Archive for July, 2007

Interview With Bishop of Las Cruces, New Mexico


APARECIDA, Brazil, MAY 21, 2007 ( Bishop Ricardo Ramírez says the 5th General Conference of the Episcopate of Latin America and the Caribbean is an opportunity to learn many things for the direction of the Church in the United States.


Bishop Ramírez of Las Cruces, New Mexico, spoke to ZENIT about the North American bishops’ participation in the conference, taking place in Aparecida until May 31.


Q: How did the invitation to North American bishops to participate in the Aparecida conference come about?


Bishop Ramírez: I believe the idea to invite them came from Pope John Paul II who took the initiative to unite the entire hemisphere in the American synod, and then in the document “Ecclesia in America” he completed an attempt to unify all the dioceses of the Americas, not only Latin America, but also North America.


For this reason bishops from Canada and the United States are included in this conference. There are four of us from the United States: the president of the bishops’ conference, the president of the Commission for Hispanic Affairs, the president of the Church for Latin America and a person who has worked on the central committee for the general conference.


Q: What is the role of the North American bishops in this conference?


Bishop Ramírez: We are here as observers, to see in what way we can serve, because we cannot impose ourselves.


We are a very large country, very powerful, with a lot of influence, but we must be careful about the way we act at this conference. Without imposing, we would like to offer our experience and knowledge of a country that has a lot of influence worldwide, and certainly in Latin America.


Many good things, as well as bad things, come from the United States. And that is why we are here.


Q: What concerns do you bring with you to this conference?


Bishop Ramírez: Problems of evangelization, pastoral problems, we want to discover norms for the new evangelization which John Paul II spoke of.


I believe that we can learn many things for the direction of our country, even if we are not part of Latin America. The Medellin conference had a great impact on the United States, as did [the one in] Puebla.


I hope that Aparecida has an influence on our pastoral practices in the United States, above all with the Hispanics living there; it can enrich the entire continent.


Q: What is the state of affairs with Hispanics in the United States at the moment?


Bishop Ramírez: The most worrisome aspect is the situation of the illegal immigrants, who live in the shadow of society because they cannot lead normal lives.


Sometimes, for example, they are afraid to go to church for fear of being captured by the border police. They are afraid to be ministers.


When they have the chance to sign up to be catechists, they refuse because they are afraid that the government will find out and they will have to leave. Many are there with their children who were born in the United States: The children are legal citizens but the parents are not. If the parents are exported, what will happen to the children?


Q: Are these Hispanics a powerful presence in the Catholic Church of the United States?


Bishop Ramírez: More and more! In two or three decades the largest group of Catholics in the United States will be made up of Hispanics — more than 50%.


Q: What can Catholic Hispanics, who live in the United States, expect from this conference?


Bishop Ramírez: They can expect support from the bishops of Latin America who will encourage them to stay Catholics, to keep their families united, to maintain the traditions and values which they have received from here, from Latin America.


I believe that words of encouragement from the Latin American bishops for the immigrants would be a very good thing.


Key Themes Raised During Visit

By Father John Flynn

ROME, MAY 21, 2007 ( Brazil, Benedict XVI announced upon arriving in São Paulo on May 9, has a very special place in his heart. The Pope explained that this is due to it being the country with the largest number of Catholics and because of its potential that gives joy and hope for the Church.

During his first trip to the Americas, the Pontiff addressed many important themes in his discourses and homilies. Some of them were directed more toward Brazil, but many of the points raised had implications for the Church as a whole.

Evangelization an urgent task

The need for the Church to be imbued by a missionary attitude was repeatedly mentioned by Benedict XVI. In his brief address upon arriving in Brazil, the Pope commented that the Church has a “deep commitment to the mission of evangelization at the service of the cause of peace and justice” (No. 3).

The Holy Father returned to this theme in his address to some 400 bishops, gathered on May 11 to pray vespers in the Cathedral of São Paulo. God desires all to be saved and to know the truth, he observed. “This, and nothing else, is the purpose of the Church: the salvation of individual souls” (No. 2).

Therefore, there is an urgent need to instruct people in the faith and to celebrate the sacraments. In fact, in explaining why so many have left the Church Benedict XVI argued that: “It seems clear that the principal cause of this problem is to be found in the lack of an evangelization completely centered on Christ and his Church” (No. 3).

In general, he noted, those who are most vulnerable to the activity of the sects or to falling victim to the temptation of secularism and relativism, have been insufficiently evangelized.

The Pope urged the bishops to put into practice a pastoral plan to seek out and welcome back those Catholics who have left the Church, or who know little about Christ.

What must we do to have eternal life?

During his encounter with youth, held at the Pacaembu stadium May 10 in São Paulo, the Pope reflected on the implications of the question the young man made to Jesus when he asked what he should do to have eternal life (cf. Matthew 19:16-22).

We can also understand this interrogatory as meaning: “What must I do so that my life has meaning?” noted the Pontiff (No. 3). “Jesus alone can give us the answer, because he alone can guarantee us eternal life,” he added.

Part of the answer, he continued, is to be open to goodness, and to see God in all that is around us and in all that happens. We also need to keep the commandments, but not just by knowing them, we must keep them and give witness in our own lives to them. This is much more than just obeying external rules, Benedict XVI commented. At the heart of the commandments we find both grace and nature, and by following them we fulfill our potential. We only have one life to live and it is important not to squander this opportunity, he urged.

The Pope also encouraged young people to evangelize, and to invite their friends and those around them to encounter Jesus, so they too can experience his love. He invited youth to demonstrate their faith in their commitment to marriage and the family, and to build a more just society.

In all of this it is important to remain close to Jesus through giving sufficient attention to the interior life: “The life of faith and prayer will lead you along the paths of intimacy with God, helping you to understand the greatness of his plans for every person” (No. 5).

The role of bishops

During his address on May 11 to bishops in the Cathedral of São Paulo, the Pope gave some advice on what he saw as the priorities for those chosen to be pastors of the Church. “Fidelity to the primacy of God and of his will, known and lived in communion with Jesus Christ, is the essential gift that we bishops and priests must offer to our people” (No. 2).

Bishops must also ensure that the work of catechesis is carried out properly. The catechist’s task, the Holy Father explained, is not to merely communicate “faith experiences,” but to be “an authentic herald of revealed truths” (No. 4). This means a faith that is characterized by conversion and discipleship.

Part of this catechesis, he continued, also consists in ensuring the correct implementation of liturgical principles. “For bishops, who are the ‘moderators of the Church’s liturgical life,’ the rediscovery and appreciation of obedience to liturgical norms is a form of witness to the one, universal Church that presides in charity” (No. 4).

Bishops should also avoid any reductive vision of the mission they have been entrusted with, the Pope advised. “It is not enough to look at reality solely from the viewpoint of personal faith; we must work with the Gospel in our hands and anchor ourselves in the authentic heritage of the apostolic Tradition, free from any interpretations motivated by rationalistic ideologies” (No. 5).

The Pope also recommended that the bishops apply the social teaching of the Church in dealing with the economic and social problems of Brazil, and consider issues from the viewpoint of human dignity, which is a vision that rises above the mere interaction of economic forces.

Christ the Savior

On May 13, Benedict XVI gave the inaugural address for the 5th General Conference of the Bishops of Latin America and the Caribbean, held near the shrine of Our Lady of Aparecida. In his opening his remarks the Pope commented that the continent can count on a rich Christian culture, five centuries after the initial evangelization, but at the same time faces some serious challenges.

One interesting point raised by the Pontiff dealt with the arrival of the Christian faith in the region. This event meant the arrival of Christ, which the people living in those nations had been seeking, but without realizing it, in their local religious traditions. “Christ is the Savior for whom they were silently longing,” the Pope stated (No. 1).

Seen in this perspective, “the proclamation of Jesus and of his Gospel did not at any point involve an alienation of the pre-Columbian cultures, nor was it the imposition of a foreign culture,” he argued.

Turning to the challenges to be considered by the bishops, the Holy Father mentioned globalization. This brings with it benefits, he noted, but at the same time the risk of economic priorities dominating society. Globalization, like other activities, must be guided by ethics, the Pope exhorted.

He also spoke of progress made towards democracy in the countries of Latin America and the Caribbean. There are, however, still some regimes that follow ideologies that do not correspond to the Christian vision of man and society.

We must, the Pontiff enjoined, avoid the error of considering material goods as the only reality in our lives. This is the mistake made in the last century by both the Marxist and capitalist systems. “Only those who recognize God know reality and are able to respond to it adequately and in a truly human manner,” he commented (No. 3).

Part of his address laid out what the Pope saw as priorities for the renewal of the Church. In this respect he mentioned the family, the role of priests and religious, and the mission entrusted to the laity.

In his words Benedict XVI observed that the region has been referred to as the continent of hope. He also augured that it could become the continent of love. An aspiration no doubt seconded by many.

Interview With Director of British Evangelization Agency


LONDON, MAY 20, 2007 ( ).- A new report on church attendance in the United Kingdom suggests that many Britons have no connection with organized religion, and that the majority of those who identify themselves as Christian never go to Church.


The Christian relief and development agency Tearfund released the report “Churchgoing in the U.K.” in April, which revealed that more than half of those polled claim to be Christians.


Monsignor Keith Barltrop, director of the Catholic Agency to Support Evangelization (CASE) of the bishops’ conference of England and Wales, tells ZENIT in this interview that the key to successful evangelization in the modern world is renewing a sense of confidence among Catholics in their faith.


Q: How did the decision by the bishops of England and Wales to establish CASE three years ago herald a change in the way the Church engages with evangelization?


Monsignor Barltrop: First of all, the decision to establish CASE heralded a recognition by the bishops that there was already a certain amount happening at grass roots level in England and Wales regarding evangelization, but it needed more official support and coordination if the challenges of 21st century Britain were to be met.


When the archbishop of Westminster, Cardinal Cormac Murphy-O’Connor, asked me to help in setting up CASE, he told me that we needed to look at such new ecclesial movements and distil the secrets of their success into the mainstream of parish life, so that evangelization would no longer be a foreign, or even an embarrassing, concept to Catholics, but something they felt happy to engage in.


The bishops were thus trying to root in English and Welsh soil the understanding that Pope John Paul II gave the universal church — that the time has come for a new evangelization. By that he meant that secularization had made such inroads into what were once Christian societies that the Church needed a new ardor and new methods in evangelization.


Q: What are the biggest obstacles to evangelization in Europe today?


Monsignor Barltrop: The biggest obstacles are sheer ignorance or “forgetting” of the Gospel, and the fact that many people who think they know what Christianity means actually have a distorted and woefully incomplete picture.


The “forgetfulness” of Christianity — summed up in the well-known saying that “God is missing but not missed” — is a phenomenon with a complex origin. In the 20th century the twin disasters of Communism and Fascism led people to become profoundly disillusioned with all attempts to explain and save the world. People have now become consumers of spirituality and religion, as they are of material products, and Catholic truth itself can become one more lifestyle option among others.


This problem is compounded by the way values of Christian origin — such as justice, equality and human rights — have become detached from their Christian roots and are now even being turned against the Church, so that the very proclamation of the truth is seen as somehow oppressive and destructive of human freedom and happiness. In such a world it becomes difficult to avoid the impression that evangelization is about clever manipulation of the truth or, even worse, associated with that fundamentalism which the modern world both fears and is, paradoxically, responsible for.


Q: Why is it often difficult to engage Catholics with the need to support evangelization?


Monsignor Barltrop: In Britain, one of the main factors is that evangelization is associated with a certain kind of Protestantism, or with related images such as people preaching aggressively on street corners and “televangelists” looking for money.


By making known a variety of Catholic methods of evangelization, and especially by associating it with the Eucharist and Eucharistic adoration, CASE tries to get across the message that there is a Catholic way of evangelizing.


There is also the problem that evangelization is seen as the preserve of specialists, but we want Catholics to see that it is fundamentally about living and sharing their faith in everyday life, with the people they meet at home, in the office or in their neighborhood.


This means Catholics need to recover a sense of confidence in their faith, and to see it as something coherent — nothing less than the splendor which radiates meaning to every corner of the universe. Where there has been poor catechesis, liturgical deformation or a false understanding of ecumenism or interfaith work, Catholics lose the sense that the Gospel is a marvelous treasure that all need to hear.


Q: A report released recently by Tearfund on church attendance in the United Kingdom found that, while 53% of adults still claim to be Christian, only 15% attend church at least once a month. How do you explain this discrepancy?


Monsignor Barltrop: I think that by claiming to be Christian, people are saying they want to be associated with Christian values such as kindness, fairness and compassion. Obviously that is an inadequate understanding of Christian identity, which is actually based on faith in Christ leading to a personal relationship with him which can only be real if it is rooted in active membership of his body, the Church.


However, it does constitute a reminder to the Church that there is more good will and openness to the Christian faith in our society than we might think. It is up to us to find creative ways of engaging with whatever spiritual quest such people are on, however inadequate we judge its basis to be.


Q: How can the Church re-engage people with the Gospel who may never have encountered it?


Monsignor Barltrop: Through a change of mentality where we see ourselves as having something of immense value to offer everyone in our society, and through more imaginative methods.


As an example, I have just come back from a “Christian Spirituality Fair” in one of our Anglican cathedrals, at which I joined the Franciscan Friars of the Renewal in blessing animals — and people — and in explaining the cross of San Damiano which spoke to St. Francis. We joined Christians of other denominations in reaching out to passers-by, yet were very clear about our Catholic faith and way of life. We have to believe fully in what Pope Paul VI called “the divine power of the message the Church proclaims,” and look for creative ways to bring it to non-Christians.


Q: In the three years since the launch of CASE, what have been its main achievements? Is the model of CASE in England and Wales one that could and should be used elsewhere?


Monsignor Barltrop: One of our main achievements has been setting up two Web sites, one for Catholics (, and one to interest non-Catholics in the faith ( — with a third Web site for young teenagers on the way. Through these sites we have been able to identify or create opportunities to get the good news into the public square. For example, this year on Valentine’s Day we promoted St. Raphael as our “heavenly helper” in finding a suitable life partner, and this attracted a huge number of hits and interest from the secular and Catholic media.


We have held many training days in dioceses, published many resources — both printed and online — and have produced a Directory of Evangelization Resources for Catholics in England and Wales, listing all the groups, movements and training opportunities available. It runs to 168 pages, which is encouraging in itself.


Whether we are a model that should be used elsewhere is hard to say. Setting up an agency is a pragmatic approach which fits well with British culture since an agency implies doing something practical. Other countries may already have a lot of evangelization going on and need a more theologically based approach.


New evangelization is for the whole Church but the approach varies from culture to culture. One thing is constant, though, as Pope John Paul II wrote: “Those who have come into genuine contact with Christ cannot keep him for themselves, they must proclaim him” (“Novo Millennio Ineunte,” 40).

Studies Raise Concerns Over Video Games


By Father John Flynn


ROME, MAY 20, 2007 ( A couple of new publications in the United States shed light on the long-standing debate over media violence and children. In April the Federal Trade Commission published the latest in a series of reports on the issue.


Titled: “Marketing Violent Entertainment to Children,” it provides an overview of the exposure of children and adolescents through music, films and video games to content normally reserved for an adult audience.


There has been progress, the report observes, with more limits on ads for movies and video games. Nevertheless, the Commission notes that with regard to video games advertisements for the M-rated games still reach large numbers of children and young teens. The M rating (mature) designates that the games are suitable for an audience of 17 years of age and above.


The report cited concerns by critics, who argue that children have too easy access to M-rated games. For example, a 2005 survey by the National Institute on Media and the Family found that 70% of children in grades 4 through 12 reported playing M-rated games.


The second publication is a book, published earlier this year, titled: “Violent Video Game Effects on Children and Adolescents.” (Oxford University Press, USA). The book is the result of a joint effort by three psychologists: Craig A. Anderson; Douglas A. Gentile; and Katherine E. Buckley.


The book starts by noting the difficulty, from a scientific point of view, in establishing a relationship of direct causality between exposure to violent video games and violent behavior. Over the years researchers have carried out many studies on the more general question of media violence. The overwhelming conclusion of what is now a substantial body of evidence is that exposure to violence through the media does indeed increase aggression.


Research in the area of video games is, however, more limited. To remedy this deficit in the evidence the bulk of the book presents the results of three new studies on video games.


As a preliminary the authors observe that children and adolescents are spending an increasing amount of time playing video games. Recent surveys show school-age children devoting about 7 hours a week playing video games. Generally, boys spend more time playing video games, with one 2004 survey of students showing 5 hours a week for girls and 13 hours for boys.


Not only do children and teens spend considerable amounts of time playing video games, but they do so with little parental oversight. Over 50% of students in one study said their parents never checked the ratings for video games before giving the go-ahead for their purchase or rental.


New evidence


In the first of the three new studies that form the core of the book the authors explain that they tested 161 9-to 12-year-olds, and 354 college students. Each was randomly assigned to play a violent or non-violent game. Subsequently, participants played another game in which they were asked to set punishment levels to be delivered to another person.


The results demonstrated that those who had played the violent video games punished opponents more severely than those who had played the non-violent games. In addition, the research revealed that the interactive nature of video games results in a stronger relationship with violent behavior, compared to non-interactive media such as television or movies.


A result that surprised the researchers was that there was no apparent difference between the children and college students. This is in contrast with the view held by many that children are more vulnerable to media violence, and indicates college students are just as much affected.


On a positive note, based on information from those surveyed, it turned out that what happens at home influences behavior. Children whose parents set more limits on media usage were less aggressive.


The second study consisted in a survey of 189 high school students. The results showed a positive relationship between those who played a greater number of violent video games and possessing more hostile personalities.


The survey took into account factors that could influence the results, such as the amount of time spent playing games, the normal differences that exist in attitudes between males and females. Even after taking these and other elements into consideration the researchers concluded that playing violent video games was a significant predicator of aggressive behavior.


The study also found that the more time students spent on the combination of video games and watching television, the poorer were their academic results.


The final study examined 430 third, fourth and fifth graders, at two times during a school year. The student’s peers and teachers were also questioned, in order to obtain more information about the level of aggressiveness of the group studied.


More aggressive, less sociable


By examining the group over a period of time, on average there was a gap of 5 months between the measurements, the researchers were able to conclude that children who played a greater number of violent video games early in the school year had changed later on, and came to see the world as a more hostile place. They also became more aggressive and less inclined to socialize with their peers.


The results showed no apparent differences between boys and girls. In fact, the researchers concluded that no one is truly immune from the effects of media violence.


As in the first study the factor of controls put in place by parents had an important influence on children. If at home there are controls on both the amount of time spent playing video games and the content of them, then children suffer a lesser degree of ill-effects.


Proceeding to a general evaluation of the relationship between media violence and its effects on children and adolescents the authors conclude that the impact of the media is far from trivial. Given this, and considering that almost all children play video games, if society were to reduce the exposure of this group to violence through games there would be a significant social impact for the better.


In spite of evidence showing the harmful effects of media violence the authors admit that so far attempts to put any legal restrictions on children’s access to violent video games have had little success.


An alternative approach is to increase efforts at public education, so that parents are more aware of the risks their children run with video games. The authors also recommend that parents discuss with their children the question of violence, pointing out the inappropriateness of aggressive behavior in resolving personal problems.


Improving the ratings system for games, and putting more explicit warnings on the games themselves could also help, the authors point out. In addition, community action to pressure retailers not to sell violent games to children can be effective.


On May 20 the Church celebrated World Communications Day. Benedict XVI’s message for the event was titled: “Children and the Media: A Challenge for Education.” The problem of violence in the media was one of the questions dealt with by the Pope.


“Any trend to produce programs and products — including animated films and video games — which in the name of entertainment exalt violence and portray anti-social behavior or the trivialization of human sexuality is a perversion, all the more repulsive when these programs are directed at children and adolescents,” the Pontiff declared. (No. 3) Strong words, but well-grounded, as the latest research amply demonstrates.

“Fairness and Unfairness of the Financial Markets”


VATICAN CITY, MAY 19, 2007 ( Here is the address Luis Ernesto Derbez Bautista, former foreign minister of Mexico, gave at the plenary session of the Pontifical Academy of Social Sciences in Rome. The meetings were held from April 27 – May 1.


When speaking of fairness in financial markets, one has to be aware of the many aspects this implies.


Because I framed my thoughts in terms of the capital markets of the world, I would like to start my presentation with the following quote that appeared in the March 31 issue of the magazine the Economist, as it referred to the current situation of the world’s financial markets:


“The next wave of distress will be unlike the last in two respects. First, commercial banks no longer dominate the process. Non-banks such as hedge funds now make roughly half of all high-yielding leveraged loans and hold the lion’s share in the secondary market. Secondly, borrowers’ capital structures — the various layers of debt and equity, each with different rights in the event of default — are now more complex.”


Fairness and unfairness of the financial markets


What does this mean? It means that globalization, and the appearance of new actors in the market has modified the rules in such a way that fairness in international flows of capital is difficult to evaluate. The explosion of financial instruments based on derivatives make it extremely difficult to understand even by experts in the field, why the access that many developing nations should have to required capital, either as foreign aid, or foreign direct investment, is not occurring.


Indeed, unlike the expectations that globalization of the markets brought in the last part of the past century, the many financial instruments now available to the world and the fact that speculation has taken hold of the markets, has led the world to a financial system with greater vulnerability to accidents than it ever was before. As a result, time and again we have observed that the possibility that through no fault of its own, a developing nation suddenly finds itself without access to capital in a very quick period of time occurs.


Today, as a result of this globalization process, we are facing two major financial risks which throw initial light on the unfairness of the current system to developing nations. The first one has to do with the proliferation of derivative instruments; the second with an excess appetite for dollar denominated debt to finance current account deficits in large nations. I would like to talk about both today, as I believe they are the source of the great inequality and unfairness in today’s world that developing nations face when looking for financial support to their economic programs.


First, proliferation and profusion of financial instruments have increased the potential risks to the international financial system. The instability that they produce, translates into fewer opportunities for financing projects in developing nations. The nominal (face) value of derivative instruments amounts to multiples of global gross domestic product. Based on this massive number, it is easy to tell stories about how a financial crisis can occur, as a chain of interlocking derivative contracts unravels due to a failure to settle one contract, which is hedging another contract, which in turn is a hedge to something else. Pretty soon, as in stories in which the payments system grinds to a halt due to a relatively small payments failure, a small event can be made to have frightening consequences.


Scenarios involving the unraveling of a chain of derivative transactions may be unrealistic, because there are netting arrangements among most institutions which mean that it should generally be possible to offset obligations that have not been settled. Nevertheless, it may be equally possible that the risks that are passed on through derivative contracts may be inappropriately placed and not adequately recognized. For instance, when banks securitize or hedge a risk, the risk migrates to other places — frequently, it is believed, to insurance companies. The concern is that the risks move from people who understand them to those who do not. If that is the case, the world may soon be facing a major financial collapse; one where poor and disadvantaged nations may end up with the worst part of the cost.


On the other hand, superfluous consumption in developed nations has created an excess demand for funds to finance their current account deficits. The ease with which a country as the United States of America manages to attract funds is remarkable, leading to question a system which provides large amounts to finance consumption, and few resources to finance projects in developing nations which could help them to reach higher levels of growth and employment, thus to lower levels of poverty. Moreover, the consequences of this mismatch between demand and supply of financial flows could lead to consequences that would hit in a stronger negative way to developing nations, once again, through no fault of their own.


Let me explain this last point.


We are all aware of the devastating effects that excess international debt had in the economies of nations who found it easy to finance a consumption period in their histories. The Mexican crisis of 1994, the Asian crisis of 1997, and the Argentine crisis of 2001 are examples of currency mismatches and their aftermaths. However, in those cases the size of the economies involved and the nature of the foreign exchange risks taken by them are different from what could happen today. The punishment brought about by the solution to those crises was bore mostly by the borrowing countries which had indebted themselves in foreign currency. Devaluation punished the debtors, but we all know the effect on growth caused by the ensuing financial crises, I will refer to them later on.


Bad as they were these episodes of financial world crises, we have today a more dangerous situation. It is no longer small economies that are at risk; it is the United States of America, the world’s largest economy. The United States has borrowed heavily abroad to finance ever larger current account deficits derived from an insatiable appetite for consumption goods. But whereas in the past those countries indebted did so in currencies other than their own, the US has done it almost entirely using dollar- denominated liabilities. This implies that, just at the time that creditor countries could be facing the challenge of appreciating currencies and more competitive trade markets, they would also be facing the “headwinds” of sharp wealth losses on dollar-denominated assets.


The negative effect would be a double negative impact on developing nations: first, a loss to financial access product of a reduction in financial official aid from many developed nations, as well as a fall in foreign direct investment arriving to their economies. Secondly, the heavy losses which such a crisis could bring to the world undoubtedly would translate in a more protective trade environment, affecting the developing nation’s access to the very markets they would need to receive income needed for their development.


The evolution of the market


How this unfairness in financial flows for development came to be?


Fifty years ago, foreign direct investment and capital market flows were negligible Official financial aid was the dominant factor in financial flows arriving to developing nations. Thus, an orderly manner of transferring capital was in place. This was possible because first, foreign direct investment was strongly curtailed by limitations imposed by many developing nations. Sectors of national interest were the recipients of such flows, the result was productive investments and growth which helped create jobs and welfare in the economies when the funds arrived. No speculative flows arrived, which was a major difference from where we are today.


Indeed, investing in foreign securities was practically impossible for most investors. Typically, nationals were forbidden to take their money away from the country, or foreign currency restrictions made it impossible for them to obtain foreign currency to pay for foreign securities. In addition, the countries in which they would have wanted to invest almost always did not allow them do so. As a result, capital markets in most countries were completely segmented. As financial liberalization took hold of the world, explicit barriers to international investment were brought down and, for the largest and most developed countries, largely eliminated. To use the analogy of the best seller author Friedman, when one focuses on explicit barriers, the financial world has become flat when one looks at developed countries, and has become flatter when one considers emerging markets.


Unfortunately, the financial world is much flatter “de jure” than “de facto.” The results we have observed from this new arrangement in the international financial system have limited the sharing of risks internationally and prevented capital from flowing to where neo-classical models suggested it would have the highest return: developing nations in need of it.


Leading trade and financial theorists now know that capital mobility is different to goods mobility, and that there is something about trade in financial instruments that is different than trade in goods. This is due to the failure to recognize that while regulation is almost certainly more necessary in financial markets than in goods markets, the need is not for regulation of international capital flows, it is for regulation of financial markets, domestic and/or foreign — a distinction that may not have been drawn sufficiently when recommendations to liberalize financial markets was pushed by multilateral institutions like the World Bank and International Monetary Fund.


The proposed liberalization of financial markets pushed by the multilateral financial institutions was based on the neoclassical model of portfolio choice which predicted that, under liberalized markets investors would hold portfolios that are well-diversified internationally, so that risk is shared across countries efficiently and capital flows where it can be used most profitably. Unfortunately experience has showed us that instead of this result capital does not appear to flow to where neoclassical models predicted it would. Today, investors hold portfolios that are overweighed in the securities of emerging countries which are approved by international financial agencies. And foreign investment funds follow the same approach, reducing substantially the offer of capital to those nations not considered safe by the international rating agencies. Furthermore, as the governments of developed nations consider that a sufficient amount of financing exists in the world, they have reduced their official aid flows, a situation that clearly has created a more unfair financial system than the one we had in the second half of the 20th century. In other words, an inherent bias is very much with us, one which unfairly discriminates against many of the countries where the financial flows would do the most good, both in terms of return to productive investments, as well as, more importantly, to the return of investment in people, a fact which is leading to today’s migration processes: migration of people instead of trade of goods, a doubly unfair result.


We should have expected this bias when pushing for financial liberalization in the world. While experts were emphasizing financial liberalization, the Asian crisis intervened, and the countries most affected by the crisis were those of developing nature. As an example take the Brazilian crisis of 2002. If a country was following the experts advice on implementing the so called “Washington Consensus” measures it was Brazil. The crisis thus, was the result not of poor economic management of the country; it was caused by the fear of international investors that Brazil might not service its debt if Lula were elected president. Clearly such a response to good management was an unfair outcome.


The unfairness derived from: a) the short-term nature of many of today’s financial flows, b) the high turnover in financial markets and the multiplicity of agents who decide about a country’s prospects, c) the speed with which market participants react to new information in negative ways, and quite importantly, d) the global reach of financial institutions with monopolistic power in the sector, commercial banks and financial rating agencies. These complexities of the new financial markets and the dominance by a few global financial institutions have a number of implications which affect the fairness on the way that capital is allocated in today’s world.


Let me briefly consider a few of these, before turning to how they can significantly complicate the lives of policymakers.


The first implication to note has been the growing integration of financial markets, including those in emerging market countries, with subsequent impact on the covariance (perhaps even “excessive covariance”) of asset prices. Over the last year or two, equity prices in virtually every emerging market economy (EME) have risen strongly while sovereign spreads have dipped to record lows. Even more astonishing, the sharp increase in house prices in most industrial countries has also been reflected by similar sharp increases in many EMEs. While arguments can be put forward to explain these developments in terms of “pull” factors (better policies) in EMEs, there seems a reasonable chance that “push” factors are also in play. The sharp increase in competition in the financial services industry in the industrial world, together with high hurdle rates and very low policy rates, has fostered a search for yield that has affected markets everywhere.


In what way does the international dimension complicate the lives of policymakers in developing nations? Consider first the conduct of monetary policy in tightening mode, with price stability as the ultimate objective of policy. As interest rates begin to rise, the currency will tend to strengthen. This will have a downward influence on inflation, implying that interest rates have to rise less than otherwise. This can have two dangerous effects. To start with, if the combined effect on the price of tradeables is greater than on non-tradeables, the trade account may deteriorate. Then, with domestic interest rates relatively low, asset prices could rise and even take on “bubble”-like dimensions. With spending further supported by this phenomenon, there would likely be further deleterious effects on the trade account. In the end, the markets could lose patience and a crisis might follow for the country involved.


This sounds very much like the dynamics of the Mexican and Southeast Asian crises. And while it would be tempting to say that the international complication is really only material for small open economies, what has been going on in the United States, seems qualitatively similar. The rate at which the United States is becoming externally indebted is, in itself, a cause for concern. Moreover, such concerns must be heightened by the recognition that the money lent by foreigners has been spent on bigger houses and higher oil prices, rather than investment in the tradable goods sector. As I mentioned before, the US deficit also has the potential to unleash a bout of global protectionism, which is not the case when small economies run into similar problems.


A second implication has to do with the management of monetary policy to help reduce cyclical effects in the emerging economies. Monetary policy in a financially integrated world is more complicated than it was in the past. The danger here is that an orderly management of the monetary mass could turn into a disorderly one, necessitating a sharp increase in policy rates to stabilize the situation. We saw this on a number of occasions in Canada in the 1980s, and we have had a more recent example in Turkey. The end result of such policies could be a tightening of monetary policy which affects growth and investment in the host country, rather than an intended easing which would help increase investment possibilities in the nation concerned. As we in Mexico know, it is not a pleasant experience to find you going in the opposite direction from that originally intended.


The third problem arises from the globalization of commercial banks, and the presence of hedge funds as the major suppliers of financial flows in today’s domestic and international markets. Banking supervision in a globalized world poses huge challenges for the relationship between home and host supervisors as they collectively seek to prevent crises from happening. The oversight of international payment and settlement systems is another important cross-border issue, one that affects the fairness of the international financial system.


Should the global financial system be subject to a sharp shock somewhere, the issue of how large, complex financial institutions might be wound down remains unresolved. The question of who might bear the costs of an adjustment under such shock still remains undecided. But we have then to ask ourselves the following, in a domestic financial crisis provoked by lax supervision of large dominant international banks in our economies, when emergency liquidity assistance is required, who is to provide it? In what currency?


There are a lot of issues to think about here, particularly since the absence of clarity about the limited role of the public sector brought about by liberalization policies positively encourages moral hazard behavior of the large financial institutions that control the domestic markets of many emerging nations. Thus the globalization of financial markets may provide enormous opportunities, but what we know is that it does create enormous concerns on their effect in providing a fair and just financial world system.


What may seem to the parent organization to be marginal decisions in a global business strategy may have major consequences for the availability of credit and liquidity in the host country when the local financial institution is large relative to local markets. While competitive forces, relatively free entry, and a global market for corporate control should replenish any gap in capital or risk tolerance over time, in practice, frictions, entry restrictions and information asymmetries can slow that process. The process could become more disorderly in periods of individual institution or general financial distress.


To resolve this situation which clearly is a major factor in the unfairness of the current international financial system, home and host country supervisors need to coordinate their supervision of large, multinational financial institutions. Where foreign-owned institutions make up a large proportion of the financial sector of an emerging market country, the health and wellbeing of the country’s financial system may depend greatly on the financial strength and managerial effectiveness of the parent organization, as well as the local subsidiary or branch. In turn, host country supervisors would like to benefit from that comprehensive overview of the parent as they carry out their supervisory responsibilities. In particular, host country authorities want to receive information that is material to the operation of banking and financial markets within that country, recognizing that some constraints exist, especially for public parent companies.


After all above is taken into consideration, it is difficult not to be skeptical of the fairness of the present financial international system of allocation of capital. The more we look at it, the more we feel concerned about its current structure. The skeptics now claim that the costs of financial opening in emerging markets are likely to outweigh its uncertain benefits. However beneficial the globalization trends may be in terms of economic efficiency, the implied changes, increased cross-border competition and pressure to adjust have provoked negative economic results and calls for protection, and not only in emerging markets.


The Mexican and Asian crises, in particular, were of a systemic nature, reminding us that financial markets have a growing capacity to transmit shocks, both across borders and across markets. The list of financial shocks in recent decades also includes the global stock market crash of 1987, the bursting of real estate bubbles in the late 1980s, and credit and asset price booms and busts. Experience has shown that in a number of instances the bust phase of the cycle has been accompanied by a crisis in the financial system. In many emerging market economies, domestic tendencies toward credit, asset price and investment booms have been reinforced by capital flows. Their abrupt reversals have deepened the bust phase. Moreover, emerging market economies – unlike developed ones – as a rule have not been able to borrow in their own currency. The resulting costs to the real economy have thus been greatest when, due to currency mismatch problems, banking crises and foreign exchange crises have coincided.


As if all this were not enough, even though international capital markets have become deeper and more capable of taking on risk, they have become more sensitive to fads and fashion. Changes in perceptions or attitudes toward risks can abruptly alter the funds that a country can expect to receive (sudden stops). These changes can prove costly, in terms of sharp price variations, pressure on the exchange rate, projects having to be abandoned for lack of funding, and so on. In such a scenario, what can small countries do?


Thus, the new financial order of integrated markets comes as a mixed blessing for developing nations. Certainly, integration does bring great benefits to these economies: external funds begin flowing in; countries can enjoy lower costs of capital and take advantage of greater opportunities for risk diversification. In addition to cost reduction, through increased competition, it pushes local industry to increase efficiency and adopt best practices. In a more open environment, competition and market discipline are enhanced.


However, financial integration also entails the danger of amplifying the costly distortions and imperfections of domestic financial markets, as they are internationalized through financial flows between countries. It may also uncover the incompatibilities that arise between countries with inconsistent macroeconomic policies. But what is probably even more important, financial integration creates an additional source of domestic volatility, as irrational exuberance, bubbles and crashes in international markets are imported and contagion effects and sudden stop dynamics make it almost impossible to remain isolated from shocks elsewhere in the world. When financial imbalances grow too far and/or for too long, they do have the potential to trigger financial instability, especially if financial institutions’ balance sheets are exposed to such risks.


Financial instability implies that due to some shock the financial markets are not properly performing their standard functions, i.e., effective mediation between creditors and debtors, spreading of risks and efficient allocation of resources to particular activities and over time. Such a situation, with its serious implications for payment and other systems, can be quite disruptive to economic activity. Although the advanced countries have also gone through episodes of boom and bust in credit and asset prices, experience has shown that the probability of a full-blown financial crisis is higher in emerging market economies. The latter are constrained by their institutional and structural weaknesses. Unlike developed countries, they cannot borrow in their own currency. By their nature these economies are susceptible, in particular, to foreign exchange and currency crises, which are rare in advanced countries.


All of this suggests that a continuation of past policies that seemed appropriate when initiated is now desirable. In particular, because it is hard to say when, where, and how future shocks will hit, developing countries have to start thinking about weaning themselves off reliance on global savings and look for a more stable source of funds, while surplus countries have to find ways to depend less on external demand. Since adjustment is inevitable, would it not be better to commit ourselves to a medium-term policy framework? One that should be agreed by all governments and international financial institutions involved, so that public policy can support the needed private sector adjustment and ensure the process is smooth? One that would define a sufficient level of official aid funds as promised under the Millennium goals?


There are many interesting questions when analyzing the fairness of today’s financial systems in the world. But we do not have the time to go over all of them, so please let me conclude my remarks.




First, under the impact of financial globalization, a gradual shift from the government-dominated official aid/multilateral aid system of the Bretton Woods tradition to a market-led system has evolved. Exchange rates, liquidity conditions and adjustment to shocks are increasingly determined by decentralized market forces. In the changed environment, a gradual shift from bank-centered to market-based financing is taking place, albeit at a different pace in individual countries and regions. The resulting decline in banks’ core business areas has forced them to search for other opportunities both at home and abroad. They have found a niche in emerging economies, an action that has its positive and negative aspects, but above all that defines the unfairness of the current system with its bias against small and less developed nations.


Second changing rules in the financial markets have meant a changing structure of power on who makes the decisions to provide financial flows to developing nations. Whereas the Bretton Woods system had a clear mandate to create a fair system of aid to developing nations, a system like the one we have now where private agents and speculative investments dominate, is a system where the governance structure is biased against fairness. It is a system that does not care for the need to give each country the possibility of reaching growth and eliminating poverty. It is therefore, a system without the legitimacy or the appearance of impartiality necessary to undertake the sometimes intrusive tasks entailed in facilitating international policy dialogue or international lending.


A financial system that can finance the running current account deficit of 6.5 percent of its GDP in the USA – in the process absorbing nearly 70 percent of world external savings- while denying funds to countries in dire need of them to rescue their population from poverty and hunger seems hardly a fair system.


A system that can impose in small emerging economies the mood of foreign investors at their will, not so much because foreign investors will inflict a “sudden stop” but because they are likely, at some point, to start demanding a much higher premium for continuing to finance, is not a fair system.


This system thus, requires to be changed to operate in a different more just manner.


First, it should recognize that trade imbalances are a shared responsibility and help prevent concerns about imbalances degenerating into protectionism, or into calls for one country alone to narrow its deficits or another to appreciate its exchange rate, measures that will be ineffective by themselves.


Second, it should reassure financial markets that a policy framework for supporting adjustment without undue pain is in place, thus limiting the risk of an abrupt and costly market-induced adjustment.


Third, it should create conditions to otain a sufficient amount of donor aid to ameliorate the poverty conditions of extremely poor nations.


Unfortunately, even if the politicians in a country are far-sighted, only domestic benefits enter their calculus: the effects of their actions on reducing risks for everyone else is heavily discounted. As a result, policies that have large external spillover effects may not be undertaken because:


1. Politicians don’t think the risks of an abrupt adjustment are high or that the recommended policies will do anything to narrow imbalance; or


2. They think the risks are high but they care more about the high cost to their own political futures if they undertake corrective policies; or


3. They think the risks are high, and they want to do what is right for the country, but the domestic cost of action outweighs the domestic benefit because much of the benefit redounds to the rest of the world; or


4. They think the risks are high but they cannot move unless others move?


This means some way has to be found to persuade countries to internalize the beneficial effects their policies will have on everyone else – to internalize the spillover effects. That, my friends is a task that only an Academy as this we are in now can undertake. A task that I am sure most of us would gladly undertake, because it is a task that would help those in the world in more need of our support, the poorest of the poor.