Delivering the insufficient?

September 11, 2009

G20 finance ministers issue another bland statement

Bretton Woods Project, 10 September 2009

Despite spin doctoring that called it a triumph for cracking down on banking bonuses, the G20 finance ministers’ statement in early September produced an accounting for how the G20 met or did not meet existing promises and little new agreement. Once again the UK government excluded critical civil society from the discussions.

The summit, held in London in order to prepare the ground for the G20 leaders meeting scheduled for 24-5 September in Pittsburgh USA, was billed as a battle over bank bonuses, but the final communiqué was mostly a bland repetition of existing statements with plenty of escape clauses and pushing issues to other forums. On the fiscal stimulus and loose monetary policy that have been the mainstay of rich country responses to the financial crisis, it committed countries to continue “necessary financial support measures” but also “agreed the need for a transparent and credible process for withdrawing our extraordinary … support.”

The communiqué was short, with only seven paragraphs. It final two points served to report on the commitments made to strengthen the IMF and World Bank. The G20 hailed the “significant progress in strengthening the IFIs” but also said “more needs to be done”. For the pedantic, the change in language on IMF governance may look like a positive step forward. In April the G20 said “emerging and developing economies, including the poorest, should have greater voice and representation”, whereas in September it read “the voice and representation of emerging and developing economies, including the poorest, must be significantly increased.” A searching look at the accompanying “progress report on the actions of the London and Washington G20 summits” highlights the areas left vague.

SDRs go ahead at the IMF

The report confirms that the $500 billion promised to the IMF has yet to be delivered as it references only the “commitments of more than $250 billion”. Actually delivery has only come from Japan, Norway, France, Canada, China and the United Kingdom, totalling about $195 billion. The US commitment of $100 billion has been agreed through the New Arrangements to Borrow, which requires additional measures to activate. The IMF has committed about $173 billion overall (including loans made before the crisis), but it had about $250 billion in available capital before the agreement to boost its resources. Thus, the boost in resources has not yet been used to support any developing countries.

And while the London Summit called for a “doubling of the IMF’s concessional lending capacity for low-income countries”, this has been reinterpreted to be a simple doubling of concessional lending year-on-year rather than the overall pot of resources available for such lending. The Fund announced in late July an increase in expected concessional lending to $4 billion a year in 2009 and 2010 from about $1.2 billion on 2008.

The commitments on issuing special drawing rights (SDRs, see Update 65), the IMF-created reserve asset, were the most tangible and successful, with full allocation of SDRs as per the G20 communiqué. This included the final ratification of the fourth amendment to the IMF Articles of Agreement, which provides for an extraordinary allocation of SDRs to countries that joined the IMF between 1981 and 2009. Still most of the new SDRs go to rich countries and no progress was made on a method of re-allocation.

Some World Bank changes left vague

While the Bank did raise lending from about $30 billion to $60 billion in the last fiscal year, there was no quantitative reporting on the take up of programmes oriented at social protection and low-income countries. The communiqué indicates that the Rapid Social Response Fund (see Update 65) was agreed, but fails to say how much was provided, likely due to very low take up of the facility.

A paper on increasing the financial capacity of the Bank through a capital increase is promised for the annual meetings, while the Bank is still “developing an approach” to let some low-income IDA-eligible countries borrow more money on IBRD terms usually reserved for middle-income countries. The progress report said that the IMF and World Bank boards were both reviewing the debt sustainability framework, though the IMF board had actually met on 31 August, prior to the G20 meeting. The IMF’s agreed changes were announced on 9 September.

On the promise of increasing trade finance by $250 billion, the G20 produces an unreferenced figure of $65 billion having been taken up, though the only actual programme cited is the one by the World Bank’s International Finance Corporation (IFC), which received commitments of just $7.75 billion (see Update 66).

The promised G20-chair review of the IFI’s role and responsibilities, which was supposed to be personally handled by British prime minister Gordon Brown, is reported to be in “consultation with the G20, external academics and LICs.” There was little to no discussion on the matter with civil society, despite repeated questioning of the prime minsters’ office by NGOs about how a consultation would be run. In the end the exercise was contracted out to London-based think-tank the Overseas Development Institute, which placed a limited discussion note on its website and failed to alert more than its database of researchers about the online discussion forum.

Financial and tax regulation still pending

Despite the hype on bonuses, the communiqué merely asked for “global standards on pay structure” and called on the Financial Stability Board (FSB) “to report to the Pittsburgh summit with detailed specific proposals for developing this framework.” FSB standards are not legally binding and there is no mention in the communiqué of the idea that there should be a cap on the total bonus pool. As the FSB in basically a forum for discussion among the G20 and other governments, countries that have opposed strong regulation on financial sector remuneration such as the UK, will work hard to water down any proposals.

On the fight against tax evasion, there was recognition of the need for “developing countries [to] benefit from the new tax transparency, possibly including through a multilateral instrument.” However the use of the word “multilateral” was left vague. The OECD which has been the lead analytical body on tax matters often uses ‘multilateral’ to mean merely a series of bilateral agreements.

The G20 had previously agreed that all systemically important financial institutions should be regulated, but had left the definition of systemically important to the IMF, Bank for International Settlements (BIS) and the FSB. They promised to do it “by the next meeting of finance ministers and central bank governors.” However they failed to produce the guidelines on the definition by this early September finance ministers’ meeting. They have now promised to do it by November when the G20 finance ministers meet again.

Civil society exclusion

UK-based NGOs, the Jubilee Debt Campaign and Bretton Woods Project, had their accreditation for the G20 finance ministers’ meeting revoked by the UK Treasury just days before the summit. Representatives of both organisations had received notification of accreditation on Friday, 28 August. Both received emails late on 2 September saying “Unfortunately your accreditation has been withdrawn by HM Treasury. Please be aware that you will not be permitted access to the meeting venue or any of the press facilities.” No further information or reason was given for the withdrawal of accreditation for the NGOs.

The UK government also barred NGOs War on Want and the World Development Movement from attending the G20 London Summit in April. Nick Dearden, director of Jubilee Debt Campaign, said “It is outrageous that NGOs such as ours have again been banned again from attending G20 summits. The UK seems to be setting a precedent that it is acceptable to silence voices of dissent and prevent debate from being aired.” Both Bretton Woods Project and Jubilee Debt Campaign had been involved in a 4 September London action calling on the G20 to stop letting money rule the world on the day the summit commenced. UK NGOs Oxfam and ONE, which had not been listed as organisers of the action, were accredited and allowed into the summit venue.


G20: Moving Up BRIC by BRIC

September 8, 2009

Analysis by Sanjay Suri, Inter Press Service, 4 September 2009

LONDON, Sep 4 (IPS) – Every one of these ‘G’ meetings becomes now an occasion for the developing countries – say the emerging economies – to turn that extra energy into a louder voice in the business of global decision-taking.

A day before the leaders of the wealthiest developed nations met at the last G8 summit in L’Aquila, Italy in July, the G5 met with announcements of consolidated positions. They held together jointly, and therefore that much more firmly, against a particularly European push for some binding commitments on actions towards curbing climate change.

And now on the eve of the substantive part of the G20 finance ministers meeting in London Saturday, the BRIC nations came together to make a collective announcement that would both inform the formal meeting in advance of common positions, and pre-empt increased pressure from the developed – the G8 part of the G20.

For the record, the G8 are the U.S., Canada, Britain, France, Germany, Italy, Japan and Russia; the G5 are Brazil, India, China, South Africa and Mexico; and BRIC are Brazil, Russia, India and China. The remaining members of the G20 are Argentina, Australia, Indonesia, Saudi Arabia, South Korea, Turkey and the EU represented by its rotating presidency (currently Sweden).

Russia belongs to both the G8 and outside, China some say should really belong to a G2 alongside the U.S., to sit above the G8. These numbers are not that serious; certainly they are not formal. That one or two may move this side or that is just a fallout of what everyone calls these days ‘the changing world order.’

Change has come outside of the U.S. too, and U.S. President Barack Obama is not the only one looking for change, even if that sort of push coming from others makes for smaller headlines. But the push is unmistakable – and change inevitable.

So the BRIC finance ministers did not just call for reform of the international financial institutions when they met in London Friday ahead of the finance ministers meeting proper. “The main governance problem, which severely undermines their legitimacy, is the unfair distribution of quotas, shares and voting power,” the BRIC ministers said in a statement following their meeting. That they have said before, but on Friday they went further.

“We propose the setting of a target for that shift of the order of seven percent in the IMF and six percent in the World Bank Group so as to reach an equitable distribution of voting power between advanced and developing countries. This would lead the overall share of emerging market and developing countries in the IMF and World Bank to correspond roughly to their share in world GDP.”

Six or seven percent may not sound like a lot. But the last time, three percent of votes shifted from rich to developing countries. Now they want the next shift to be twice as big. Push has not yet come to shove – the emerging economies are looking for change, not upheaval, for steps that will in time add up to a change that is certain to be revolutionary, but not looking for a dramatic revolution in the old ways.

The G8 governments have been dragging their feet since agreeing to reform of these institutions. At this G20 gathering, the pressure will be on for reform. U.S. Treasury Secretary Tim Geithner dropped in at the end of the BRIC ministers meeting to hear what the ministers had to say, and to reassure them the U.S. will back change. Brazilian Finance Minister Guido Mantega reported at the end of the meeting that Geithner agreed action to reform the international financial institutions, and to do so quickly.

And he agreed too, as the BRIC ministers demanded, that the next managing director of the IMF and the next president of the World Bank should be elected “irrespective of nationality or any geographical preference.” And that the executive boards of these institutions give more representation to developing countries.

This was always a good argument, but now strength speaks. As Indian Finance Minister Pranab Mukherji said after the meeting, BRIC nations between them have a higher gross national income (GNI) now than does the U.S. Sure, that is still four big countries that just about surpass the U.S. standing alone – but the U.S. giant stands less tall above others now than it did before, and looks more fragile than the smaller economies.

“Emerging market economies have shown resilience and helped the world economy absorb the impact of the deterioration of trade, credit flows and demand,” the BRIC ministers pointed out in their statement. “In many of them, growth is already back on track after a few quarters of recession or slowdown.”

And with 80 billion dollars of their money now going into the international financial institutions, it does not seem likely they will be able to resist change for long along the lines that the emerging economies are pushing insistently for.

The BRIC ministers held on to earlier positions on the principle of common but differentiated responsibilities in taking action on climate change. But they acknowledged too that there is much that needs to be reformed beyond voting rights and the lot within financial institutions.

“Permanent, stable reforms must still be implemented on multiple fronts,” they acknowledged. The need, they said, is to “change international practices, rules and governance structures to make the global economy more resilient to future crises.” They have an interest in this, suffering as they did from a crisis not of their making.

Few expect the developing nations to secure all the reforms they want in a hurry. But few doubt, either, that the developing world has taken at least some steps towards that end as never before. (END/2009)

G-20 or G-192: Fear of the South

July 20, 2009

The Real News, July 13, 2009

Western governments shutting UN out of global crisis response, as Southern governments question pillars of the world economy.

G20 found responsible for most abuses

May 29, 2009

AlJazeera, May 27, 2009

Human rights abuses are being encouraged by the global recession, says Amnesty International. The rights group believes that as world leaders focus on reviving the economy, they are neglecting deadly conflicts and social rights. 

And the G20 member nations are being singled out for blame.

Al Jazeera’s Nazinine Moshiri reports.

A Development-blind G20 outcome that empowers an unreformed IMF

April 9, 2009

TWN analysis of G20 SummitBy 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. 

Reality behind the hype of the G20 Summit

April 9, 2009

Martin Khor*, South Centre, April 5, 2009

The G20 Summit in London last Thursday was projected by the organisers and the Western leaders as having agreed to a US$1.1 trillion package of measures to boost the sagging world economy, and especially to help developing countries.

The trillion dollar figure was what caught the headlines. But as serious analysis shows, this figure purporting to be new money was more hype than reality. Some of it had already been decided long before the Summit, and some of it reflected only an intention rather than concrete pledges.

As an incisive Financial Times article by Chris Giles commented caustically: “Figures at the end of any international summit need to be examined closely, particularly those presented by the UK prime minister. His reputation for numerical inflation, repeat announcements and double-counting precedes him.

“The emphasis on quantities rather than concrete agreements also serves to mask the big missing element in the communique: a new and binding commitment to specific measures to clean up the toxic assets of the world’s banking systems.”

Rather than the US$1.1 trillion announced, the new commitments were estimated by Giles to be below $100 billion and most of those were already in train without the G20 summit. While the inflation of small and old commitments into an enormous amount “does not render the summit a failure, the desire to produce large headline numbers as the main result of the gathering suggests the splits on other issues were considerable,” he wrote.

The biggest winner was the International Monetary Fund. It was announced that the IMF would get $500 billion more funds. Japan and the European Union had already offered about $100 billion each. The Summit did not formally announce where or when the other $300 billion will come from, but unofficial and unconfirmed reports indicated that the United States would put in $100 billion and China $40 billion.

These would be loans by the countries to the IMF, which will recycle them as loans to crisis-hit countries that are running out of foreign reserves.

There are questions whether countries should give loans to the IMF and whether the IMF will impose the wrong conditions when it recycles the funds to crisis-hit countries.

According to former UNCTAD chief economist Yilmaz Akyuz, countries should not be requested to provide loans to the IMF to augment its resources because this would compromise the ability of the IMF to carry out its surveillance function and to discipline the policies of countries that provide the loans. It can obtain resources from the market or from the issuance of Special Drawing Rights (SDRs), instead of obtaining loans from governments.

The G20 meeting did agree for the IMF to issue $250 billion in SDRs, but instead of its use to assist countries in need, it was decided to allocate this to the 186 IMF members according to their quotas or voting shares. As a result, 44% will go to the richest seven countries, while only $80 billion will go to middle-income and poor developing countries.

As many critics of the IMF had pointed out before the Summit, it would be dangerous and counter-productive to augment the funds to the IMF for re-lending to crisis-hit countries if the agency does not reform its policy conditions but continues to insist on policies that lead the countries deeper into crisis, as had happened during the Asian crisis a decade ago.

Unfortunately, the G20 did not insist on any IMF policy reform, but boosted its resources. This may be the most serious error of the Summit.

The G20 Communique states that it will make available $850 billion to the global financial institutions in order to support emerging market and developing countries, including to finance counter-cyclical spending.

“Counter-cyclical spending” is normally used to mean the kind of significant increases in government expenditure that the United States and Europe are engaged in, as the “fiscal stimulus” to jump-start economic recovery.

The IMF is presumably charged with the new resources to enable cash-strapped developing countries to participate in this fiscal stimulus, which is the newly re-discovered policy formula to get a country out of recession.

However, an analysis by the Third World Network of the nine most recent IMF loans to countries affected by the crisis (including Pakistan and several East European countries) clearly demonstrates that the IMF is still prescribing “pro-cyclical policies” (policies that accentuate the downturn in a recession) of fiscal and monetary policy tightening.

“The Fund’s crisis loans still contain the old policy conditions of cutting public sector expenditures, reducing fiscal deficits and increasing interest rates — which is the stark opposite of the expansionary, stimulus policies being supported in the G20 countries,” according to TWN researcher Bhumika Muchhala.

Asia Russell, of the US-based Health Global Access Project, said that “the IMF has imposed disastrous conditions on poor countries that have contributed to massive under-investment in health, HIV/AIDS and education, particularly in sub-Saharan Africa. The G20 must make sure the IMF abandons these policies before infusing the Fund with new resources.”

The same day that the G20 Summit was giving a boost to the IMF supposedly to help countries undertake counter-cyclical policies, the IMF suspended lending to Latvia (one of the countries it has recently extended emergency crisis loans to) “until it sees more progress in cutting public spending”, according to a news report.

Latvia had agreed to limit its budget deficit to 5% of GDP, but due to the sharp fall in its GDP (by 12% this year, according to latest estimates compared to the 5% estimate when the IMF loan was made last December), the budget deficit could now jump to 12% of GDP.

The incoming government had hoped to persuade the IMF to accept a slightly higher budget deficit of 7% of GDP, but the IMF insisted on sticking to the target and suspended its lending, and thus Latvia is now “racing to prepare more spending cuts”, according to the report in the Financial Times.

The Latvia case indicates that the IMF has not changed, and that funds channeled through the IMF are likely to lead to greater economic contraction in countries that take the IMF loans and the attached conditions.

It is thus unfortunate that the biggest result of the G20 Summit is to boost the IMF instead of other more appropriate organizations that can help countries with economic recovery.

The G20 Summit made some progress, though not significant, in other areas, such as expanding the membership of the Financial Stability Forum (renamed the Financial Stability Board) to include developing countries that belong to the G20, agreeing that the heads of the IMF and World Bank need not be from Europe or the United States, and initial measures to regulate hedge funds and rating agencies, and to take note of the status and reports of tax havens that the OECD will publish.

There are several issues that the Summit failed to resolve, besides the biggest omission – failure to reform IMF policies.

First, it failed to produce anything tangible on a coordinated fiscal stimulus policy, which the Americans wanted but which Germany and France objected to. Secondly, it did not come up with a plan of action to clean up the crisis-hit banking systems.

Thirdly, there was no plan for regulating cross-border activities of financial institutions or cross-border financial flows, nor an acknowledgement that a framework should be created that facilitates developing countries’ ability to regulate the flow of cross-border funds.

Fourthly, there was no move to assist developing countries to avoid wrenching debt crises through plans to establish a international system of debt standstill and debt work-out, through an “international bankruptcy mechanism”. Without this, developing countries would be deprived of the kinds of schemes by which banks or companies in trouble pay back only a portion of their loans whose market values would have fallen.

One positive aspect of the Summit is that a few leading developing countries have become an accepted part of a G20 which thus has better representation than the G8 as a forum for global economic decision-making. Countries likeChina, India and Brazil are now participants.

Nevertheless, the vast majority of developing countries are absent from the G20 table, and thus the G20 does not have international legitimacy.

The United Nations is the better venue for discussion and decision-making on the global economy and the way out of the crisis, with a greater chance that the interests of developing countries will be taken care of.

The Commission of Experts set up by the President of the General Assembly presented their forthcoming report’s draft recommendations, which included proposals for actions that were more relevant to the basic changes required to the international financial system, including changes that would meet some of the critical needs of developing countries.

The UN General Assembly will hold a summit-level session to discuss the global financial and economic crisis and its implications on development in the first week of June. This will be an occasion for a more comprehensive review of and plan of action on the global crisis.

*Martin Khor is the Executive Director of the South Centre

G20 ‘trillion’ dollar magic trick

April 4, 2009

Reforms remain house of cards

Bretton Woods Project, April 3, 2009

To great fanfare, the G20 announced a $1.1 trillion global package, which will actually deliver less than half that amount in new or guaranteed resources. Meanwhile issues of fundamental economic reform were left off the agenda.

The G20 meeting on 2 April, billed as the London Summit 2009 because of its inclusion of non-G20 players, captured positive media attention despite failing to set out a vision for transformative economic change, and pumping more money into the IMF and World Bank without a clear plan for reforming them.

Where did the “trillion” go?

The IMF received most of the boost, with a possible $500 billion in new resources and $250 billion in issuances of Special Drawing Rights (SDRs). Of the $500 billion, only half has been signed and sealed, the vast majority of which had been previously announced:  $100 billion from Japan in January and the same amount from the EU in March.  Most of the new $50bn comes from China – a small drop in its vast ocean of reserves, indicating that it continues to be reluctant to back the IFIs financially without real governance reform. The second tranche of $250 billion only exists as a G20 promise to find the extra cash, and to make “substantial progress” in doing so by April’s spring meetings.

The other massive increase in IMF resources was through an allocation of  Special Drawing Rights (SDRs), the IMF’s own internally created reserve asset (See article.) An SDR allocation effectively means printing new money, $100 billion of which will go to “emerging market and developing countries”. Unlike other forms of finance, SDRs come without conditions attached, but a country must still pay interest when it uses them.  As SDRs are allocated according to voting shares at the IMF, the majority will go to rich countries.

On new money for the multilateral deveopment banks (MDBs), the language is particularly hazy.  The G20 agrees only to “support” additional annual lending by the MDBs of $100 billion per year.  Some of this, such as a boost to IFC trade financing, is money already promised.  Some is supposed to come from existing MDB resources.  Some will come from a 200 per cent boost to the Asian Development Bank’s capital, and consideration of similar moves for the Inter-American Development Bank and the African Development Bank.

World Bank attempts to garner additional contributions for their ‘vulnerability’ funds were snubbed, with the G20 making clear that these would only be delivered bilaterally from willing donors.  So far, the UK is the only country to make concrete commitments – diverting £200 million of its existing aid budget for this purpose.  The G20 also asked the Bank to increase lending limits for “large countries” and to lend at market rates to low income countries, but only those with “sustainable debt positions and sound policies.”

Money for the poorest?

Of the putative $1.1trillion, $50 billion, or less than 5 percent, is likely to be for the 49 poorest countries in the world.  The communiqué does not give clear details of how this figure is arrived at.  Brussels based NGO, Eurodad estimates that, in addition to $6 billion (over three years) from IMF gold sales that will be added to the IMF’s concessional lending pot, $19 billion in new money will come from the SDR allocation. The communiqué also calls for a doubling of the IMF’s concessional lending capacity, currently at about $20 billion. That means that most of the total is IMF loans, which are only available if poor countries’ economies go into meltdown.

The detail on the promised “global effort to ensure the availability of at least $250 billion of trade finance over the next two years” is entirely absent from the communiqué. The communiqué’s commitment to meet existing aid pledges obviously meant more to some G20 countries than others. Italy, the current host of the G8, plans to cut its aid by 55 per cent this year.

Elephants in the room: governance and conditionality

The G20 communiqué says nothing new on IFI governance reform, and big increases in IMF resources have not been matched with clear commitments to end the controversial austerity policies that have so far been accompanying IMF bailout packages (see Update 6463). 

Changes to voting shares to give developing economies “greater voice and representation” are promised in general but the annex appears to backtrack on IMF reform. The existing plan for Bank governance reforms by the 2010 Spring Meetings for the World Bank is reconfirmed, but on the Fund, the annex indicates that the slightly accelerated quota review may not address the democratic deficit or governance imbalance but will be undertaken “to ensure the IMF’s finances are on a sustainable footing”.

Critics remain concerned that lessons from the Asian financial crisis a decade ago have not been learned, where IMF conditions were blamed for worsening recessions. Duncan Green of Oxfam said: “we have deep concerns about how central the IMF has become in this crisis. The fund has been given a blank cheque but its reform remains no more than a promise.”

Financial reform: does it have teeth?

Campaigning NGOs and continental European governments had pushed the issue of tax havens to the fore in the run up to the summit.  The UK, itself a sponsor of many of the world’s most famous tax havens including the Cayman Islands and Jersey, had picked up the rhetoric.

The G20 decided to endorse the OECD approach of exchanging information about companies and individuals suspected of evading taxes on request, rather than the more stringent automatic exchange of information called for by the Tax Justice Network and others. There was no mention of measures that could help developing countries crack down on corporate tax abuse: country-by-country financial reporting or requiring transparency of all information on beneficial ownership in all jurisdictions.

The fanfare surrounding a supposed ‘blacklist’ of non-cooperative countries published on the day of the summit by the OECD went silent when it emerged that only four countries were on the list – Uruguay, the Philippines, the Malaysian Federal Territory of Labuan, and Costa Rica – none of them well known tax havens.  The strong rhetoric – declaring that “the era of banking secrecy is over” and promising to “stand ready to deploy sanctions” – has yet to be turned into effective action.  

As promised by the G20 finance ministers in March the Financial Stability Forum will be expanded to include all G20 countries, and renamed the Financial Stability Board (FSB).  It will continue to have a purely advisory role to; “promote co-ordination”; “assess vulnerabilities affecting the financial system” and “set guidelines”.  With no specific powers or sanctions available to it, and a lack of a clear governance structure, it remains to be seen whether the new board will be an improvement on the old forum.

On banking regulation, a topic that has dominated headlines in the run up to the summit, surprisingly little concrete was agreed, though international bodies are tasked with looking further into a host of issues. International minimum capital requirements will remain unchanged “until recovery is assured” and the often criticised Basel II capital framework supported. The existing ‘toxic assets’ in banks remain a huge problem, but one that has been left to national regulators to fix.

In his post-summit press conference, British Prime Minister Gordon Brown repeated his assertion that the ‘shadow banking system’ would be brought into “the global regulatory net”, but the language of the communiqué is far more cautious – “systematically important financial institutions, markets, and instruments” should be subject to an “appropriate degree of regulation and oversight.”

The FSB and IMF are tasked with deciding what “systematically important” means. Many hedge funds and private equity firms may continue to escape the regulatory net, especially those formally headquartered in off-shore financial centres. Hedge fund and credit rating agency “registration” is promised, and credit derivatives markets will be “standardised,” but it is left to the industry itself to decide how to do this.

Missing the green picture

Green groups slammed the G20 for failing to grasp the opportunity to signal a clear commitment to building a low-carbon economy.  The communiqué promises to “make best possible use” of stimulus packages “towards the goal of building a resilient, sustainable, and green recovery” and to “identify and work together on further measures to build sustainable economies.”  But there were no hard commitments about what portion of stimulus packages would be directed towards green projects, technologies, or jobs.

The aim of the upcoming UN climate talks in Copenhagen is set as reaching agreement, with no reference made to the scale of the changes G20 countries, particularly the richest ones, will have to make to combat climate change. Friends of the Earth said the G20 had “short changed people and the planet”; whilst Greenpeace said climate change had been tagged on to the communiqué as an “afterthought”.

Liberalisation still the norm?

The communiqué is understandably short on the usual congratulatory opening paragraphs, though it reiterates support for “an open world economy based on market principles” but now balanced by “effective regulation, and strong global institutions.” 

On trade the expected promise to “not repeat the historic mistakes of protectionism” is made, but the commitment to “reach an ambitious and balanced conclusion to the Doha Development Round” looks suspiciously similar to the commitments made by the G20 in Washington last November, since when little progress has been made. Interestingly the G20 estimate for how much the Doha trade round could boost the global economy stands at a modest $150 billion. Civil society organisations around the globe have questioned whether reviving a trade round that developing countries have rejected many times is a good idea.  

Protest grows

Marches and protests took place around the world in the run up to the G20 summit, including in India, Philippines, Indonesia, Spain, Germany, France, Austria and Italy. In London, thousands marched under the banner of ‘Jobs, Justice, Climate,’ as part of the 160-plus Put People First alliance of development, environment, faith groups and trade unions. 

In addition to mobilisation of citizens, civil society groups have also put out collective statements which look very different from the limited set of issues in the G20 communiqué.  At January’s World Social Forum, civil society and social movements from around the world produced a statement signed up to by more than 600 organisations worldwide, entitled “Let’s put finance in its place!”  It includes demands barely considered by the G20, yet at the heart of the debate about how best to control global finance, including controlling capital flows, and calling for “citizen control of banks and financial institutions.” It also issued a challenge to the leaders gathered in London, saying: “the G20 is not the legitimate forum to resolve this systemic crisis.”

On the eve of the G20, at the World in Crisis NGO summit in Prague, a declaration was issued calling for putting economies “…at the service of social, environmental and other vital interests of women, men, girls and boys, in particular to start greening our economies and to increase local economic resilience.”  A raft of proposals were included on a host of critical topics including: market regulation; breaking the dominance of finance over the economy; keeping the climate negotiations on track; rethinking development finance; fairly sharing resource consumption across the globe; ensuring tax justice; and making IFIs more transparent, representative and accountable.

Meanwhile, the London Summit was slammed for systematically excluding civil society voices.  In contrast to most international gatherings there was no process for civil society organisations to accredit and attend.  Of the few who were allowed in as media representatives, some had accreditation withdrawn at the last minute. One of these denied entrance, Benedict Southwark of UK campaigning group the World Development Movement said that this: “starts to reek of the deliberate exclusion of critical voices.”

Spotlight turns to UN

A week before the G20 met in London, the UN General Assembly president’s commission on financial reforms (see Update 6463) released its draft report. The Joseph Stiglitz-led commission was much stronger in the latest report than in its first set of recommendations, and appears ahead of the G20 curve. The G20 has yet to pay adequate attention to this high powered group of thinkers.

The recommendations said: “short term measures to stabilize the current situation must ensure the protection of the world’s poor, while long term measures to make another recurrence less likely must ensure sustainable financing to strengthen the policy response of developing countries.”

The commission was not unwilling to lay blame: “Loose monetary policy, inadequate regulation and lax supervision interacted to create financial instability,” and there was “inadequate appreciation of the limits of markets.” The report split its recommendations up into things to be done immediately and those that should be on the agenda for systemic reform.

Among immediate goals, it called for global fiscal stimulus, a new credit facility with better governance arrangements than exist at institutions such as the IMF, an end to pro-cyclical conditionality and rolling back the limits on developing country policy space created by trade agreements. For the financial sector the commission noted “While greater transparency is important, much more is needed than improving the clarity of financial instruments,” and recommended the use of rules and incentives to limit excess leverage, prevent tax evasion, and address the regulatory race to the bottom.

While the short-term recommendations were sometimes eye-catching, the systemic demands surprised many observers. The call for “a new global reserve system”, echoed the demand to end the US dollar’s privileged position as international reserve currency made by China’s central bank governor Zhou Xiaochuan. The commission also supported the idea for a UN-based Global Economic Council at the head of state level – essentially bringing a G20 type structure under the auspices of the UN system.

On long-term changes to financial regulation, the commission has seven areas for reform and warned against “merely cosmetic changes”. Notably it said: “The fact that correlated behaviour of a large number of institutions, each of which is not systemically significant, can give rise to systemic vulnerability makes oversight of all institutions necessary.” This throws cold water the G20’s plans for regulating only ‘systemically-important’ financial institutions.

The UN commission, despite being organised more quickly than the G20 meeting, was much more open to civil society input. More than 100 organisations made submissions to the stakeholder consultation procedure, and the final report on civil society opinion was detailed, comprehensive, and well received by the commission. The civil society submissions were all put online, more than can be said of the official G20 working group reports (see Update 64), which are yet to be published. In late March, members of the commission also held interactive dialogues with representatives at the UN General Assembly and civil society organisations.

The global focus will now move to a planned UN conference from 1-3 June in New York, billed as the follow-up to the UN Financing for Development conference in Doha. The conference is being held at the initiative of the General Assembly president, rather than from the UN Secretariat because of opposition from some major countries.  It is unclear how much participation there will be by heads of state, especially as the G20 announced that it will hold another leader’s level summit sometime before the end of this year.