The Bahamian economy and living standards shrunk at a rate of 0.3 per cent per annum between 2002-2009 "as a result of its narrow" base

Living standards fell 0.3% per year, 02-09
By NEIL HARTNELL
Tribune Business Editor:



The Bahamian economy and living standards shrunk at a rate of 0.3 per cent per annum between 2002-2009 "as a result of its narrow" base, a Wall Street credit rating agency has concluded, while surprisingly questioning whether the Bahamas Telecommunications Company's (BTC) privatisation process had been "postponed" yet again.

Standard & Poor's (S&P), in its full country report on the Bahamas' sovereign credit rating that was released this week and obtained by Tribune Business, raised questions about whether the 2002-2007 period - described as 'years of plenty' by the then-governing Christie administration - actually delivered the major increase in salaries/living standards for most Bahamians that it was supposed to have done.

Placing the Bahamas' short-term sovereign credit rating at 'BBB+', down from the previous 'A-2', S&P said: "The Bahamian economy contracted by an average of 0.3 per cent per year on a capita basis from 2002-2009 as a result of its narrow economy and close economic ties to the US.

"This lags the growth rates of most peers, and is less than the 'BBB' median average of 3.7 per cent growth. The weaker performance results from several factors. These include the adverse weather conditions that the Bahamas, like other Caribbean islands, is susceptible to; a lacklustre tourism arrival performance over the past few years; greater competition in the tourism industry; and the global recession in 2008-2009. Medium terms prospects remain subdued."

Data released by S&P reveals that the Bahamas' GDP per capita, or income per person, has been impacted heavily by the global recession, having not increased much during the Christie administration.

While GDP per capita rose from $22,223 in 2006 to $22,577 in 2007, the onset of the global financial crisis saw it fall back to $22,465 in 2008, followed by a further contraction to $21,449 in 2009. Bahamian GDP per capita is predicted to 'bottom out' this year at $21,433, before rising to $22,099 in 2011 and $22,559 in 2012.

Meanwhile, S&P's analysis raised questions as to whether it knew something the rest of the Bahamas did not on the status of the BTC privatisation process.

The Wall Street credit rating agency said: "The Government hoped to receive $200-$300 million in proceeds from the sale of a 51 per cent stake in BTC in the first half of 2010 to alleviate financing needs.

"However, the Government has once again postponed the privatisation following seeming disappointment with the bids and prices offered at the end of 2009. Plans have existed to sell BTC since the first Ingraham government, and when it took office again in 2007, it cancelled the sale of BTC to Bluewater Communications, which the previous administration had arranged."

BTC's "postponed" statement is at odds with the Government-appointed privatisation committee's recent assertion that 'due diligence' on the prospective bidders was continuing.

Zhivargo Laing, minister of state for finance, who heads the advisory committee overseeing the process, could not be reached for comment before press deadline. And nor could T. B. Donaldson, chair of the privatisation committee, or Julian Francis, BTC's chairman, despite messages being left.

It appears likely that S&P may have got it slightly wrong, and that privatisation is not 'postponed'. It may, though, have been delayed, as the protracted seven-month 'due diligence' period indicates that the Government may indeed have not received the quality of offers and prices it was hoping for, and has possibly engaged in talks with one or more bidders.

Those invited through to the due diligence round included J. P. Morgan/Vodafone; Atlantic Tele-Network/CFAL; Trilogy International Partners; and Digicel. Tribune Business last week heard whispers that both Digicel and J. P. Morgan/Vodafone were no longer interested, which would be a surprise in the latter's case, given that it was a frontrunner.

Those rumours have not been confirmed, though, and nor has speculation of a $130 million purchase price for 51 per cent of BTC.

Elsewhere, S&P reported that foreign direct investment, so crucial to the Bahamian economy and its foreign currency earnings/reserves, was likely to decline even further in 2010 compared to last year.

"Traditionally, foreign direct investment has financed a large part of the current account deficit," S&P said. "From 2005-2008, foreign direct investment financed almost two-thirds of the current account deficit.

"In the first three quarters of 2009, foreign direct investment inflows were greater than the current account deficit. However, we believe that in 2010 and over the following years, foreign direct investment will not fully finance the deficit.

"Foreign direct investment totalled $600 million during the first nine months of 2009, compared with $1 billion in full-year 2008. We expect foreign direct investment to slow further in 2010 as tourism projects progress slowly."

And while international reserves grew to $825 million in 2009 compared to $563 million at year-end 2008, they received a "particular boost" in the 2009 second half from the Government's $300 million foreign currency bond, coupled with $178.7 million in 'special drawing rights' from the International Monetary Fund (IMF).

In addition, S&P said analysis of the Bahamas' current account deficit financing was complicated by the "presence of persistently large positive errors and omissions", which were 24 per cent and 85 per cent of the current account deficit in 2007 and 2004 respectively.

April 30, 2010

tribune242

Bahamas Blog International

The Black Dilemma!

By Jean H Charles:


The black American population according to the latest census is shrinking, whether in Washington DC, Los Angeles or Harlem New York, the Mecca of Black Renaissance; is losing its majority to an increasing white populace. The same phenomenon is visible also in the Caribbean, where, whether in Roseau Dominica or in Port au Prince, Haiti, beautiful homes are closed, and their absentee owners are in New York, London or Toronto. The black dilemma pictures a canvas whereby new Caribbean or African blood is not welcomed with open arms by the indigenous black American population to increase and renew the black stock of America.

The Euro-American by contrast, coming from Lithuania or Malta, is quickly mixed and integrated into the bloodstream of the white population, thereby energizing America and its white composite. The black dilemma is made more troublesome due to the fact that in the Caribbean those who left their homelands to establish themselves in Europe or in America must endure the ignominy of a one way ticket. They are not welcomed to bring back their intellectual and their financial resources in the building of their motherlands. From Belize to Cuba, in passing through Trinidad or Jamaica, the Caribbean Diaspora does not enjoy the political right to vote and cannot contribute to the policy-making of their country so as to render their homeland hospitable to all.

This attitude can be compared with the situation facing European immigrants, where new legislation is being drafted to offer citizenship to the offspring of the third generation of immigrants whose parents left Europe for the United States some fifty years ago. These new French, Polish or Italian citizens with double nationality will pollinate both side of the Atlantic with new inventions, new business and new offspring that will make both their ancestor-lands and their new home-lands fertile and prosperous.

This essay is looking into what deliberate steps should be taken in a diligence mode to increase the black stock of America, create a renaissance in the Caribbean and in Africa with the exchange of resources and of people on both sides of the Caribbean and of the Atlantic sea.

The cold shoulders existing between brethren of the same continent has its origin in the dark ages of Africa's history. For example, Professor Henry Louis Gates Jr., in a recent article in the New York Times, quoted John Thornton and Linda Heywood of Boston University, who in their research have found out that 90% of the black slaves brought into the Western Hemisphere were captured by and sold to European traders by African elites and kings, who took them as hostages through tribal warfare. This attitude and its ongoing deluge of inhospitality has extended itself at all levels and in most places since.

Starting with my hometown of Grand River Haiti, it has produced through the years not only liberators and luminaries such as Jean Jacques Dessalines and Jean Price Mars, it has also produced more recent individuals such as Jacqueline Charles of the Miami Herald, and, as well, Marie St Fleur, the first Haitian-American State Representative in Massachusetts. Despite these contributions, the elite of Cape Haitian, the closest large city, has always found repulsive those outsiders—moune en dehors—who migrate into the city. Some of the former have also left for Port au Prince, the capital, where they have themselves also endured the disdain they had earlier bestowed on their comrades.

Migrating into America, those who came barefoot as well as those who came wet foot have endured similar hostility, not only from the authorities but also from black natives who were supposed to be a natural ally in the acculturation process. By comparison, the Jewish Diaspora from Russia has a well oiled agency that picks up the new migrants at the airport, with a scholarship to City College, a voucher for lodging and another for food stamps. Henry Kissinger, as a young lad, for example, could not get into Harvard but was schooled at City College through that route before moving to higher ground.

I am watching with desperation the young men and women from Senegal or Mali on 125th Street in Harlem selling counterfeit merchandise, or luring the ladies in for a hairdo while they represent excellent material for a one way ticket to City College up the hill. No concerted effort is being made by officials or the non-profit organizations to help this new crop of migrants to become fully integrated into the fabric of America, and thereby renewing the black stock for a continuous process of nation building.

Recently, some 30 Haitians people landed in Jamaica after the earthquake in search of a solace in a more peaceful land. They were unfortunately returned by the Jamaican government under the pretext that Jamaica could not afford to absorb them. The contradiction in brotherly solidarity occurred at this peak of Haiti’s national disaster. Such lack of solidarity in such extreme conditions can only spell, in the long-term, the demise of all of us. I have also seen in Roseau, Dominica, how the culture of stupidity has facilitated the extinction of the Creole language as a lingua franca of the citizens of Roseau as compared to the rest of the country, where speaking Creole is routine and ordinary.

The black dilemma, as Abraham Lincoln and Frederic Douglass have seen, could not be solved in a piecemeal manner, State by State, as Senator Frazier Douglas then preferred it to happen. Today, sorting out and solving the black issue, starting from the United States with its sizable black population and a black president, it must be seen in its entirety and its universality. Barack Obama can help but using a Lincolnesque analogy, he must be forced to do so.

There is no other solution but using the term of Frederic Douglass, who, while speaking to Lincoln, said, “Power concedes nothing without a demand, it never did and never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed on them, and these will continue until they are resisted with either words or blows or both.”

Yet when the black dilemma is solved it will be only a partial one if it does not include the white population. As with the women’s liberation movement that failed to include the men in the process, the white populace must also be included into that solution. Making the world hospitable to all is not a black or white issue; others like the Abolitionists, the Quakers and the British did understand that humanity is indivisible.

In closing, maybe we should hear from the man from Harlem, Langston Hughes, to find our direction and purpose:

I am the poor white fooled and pushed apart
I am the Negro bearing slavery scars
I am the red man driven from the land
I am the immigrant clutching the hope I seek
And finding only the same old stupid plan
Of dog eat dog, of mighty crush the weak

Yet I am the one who dreamt our basic dream
In the old world white still a serf of kings
Who dream so strong, so brave so true?
That even yet its might daring sings
In every brick and stone, in every furrow turned
That made America the land it has become
O; I am the man who sailed those earlier seas
In search of what to be my home
For I am the one who left Ireland’s shore
And Poland plain land and England grassy ilea

And torn from Black Africa strand I came
To build a homeland of the free

O’ let America be America again.

May 1, 2010

caribbeannetnews

Bahamas Blog International

Save the Caribbean's standing: Sink the yen for whales

By Sir Ronald Sanders:


“…. He that filches from me my good name
Robs me of that which not enriches him,
And makes me poor indeed”: Shakespeare, Othello

Several Caribbean countries could be stigmatized globally if they support a proposition to topple the global ban on commercial whaling and legitimize the heinous slaughter of these intelligent mammals.

This proposition is being advanced by the Chair and Vice Chair of the 88-nation International Whaling Commission (IWC), a body whose governing Convention provides for the proper conservation of whale stocks and the complete protection of certain species as well as designating specified areas as whale sanctuaries.

Most of what constitutes the proposition was developed by 12 governments in a small working group, and it is being touted by the Chair and Vice Chair as a basis for additional negotiations between now and an IWC meeting to be held in Morocco in June.
No member government of the IWC has endorsed the proposition to date but some governments have forcefully stated their objection to it – among them: Mexico, Australia, New Zealand and Britain. It is expected that India, South Africa and Brazil will also oppose the proposition.
Caribbean countries that are members of the IWC – the six independent members of the Organization of Eastern Caribbean States (OECS) and Suriname – could be very instrumental in either quashing it or validating it.

If the proposition is endorsed, it would: overturn the global ban on commercial whaling and allow hunting in the Southern Ocean Whale Sanctuary around Antarctica; approve the killing of whales for commercial purposes by Japan around Antarctica and in the North Pacific; and allow continuing whaling by Iceland and Norway in violation of long-agreed scientific procedures and the global whaling ban.

The Caribbean nations have absolutely nothing politically, or in orthodox material terms, to gain by helping to support the proposition; they have much more to lose.

Apart from Bequia, one of the tiny islands of St Vincent and the Grenadines (about which, more later), Caribbean people do not eat whale meat, but many of the islands have a vibrant whale-watching industry from which they derive revenue and jobs. More importantly, the Caribbean sells itself to the global tourism market as environmentally friendly and protective of natural wildlife – an assault on this latter reputation by tourism groups, who are increasingly demanding higher environmental standards, could damage the region’s already fragile tourism industry.

It has to be recalled that it is only inside the Caribbean that a differentiation is made between the countries that reside in it; to the North American and European tourists, the Caribbean is one place. The perception of the area overall can affect countries individually.

It is claimed that Japan pays the IWC membership fees for several of the Caribbean countries, and also finances the participation of their delegations who have become the most vocal supporters of Japan’s drive for commercial whaling.

In April 2002, the then Accountant General of Grenada wrote in a letter (later made public):”contributions from the government of Japan to the government of Grenada were not received for the International Whaling Commission and as such was not reflected in the said accounts for the years 1998 and 1999. However, our internal audit revealed that contributions were received for all other years prior to and following 1998 and 1999. Moreover the Japanese have confirmed that it made contributions to the government of Grenada for the specified periods.”

Japan has taken advantage of the economic vulnerability of these small and needy countries to capture their votes. In return for support at the IWC, Japan has provided fish refrigeration facilities in all the independent OECS countries which, while opened with great fanfare and flourish as a boon to local fishermen, are now mostly disused or used for other purposes. In some countries, they have become known as the local “ice house”.

But, when the economics of the relationship with Japan is analyzed, these Caribbean countries come out worse. Japan has a massive annual balance of trade surplus with each of them – they are ready markets for Japan’s motor-vehicles, television sets, radios, computers, printers, cameras, agricultural equipment and a host of other goods. In turn, Japan’s purchases from these countries, where such purchases exist, are negligible.

To say that the latest proposition from the IWC Chairs to overturn the ban on commercial whaling has caused outrage around the world would be to put the matter mildly.

Governments, non-governmental organizations, environmental groups and ordinary people have written letters, signed petitions, organized demonstrations, created blogs on the Internet and generally agitated against what they rightly regard as an activity that is not only unnecessary, but is cruel and barbaric.

The human population of the world does not depend on whale meat to live; in fact, including a small number of aboriginal peoples – and an elite group in Japan – whale meat is eaten by only a tiny fraction of the global population.

The three remaining countries in the world that flout the spirit of the IWC rules and decisions in respect of commercial whaling are Iceland, Japan and Norway.

In the Caribbean, apart from Bequia, any ancient hunting of whales has long since been abandoned, and there is certainly no tradition of eating whale meat in the region. The primitive process of hunting whales off Bequia is cruel verging on the barbaric and does nothing to promote the island’s reputation as a premier residential tourism destination. It has to be assumed that this activity will soon be regulated by the Minister who has power to do so under the law.

The Caribbean governments involved in this matter should join progressive governments around the world by formally declaring their opposition to the proposition long before the IWC meeting in June, and, if they do attend, by vigorously opposing it then.

Better still, given the difficult financial circumstances confronting each of them, Caribbean countries can validly stay away from this meeting which would be costly to attend in distant Morocco, and which has no benefit for them. In that way, they could save their own standing with the vast majority of public opinion while sinking the yen for whales.

Othello’s exclamation above began:

“Good name in man and woman, dear my lord,
Is the immediate jewel of their souls”.

In this matter of the slaughter of the world’s whales, the people of the OECS countries and Suriname would not want the jewel of their souls tarnished with ‘thirty pieces’ of yen. But it could happen to their detriment unless Governments remove their countries from the fray.

April 30, 2010

caribbeannetnews

Bahamas Blog International

CARICOM official calls for new remedies for illicit drugs

GEORGETOWN, Guyana -- “The time has come to consider a change in our approaches to the global fight against drugs. We must act now to find new remedies.”

This was the essence of the challenge made by Dr Edward Greene, CARICOM Secretariat’s Assistant Secretary-General for Human and Social Development to the Drugs Summit of the Europe, Latin America and the Caribbean which opened in Spain on Wednesday morning.

The Summit was convened to address threats to security within the Latin American and the Caribbean regions and to make appropriate recommendations in dealing with those threats.

In providing a context for his recommendations, Dr Greene enumerated a plethora of security issues affecting the Caribbean, chief of which was crime and violence, which he said posed a “clear and present danger’ to the Caribbean. Others include drug trafficking, trafficking in human beings; trafficking in firearms; smuggling of migrants; money laundering and murder.”

He explained further that the enormity of the situation had prompted CARICOM Heads of Government to place security alongside Economic Integration, Foreign Policy Co-ordination and Functional Co-operation as a main pillar of the integration movement. In this regard, he explained that the Community had established a new architecture for crime and security which included a ministerial body - the Council for National Security and Law Enforcement (CONSLE) - and an Implementation Agency for Crime and Security (IMPACS) to focus specifically on challenges and solution to crime and violence in the Region.

Dr Greene pointed out however that notwithstanding the mechanisms in place, there was still an urgent need for further action, and called for new remedies for crime and security within the Caribbean Community.

He implied further that interdiction and eradication efforts had failed to decrease the global supply of drugs and that punitive methods had reaped very little success in lowering drug use. The assistant Secretary-General proffered a three-pronged policy driven approach that the Caribbean had adopted in fighting illicit drugs and illicit trafficking. These are: the adoption of a multidimensional approach, international cooperation and capacity building and research.

The multi-dimensional approach acknowledges that security of the hemisphere include political, economic, social, health and environmental factors and is rooted in the Declaration of Bridgetown 2006, which recognises the “inextricable link between economic disenfranchisement, poverty, conflict, apathy and disillusionment of our citizens,” and agrees that those risk factors could produce “the root causes of terrorism.”

According to Dr Greene, the multi-dimensional approach to security for CARICOM now encompassed “extreme poverty and social exclusion of broad sectors of the population, natural and man made disasters, HIV/AIDS and other health risks and climate change in all its manifestations.” Inherent in all those challenges, he explained, was the risk of social instability which in turn provided a platform for security concerns.

The second policy approach, according to Dr Greene, emphasised international cooperation. In this regard, he underscored the need to establish comprehensive strategic partnerships with extra-regional forces as a deliberate regional security strategy.

Thirdly, Dr Greene pointed to the work of the CARICOM Secretariat in tandem with National Drug Councils and the Inter-American Drug Abuse Control Commission (CICAD) to enhance the Region’s capacity in developing anti-drug strategies and plans, as an example of how capacity building through training could assist in drug demand reduction.

He added that CARICOM had also agreed on the development of a regional human resource strategy for crime and security, which would consist of two components: one was the establishment of a Caribbean Institute of Security and Law Enforcement Studies (CISLES), and a proposal by the University of the West Indies (UWI) to establish an Institute of Criminal Justice and Security (ICJS).

April 28, 2010

caribbeannetnews

Bahamas Blog International

Jamaica bans scrap metal trade

KINGSTON, Jamaica (JIS) -- The Jamaican government has put a stop on all scrap metal trade effective April 28, with the exception of manufacturers who generate their own material, and do not buy from other sources.

"This must be upon submission of evidence to the Customs department to verify," Minister of Industry, Investment and Commerce, Karl Samuda stated on Monday, as he made the announcement at the Ministry, in New Kingston.

The decision has been made in the wake of the theft of millions of dollars worth of infrastructure across the island, and most recently at the Colbeck Irrigation pumping station in St Catherine, where scrap metal thieves vandalised critical agricultural equipment with losses estimated at some $5 million.

Samuda said the situation, which has intensified over recent months, was untenable, and that the current way in which the industry was operating, is not in the best interest of the country.

The ban does not apply to containers that are already on the ports. Other containers, which have already been packed, will be inspected by a special team comprising the Jamaica Customs Department, the police and other stakeholders, and then repacked.

Samuda said the Customs Department has given an undertaking to have this process completed by Friday, April 30.

In addition, effective immediately, there will be no further export of copper.

"No metal that is smelted prior to being packed will be permitted for export. The metal must be in its original state; it may be compacted, it may be cut up into pieces, but it must remain in its original state, and that is particularly in respect of certain types of metal. They must not be processed in any way at all," Samuda emphasised.

The Minister said that when he speaks in Parliament on May 4, he will outline all the processes necessary as it relates to the export of scrap metal.

Samuda said that this morning's meeting with scrap metal dealers had not provided a satisfactory explanation (from the dealers) nor one that would "cause any other action than the one I decided to take."

He spoke of the importance of the scrap metal industry, despite the ban, but argued that, "the scrap metal industry is sick, and needs to be stabilised, and that's precisely what we are going to do."

" We cannot continue business as usual. There has to be some dramatic changes in how we do business in this trade," the Minister emphasised.

The scrap metal industry earned more than $100 million in 2009.

April 27, 2010

caribbeannetnews

Bahamas Blog International

Cayman Islands fight growing crime

Caymans fights growing crime
tribune242 editorial
Nassau, Bahamas



WHILE Commissioner of Police Ellison Greenslade and his newly energised team of officers make their presence felt throughout New Providence, the Cayman Islands has imported British police to help them get their rising gang-related crime under control as quickly as possible.

Dependent, like the Bahamas, on its world image as a safe tourist and financial destination, Caymanian business leaders fear that rising crime could damage that image. According to a Reuters news report from Georgetown on Thursday, 14 British officers arrived on the island late Wednesday at the request of Cayman Police Commissioner David Baines.

"The murder rate in the small British territory, with a population of 55,000, remains low compared with Caribbean states like Jamaica," said the Reuters report. "But the 390-strong local police force has been stretched since the start of the year by five murders, a kidnapping, armed robberies and shootings. Victims included a 4-year-old boy killed in crossfire.

"Cayman authorities and local leaders in tourism, financial services and real estate are worried the spike in crime could damage the islands' reputation for safety and security, which has underpinned its emergence as a legal domain for many of the world's hedge funds.

'"If we can't crack the problem and bring down the murder rate and restore a much better level of law and order, in the long term, it is going to damage the Cayman Islands,'" the British-appointed governor, Duncan Taylor, said this month, according to the Reuters report.

Fearful of losing its attraction -- already crime is affecting the recruitment of foreign staff for financial positions -- Cayman is determined to get the problem under control as quickly as possible. "It has to be dealt with now and we have to deal with it aggressively," said a developer.

Cayman's police commissioner has cancelled all rest days for his force and put them on 12-hour shifts. Non-essential services were suspended to boost police visibility on the streets. Commissioner Baines said it wasn't a matter of bringing in a UK SWAT team, rather it was about "filling in the skill shortfall we have because our existing detectives are stretched."

Although Cayman knows its problems are not as severe as its neighbours, it is taking no chances. Compared to its five murders for the year, the Bahamas has had 26. National Security Minister Tommy Turnquest said last week that the international yardstick for murder is five per 100,000. "Assuming a population of 350,000 (as is the Bahamas) that should equate to around 17 or 18 murders a year in the Bahamas. At 26 murders to date, we are way over the threshold," he said. The Cayman's population is 55,000.

Commissioner Ellison Greenslade has also moved into emergency mode. Armed with a new police Act, he has outline his five "strategic" crime fighting priorities for 2010. One of them is to raise the standard of recruits -- the days of compromising a community's security to give a chance to unqualified, and probably undeserving persons, are over. He will also demand greater accountability from his men, and those police officers who are not doing police work, will be recalled to active service. He is determined to make our communities healthier and safer.

After studying the hours that most crimes are committed -- 4pm to 8 am - the hours that the police are on duty will no longer be exclusively from 9am to 5pm. There will be an active night shift.

Commissioner Greenslade is determined to have an around-the-clock police presence in the community. Many of us are already aware of that presence. We are also aware that the public is starting to assume its responsibilities of assisting their law enforcement officers in flushing out pockets of subterranean criminals, who, confident in the silence of their frightened neighbours, have gone about their evil ways undisturbed.

Friday's uncovering of what police believe is a long-running, well orchestrated car theft ring, should turn up much information. Already police have discovered parts of cars that have been used in armed robberies.

For many years here at The Tribune we have battled with the police about withholding information from the public. There were always two schools of thought in the Force -- those who believed in keeping information to a minimum so as not to alarm the public, and those (in the minority) who wanted to share as much information with the public as possible, believing that an informed people could better protect themselves.

At long last we now have leaders of a Force who realise that the only way to recruit the public to their crime fighting team, is to keep them informed. The National Crime Prevention Office at police headquarters is making its presence felt. It is keeping the public informed, not only of crimes committed, but crime trends and tips to help them protect themselves and their property. At long last the public is starting to feel that the police have their welfare at heart. And in turn more members of the public are responding with good, solid information.

With the police and public working in tandem, the criminal will gradually learn that with the spotlight on him, his safest bet is to turn himself in. He has already discovered that there is no longer any place to hide. The public has had enough crime, and they want the criminal in the one location built for him -- HM Prison, Fox Hill.

It is now up to the judiciary to get itself organised and join the team that is determined to rid our islands of criminals.

April 26, 2010

tribune242

Bahamas Blog International

Global governance today

Keynote address by Mr Jean-Claude Trichet, President of the European Central Bank, at the Council on Foreign Relations, New York, 26 April 2010.

 

 

Ladies and Gentlemen,

 

 

It is a real pleasure to be back here at the Council on Foreign Relations.

 

You will all be familiar with the well-worn French expression “plus ça change, plus c’est la même chose” – and its New York equivalent “same old, same old” – to imply a world-weary feeling that despite the appearance of change, things remain the same.

 

Well, since my last visit three years ago, I think we will all agree that there have been the most dramatic changes in the world economy. And these are changes that suggest that things will not and should not remain the same.

 

Back in April 2007, I noted that the ever-closer integration of national economies and the rise in capital mobility had made the international system more vulnerable to changes in investor sentiment. I added that it was vital to strengthen the ability of the global economic system to absorb shocks to preserve global financial stability.

 

But few then could have imagined the magnitude of what eventually came to pass, starting with the subprime crisis in the summer of 2007, turning into a full-blown global financial crisis in the autumn of the following year with the collapse of Lehman Brothers, and culminating in a devastating impact on trade, production and jobs.

 

These are not entirely new phenomena – but we have to go a long way back in the history books for a suitable comparison. According to economic historians Barry Eichengreen and Kevin O’Rourke, the initial decline in global production between mid-2008 and mid-2009 was broadly comparable with that at the beginning of the Great Depression. The corresponding correction in global equity prices and the fall in global trade volumes were even larger.

 

The good news is that the global economy has now turned the corner, largely thanks to the unprecedented support measures taken by both central banks and governments, which have helped to restore confidence. Yet the recovery remains somewhat fragile and not yet sufficiently supported by private demand; therefore, it is not the time for complacency.

 

I should add that the recovery should be measured in much broader terms than focusing on a resumption of GDP growth. A full recovery also implies a return to sustainable fiscal positions. It means a full restoration of trust in some of our financial institutions. And it requires a healing of the scars that the irresponsible behaviour of some financial players has inflicted on our societies and on the real economy.

 

In my introductory remarks today, I would like to explore some of the lessons for policy-makers around the world that can be drawn from the extraordinary events of the past three years.

 

I will first elaborate on why we need a set of rules, institutions, informal groupings and cooperation mechanisms that we call “global governance”.

 

Second, I will analyse how, in hindsight, the existing system of global governance has fared during the crisis.

 

Third, I will examine the evolution of the system in response to the crisis, in particular the rise of new key players in the world economy, such as the G20, the Global Economy Meeting of central bank governors and the Financial Stability Board.

 

 

1. Why we need global governance

 

 

There are numerous definitions of global governance. In the economic and financial sphere I will propose that global governance comprehends not only the constellation of supranational institutions – including the international financial institutions – but also the informal groupings that have progressively emerged at the global level. Those informal forums (G7, G10, G20, etc.) are key in improving global coordination in all the areas where decision making processes remain national – whether in helping to work out agreed prudential standards and codes or to facilitate where appropriate, the coordination of economic macro-policies.

 

No market can survive without a set of rules. This is particularly true at the international level, where natural barriers to transactions are formidable. One of the global governance’s primary aims should be that of facilitating the proper functioning of cross-border markets and thereby of reducing transaction costs.

 

The process of doing so is evolutionary and demands a pragmatic approach with respect to what arrangements may and may not work, depending on the circumstances. But the more complex the goods and services exchanged are, the greater the need for a sound institutional infrastructure. In this respect, finance stands out as an arena in which global rules may be particularly beneficial.

 

More generally, the crisis has weakened the arguments of those who think that deregulation is always conducive to better functioning markets. We have learned once again that markets cannot function properly without an effective regulatory and supervisory infrastructure.

 

Governments, central banks, international institutions and globally agreed prudential standards and codes are the means by which we collectively seek to avail ourselves of the global public good of global economic stability.

 

Of course, there are limits to what internationally agreed rules can and should seek to achieve.

 

First, the principle of subsidiarity is essential. This principle, which is a key feature underlying of European Union legislative framework, says that no rule should be imposed at a global or supra-national level that cannot be more or equally effectively set at the national or local level. This principle might also be read as implying that the “burden of proof” should rest on those who want to establish global, as opposed to local, rules and institutions.

 

Second, it is not straightforward to set common rules in complex and innovative fields such as finance. While financial liberalisation, deregulation and innovation all have the potential to make our economies more productive and more resilient, the financial sector must not forget that its purpose is to serve the real economy, not the other way around. We have painfully witnessed the fallout from excessive complexity of financial instruments in the current crisis.

 

Finally, there is a risk that common rules are not optimal and in particular that they are too limited, since they have to be the minimum standards across many constituencies. This risk is very real in the area of finance because of significant differences across countries in financial structures, financial instruments and preferences for financial regulation.

 

Overall, the global financial crisis has shattered previously held convictions that “keeping one’s house in order” is the right principle to ensure global welfare. We have certainly become more aware of the negative externalities that financial innovation and financial globalisation can create. Finance in its current form has become a double-edged sword for the real economy.

 

 

2. How global governance has fared during the global crisis

 

 

Let me now turn to how our institutions of global governance in the financial sphere have fared during the crisis.

Central bank cooperation

 

 

One dimension of international cooperation that I consider to have worked particularly well during the financial crisis has been that among central banks – both bilaterally and channelled through the various Basel-based committees. This institutionalised cooperation has ensured an unprecedented degree of collaboration in, for instance, the provision of cross-border liquidity – the network of temporary currency swaps or repos set up bilaterally by major central banks such as the Fed and the European Central Bank.

 

The Bank of International Settlement (BIS) itself has been “ahead of the curve” in terms of identifying unsustainable trends in the financial sector and more generally in the global economy – such as the under-appreciation of risk and excessive credit growth – which eventually led to the crisis. It could do so based on a high degree of analytical depth and information sharing at a global level that the central banks’ global cooperation has been able to develop over time.

 

These analytical contributions assisted in driving the strong and coordinated policy response when the crisis erupted. We have now scaled back our cross-border operations as markets have recovered, but the spirit of cooperation and the readiness to work together is stronger than ever.

 

 

Regulatory arbitrage

 

 

But as much as some aspects of global governance appear to have passed the severe test of the global crisis, we should remember the significant shortcomings that may have contributed to creating the conditions for the crisis to happen in the first place.

 

One is the lack of coordination in financial regulation that was pervasive before the crisis and which encouraged financial institutions to engage in a large degree of regulatory arbitrage.

 

This was the unavoidable result of the fact that while financial players were becoming increasingly global, and despite the remarkable efforts of the Basel Committee in respect of the banking sector, financial regulation remained largely national, with only relatively weak coordination at the international level.

 

The dramatic under-supply of the global public good of international financial stability is an area where reform is essential.

 

 

Global imbalances

 

 

Another shortcoming that needs to be addressed for the future was the insufficient orientation of macroeconomic policies towards medium-term stability and sustainability.  This led to the build-up of unsustainable external imbalances between deficit and surplus economies prior to the crisis.

 

Although warnings had been voiced, including by the IMF, about the risks of a disorderly adjustment, there was no effective mechanism to influence macroeconomic and structural policies in key countries where those policies appeared unsustainable from the standpoint of global economic and financial stability. This must change – and it requires both the work of international institutions and the cooperation of national authorities.

 

 

3. The evolution of global governance

 

 

Let me turn to the question of how global governance is evolving after the crisis.

 

 

The scope of international cooperation has been significantly broadened. After an initially hesitant response, governments implemented broadly coordinated policies, both within the EU as well as at the global level under the aegis of the G20. And central banks were able to take quick, decisive and coordinated action at short notice.

 

But the crisis also showed that gaps in the system of global governance – in terms of both efficiency and legitimacy – have to be filled. This can be done – indeed, it is being done – by strengthening the mandate of existing international institutions and adjusting existing or developing new informal forums.

 

Overall, the system is moving decisively towards genuine global governance that is much more inclusive, encompassing key emerging economies as well as industrialised countries.

 

The significant transformation of global governance that we are engineering today is illustrated by three examples.

 

First, the emergence of the G20 as the prime group for global economic governance at the level of ministers, governors and heads of state or government.  Second, the establishment of the Global Economy Meeting of central bank governors under the auspices of the BIS as the prime group for the governance of central bank cooperation. And third, the extension of Financial Stability Board membership to include all the systemic emerging market economies.

 

Let me touch on each of these.

 

 

The breakthrough of the G20

 

 

One distinctive feature of this crisis has been that it erupted at the centre of the system. Although emerging countries have been severely affected, taken as a group, they have rapidly become a source of strength for the world economy. It is therefore not surprising that the crisis has led to a clear recognition of their increased economic importance and to their full integration into the institutions of global governance, notably with the breakthrough of the G20.

 

The G20 has been effective in addressing the global crisis. We are now at the stage where this forum is making the transition from acting in a crisis resolution mode to contributing to crisis prevention. This is, in particular, the purposes of the G20 framework for strong, sustainable and balanced growth. The primary goal of this framework is to collectively implement coherent and medium-term policy framework to attain a mutually beneficial growth path.

 

For this purpose a Mutual Assessment Process (MAP) has been set up that will allow to assess whether policies of individual members are collectively consistent with sustainable and balanced growth trajectories. The first steps in this MAP have been presented by the IMF to the G20 Ministers and Governors last week during our spring Washington meetings.

 

Guidance has been given to the IMF on the next steps in the process that will lead to policy recommendations on how to best meet the common goal of strong, sustainable and balanced growth.

 

Since this process is fully owned by the G20 members, and given that it involves them not only at the level of Ministers and Governors but also at the level of Heads of State and Government, it is confirming the strong commitment at the global level to more multilaterism in economic decision making.

 

 

Further strengthening of central bank cooperation

In the area of central bank cooperation, the main forum is the Global Economy Meeting (GEM), which gathers at the BIS headquarter in Basel. Over the past few years, this forum has included 31 governors as permanent members plus a number of other governors attending on a rotating basis. The GEM, in which all systemic emerging economies’ Central Bank governors are fully participating, has become the prime group for global governance among central banks.

 

The GEM has become a very important forum for assessing global economic and financial conditions, for analysing economic and financial policy issues of common interest to central banks. I have the privilege of chairing the GEM presently, and must say that I find the candid exchange of views of our bi-monthly meetings of enormous value.

 

 

Strengthening institutions

 

 

Among the new and strengthened forums, I would like to highlight the expansion of the membership in the Financial Stability Board (FSB), whose membership is now largely overlapping that of the G20. The FSB has received an enhanced mandate to strengthen the international financial architecture and global financial stability.

 

Collaborative efforts between the IMF and the FSB in this context are currently underway, including a joint early warning exercise for the identification of risks to the global economy.

 

The IMF itself has overhauled its lending framework and introduced new instruments to assist countries in financial need, a first step in the broader discussion of its future mandate and internal governance. The meeting of the IMFC, two days ago in Washington, showed a confirmed determination to move ahead in this field.

 

The crisis has also pointed to the need to enhance the framework for cooperation in financial regulation and supervision in Europe. As a result, micro-prudential supervision will be reinforced with the creation of a European System of Financial Supervisors, including three new European supervisory authorities in banking, insurance and securities.

 

Moreover, micro-prudential supervision will be complemented by macro-prudential supervision, focusing on the prevention of systemic risk. The financial crisis has been revealing in many respects. It has revealed the scale of the potential fallout from the failure of large financial institutions. It has revealed the fragility of the financial system to features and trends that cut across institutions, markets and infrastructures. And it has illustrated the magnitude of the consequences of adverse feedback loop between the financial system and the real economy.

 

All three elements I have just described are key features of systemic risk: first, contagion; second, the build-up of financial imbalances and unsustainable trends within and across the various components of the financial system; and third, the close links with the real economy and the potential for strong feedback effects.

 

In short, the crisis has revealed the fundamental importance of systemic risk. The purpose of macro-prudential supervision is to identify sources of systemic risk and recommend remedial action. In the EU, this will be the task of the European Systemic Risk Board (ESRB). The members of the ECB’s General Council will be voting members of the ESRB, together with the three heads of the envisaged European supervisory authorities and a member of the Commission. Moreover, the body will comprise all national supervisory authorities. The ECB, as an institution of the European Union as a whole, as an institution of the 27 EU Member States, has been invited to provide support to the ESRB. The Ecofin Council concluded that the ECB should provide analytical, statistical, administrative and logistical support, in close cooperation with all the national central banks from the 27 states.

 

The ECB is prepared to bring to the benefit of the ESRB, with the participation of all the members of the ECB’s General Council, the macroeconomic, financial and monetary expertise of all EU central banks.

 

The legislative proposals are currently being reviewed by the European Parliament for a decision later this year. I am confident that the ESRB can make a very important contribution for the overall stability and functioning of the EU’s financial system.

 

 

Conclusions

 

 

In conclusion I would like to stress four points.

 

First, global governance is of the essence to improve decisively the resilience of the global financial system. We avoided a major depression but it was a close call. Governments had to support the financial sector by putting at risk taxpayers’ money for the equivalent of around 25 % of GDP on both sides of the Atlantic. This as unprecedented. I am convinced that, if we do not reinforce significantly the resilience of the financial system, our democracies will not accept for a second time such a very large scale of rescue operation.

 

Second, a characteristic of the recent turbulences is not only that they displayed a high level of unpredictability but also an extreme rapidity in the succession of events characterising the unfolding of the crisis. Global governance today must demonstrate a capacity to coordinate with agility and, where necessary, to decide extremely swiftly.  This is also unprecedented.

 

Third, the crisis has had some paradoxical effects: on the one hand it has unleashed a tendency to reengage in financial nationalism if not mercantilism; on the other hand it had contributed to the recognition that a very high degree of interdependencies between economies called for a much higher level of cooperation. These two opposing forces are presently competing. It is imperative that effective global governance preserve the level playing field which is indispensable to foster global stability and prosperity. It is a major challenge. Both sides of the Atlantic have a very important responsibility in this respect in many domains, in particular in prudential and accounting rules.

 

And fourth, as we have seen the crisis has driven an historic change in the framework of global governance. In my view this transformation was overdue. But there are two immediate reasons for this change. One is positive: the emerging economies are now economically and financially so important and systemically so influential that they must have a full and proper ownership of global governance. But the second reason is negative: the industrialised countries have proven particularly clumsy in their handling of global finance before the crisis at the time when their responsibility in global governance was obviously overwhelming.

 

There was therefore no reason to confirm their exclusive prime responsibility. This calls for the industrialised countries to be now particularly irreproachable in the delivery of their present and future contribution to the stability and prosperity of the global economy within the new, more inclusive framework.

 

Thank you for your attention.

 

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