Minsk International Model United Nations 2013
Global Security: Motion to stable future
Instructional Guide
GA2 (Economic and
Financial Committee)
Minsk International Model United Nations University Conference 2013
GA 2 (Economic and Financial Committee)
Honorable delegates of Economic and Financial Committee! We are very
pleased to be serving as your Chairs at the First Minsk International Model
United Nations conference for University Students.
The issues addressed by the GA2 (ECOFIN) range from macroeconomic
policy questions such as public debt sustainability and financial regulation to
issues concerning globalization and interdependence, human settlements,
poverty eradication, and the financing for development. In light of the global
financial and economic crisis, the GA2 has recently focused on the
coordination of economic policies in order to re-strengthen international
financial and economic stability.
Now some facts about us, the Chairs of ECOFIN:
My name is Valeria Yasukevich. I’m a student of the journalism faculty at
the Belarusian State University. This is going to be my sixth conference overall
and I am thrilled to be serving as Chairman for the third time already. Every
MUN I took part in was an immense experience not just because I met great
people but because I always got the feeling that I had a chance to change the
world. I am looking forward to meeting you and expecting a great, productive
and enjoyable session.
My name is Vita Arhipova. I’m a 1-year student of Belarusian State
Economic University. It will be a great pleasure for me to be a Chair of
Economic and Financial Committee in MINTMUN 2013. This is going to be my
6th MUN experience and I do hope everyone will have a wonderful time during
our conference. I think that MUNs are great chances to improve language
skills, to get to know people from different cultures and countries and to have
an overview on the international political situation. I suggest you to have a
sufficient preparation on the topics that will be discussed in order to make our
debates more interesting and involving. I hope we'll have really unforgettable
time!
This year’s topics are as follows:
1. Information asymmetry as a major factor amplifying financial crisis.
2. Economic sanctions as aggressive action.
Your experience in the General Assembly Second Committee will be a
challenging but rewarding one.
Best regards,
Valeria Yasukevich and Vita Arhipova.
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1.Information asymmetry as a major factor amplifying financial
crisis
In the financial sector, due to the
structure of the involved companies, the
sophisticated network of exposures among
institutions, the related credibility problems
and the inter-temporal character of financial
contracts contagion phenomenon is hence
considered a noteworthy topic in the
scientific discussions. In the same time, any
financial crisis impacts the real economy.
The integration of financial markets
plays an important role in the transmission mechanism. Interdependent
financial markets are especially exposed to systemic risks that can be spread
more easily. In a globalized market, risks are not limited to a certain market, but
can spread easily across borders.
The ongoing financial crisis has brought into attention the importance of
liquidity that influence the force of existing real and financial sector
transmission channels and even create additional transmission channels.
The effects of an international financial crisis are transmitted via
commercial channel through a deceleration of exports increase or even through
the downturn of their exports. Through the financial channel the access to the
external financing is narrowed and thus the volume of lending is restricted and
can generate private external debt service difficulties.
Information asymmetries in credit markets constitute the backbone of the
financial intermediation theory. In fact information asymmetries have been one
of the causes of the current financial crisis, as some investors took on risks they
did not sufficiently understand. Innovative derivative instruments and
securitization enabled the originators of loans to distribute the risk to investors
with little knowledge about the credit quality of the borrowers. The market for
syndicated loans is one of the major markets allowing such risk sharing and
distribution.
Asymmetric information has two facets in loan syndications. Firstly, there
are information asymmetries between the group of lenders and the borrower.
Secondly, there are information asymmetries among the arranger and
participant banks of the syndicate about the borrower. The arranger is likely to
have more proprietary information about the borrower than the participants,
either because it has experience in lending to the particular borrower or the
sector, or because it is the borrower’s relationship bank. Information
asymmetries among the syndicate members may arise before and after loan
signing. At the initial pricing phase the participant banks depend on the
arranger to evaluate the riskiness of the borrower. Here there is a first type of
moral hazard problem.
Some facts about information asymmetry:
1. Asymmetric information results in two problems: adverse selection, which
occurs before the transaction, and moral hazard, which occurs after the
transaction. Adverse selection refers to the fact that bad credit risks are the
ones most likely to seek loans, and moral hazard refers to the risk of the
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borrower’s engaging in activities that are undesirable from the lender’s point of
view.
2. Adverse selection interferes with the efficient functioning of financial
markets. Tools to help reduce the adverse selection problem include private
production and sale of information, government regulation to increase
information, financial intermediation, and collateral and net worth. The freerider problem occurs when people who do not pay for information take
advantage of information that other people have paid for. This problem explains
why financial intermediaries, particularly banks, play a more important role in
financing the activities of businesses than securities markets do.
3. Moral hazard in equity contracts is known as the principal–agent
problem, because managers (the agents) have less incentive to maximize profits
than stockholders (the principals). The principal–agent problem explains why
debt contracts are so much more prevalent in financial markets than equity
contracts. Tools to help reduce the principal–agent problem include
monitoring, government regulation to increase information, and financial
intermediation.
4. Tools to reduce the moral hazard problem in debt contracts include net
worth, monitoring and enforcement of restrictive covenants, and financial
intermediaries.
5. Financial crises are major disruptions in financial markets. They are
caused by increases in adverse selection and moral hazard problems that
prevent financial markets from channeling funds to people with productive
investment opportunities, leading to a sharp contraction in economic activity.
The five types of factors that lead to financial crises are increases in interest
rates, increases in uncertainty, asset market effects on balance sheets,
problems in the banking sector, and government fiscal imbalances.
Sequence of Events in the Mexican, East Asian and Argentine Financial
Crisis
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2. Economic sanctions as aggressive action
Economic sanctions are rapidly becoming one of the major tools of
international governance of the post-Cold War era. Essentially, economic
sanctions imposed by a state, a group of states, or an international
organization become a form of power exercised to influence other countries’
behavior or policy, which does not necessarily violate international law.
Economic warfare represents a long-term approach to dealing with adversaries
while economic sanctions usually have immediate political goals.
Economic inducements involve commercial concessions, technology
transfers, and other economic carrots that are extended by a sender in
exchange for political compliance on the part of a target. “Economic
inducements” are also called “positive sanctions.”
The UN Security Council, empowered
under Article 16 of the UN Charter to use
economic measures to address "threats
of aggression" and "breaches of peace,"
approved partial or comprehensive
sanctions on only two occasions from
1945 to 1990. By contrast, since 1990
the Security Council has imposed
sanctions on eleven nations, including
the former Yugoslavia, Libya, Somalia,
Liberia, Haiti, and several other nations.
However,
the
U.S.
has
imposed
sanctions, unilaterally or with other
nations, far more frequently than any other nation in the world, or any
multinational body in the world, including the United Nations. More than twothirds of the sixty-plus sanctions cases between 1945 were initiated and
maintained by the United States, and three-quarters of these cases involved
unilateral U.S. action without significant participation by other countries.
Thus, while the question of ethical legitimacy has implications for the UN
strategies of international governance, it has far greater implications for the
U.S., which uses sanctions more frequently and in many more contexts, from
trade regimes and human rights enforcement to its efforts to maintain regional
and global hegemony.
Sanctions seem to lend themselves well to international governance. They
seem more substantial than mere diplomatic protests, yet they are politically
less problematic, and less costly, than military incursions. They are often
discussed as though they were a mild sort of punishment, not an act of
aggression of the kind that has actual human costs. Consequently, sanctions
have for the most part avoided the scrutiny that military actions would face, in
the domains of both politics and ethics.
There are four main methods of applying economic sanctions by the sender:
trade controls, suspension of aid or technical assistance, freezing of the target’s
financial assets, and blacklisting of companies involved with bilateral business.
First, trade controls (both goods and services) by the sender include one
or more of the following elements: quotas on exports/imports; restrictive
exports/imports licensing; limited or total export disruption (embargo); limited
or total import disruption (boycott); discriminatory tariff policy (including
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denial of most favored nation status); restriction or cancellation of fishing
rights; suspension or cancellation of trade agreements; and bans on strategic
goods and advanced technology exports.
Second, suspension of aid or technical assistance by the sender
includes one or more of the following elements: reduction, suspension, or
cancellation of credit facilities at concessionary or market rates; reduction,
suspension, or cancellation of technical assistance, military assistance,
development assistance, and training programs; and votes against loans,
grants, subsidies, and funding for technical or other assistance from
international organizations.
Third, freezing of the target’s financial assets by the sender includes one
or more of the following elements: freezing or confiscation of bank assets of the
target government or target nationals; confiscation or expropriation of other
target assets, including the target’s investment in the sender; freezing interest
or other transfer payments; refusal to refinance or reschedule debt repayments
(interest and principal); and suspension or cancellation of joint projects.
Fourth, blacklisting of companies involved with bilateral business by
the sender includes the following elements: blacklisting of sender’s or third
parties’ companies doing business with the target, including trade and
investment; and/or blacklisting of the target’s companies doing business with
the sender, including trade and investment.
The Goals of Economic Sanctions
Punishment (Deterrence)
Both historically and conceptually, economic sanctions have been used
to punish a transgression. Like sending a criminal to prison, the goal is not
necessarily to rehabilitate the wrong-doer, but to punish him for his offense
and to deter others from such wayward behavior. Economic sanctions invoked
for punitive ends also serve to define unacceptable behavior, either unilaterally
or multilaterally, and thus contributes to the establishment of internationally
accepted standards of legitimate conduct.
Compliance (Coercion)
The sender may impose economic sanctions in order to force the target to
alter its policy or behavior to conform to the sender’s preference or specific
political goals, such as compelling desired action, encouraging acceptance of
international norms, or restoring the status quo. In deterrence, one seeks to
prevent action. In compliance, the sender is seeking to force the target to undo
an action.
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Destabilization (Subversion)
The sender may impose economic sanctions to destabilize the target
government or subvert the entire target political regime. For example, Stalin
sought to replace Tito with a pro-Soviet leader by imposing economic sanctions
against Yugoslavia (1948-1955). When the U.S. embargoed Cuba (1960-), it
hoped to replace Castro’s regime with a non-communist one. The economic
sanctions imposed by the Organization of American States and the United
States against Haiti (1991-1996) demanded the restoration of the
democratically elected President Jean-Bertrand Aristide, who had been
overthrown in a military coup led by Lieutenant General Raoul Cedras.
Signaling
The imposition of economic sanctions conveys a signal of the sender’s
resolve to both the target and the sender’s allies. It says that the words of the
sender will be supported with action. Economic sanctions by a great power or
an international organization often imply a threat of more drastic action (for
example, military) against the target country.
The examples of the UN’s resolutions:
 S/RES/794 (1992) Somalia
http://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C8CD3-CF6E4FF96FF9%7D/Chap%20VII%20SRES%20794.pdf
 S/RES/1132 (1997) Sierra Leoene
http://www.sipri.org/databases/embargoes/un_arms_embargoes/sierra_le
one/1132
 S/RES/1267 (1999)
Afghanistan
http://www.bmf.gv.at/Finanzmarkt/GeldwschereiundTerr_2675/DieVerein
tenNationen/Security_Council_Resolution_1267-1999.pdf
 S/RES/1489 (2003) Democratic Republic of the Congo
http://www.unhchr.ch/Huridocda/Huridoca.nsf/(Symbol)/S.RES.1489+(2
003).En?Opendocument
 S/RES/1574 (2004) Sudan
http://www.mpil.de/shared/data/pdf/resolution_1574.pdf
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Useful links:
If you have any questions or are in need of more in-depth information, more sources are
available at the links below:
1. Information asymmetry as a major factor amplifying financial crisis
Organizations:
 Past ECOFIN committee sessions
http://www.un.org/en/ga/second/archives.shtml

UN DESA (Department of Economic and Social Affairs)
http://www.un.org/en/development/desa/index.html

The Organization for Economic Co-operation and Development (OECD)
http://www.oecd.org/about/

International Institute for Sustainable Development
http://www.iisd.org/
Useful info:
 The Role Of Credit Ratings In The Financial System
http://www.standardandpoors.com/ratings/articles/en/us/?articleType
=HTML&assetID=1245333793833

Market Failures of the Financial Crisis
http://www.adbi.org/workingpaper/2011/02/08/4377.market.regulatory.failures.lessons.gfc/market.
failures.of.the.financial.crisis/

Adverse Selection and Financial Crises
http://www.bankofcanada.ca/wpcontent/uploads/2011/02/kirabaeva.pdf

The Financial accelerator effect: concept and challenges
http://www.ijf.hr/eng/FTP/2011/2/coric.pdf

Asymmetric information: the multiplier effect of financial instability
http://mpra.ub.uni-muenchen.de/23013/1/asym_information.pdf
2. Economic sanctions as aggressive action




http://www.un.org/sc/committees/
http://www.gao.gov/assets/220/217680.pdf
http://en.wikipedia.org/wiki/Economic_sanctions
http://www.tid.gov.hk/english/import_export/uns/uns_countrylist.html
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