> The Newsletter of The Australian APEC Study Centre

Bali a success

Bali was a success. The Bali mandate laid the basis for a new global consensus on climate change. All major emitters of greenhouse gases signed on.

Not everyone was happy. It was not the start the EU wanted. 

The EU strategy rejected

The EU wanted reference to long term and short term targets and agreement that the new consensus would extend rather than replace Kyoto. Others did not, not just the US, but Russia, China, Canada, India and Brazil.

The EU also wanted direct reference to a part of the many reports of the Intergovernmental Panel on Climate Change (IPCC) which argued the need for deep, early and strong action to reduce emissions.  They were not mainstream and others would not agree.

Developing country climate chess move?

For its part, the US wanted a stronger commitment by developing countries to measures to reduce emissions. The developing countries refused.

The Bali mandate does expect developing countries to agree to actions which are measurable and verifiable, but not explicitly to mandated targets to reduce emissions. That is an advance because there was nothing like that in the Kyoto Protocol.

But the US sought more, and had a good reason. After the Clinton/Gore Administration signed the Kyoto Protocol, the US Congress voted unanimously to oppose acceptance by the US of obligations to adopt mandatory targets to reduce emissions of greenhouse gases, unless developing countries accepted similar obligations. They clearly had China and India in mind.

Was the refusal by developing countries to go further at Bali a policy chess move to reinforce Congressional opposition in case the Bush Administration moved or a successor Democrat Administration in 2008 proposed globally mandated cuts? If it wasn’t, it had the same effect. 

Reality bit at Bali - the cost of cuts

At Bali, the EU found itself isolated.  No one else, including several of its own members, wants a global program to attack global warming which will seriously harm their economies.

The reason is simple. Most countries consider the cost of early, deep cuts as advocated by the EU, too steep.

The EU case was based on the report commissioned by the British Government (the Stern Report), that claimed failure to commit to early, deep cuts in emissions would harm developing economies more.

Few agree. The world’s leading development economists assess that early deep cuts will impose costs that developing economies cannot afford, blunting programs to raise living standards and eliminate poverty.

Advanced economies have evidently also assessed the cost of deep, early cuts. Japan and Canada cannot meet the modest targets under Kyoto to reduce emissions by around five percent by 2012. German business cannot see how Berlin’s intention to reduce emissions by between 30 and 40 percent by 2020 can be achieved without damaging the German economy.

No wonder there was resistance at Bali to the EU rush to endorse radical action, the impact of which has not been adequately assessed.

Measure is the answer, not haste.

Singapore’s Prime Minster, Lee Hsien Loong, delivered one of the most measured speeches at Bali. He pointed out that the “one size fits all” prescription does not work with climate change: each country should develop the strategy which best suits its own circumstances.

If he thought Europe’s strategies posed economic risk to developing countries, he did not have to say so. The Italian environment Minister, who also leads the Italian Green Party, did it for him. 

At a high level panel during the Bali meeting the Italian Minister said it was necessary to ensure developing countries did not make the same mistake as the industrialized world.
Did he mean despoil the environment or become prosperous? To Europe’s Green parties they are the two sides of the same coin.

Bali has laid the basis for a global strategy that everyone can live with provided the messages delivered by Prime Minister Lee are followed.

The non-life (general) insurance sector is a major contributor to risk management and to the financial stability of an economy, and has increasing importance as economies modernise, driving the need for increased capital.

Additionally, environmental disasters and terrorism cause strain on insurance and re-insurance providers, and highlight the need for international standards and best practices as well as improvements in corporate governance and planning for contingencies.

The program, sponsored by the APEC Secretariat, focused on a wide variety of industry-related topics such as increasing understanding of the risks in the non-life insurance industry and how to best address them.

Other topics included the roles of various insurance stakeholders, the importance of corporate governance, failures of major non-life insurance organisations, the role of re-insurance in catastrophic risks, and how best to analyse the capacity of existing regulatory bodies.

Academic Coordinator Dr Jules Gribble said: "Insurance supervision is an area in financial services regulation that continues to be a source of vulnerability. Strengthening regulatory frameworks to manage risk is our goal in undertaking this training."

The training course was part of the Managing Regulatory Change (MRC) program, which develops regulatory capacity in the financial services sector. Programs to date have included prudential banking regulation, life insurance and pensions risk management and financial services liberalisation.

The program included a diverse group of non-life insurance stakeholders and independent experts from within Australia and abroad, including an International Association of Insurance Supervisors (IAIS) representative, insurance regulators, industry officials and academics, who delivered training program modules and discussed pertinent issues with participants.

Infrastructure financing, commodity price and energy price hikes, inflation and the seriously constrained liquidity global position and its impact on credit growth are matters now firmly on the agenda of APEC Finance Ministers for 2008. As is to be expected, the agenda reflects contemporary financial developments but also maintains a focus on medium term strategic issues aimed at strengthening budgetary management in the region’s economies and in deepening the region’s financial markets. The agenda was mapped out a meeting of senior APEC finance officials held in Lima, Peru, in November 2007 and it will be developed further through 2008, in preparation for the APEC Finance Ministers’ Ministerial meeting toward the end of the year. The contemporary issues on the agenda compose daunting challenges, both to APEC economies and globally. The position on some of them may well deteriorate from circumstances as they are viewed today – oil prices may well move beyond the $US100 pb mark, other commodities, in particular food based commodities, are likely to continue to rise sharply further, it is likely that interest rates will continue on an upward trend, despite some lowering of official rates in the short term, and credit may become more restricted. In some months time we will know whether the slow down in the US and the global economy will be prolonged and what the impact of that will be on the global and regional economic outlook.

These are clearly major issues to engage APEC Finance Ministers and other regional and international forums in the months ahead. Arguably, there are limits to APEC’s capacities to deal with concerns that are now arising and which are manifest in a lowering of community confidence in the economic and financial outlook, in falling asset values world-wide and in the realignment that is occurring in major currencies. These issues are the province of especially the G8, the International Monetary Fund and other groupings. But equally, arguably, these groupings and international financial regulatory agencies have been relatively passive as markets are forcing adjustments to major imbalances that have occurred over recent years. APEC and other groupings can and do play very important roles in promoting understanding about sound policy frameworks and how they may best be implemented.

Excessive credit growth, a long period of exceptional liquidity and low interest rates, falling savings rates in the US, major current account imbalances and inflexible exchange rates in some major economies inevitably take their toll as institutions and economies face up to market driven adjustments. APEC, the IMF and numerous other responsible groupings have been warning of the need to adjust major imbalances. That adjustment is now in part occurring and the consequences, however unfortunate they be, are now impacting on most if not all economies. In these circumstances there will inevitably be calls to for greater intervention by economies in an effort to ameliorate the impact of market adjustments. The sub-prime mortgage debacle in the US is described by some as evidence of a market failure in part caused by inadequacies in the US financial regulatory system and by measures that have occurred in the last decade or so to open financial markets and to promote financial innovation. While deregulation and financial and technological innovation will have played a part in shaping or exacerbating the circumstances now in evidence, there needs to be a very careful assessment of any measures which may be contemplated and which might impede further innovation and financial market development.

So far, central banks and other agencies are doing that by supporting markets with liquidity and with temporary measures of various sorts, including through official interest rate adjustments. It will be a matter of very fine judgment over the next few months as to when the interest rate tool will have to be brought into play to effectively deal with growing inflationary pressures now evident.
 
As regards any consideration of changes to regulatory arrangements it is to be hoped that these will continue to support financial market innovation and development and the better functioning of markets – both financial and other markets. Financial innovation and deregulation have brought great benefits to global economic development, investment and business growth, job creation and poverty alleviation. These are gains to be built on by APEC and by other groupings and should not be lost sight of as policy makers grapple with the current complex economic circumstances. At the same time, APEC Ministers and international and domestic agencies are well advised to continue to focus on the importance of economic fundamentals – sound fiscal and monetary policies and flexible exchange rate policies which promote non-inflationary growth - and which, when they are ignored, sew the seeds of economic and social discontent.

Preview of the upcoming publication – The Australian APEC Study Centre through the generous support of the Department of Foreign Affairs and Trade, is compiling and editing papers from the Preliminary and Consortium conferences for the production of a hard copy compendium. For a sample click here.

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Asia-Pacific Funds Dialogue in Melbourne – The Melbourne APEC Finance Centre is organising a dialogue that will bring together local and regional regulators, together with funds managers, to discuss the current challenges in regulatory arrangements with regards to private pensions, funds and asset management. For more information click here.

Source: APEC Secretariat