Caracas, 28 january.- Following is the transcribed version of the on-line conference on the international financial crisis given by Ambassador Carlos Moneta, Permanent Secretary of the Latin American Economic, from the headquarters of the Permanent Secretariat in Caracas on Thursday, 28 January 1999, from 6 to 7 PM. This event was made possible by the United Nations Educational, Scientific and Cultural Organization (UNESCO) through its "Communication for Integration In Latin America and the Caribbean" programme.

Moderator: Good afternoon. We are here today in the company of Ambassador Carlos Moneta, Permanent Secretary of the Latin American Economic System (SELA). Ambassador Moneta will be speaking on the "International Financial Crisis and its impact on Latin America and the Caribbean." The Latin American Forum would like to welcome Ambassador Moneta.

Moderator: Ambassador Moneta will begin with a brief introduction to be followed by your questions.

Ambassador Moneta: Good afternoon. When crises break out, destabilizing economies and triggering a domino effect, they modify, within very short lapses of time, the international flows of trade and investment worldwide. In the decade that lies ahead, external policies must necessarily include the management of these systemic risk factors in their formulation and implementation. In this respect, an area that will become most significant is the issue of the operability of global financial and trade institutions and their capacity to manage the system. From the national perspective, participation in these fora and in trade negotiations that make it possible to conquer markets and which due to their nature will bear a long-term impact, will soon be viewed as a vehicle that allows adjusting and compensating for the uncertainties generated by global monetary and financial volatility. There is indeed reason for worry when one considers the serious and costly efforts incurred by the governments of Latin America and the Caribbean to ensure stabilization and growth, and to think that these efforts can be affected by factors that are entirely alien to their economic realities, and that no international mechanisms exist that can deter or avoid that this happens. In view of this, a crisis induces us to reflect on what criteria to apply in order to measure "success" in the context of globalization. Another factor that emerges as a result of the financial crisis sparked in the Asia Pacific stems from how that situation is applied towards deepening and broadening the economic liberalization of emerging countries in all sectors, particularly in those sectors kept under government control so as to maintain a given level of autonomy, as for example, the system of property of land and labor, fostering of strategic industries, active policies, etc., in the face of undesirable consequences of globalization and to improve their options for insertion. You may now proceed to formulating your queries.

Moderator: Gerardo Thielen would like to formulate his question to Ambassador Moneta.

Gerardo Thielen: In view of the discussions being heard in Latin American circles of linking national currencies to the U.S. dollar in an effort to avoid large fluctuations/devaluations, I ask myself whether the recent creation of the euro provides an alternative that will lower the fluctuation of national currency as a result of greater linkage between these and the euro, even in terms of currency reserves?

Moderator: Ambassador Moneta gives his answer to Gerardo

Ambassador Moneta: The introduction of the euro could be or rather, will certainly be a factor that contributes to stabilizing financial markets worldwide and to opening the way for the diversification of international reserves. In this respect, the euro could indirectly influence a drop in fluctuations of currencies in Latin America. There is not much that the euro can do directly for national currencies, however. In some cases because the cause of the instability lies in domestic problems or policies. In other cases because fluctuations are set off by speculative transactions that prey on circumstances allowing for benefits from changes in currency value. If this speculation is not possible within a stable monetary area, for example among the members of the European Monetary Union, the betting game moves on to another scenario. For this reason, the stability of a currency or of a monetary area does not necessarily lead to the stability of others. The opposite effect can also occur. This is what we have seen in recent times: when the window for speculation in a given market vanishes, be it because of stabilization or excessive instability, speculators immediately move on to other markets, jumping from Thailand to Malaysia, to Hong Kong, to Russia or to Brazil.

Moderator: Abelino Martinez asks Ambassador Moneta

Abelino Martinez, University Professor, Colombia: Could it be that the world economy is coming to the end of the monetary era and is beginning a new one, under a different pattern, where convertibility and dollarization rule in the design of monetary stabilization programmes? Is it plausible to think that the dollar, yen and euro can adapt to one exchange band and that the rest of the world’s currencies will follow this pattern?

Moderator: Ambassador Moneta replies to Abelino

Ambassador Moneta: The world economy, as you put it, is coming to the end of an era and entering another with the entry into force, less than a month ago, of the euro, a currency of global importance. But we are still not familiar with the characteristics of this new era we are entering, particularly if we look at it from the standpoint of the developing countries and emerging markets. Even though the prevalence of three important currencies could lead us to believing that monetary issues may become regionalized and directed by three poles of influence, we could also think, on the other hand, that the volume and speed of financial transactions, as well as the globalization of international trade, point in the other direction, towards that of the multipolarization of economic relations. So we ask ourselves, regionalization or globalization? Put into other words, the possible compatibility of both phenomena will be resolved in terms that go beyond the sphere of monetary matters. The coordination of monetary policies between countries or areas of greater impact would prove beneficial in terms of providing a positive solution to the problem. In this respect, the adoption of currency bands could be beneficial. But this alone is not enough because other factors are also present and cannot be underestimated, such as current events in the real economy, development possibilities of other regions, and the distribution of economic and political power. Similarly, reconciling a national currency to an area of monetary influence on the basis of convertibility or dollarization would only make sense if we an attempt is made to adapt all economic relations and the capacity of economic rapports to the interests of this area or currency. We firmly believe that this is not what the Latin American and Caribbean region is seeking.

Moderator: Beatriz de Salom asks Ambassador Moneta

Beatriz de Salom: During this year, what countries could face financial problems like those in Brazil?

Moderator: Ambassador Moneta answers the question formulated by Beatriz de Salom

Ambassador Moneta: Brazil’s situation is still changing, and it would therefore be difficult to say how far it can reach and bear an impact on the rest of the countries of the region. However, to the extent that the crisis in Brazil is a new expression of the international financial crisis, we could evaluate the impact of the global phenomenon on the countries of the region. The region has been hit hard. And the impact has been negative. The forecasts for the region during 1998, prepared by specialized organizations, predicted that growth would lie somewhere between 4 and 5 percent. 1998 came to a close with growth reaching but half of the expected level. This situation is worsened by the fact that this negative trend emerged during the second semester and will most likely continue for most of the year coupled with a slowdown in economic activity, If we add to this the current difficulties in Brazil, the impact could be deeply felt, in view that relations between Latin America and that country are much greater than with other countries hit by the international financial crisis. In this context, it is important to establish the difference between the impact on financial markets, which is closely linked to psychological reactions that are difficult to predict, and the impact on trade flows that respond to very concrete situations. The first can affect the region as a whole, particularly those that are most active in the financial markets. The second can affect those countries that have more trade ties with Brazil, as would be its Mercosur partners. In both cases the effects will be negative, and the extent of these depends on how the events develop in Brazil and the market reaction.

Moderator: Daniel Gatti asks Ambassador Moneta:

Daniel Gatti, Semanario Brecha (weekly magazine), Montevideo: The repeating emergence of crises and their increasingly global impact lead us to believe that the international financial system is in crisis and questions the compatibility of its institutions with globalization. What do you make of this situation and do you see a solution for this?

Moderator : Ambassador Moneta answers Daniel’s query :

The multilateral institutions themselves have suggested the convenience of designing a "new architecture" for the international financial system. But consensus has been reached only on the need for a change. A first aspect that needs to be dealt with is to determine who would design this new structure. Opinions cover a wide range including those who feel the market should determine the new architecture while dismantling the institutions currently in place and those who consider that this is a task that belongs to the State. I share the opinion of the latter. There is yet another problem to contend with in the framework of this second opinion: what States and using what procedures will the system’s reform be carried forth? Our position in this regard is that broad participation is needed taking into account the needs and viewpoints of the developing countries most affected by the crisis in the system and which, under the present circumstances, count on the fewest mechanisms to face it. More specifically, the countries of Latin America and the Caribbean and Asia Pacific as well as some of the European powers could cooperate in this area. It should be pointed out in this respect that developing countries’ participation can not be curtailed to include on emerging markets because this would mean the exclusion of a great number of countries thus thwarting their development opportunities. As for the content of the reform, it is self-evident that focus should be placed on eliminating market volatility and lessening the vulnerability level of small and medium-sized countries. The skyrocketing increase in the number of financial transactions in recent years, has unleashed forces that are practically uncontrollable, and regulations, mechanisms and institutions must be created to channel them, in a constructive way, and contribute to development. This last objective has been overlooked in recent years and postponed in view of the need for stabilization, which too is now endangered.

Moderator: Estrella Gutierrez formulates a question for Ambassador Moneta

Estrella Gutiérrez, correspondent with the IPS news agency in Venezuela

Does SELA consider that Latin America must formulate its own and specific "third avenue" to contend with financial volatility and promote development? If your answer is yes, what would be the basic instructions to follow?

Moderator : Ambassador Moneta answers Estrella’s query:

You too, Estrella?....

SELA has always upheld the belief that Latin America and the Caribbean needs to have its own and specific development and international insertion strategy. In the present scenario, this need has become all the more evident and SELA work programmes have always been plotted to stay on that course. The essential elements of its own strategy are, in my own opinion, that it resolve the region’s specific problems: 1) substantially improve income distribution, 2) take care of social problems, 3) carry out an educational transformation that has been proposed but has yet to be set down 4) diversification of external relations, including regions and countries with which ties had been limited until now , 5) stability and continuity of development programmes, encompassing these in a model tailored to the region 6)strengthen the integration process extending its horizons to include new ambits of the economy, politics, and culture 7) diminish asymmetries in the region.

Moderator: Claudio González-Parra asks Ambassador Moneta

Claudio: Could you explain the role of the state, passive, active or no interference in the financial crisis?

Moderator :Ambassador Moneta responds Claudio’s question in English:

The state necessarily plays and should play an active role in the financial crisis. Particulary as regards the management and speed of our financial openness processes, the characteristics of the development models and the active and coordinated participation of developing countries in the most important decision-making mechanisms of our international financial system, which I made reference to in the question posed by Mr. Gatti.

Moderator: Rafael Kries submits a question for Ambassador Moneta

Rafael Kries, PhD in Economics

Ever since the world entered the postwar period and even prior to the idea of interdependence, trade development among countries has been based on country specialization. However, the current logic of integration has not been an inverted reflection of this phenomenon but instead the prevalence of financial dynamics over that of trade and production. Will regional integration negotiations change this situation or at least bear an impact on it, turning away from the need to restructure the international monetary and financial system?

Moderator : Ambassador Moneta answers Rafael’s query :

The idea behind integration in Latin America and the Caribbean has always been based on interdependence and specialization of countries, particularly in the sphere of trade, and with lesser intensity in the production area. However, the slow pace and difficulties of the process have led to the weakening of the financial dynamics. Coordination of macroeconomic and monetary policies, which would be the avenue to take to deal with financial problems, has lacked the required trade base. MERCOSUR took important strides in this sense. However, the current financial crisis places another serious hurdle in its path. For this reason, among others, the countries of Latin America and the Caribbean and their integration groups should join their efforts and positions for the purpose of restructuring the international monetary and financial system.

Moderator: With this response the on-line conference with Ambassador Moneta comes to its close. The Latin American Forum thanks Ambassador Moneta for his participation in this Forum and all those who joined us for this event. Thank you and have a pleasant evening.

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