China, India, Brazil join inner regulatory circle
Feb 20, 2009
LONDON (Reuters) - China, India and Brazil have joined the inner circle of a top global financial regulation forum on Thursday as part of wider efforts by policymakers to formally recognise the three countries' growing economic clout.
The International Organisation of Securities Commissions (IOSCO) groups watchdogs from over 100 countries representing more than 90 percent of the world's securities markets.
But the key standards-devising work is done by its technical committee of just 15 members, including the United States, Japan, Germany, France and Britain.
It has left out watchdogs from countries such as China, now the world's third biggest economy and with a fast growing financial market.
"The changing landscape of the international financial system in this time of crisis demands that organizations, such as ours, reflect such changes in the composition of its membership," said Kathleen Casey, chairman of the technical committee and a commissioner at the U.S. Securities and Exchange Commission.
IOSCO's move mirrors broader trends as the ability of just a handful of countries to determine global financial rules is increasingly seen as untenable. Global leaders have agreed to draw regulatory lessons from the credit crunch via the Group of Twenty (G20) countries so that nations like China, Brazil and India have a say.
The Financial Stability Forum (FSF), a body aimed at ensuring market stability, is made up of government and central bank officials from 12 countries and several financial institutions, is expected to be expanded.
Haggling over which new countries may join the FSF continues behind the scenes and some observers expect China, Brazil and India to be given a seat.
The G20 holds a summit on April 2 in London to agree on a more detailed set of actions to reform financial market regulation and oversight.
Keeping Stability at All Costs
By Ruchir Sharma | NEWSWEEK
Feb 21, 2009
The current global economic crisis has been traumatic enough to throw many countries into a deep funk. But in Brazil, life is still a beach. No, it's not as if Brazil is completely unaffected by the worldwide collapse in economic growth.
After expanding at an average of nearly 4 percent over the past five years, the Brazilian economy is set to slow to a crawl in 2009. Capital flows are shrinking and credit is harder to come by in the country as well. But given its long history of crises, Brazil's reaction to the current shock is more along the lines of "we have seen this movie before"—and its past experience has seasoned the nation to weather such storms. There's also a sense of relief that the latest episode is centered around a global growth meltdown and is not homegrown in nature.
This mood is perhaps best reflected in a record-high approval rating for President Luiz Inácio Lula da Silva. With an 80 percent rating, he must be the most popular leader in the world, and he has achieved this in part by assigning all blame for the sudden stop in the country's growth to
developments in the United States while continuing to capitalize on the five years of unprecedented stability he has presided over. But another reason for the divergent reaction in Brazil compared with many emerging markets in Eastern Europe and Asia is the country's main policy objective this decade of seeking stability above all else, rather than the "growth at any cost" mantra in several other emerging markets.
Brazil had good reason for doing so. Since 1980, the country has typically suffered some sort of crisis every five years. The last one was in 2002-03, when markets feared Brazil might cave under its huge debt burden. Since then, it has made remarkable progress in reducing its dollar debt, building up a large war chest of foreign exchange and anchoring inflationary expectations.
Brasília's policy initiatives—including targeting a low inflation rate and increasing spending on social programs—were also guided by this desire to achieve stability. Result: an annual growth rate of 2 percent in the 1980s and '90s, and nearly 4 percent during the global boom period stretching from 2003 to 2007—but still well short of the average 7 percent growth across the
developing world during the same period.
While the importance of stability in fostering sustainable growth cannot be underestimated, it's safe to say that it would have been difficult for Brazil to achieve any of its objectives without the support of the roaring bull market in commodities. Therein lies the key to Brazil's growth. Commodities such as iron ore and soybean make up 55 percent of Brazil's exports. And even though exports, at 15 percent of GDP, form a not-too-large share of the economy, evidence from the past few decades shows that Brazil's growth rate has oscillated around an average 2 percent, and variations from that trend are largely explained by commodity price swings.
Commodity prices have indeed fallen sharply over the past few months but remain well above the average levels of the past two decades, thereby providing the economy with some cushion. Furthermore, since Brazil never recorded the gangbuster growth rates of other commodity exporters such as Russia and parts of the Middle East, it finds itself better able to cope with the
present dire external funding environment. Brazil does not have a significant amount of debt to roll over this year. To fund growth, Brazilian companies did not leverage their balance sheets as aggressively as other companies did during the liquidity boom of the past few years.
In effect, the Brazilian economy has managed to move to a lower-volatility regime, whereby it will be able to avoid the boom-bust cycles of the past—especially compared with other major commodity-exporting nations—after long being considered the soft underbelly of the emerging-markets world. But the low ambition on the growth front also implies that it will be a very long time before Brazil can break out of its middle-class existence. That means that the country's policymakers can no longer be content with just achieving stability. They will now have to think more in terms of how to put the country on a faster growth track.
Brazil's productivity growth over the past two decades has averaged an abysmal 1.5 percent, as businesses have been stifled by a prohibitive tax structure. The government has been compelled to maintain high taxes to fund its huge spending, which, at 37 percent of GDP, is extremely high for a developing country. And for all the work done toward promoting stability, little has been done in the way of structural reforms, such as reducing the inordinately large share of taxes in the economy or amending cumbersome labor laws. These changes are required to fully unleash the entrepreneurial energy in the country and boost Brazil's long-term economic growth trajectory.
Brazil must then stop soaking in the glory of its last victory, get off the beach and work toward moving higher on the development plane. Otherwise, the country's growth profile will remain relatively unimpressive and vulnerable to commodity price swings. And if commodity prices fall further, even Brazil's much-heralded stability could come under threat.
