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Last Updated: Wednesday, 5 September 2007, 19:13 GMT 20:13 UK
UN calls for curbs on currency speculators
By Jorn Madslien
Business reporter, BBC News

Poverty reduction and wealth creation - the dreams of millions of people throughout the developing world - could be about to be dashed unless the powers of current economic forces are harnessed, a report by a United Nations (UN) agency warns.

A worker stand next to copper cathode sheets being loaded into a truck at the Dachang refinery in Shanghai
Commodity exports have boosted economic growth in many countries

In recent years, economic growth has been exceptionally strong in many of the world's poorest nations.

In the developing world, gross domestic product per head grew almost 30% between 2003 and 2007, the report notes.

However, the harsh truth is that it has come about, not because of clever economic management, but as a result of rapidly rising commodity prices.

Now, insists Heiner Flassbeck, author of the Trade and Development Report 2007, it is time for poor countries to invest the proceeds from the sale of commodities - such as oil, copper or sugar - to enable other sectors of the economy to grow.

"The window of opportunity, the windfalls, are still remarkable, and this should be used to diversify their economies," says Mr Flassbeck.

Developing nations - and indeed the world at large - must "develop ideas and patterns of successful diversification" to reduce their reliance on commodity exports, he says.

Competing nations

In practice, however - and Mr Flassbeck would be the first to acknowledge it - this is easier said than done.

We have a multilateral system for trade. Why shouldn't we have one for monetary affairs?
Heiner Flassbeck, author of Unctad's Trade and Development Report 2007

In many cases, commodity exporting countries "let their currencies appreciate" on the back of their newfound prosperity, he explains, "and this kills the manufacturing sectors in these economies".

To making matters worse, on the sidelines there are powerful armies of hedge funds and others eagerly stoking the fire, with many countries' exchange rate imbalances being "reinforced by the speculation in the currency markets", Mr Flassbeck adds.

"In reality, exchange rates under a floating regime have proved to be highly unstable, leading to long spells of misalignment, with grave consequences for the real economic activity of the countries concerned," according to his report.

To an economist like Mr Flassbeck - effectively the chief economist of Unctad, the United Nations Conference on Trade and Development - the solution is obvious.

"We need a multilateral monetary system," he declares, essentially calling for global mechanisms that make it impossible for speculators to sabotage entire nations' efforts at development and poverty reduction.

"We'll need to avoid a situation where nations compete with each other on the basis of fluctuating exchange rates."

Interdependent world

Mr Flassbeck is calling for a multilateral monetary system that would ensure that different nations' competitiveness was stable. In other words, there would be globally coordinated policies in place that would strive to reduce international imbalances.

Thai baht notes
Speculators make money from fluctuating currencies

Its goal would be to prevent manipulation of the exchange rate, wage rates, taxes and subsidies in the bid for global market share and to deter the financial markets from driving the competitive positions of nations in the wrong direction.

"A new code of conduct is needed that would regulate the overall competitiveness of nations," the report says.

Under such a system, the strength of each nation's currency should be determined by the real, underlying economy.

Exchange rates would be determined by factors such as the balance of payments or the rate of inflation, rather than reflect the activities of currency speculators.

"Real exchange rate changes have to be subject to multilateral oversight and negotiations," the report stresses. "Such rules could help protect all trading parties."

"We have a multilateral system for trade," Mr Flassbeck concludes - referring to the World Trade Organization.

"Why shouldn't we have one for monetary affairs? One cannot exist without the other."

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