Noeleen HeyzerUN Under-Secretary-General & Executive Secretary of UNESCAP

Executive Secretaries’ Dialogue with the 2nd Committee

25 October 2007

Managing financial flows for inclusive & sustainable

development in Asia & the Pacific

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Content

3. Way forward

1. Current situation & macroeconomic policy challenges2. Potential social costs

3

1. Short-term capital flows: historic highs…

• Surpassed pre-Asian crisis levels• “Other investments” flows rising

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1. Short-term capital flows: more volatile

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1. Large inflows: partly due to good economic fundamentals

Rates of real GDP growth of developing ESCAP economies compared with other regions and

world, 1997-2007

-3

0

3

6

9

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pe

r c

en

t

Africa Developing ESCAP economiesWestern Asia Latin America and the CaribbeanWorld output

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1. But…

… increasing risk of sudden & large capital flow reversals

• Speculative capital flows have increased

• Excessive investor appetite for risk

• Booming yen “carry trade” ($331 billion, 2007)

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2. Social Costs: Lessons of 1997

•Financial volatility, economic crisis & frequent economic shocks devastate the poor:

Poverty, unemployment, inequality

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2. Social impact of financial volatility - inflows

• Foreign reserve accumulation & sterilization reduce potential public health & education expenditure

Real effective exchange rates for selected developing Asian economies, 2004-2007 (Monthly avg. 2000=100)

80

100

120

140

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Ind

ex

India Indonesia Rep. of Korea Malaysia Philippines Thailand

• Relentless currency appreciation affects employment

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2. Social impact of financial volatility - outflows

4. Credit crunch will hit “sub-prime” borrowers

1. Sudden capital reversals, heavy toll on the poor2. Inequality rises, marginal workers suffer most3. The poor take longer to recover

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2. Social protection systems insufficient

– Restricted (formal sector)– Limited relevance to critical needs

• Weak social protection systems increase social costs

• Social protection systems in Asia-Pacific:

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3. Way Forward

“Modern financial markets get you where you want to go fast; we are better off with

them. But accidents are bigger.”

– Merton

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3. Manage large & volatile capital flows

3 priorities:

1.Boost domestic demand as buffer against external shock

2.Deepen financial markets, to benefit from capital flows

3.Strengthen regional cooperation, to lessen the impact of financial volatility

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3. Improve social protection systems

Develop regional social protection framework for Asia-Pacific• Build broad-based social resilience & inclusive growth• Invest in women• Target most vulnerable, less skilled

Thank you

www.unescap.org