Post 2015: Global Action for an Inclusive and Sustainable Future

CHApTER SEvEn
The international
financial crisis
has created a
broad consensus
on the need for
international
cooperation
to address
deficiencies
in financial
regulation.
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regulation determines the size and volatility of
capital flows to developing countries; international
tax regimes determine their scope for taxation;
and institutionalised engagement between SSc
and traditional donors influence the level and
effectiveness of development cooperation. thus,
for developing countries to benefit from larger and
more diversified financial flows, there is a need for
better international cooperation to reform rules and
policies related to financial flows. the remainder
of this chapter focuses on the opportunities and
challenges for the international community in
these areas.
7.4.1 A development-friendly
international financial system
In order to make the international financial system
more conducive to development, reformers, both
scholars and policy-makers, have sought to promote
international cooperation in two major areas. First,
financial regulatory reform in order to increase
financial stability, which is essential for developing
countries to receive more stable external financial
flows; and second, curbing illicit financial flows
(IFFs) from developing countries, which would
facilitate domestic resource mobilisation. this
section looks at these in turn and then discusses
the implications for a post-2015 global framework.
Opportunities and challenges for
international financial reform
the international financial crisis has created a broad
consensus on the need for international cooperation
to address deficiencies in financial regulation (ImF,
2012; levine, 2011; G20, 2010b). this consensus
emerged when the extensive costs of the regulatory
deficit at the international level and of the subsequent
financial and economic crisis in developing countries
became known. In addition to significant impacts on
growth and poverty in some countries (massa et al.,
2012; van bergeijk, 2012; te velde, 2010), the global
EuropEan rEport on DEvElopmEnt 2013
economic and the eurozone crises have severely
constrained the potential of external capital, both
oDa and private cross-border flows, to finance
development. In the wake of their fiscal crises,
Greece, Ireland, Italy and Spain have significantly
reduced their oDa (World bank, 2012a) and Dac
members’ net oDa fell by 2.7% in 2011 compared
to 2010 (2012c). 82 moreover, as Figure 7.8 shows,
the financial crisis led to a sharp (albeit temporary)
drop in net flows to developing countries, due partly
to an increase in capital flight. the financial crisis
has increased the volatility of capital flows in mIcs
because of their greater integration into international
financial markets. the volatility and reduction of net
financial flows to developing countries created by
the global financial crisis has increased awareness
of the need for international cooperation on financial
reform in order not to undermine development
(ostry et al., 2011; volz, 2011; Griffith-Jones and
ocampo, 2009). the lack of international financial
stability affects the sustainability and predictability
of external financial resources, both oDa and
private flows, and limits their potential to contribute
to development.
Since the onset of the financial crisis there has been
growing agreement on the direction of desirable
reforms among the G20 political leaders and in
a number of academic and official reports. For
instance, it is broadly agreed that regulatory reforms
should be oriented towards curbing short-term
speculative transactions that can distort markets
and exacerbate crises. In particular, there has been
increasing support for the notion that reforms
should follow the principle of comprehensiveness.
For regulation to be effective, the regulator should
be in the same domain as the market to be regulated
(reinhart and rogoff, 2008; mattli and Woods,
2008). Since financial markets are global, regulatory
oversight should be based on a network of national,
regional and international regulatory authorities
82 Empirical evidence that banking crises in donor countries are associated with a substantial drop in oDa (Dang et al., 2009) underlines the
relationship between financial instability and oDa.