By OECD Development Centre President Jorge Braga de Macedo

Prep Com Feb 21, 2001.

Thank you Mr Co-Chairman. As I mentioned to you when we met last Fall, several parts of the OECD Secretariat have been involved in the preparation of the UN SG report, especially the directorates responsible for development cooperation, tax and investment and trade, and the committees they serve have been informed of this involvement. I myself presented a brief overview of the results of the technical meetings held across the street in the fall to both the Advisory Board on the Development Centre and the Development Assistance Committee (DAC).

As early as last spring, at the request of the EU presidency, I also shared the experience of the OECD Development Centre in analysing the dynamic interaction between globalisation and governance (G&G). This was also the opportunity to meet some of you and I am honoured to be able to provide some additional comments on chapter VI of the UN SG report.

Among the suggestions made earlier, one was taken on board, as is evident from the wording of paragraph 147 on capital account liberalization. It now reflects the OECD's longstanding concern about "best practices" and calls for specific guidelines "to be followed in invoking the controls and in later relaxing them". As ll know, temporary controls often become permanent, to the benefit of bureaucrats and to the detriment of entrepreneurs and citizens.

On the other side, paragraphs 158 and 159 continue to mention the desirability of an international " lender of last resort" even though this particular cure has been shown to be worse than the disease it seeks to prevent, namely financial contagion.

These were examples, by way of introduction, of the considerable progress that has been achieved on this difficult matter and also on what remains to be done.

The OECD Development Centre – a semi-autonomous body whose membership includes countries which are not members of the OECD like Argentina, Brazil, Chile and, as of a few days ago, India – participated not only in the discussions leading to chapter VI of the UN SG report but also in the reactions presented by the OECD Secretariat on drafts of all the other chapters, especially those which involved the private capital flows and official development assistance. In all cases, these reactions at the working level were made in the spirit of helping the Financing for Development (FfD) process achieve as broad a consensus as possible among OECD member countries, and in particular the major donors gathered in the DAC.

Much progress has been achieved since my own involvement began last summer and the general tenor of the UN SG report echoes the concerns of those who wish for forms of "inclusive globalisation" requiring appropriate governance structures at the national and international levels. The commitment of the OECD SG to spreading some of the best practices among the OECD member countries as broadly as possible is well known.

To the extent that the organization has a recognized analytical capability and that it does not have a lending or borrowing agenda, it has helped create consensus about policies that cover a whole range of macroeconomic and structural issues among a membership which includes several systemically significant emerging markets.

The commitment of the OECD SG is also evident in the recent appointment of a director for development cooperation with considerable financial experience in G-7 circles. I am pleased to say that he has accepted to lead the discussion next Wednesday February 28 when the Executive Coordinator of the FfD will present the state of play to OECD delegations at an informal seminar of the Development Centre in Paris. I am confident that he will be able to see the OECD SG and that his long expected visit will reinforce the mutual understanding between a limited membership organization such as the OECD and the convenor of this global event.

Based on the experience of emerging markets and also of developing countries, the Development Centre has been looking at proposals for the reform of the international financial architecture from their perspective in an activity called "governing finance and enterprises: global, regional, national". Some technical papers available on our website have shown how multilateral surveillance procedures based on so-called " yardstick competition" (that is to say common rules and peer pressure) can help promote better policies and thereby contribute to the great challenge of poverty reduction worldwide.

In particular, the procedures that have evolved in the OECD, and indeed in the EU, can usefully be emulated to the extent that they are consistent with the system of global economic and financial governance provided by the Bretton Woods institutions and the WTO.

In particular, the Exchange Rate Mechanism to which in one way or another all EU members have been linked and which preceded the creation of the euro carries interesting lessons for a international financial architecture that would be more development-friendly without eliciting perverse incentives for national policy makers. Quite appropriately, the UN SG reports leaves the matter of exchange rate regimes in developing countries for the IMF but monetary and exchange rate policy are of course crucial dimensions of national governance and impinge on the rights of citizens to a stable and convertible currency. It is therefore useful to reiterate that the speculative attacks on the weaker ERM currencies were short lived because a system that began as an agreement between central banks became a powerful convergence instrument, and therefore promoted cohesion to a much greater extent than anticipated in the catching-up countries themselves. Of course the widening of the bands in the Summer of 1993 helped preserve this convergence function, showing that sometimes you have to float in order to credibly fix. It could be said that this is the financial equivalent of the saying from Hamlet along the lines that "you got to be cruel to be kind".

This lesson is evident in the following quote from TP nº 162, August 2000, p. 27": " Systems like the Exchange Rate Mechanism relied on shared economic and societal values. They may be difficult to adapt to the variety of emerging markets in the current world system, but they are certainly required when regional arrangements are spreading from trade to investment, as is the case, for different reasons, with the Central European Free Trade Association, the Association of South East Asian nations and Mercosul". Further examples could be added since, like the ASEAN+3 initiative.

This emphasis is of course consistent with paragraph #143 of the UN SG report and also with paragraphs #151 through155 (the relationship might be made clearer) but beyond those paragraphs, there is nothing in its current tenor of the report going against the view that financial reputation (financial market confidence in the words of paragraph 147 already cited) is a reflection of good governance. As such it is of great importance for developing countries, like financial freedom is an often neglected right for their citizens. This is more clearly recognized than many would have expected even a few years ago, as it is accompanied by the awareness that liberalizing the capital account of the balance of payments will not be credible if the domestic financial system is unsound or badly supervised, as it has been more often than not.

Having said that, Chapter VI, especially after paragraph 160, contains more than analysis. Some of the recommendations are clearly concerned with aspects of " comitology" that the member states of the OECD will have views on but that there is no point addressing here. Even in the paragraphs up to #160, the case still needs to be made that limited-membership organizations are NOT necessarily less legitimate that more inclusive ones, especially when best practices are monitored by financial markets as evidence of progress in the development process. In that regard, matters of tax cooperation remain extremely touchy, even in as close a group as the EU, and the experience of the OECD (acknowledged in paragraph # 141 but not mentioned in the recommendation), suggests that a global forum would not be manageable in the foreseeable future.

When it comes to waivers on standards until institutional capacity is adequate (paragraph #148 through 150, which do mention peer reviews) it should be pointed out that such procedure may have properties of adverse selection which would hurt the reform momentum. This is obvious with respect to data, but it also applies to procedures and institutional responses.

The same can be said about debt standstills and full liquidity support in crises which may discourage flows to emerging markets due to the associated moral hazard (paragraphs 158 and 159, already mentioned in the introduction). While fully funded liquidity support may help liquidity crises the identification of a liquidity crises is extremely complex in a transparent and well-managed economy, let alone in a developing one about which little accurate knowledge may exist.

In short, the UN’s closer collaboration with the Bretton Woods institutions, the WTO and the OECD can help promote the development goals that were first proposed by the DAC some years ago and that represent a moral imperative in today’s world, as evidenced by the recent publication of A BETTER WORLD FOR ALL (mentioned in paragraph 91).

But effective coordination is costly (the EU experience is clear in this regard, as illustrated by the ERM lessons quoted above) and the FfD process will be most effective if it creates the trust necessary for this enhanced coordination among the UN, Bretton Woods, WTO, OECD and the various regional organizations including the development banks.

To close, let me restate my strong belief, shared by the OECD SG, that the OECD and its Development Centre can play a role in the process. We look forward to continuing work in this area. Thank you Mr Co-Chairman and Honourable Delegates for your attention.