization often results in the

conduct of fragmented economic policy-making without a holistic perspective in
relation to trade, debt and finance. That is, what tends to happen in practice is that
policy-making on trade, debt and finance tend to be pursued in separate, frequently
compartmentalized ways. This is a reality at the global level, where the systemic
architecture and institutional design of global institutions are guided by a paradigm
based on functionality and division of labour along these different policy areas. But
it is also very much a reality at the national level where different Ministries or
departments are in charge of each different policy area and, in turn, liaising with the
respective institutions at global or, if existing, regional level.

But what does such a coherent approach entail in practice? And how can it be
balanced with the justifiable need for specialized policy-making without leading to
fragmented responses?

Trade and Finance Linkages for Promoting Development, a book co-published by

Center of Concern, South Centre and the German Marshall Fund of the US, sets
out to propose a methodology for academics, practitioners and policy-makers
searching for ways to integrate a more holistic and integrated approach in their
everyday activities.

The publication tries to capture the main contributions by the panelists, as well as
summarizes the rich discussion that took place at each of the sessions in a Policy
roundtable co-organized by the three publishing organizations, with the support of
the Forum for Environment and Development, the Heinrich Boell Foundation, the
Swedish Ministry of Foreign Affairs and the United Nations Foundation.

This publication was edited by Aldo Caliari and Vicente Paolo Yu III.

Section I is focused on the general question of the division of responsibility among

various international organizations and venues working on trade and finance
issues, including the WTO, UNCTAD, the International Financial Institutions and
the UN Financing for Development follow-up process. Acknowledging the tension
between the need for specialized policy-making on trade and finance, on the one
hand, and the need for a more holistic approach to trade, finance and
development, on the other, it explores feasible options for improvement.

The second section examines trade and investment rules, and trade policies, from
the perspective of whether they contribute to the process of accumulating capital
for development in developing countries. Trade rules and policies can be oriented
to increase trade and investment flows but, from a financial perspective, what
matters is whether they are oriented towards processes that accumulate capital
needed for development purposes. This is, obviously, a vast area, so the section
only focuses on. The questions explored are how rules and policies affecting
commodities and investment would impact the export and investment profile of
those countries and how such rules would impact the process of price formation in
goods and services.

The third section looks holistically at the balance between financial and trade
measures. It addresses the terms of the Aid for Trade package linked to trade
negotiations at the WTO and long term measures that should be addressed
through complementary reforms of the international financial system. It also asks
questions regarding the balance between Aid for Trade measures and problems
that should be addressed through trade rules, as well as the balance between Aid
for Trade proposals and deeper issues of functionality of the international financial
system that may require a different response.
Finally the fourth section enters is focused on the impact of exchange rate and
financial volatility on the trade performance of developing countries.

For the table of contents please visit

http://www.coc.org/system/files/TOC.pdf
For the full book, as well as information on how to order your own copy, visit
http://www.coc.org/node/6428

2) IMF backtracks on constraints to trade-led development -but how much?

Over the summer, in an IMF Board discussion that was not reported through a
Public Information Notice, the IMF revised its Guidance Note on how staff should
apply the Decision on Bilateral Surveillance over member Policies ("2007
Decision"). While the new Guidance Note -as IMF staff hastened to clarify -does not
overrule or change the 2007 Decision, the move clearly softens its requirements.

The 2007 Decision 2007: Background and Issues

The IMF 2007 Surveillance Decision was one of the pillars of the strategic reform
that former IMF Managing Director, Mr. Rodrigo de Rato, was trying to promote
during his time. It came to reform the Decision on Bilateral Surveillance that had
been in force since 1977, which regulated the Fund's role in exercising surveillance
over the exchange rate policies of member countries. The Decision, opposed by
several developing countries, including through the G24, was the target of criticism
because of the way it would constrain the space for developing countries attempting
to profit from a trade-led development model. At the same time it was not clear that
its approach would contribute to solve the then growing global trade imbalances-a
forecast that would soon be confirmed.

A growing body of research -growing both before and after 2007-- militates in favor
of exchange rate management as a key factor in strategies to use trade for
development. The importance of this tool is particularly underscored in the current
crisis situation. For developing countries, traditionally more reliant on trade than
developed countries, trade and their trade profiles have acted as primary channels
for the impacts of the crisis in their economies. Low diversification of export
products has contributed to the woes of developing countries. The management of
the exchange rate is a crucial tool to boost diversification into non-traditional export
sectors. It may also prove critical to the competitiveness and capital accumulation,
by enabling cross-subsidies to other sectors of the economy and the build up of
buffers that bolsters resilience to crisis times that make the economy more
resilient.[1]

Two were the most substantive changes stemming from the 2007 revision that
altered the balance in the implementation of Bilateral Surveillance by the IMF.[2]
First, it added as principles that should guide the Fund's assessment of what
constitutes "manipulation" that "A member should avoid exchange rate policies that
result in external instability."[3]

The intention of a member's currency intervention -a central element under the old
decision-was given minimal importance. This tilted towards the IMF the balance of
power in the assessment of whether a member was in violation.

Second, there was a list of events that would prompt deeper scrutiny from the IMF
and might warrant a discussion with a member. The 2007 Decision added to these
developments "fundamental exchange rate misalignment" and "large and prolonged
current account deficits or surpluses."[4] The former was so close to the language
in legislation to punish China that was being debated in the US Congress at the
time, that the implicit reference was hard to deny.

The new Guidance Note

In an introduction to the "Revised Interim Guidance Note" issued during the summer
("new Guidance Note") the IMF provides as one of the justifications for the changes
that a "fear of labeling" had led members to engage in intense discussions with staff
on the issue which operated as a distractive factor from the broader
macroeconomic policy issues.[5]

In line with some critics of the 2007 Decision, it recognizes the difficulty to achieve
an objective judgment on exchange rate issues. "Uncertainty is particularly great
when it comes to attributing outcomes to exchange rate policies or other policies,"
says the IMF since it is always the policy mix that matters.[6] The new Guidance
Note states that "cases where a member would be deemed to be in nonobservance
of [avoiding exchange rate policies that result in external instability], in particular,
are likely to be very rare."[7]

Another change in the new Guidance Note is that it removes the requirement to use
specific terms such
as "fundamental misalignments."[8]

In a measure that makes application of the 2007 Decision closer to its predecessor,
the new Guidance Note allows the assessment of exchange rate policies to take
into account the authorities' intentions.[9]

Interpreting the changes and putting them in context

Though the changes seem to respond to critics, it is most likely that external
criticisms were not what the IMF was responding to. In fact, both the 2007 Decision
and its 2008 Guidance Note -that the new Guidance Note changes-- were passed
at a very different time. What is more likely is that the changes were forced by a
new geopolitical scenario with a new US administration and a post-financial crisis
situation where emerging markets, and particularly China, are called to play a
bigger role in sustaining the global economy, both through their reserve
management and support to established financial institutions.
On the other hand, any assessment of the Bilateral Surveillance Decision should
now be subsumed into an assessment of implementation of the Framework for
Balanced Growth approved by the G20 Leaders in Pittsburgh.[10]

Given this context, the fact that it is not the Decision that has changed, but only the
Guidance Note on its implementation for the staff, becomes a more conspicuous
indication. Just as the pressure through the 2007 Decision is softened, a
counterbalancing move seems to be emerging in the decision by the IMF policy-
making committee. This committee requested, at the Annual Meetings in Istanbul,
that the IMF "building on the success of the FCL and high access precautionary
arrangements, ... consider whether there is a need for enhancing financing
instruments and whether this can offer credible alternatives to self-insurance, while
preserving adequate safeguards."[11]

The buildup of self-insuring reserves may pose some problems from a systemic
perspective but there is no doubt that, from the individual perspective of a number
of emerging markets, it has been a crucial tool in allowing them to escape
misguided IMF advice for several years now. Furthermore, there is no conclusive
evidence that increasing those countries' reliance on the IMF is the best way to
generate the expected solution to the systemic problem (or even be a positive
influence on it).

Such has been the impact of emerging markets policy approach to self-insurance
on the IMF's visible loss of relevance before the crisis that it is surprising that the
request for the Fund to make this study ignores the large vested institutional
interests the Fund has at stake in this discussion.

Neither are preliminary results offered by the IMF Research department throwing
any surprises about the direction in which these interests are expected to orient the
discussion at the Fund. Unsurprisingly, the findings downplay the impact that
reserve accumulation strategies had on the better performance of developing
countries in this crisis[12] and foresees there may be a ratcheting up international
reserves in the aftermath of the crisis but this, "while understandable, ... could well
dampen the recovery."[13]

Thus, there is a risk that this exercise could become the basis of an institutional
decision that seeks to force member countries' reduced reliance on both trade
surplus and reserve holdings, which would be tantamount to increasing their
reliance on the IMF, hence the IMF's sphere of influence.

As far as the 2007 Decision is concerned, should countries be advised against

reserve accumulation this would logically impact the capacity of developing
countries to implement their own strategies for exchange rate management. If this
is the case, the softening of the implementation of such Decision might not mean
much.

[1] For a more complete critical assessment of the 2007 Decision on Bilateral
Surveillance see Caliari, Aldo 2007. Closing All Paths to Trade-led Development?
The IMF Revises Guiding Principles on Surveilance (available at
http://www.coc.org/node/6291)
[2] Ib., for more detail.
[3] IMF 2007. Bilateral Decision over Members' Policies, June 15.
[4] IMF 2007. Bilateral Decision over Members' Policies, June 15.
[5] IMF 2009. The 2007 Surveillance Decision: Revised Operational Guidance.
June 22, 2009.
[6] Ib.
[7] Ib.
[8] Ib.
[9] Ib.
[10] For a longer analysis of the agreement reached at Pittsburgh on this subject,
see Caliari, Aldo 2009. Can the G20 Have it Both Ways? Addressing global
imbalances without reform of the world monetary system (available at
http://www.coc.org/node/6441)
[11] International Monetary and Financial Committee of the Board of Governors of
the International Monetary Fund 2009. Communique. October 4. For more detail on
the implications of this decision, see Caliari, Aldo 2009. Brave New World Emerges
from IMF / World Bank Istanbul Meetings (available at
http://www.coc.org/node/6446)
[12] Blanchard et al 2009. Did Foreign Reserves help weather the crisis? (available
at http://www.imf.org/external/pubs/ft/survey/so/2009/NUM100809A.htm)
[13] Ib.

3) Experts debate WTO services rules' impact on financial crisis

See below background and links to a debate held at the sidelines of the WTO 2009
Public Forum.

Proponents of open trade in services argue that the GATS, the General Agreement
on Trade in Services, holds the potential to enhance efficiency and innovation
around the world. But critics counter that market opening can also increase risks,
especially in the financial system. Has the WTO's services agreement contributed
to the crisis or is it a tool which can help create a more stable environment for
international financial services? Myriam Vander Stichele, senior researcher at the
Amsterdam-based Centre for Research on Multinational Corporations, and Sergio
Marchi, senior fellow at the International Centre for Trade and Sustainable
Development, discuss this topic with Keith Rockwell, WTO Spokesperson.

To watch the webcast visit

http://www.wto.org/english/forums_e/debates_e/debate17_e.htm

(a transcript of the debate is also available at that URL).

4) WTO, Financial Services and Global Financial Reform

Find below abstract and link to a paper by Chakravarthi Raghavan, Editor Emeritus
of South-North Development Monitor SUNS, commissioned by the Group of 24.

Abstract

The ongoing global financial systemic crisis and the "Bretton Woods II" processes
under way in various fora seem likely to result in reformed national and global
regimes for governance, stronger regulations in public interest, and their stricter
enforcement. However, these will be incomplete and may not even be successful
unless there are parallel efforts in the WTO and its ongoing Doha Round, in
particular on "Trade in Financial Services," where lacking data, negotiations are
being conducted on faith and failed theory. A reformed global regime on finance
will be incompatible with a trading system outcome of liberalised trade in financial
services and capital movements. This is an area needing attention at the highest
levels of developing-country governments.

Full paper is available at http://www.g24.org/cr0909.pdf

5) G20 restrict - but also liberalize-trade and investment in the face of the
crisis, report finds

In response to a request of the G20 to monitor and report publicly on G20

adherence to undertakings on "Resisting protectionism and promoting global trade
and investment," the WTO, UNCTAD and the OECD prepared a "Report on G20
Trade and Investment Measures." The Report covers developments in the period
from April to August 2009.

In a first section, on trade and investment developments, the report restates

previous forecasts that world trade is projected to contract in 2009 by 10 per cent,
and foreign direct investment (FDI) flows, which fell by 14 per cent in 2008, are
projected to fall by 30-40 per cent this year.

Reporting on the conditions of trade finance it mentions that there is evidence that
additional capacity was mobilized in the 6 months preceding the report, but reports
"do not provide confirmation that accessibility and affordability of trade finance has
returned to normal."
In a section on trade-related measures, the report finds that, in spite of
commitments to avoid trade protectionism, there has been "policy slippage" since
the crisis began and even after the London Summit, last April. G20 members
raised tariffs and introduced new non-tariff measures to protect domestic
production, and they have continued to use trade defence mechanisms, in these
and other sectors too. It singles out agricultural export subsidies for the dairy sector
as measures that "are generally acknowledged to be among the most highly trade-
distorting." The report says two G20 members have re-introduced them (but one of
them is the European Commission and the other the United States).

However, countries such as Brazil, China, India, Indonesia, Mexico, the Russian
Federation and Saudi Arabia announced cuts in import duties, fees and surcharges
and the removal of non-tariff barriers on various products. China removed some
restrictions on trade in certain services sectors. Further looking at the services
sector the report finds "no indication...of a generalized introduction of additional
restrictions to trade in services" in the countries under assessment.

The report mentions concerns about "buy/invest/lend/hire local" requirements that

have, officially or unofficially, been attached to some stimulus and the competition-
distorting effects of the subsidy components of these programmes.

Finally, in a section on investment -related measures, the report notes that 11

countries introduced measures to facilitate foreign investment but it counts also 11
countries that took measures that, in words of the report, might restrict or distort
worldwide capital movements, some of them with "varying degrees of potential
discrimination against foreign investors." But, according to the report, 14 new
Bilateral Investment Treaties as well as 20 FTAs with investment provisions were
signed by G20 members.

The full document can be read at

http://www.unctad.org/en/docs/wto_oecd_unctad2009_en.pdf

6) Basle II relaxing urged to foster trade credit

The article below is reproduced from Financial Times, October 15 of this year.

Regulators urged to loosen credit restrictions on banks

By Alan Beattie in London
An alliance of private and official financial institutions is calling on regulators to
loosen restrictions on banks offering trade credit, claiming that overly strict rules
could hamper a global economic recovery.
The campaign, which is being backed by the multilateral Asian Development Bank,
is seeking to create flexibility in the Basel II framework, which determines how
much capital banks have to hold against different types of lending.
Steve Beck, head of trade finance for the Asian Development Bank, said: "Basel II
rules ignore the extremely low loss record of trade finance and discourage banks
from offering it."
The campaign follows a sharp rise in cost and drop in volume for trade finance over
the past year, which has sparked alarm among companies and led to a flurry of
support programmes from multilateral development banks.
Trade finance helps to ease the flow of global trade by ensuring that exporters get
paid.
Global trade dropped sharply late last year and early in 2009, though few estimates
suggest that a shortage of trade finance was responsible for more than 10-15 per
cent of the fall. Trade has begun to pick up in recent months, but some bankers
warn that a diminished capacity for trade-related lending could create bottlenecks
that will slow or stop the recovery.
Banks complain that the Basel II capital framework in effect dissuades them from
offering trade finance by requiring them to treat it as a one-year loan, when in
practice most letters of credit and other trade finance instruments last for no more
than 90-120 days. They add that the "credit conversion factors" used to determine
the riskiness of lending unfairly penalise trade finance, which is historically a safe
business with few losses.
The International Chamber of Commerce is collecting data from banks about their
past trade finance deals to assemble a "loss register", which it will use to lobby
national regulators and the Basel committee on banking supervision.
Since it is a low-profile field where big problems are rare, there is a dearth of
information about many aspects of trade finance, though Mr Beck said some
informal estimates suggested losses were as low as 77 cents per $1m of trade.
A spokesman for the Basel committee on banking supervision said Basel II did not
discriminate against trade finance.
Copyright The Financial Times Limited 2009.

7) It is the exchange rate, Mr. President- Article

The article below by Prof. Bresser Pereira appeared in Folha de S. Paulo, August
17, 2009.
It is the exchange rate, Mr. President
Luiz Carlos Bresser-Pereira

Brazil will only achieve high growth rates when it managed its exchange rate.
The newspaper Valor Econômico of last August 11 informed, in its front page
headline, that the automobile industry experiences its "3rd. wave of investment",
whereas on the same day the newspaper Folha announced that"the fall in exports
prevents automakers from recovering" and added: the accumulated slowdown of
automobile industry exports in this year reaches 12.9%. The two news are
contradictory. Why would the enterprises plan major investments when their
exports are falling? And what if one of the causes of this decrease is the exchange
rate appreciation that is now taking place? One could answer: to primarily orient
the intended expansion to meet the demands of the domestic market. But, even
though automobile industry is one of the few protected sectors, the exchange rate
appreciation opens the domestic market to imports.
I can only see one explanation for this contradiction. The investment plans
probably exist, but they were conceived in the setting of another exchange rate -
the rate that was defined after the crash of October 2008. Investment plans take
time to conceive and even more to implement. I wouldn't be surprised, therefore, if
a good portion of such projects is abandoned or postponed, given the new
exchange rate.

President Lula, however, does not seem willing to face the problem. In the same
newspaper Folha, Kennedy Alencar informs that "despite being concerned with the
negative effect of the appreciation of the real on exports, president Luiz Inácio Lula
da Silva dismisses intervening in the floating exchange rate system". How to
explain this fact? I can only see two answers: first, president Lula is satisfied with
the performance of Brazilian economy and is unwilling to take stronger measures in
the sector second, the president is not yet aware of the severity of the Brazilian
exchange rate problem he presumes that the overvaluation that is showing up
again is related to the economy - to the high interest rate -when it is a structural
issue.

I think that the president is content with little, but I understand his satisfaction. It
reflects the contentment of Brazilian population, who, after 14 years of high inflation
and low growth, understood that a low inflation and a slightly better growth are the
best we can expect. If my constituents are satisfied, why would I intervene in the
market? he probably thinks. I respect the president's political genius, but the fact is
that this exchange rate is incompatible with Brazilian economic development. It
already was so before the crisis, but it was then temporarily compensated by the
increase in the domestic market caused by his distributive measures ("Bolsa
Família" [family allowance] and increase in the minimum wage). There is, however,
no more room in this area. And the exchange rate is once again following its
structural tendency to overvaluation.
This tendency has two basic causes: the moderate but real Dutch disease existing
in Brazil and the attraction that foreign capital has for the higher profit and interest
rates existing in the country. This is the reason why we cannot let the exchange
rate be run by the market. The market makes it not only volatile, as acknowledged
by all economists, but this volatility has a tendency to overvaluation that results, in
the short run, in reduced investment opportunities and, in the medium term, in
balance-of-payment crisis. Brazil has only achieved high growth rates when it
managed its exchange rate. It is only by doing it again that those high rates will
reappear.

8) FFD General Assembly High Level Dialogue - Registration open until

November 9

The General Assembly, in its decision 63/564 of 14 September 2009, decided to

hold its fourth High-level Dialogue on Financing for Development on 23 and 24
November 2009 at United Nations Headquarters in New York.

It is proposed that the overall theme of the fourth High-level Dialogue be the
following: "The Monterrey Consensus and Doha Declaration on Financing for
Development: status of implementation and tasks ahead".

The meeting will likely take the form of a plenary meeting, three thematic
roundtables as well as an informal interactive dialogue.

Representatives of non-governmental organizations are invited to participate in the

multi-stakeholder round tables and the informal interactive dialogue, in accordance
with the rules of procedure of the General Assembly. Registration, through the
United Nations Non-Governmental Liaison Service and the Financing for
Development Office of the Department of Economic and Social Affairs of the United
Nations Secretariat, will be open to: (a) all non-governmental organizations that are
in consultative status with the Economic and Social Council; and (b) all non-
governmental organizations and business sector entities that were accredited to
the Monterrey Conference on Financing for Development and its follow-up process,
including the Doha Review Conference. Social Council; and (b) all non-
governmental organizations and business sector entities that were accredited to
the Monterrey Conference on Financing for Development and its follow-up process,
including the Doha Review Conference.

Each multi-stakeholder round table will include three, and the informal interactive
dialogue five, representatives of accredited civil society entities and the same
numbers of accredited business sector entities. Their participation in the round
tables and the informal dialogue will follow the practice established at the
International Conference on Financing for Development and its follow-up process.
To register, please go to http://www.un-ngls.org/ffd.

Participants may also apply for limited number of roundtable seats. In this regard,
special consideration will be given to the following criteria:
· Expertise
· Active participation in the FfD process
· Geographic balance
· Gender balance

Completed registration forms must be received by 9 November 2009. Please note

that the UN Secretariat cannot provide funding for participants in this event.

More information regarding the High-level Dialogue can be found in the Note by the
UN Secretary-General on the Proposed organization of work of the High-level
Dialogue on Financing for Development
http://www.un.org/ga/search/view_doc.asp?symbol=A/64/377&Lang=E

Aldo Caliari
Director
Rethinking Bretton Woods Project
Center of Concern