ISLAMABAD, Sept 14: The United Nations Conference on Trade and Development (UNCTAD) has emphasised the need for better regulation of the financial system to achieve monetary and financial stability.

For supporting development and structural change, a restructuring of the financial, particularly the banking, system is also needed to ensure that it serves the real economy better than in the past, according to the ‘Trade and Development Report 2013’, published by UNCTAD.

The report says that monetary and financial stability and sustained growth are complementary goals: without monetary and financial stability, stable growth of investment, output and employment would be difficult to achieve, and without sustained growth, there is the risk that corporate failures and non-performing bank loans will undermine monetary and financial stability.

The flagship report of the UN’s body argues that the world economy is experiencing a structural shift, and that countries must introduce fundamental changes in their growth strategies in order to adjust to it. In particular, developing and transition economies that have been overly dependent on exports should give a greater role to domestic and regional demand.

The latest financial crisis, like previous ones, has shown that unregulated financial markets have a strong potential to misallocate resources and generate economic instability. Since private capital flows are inherently unstable and often unproductive, active intervention by economic authorities is indispensable for preventing destabilising speculation and for channelling credit to productive investment.

The report goes on to say that a selective approach towards cross-border capital flows, including pragmatic exchange-rate management and capital-account management, would reduce the vulnerability of developing and transition economies to external financial shocks and help prevent lending booms and busts.

Monetary policy alone is not sufficient to stimulate investment, as evidenced by the policy response to the ongoing financial and economic problems in developed countries, it says, adding that monetary expansion in these countries has failed to increase bank lending to private firms for reviving investment in real productive capacity, and this points to the need for a credit policy as well.

Credit policy can also be partly implemented by other public, semi-public and cooperative institutions for financing agricultural and industrial investment particularly by small and medium enterprises at preferential rates.

Nevertheless, demand growth in developed countries is likely to remain weak for a protracted period. Thus, developing and transition economies whose development strategies have been overly dependent on exports should move towards a more balanced growth strategy. They should give greater weight to domestic and regional demand.

Wage growth, employment creation and social transfers that favour lower- and middle-income households are crucial to this development strategy, because such households tend to spend a larger share of their income on consumption, particularly of locally or regionally produced goods and services.

Also needed is an expansion of production capacities, and their adaptation to the new demand pattern. This will require the provision of reliable and long-term financing. Countries should rely increasingly on domestic sources for such financing, with central banks conducting a credit policy, so that commercial banks, development banks and specialised institutions effectively finance the real economy.

The world economy cannot revert to pre-crisis growth, which was built on unsustainable global demand and financing patterns. Developed countries should act more decisively to address the fundamental causes of the crisis, and should move away from contractionary fiscal policies so as not to further undermine their already slow economic growth.