TWN analysis of G20 Summit, By Bhumika Muchhala
The G20’s London communiqué of 2 April promised to repair the global economy by taking action in major areas such as restoring growth, jobs, confidence and lending, strengthening financial regulation, funding and reforming the international financial institutions (IFIs), rejecting protectionism and pursuing recovery through a green economy.
However, the only apparent financial commitment by the G20 summit was to announce the injection through various ways of $1.1 trillion dollars into the IMF, the World Bank Group (which includes the regional development banks). Due to the glaring absence of a political consensus among key G20 members on a coordinated fiscal stimulus plan, or regulation of cross-border financial flows, the only agreement on immediate action was to boost the resources of the international financial institutions whose decision-making has been controlled by the US and European countries since their creation.
However, this significant funding boost, particularly for the IMF, which will be endowed with an extra $750 billion, cannot be compared to the benefit of a coordinated fiscal stimulus. As economic experts have pointed out, IMF funds only help the world’s economies if countries borrow from the Fund, whereas fiscal stimulus efforts bolster global demand overall.
The G20’s decision to channel funds predominantly through the IMF, rather than a more diverse allocation of funds, is a narrow mechanism through which the developing countries may be imposed with the same type of procyclial and contractionary policies that contributed to creating the crisis.
The capital refurbishment of both the IMF and the World Bank comes without any upfront reform requirements from the institutions. Instead, the only key reforms outlined are to end the Europe-US monopoly on the leaders of the Bank and Fund, and governance reforms to increase quotas and voice, which, however, are not to be reviewed and implemented until 2011 for the IMF and 2010 for the World Bank.
While the Fund and Bank get away without deeper reform requirements, these very institutions almost always require policy reforms from their member country borrowers upon obtaining loans. It remains to be asked why the IMF and World Bank can demand accountability from their borrowers but why accountability cannot be demanded of them when they are the recipients of financial funds?
The relatively easy agenda put forth by the G20 to the IMF and the World Bank Group reflects the low level of accountability demanded from these institutions by its biggest shareholders. This further maintains the already low level of accountability and transparency that both the IMF and World Bank have long been critiqued for by both academic experts and global civil society.
With such a significant financial empowerment of the IFIs, there is a key opportunity to demand fundamental changes in not only governance, but also policy and process. For example, procyclical fiscal and monetary tightening, still being required by countries taking out loans from the IMF, could be changed into counter-cyclical and pro-growth policies, while the transparency of loan information and the participation of parliamentarians and civil society in borrowing countries could be enhanced.
The UN Commission’s proposals offer more for development
In contrast, the United Nations General Assembly, representing 192 UN member states, has initiated a more inclusive process. The Commission of Experts it set up, led by Professor Stiglitz, presented their recommendations in the General Assembly in late March. The recommendations include regulation of financial markets, reform of the IMF, the creation of a new credit facility, a special allocation of Special Drawing Rights (SDRs) to establish a new global reserve system, channeling 1% of developed countries’ stimulus packages as official development assistance to developing countries and setting up a global economic coordination council in the UN.
A central difference between the G20 and the Commission’s approaches is that the Commission’s recommendations prioritizes the interests of developing countries in its analysis and recommendations to address the crisis, on developing countries. While the 20 nations of the G20 represent 85% of world output and 80% of world trade, the group does not represent the views of well over a hundred developing countries. This undoubtedly creates a difference of agenda, perspective and ideas. The G20 can by no means be presented as a global body in the same manner that the United Nations, with 192 national voices, can be.
Business as usual in IMF crisis loans
The G20 communiqué commends “the progress made by the IMF with its new Flexible Credit Line (FCL) and its reformed lending and conditionality framework.” However, the extent to which the IMF’s lending and conditionality framework has really been reformed is highly questionable. Only a few developing countries (that are deemed to already have sound finances) are eligible for the new flexible credit line, which is to have no or little conditionality.
Most countries will still be subjected to loan conditionality. For them, the use of conditionality on structural issues may have been streamlined, but macroeconomic conditionality in the areas of fiscal, monetary and exchange rate policies remain, and recent evidence shows that the conditions on these are still pro-cyclical and anti-Keynesian, as they were in the IMF loans in the Asian financial crisis 11 years ago.
An analysis by Third World Network of 9 IMF loans, beginning in September 2008, to emerging market economies and developing countries affected by the crisis reveals that fiscal and monetary tightening is still being prescribed. The loan conditions typically reduce or limit government spending and reduce or limit the budget deficit. Fiscal deficit reduction targets are to be achieved by cutting public expenditure, involving reductions in public sector wages, caps on pension payments, postponement of social benefits and minimum wage increases, elimination of energy subsidies and in the case of Pakistan, by raising electricity tariffs by 18% and reducing tax exemptions.
Similarly, monetary policy conditions are focused on reducing inflation through rigorous inflation targeting regimes and tightening monetary policy by increasing interest rates. In the case of both Latvia and Iceland, the official interest rate was increased by 600 basis points, or 6 percentage points. Most other countries are also asked to raise their interest rates.
The pro-cyclical conditions in these recent IMF loans contradict the directive given in the G20 communiqué that resource increases to the global financial institutions will “support growth in emerging market and developing countries by helping to finance counter-cyclical spending.” They are also opposite to the counter-cyclical policies that the G20 countries have prescribed to themselves; the G20 communique for example reports that within G20 countries “interest rates have been cut aggressively…and our central banks have pledged to maintain expansionary policies.”
The apparent double standard of counter-cyclical expansionary fiscal and monetary policies for the developed countries and the G20 countries, and pro-cyclical contractionary policies for the developing countries and East/Central European countries receiving IMF loans is not addressed nor explained by either the G20 communiqué or the IMF’s senior officials. Perhaps the G20 leaders themselves are not aware of the conditions in the recent IMF loans and were taken in by the false assurances by the IMF chiefs that the conditions have changed.
At the UN General Assembly dialogue, held in late March in New York, many developing country delegates, including the Chairman of the G77 and China, spoke out against procyclical IMF loan conditionality and called for a fundamental policy change in the IMF before it is capitalized with increased resources by the G20 countries. These developing countries’ demands were not heeded by the G20 meeting.
The role of the IMF in exacerbating the economic recession experienced by Asian countries during the Asian financial crisis and by Africa and other developing regions for an even longer period has been widely publicized. Because of this, developing countries have been reluctant to go to the IMF for financial assistance. Many Asian countries built up their foreign reserves as a form of self-insurance and protection, so that they do not have to undergo another IMF experience. The IMF itself was suffering a crisis of lack of business, with retrenchment of its staff, until the recent crisis and now the G20 meeting gave it a new boost.
Instead of demanding genuine reform of the IMF, the G20 has chosen to legitimize and empower an institution that is widely held responsible for worsening developing countries’ prospects for long-term economic growth and public spending for development needs. This empowerment of the IMF does not bode well for meeting developing countries’ needs in the current financial crisis, and it also undermines the potential international support that could otherwise be given to alternative or new institutions and regional arrangements that can do a better job of providing financial resources to developing countries.
For example, the UNGA’s Commission of Experts proposes a range of institutional options, including the creation of a new credit lending facility, and its also supports regional efforts to augment liquidity for developing countries, for instance, through the Chiang Mai Initiative in East Asia and the Bank of the South in Latin America.
These alternatives would create much needed competition to the current monopoly that the IMF and World Bank have in crisis lending, as well as provide more policy space to borrowing countries, particularly by not having the IMF’s pro-cyclical fiscal and monetary policy conditionality.
A new reserve system or a SDR allocation mainly for rich countries?
The UN Commission’s first proposal in its agenda for systemic reforms to the global economy is the creation of a new global reserve system. Such a reserve system is envisaged as a “greatly expanded SDR” which could contribute to “global stability, economic strength and global equity.” It would address the current paradox where in the predominantly US dollar based system, poor countries are lending to the rich reserve countries at low interest rates, and face the danger of single-country reserve systems where the accumulation of debt undermines confidence and stability. In contrast, the Commission suggests that a new Global Reserve System could be non-inflationary, feasible to implement and could reduce the asymmetric adjustment between surplus and deficit countries.
In contrast, the G20 communiqué does not go so far as to propose a new reserve system and instead states that a general SDR allocation of $250 billion toward increasing global liquidity will be based on the existing quotas of IMF member countries. Since the developed countries possess the predominant amount of quotas, the bulk of SDRs, or 60% of it, will go to a few of the richest countries, that need the SDRs the least. If the G20 was genuinely concerned about providing global liquidity to developing countries, it would call for a special issue of new SDRs that are issued not in accordance with existing IMF member quotas but with to countries on the basis of need. Such a new issue of SDRs was originally proposed in the IMF in 1997, but this proposal was rejected by the US.
More policy space needed for developing countries
The UN Commission’s recommendations states that many developing countries affected by the financial crisis are “encouraged or induced to pursue procylical policies.” While this is in part due to the lack of domestic resources in developing countries, it is also, the Commission states, “due to misguided policy recommendations from international financial institutions” that often require developing countries to adopt the very policies that contributed to the current crisis. It further says that IMF initiatives to reduce conditionalities are insufficient.
The Commission also asserts that policy space for developing countries is circumscribed by many bilateral and multilateral trade agreements that limit the ability of countries to apply regulations to their capital account and financial systems, and that different policy frameworks are needed to protect developing countries from exposure to crisis contagion.
The Commission makes corresponding proposals to reform the IMF policies and the relevant provisions of the trade agreements.
In contrast, the G20 communique is silent on the need to reform IMF policies or trade agreements, and thus neglects to point to the factors limiting developing countries’ policy space nor to the need for reforms.
There should be a better way forward
Overall, the G20 communique is very disappointing as it does not tackle the systemic causes of the crisis, nor does it really assist developing countries that suffer the effects of a crisis that is not of their doing.
On the contrary, by greatly empowering the IMF and other international financial institutions while allowing them to continue with their pro-cyclical policies, the G20 Summit may actually worsen the situation facing crisis-hit developing countries as the G20 did not set up alternative sources for them to obtain crisis-related funding, and thus they may have to return to the IMF for loans that tie them to policies that worsen their economic situation.
This is perhaps to be expected since the G20 is dominated by the major developed countries.
The UN General Assembly is in the process of preparing for a summit-level special session on the global economic crisis and the effects on development. This process will be more inclusive, as it involves all countries in the UN. Hopefully it will also lead to a more adequate response that is really in the interests of developing countries and that is pro-development.