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Monday, July 6, 2015
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- Many around the world look to the United Nations conference on the global financial and economic crisis this week with great expectations, as it should be the start of a process that could bring the UN into the forefront of tackling the greatest economic crisis in half a century.
The epicentre of the crisis is in Wall Street, a few blocks from the UN headquarters. But the developing countries that have no role in causing the crisis have suffered the most severe “collateral damage”, with a loss of 6 percentage points of gross national income, as their economic growth is expected to fall from 8.3% in 2007 to 1.6% in 2009 on average. Moreover, this average figure hides the fact that many of them are already in severe recession.
There has been some international action on the crisis, but much of it has been by the G7 developed countries or the G20, which is an exclusive grouping. The UN conference on 24-26 June is thus the first time all the countries are gathering to decide what to do about the crisis. It is especially important for developing countries which have no other forum than the UN to mitigate the effects of the crisis and ensure it does not happen again.
Two main actions are to be discussed Â–how to help developing countries cope with the crisis, and reform of the international financial system. The focus should be on taking international initiatives and reforming the global system to meet the needs and interests of developing countries.
The conference will have to grapple with many key issues. First is the foreign exchange shortfall facing developing countries, which could range from up to $1 trillion (World Bank estimate) to $2 trillion (UNCTAD estimate). Besides falling exports and capital outflows, many countries are also facing increasing difficulties in obtaining fresh credit, all of which affect their foreign reserves position.
The efforts so far to help developing countries are not enough. They need greater amounts of quick-disbursing, unconditional external financing. Furthermore, they should not be burdened with additional debt in order to respond to fallouts from a crisis they cannot be held responsible for. These objectives can best be achieved by a special and sizeable SDR allocation. The SDR (Special Drawing Right) is an international reserve asset, created by the IMF to supplement the existing official reserves of member countries.
The agreement reached in the G20 summit on SDR allocation brings no more than $20 billion to low-income countries, but they need several times more. Since many of these countries are on the verge of falling into an unsustainable debt trap, this should be provided through a no-cost special SDR allocation.
The additional financing needed by middle-income countries reaches several hundred millions of dollars. This should be provided through a reversible SDR allocation, to be repurchased when the crisis is over.
Second is the need for developing counties to avoid a new debt crisis. The World Bank and IMF have estimated that close to 40 developing countries are vulnerable to difficulties in having enough foreign exchange to service their loans or to pay for essential imports.
For countries facing debt servicing difficulties, there should be a moratorium on their official debt, including deferral of principal and interest payments with no additional cost. This is an established practice, used in the past in response to disasters such as the Asian Tsunami of 2004.
Countries experiencing large and sustained capital outflows should have the right to exercise temporary debt standstills and exchange controls, and should be granted statutory protection in the form of stay on litigation. An international debt court should be established within the UN system in order to settle sovereign debt disputes with private creditors.
The international community has been muddling through the official debt of low-income countries for a decade and a half without being able to bring a lasting solution. The time has come to look for a new strategy. Debt assessment and sustainability analyses should be done independently from the IMF and entrusted to an independent body which is itself not a creditor, with the agreement of both creditors and debtors to implement its recommendations.
Third, developing countries should be given the “policy space” to enable them to take policy measures to address the crisis. For many countries, this space has been blocked by conditions attached to loans from international financial institutions that usually impose pro-cyclical policies (fiscal austerity and tight monetary policy) that worsen the recession; forbid controls over capital outflows and debt standstill; and impose low tariffs (with often devastating effects on local production).
These policy conditionalities should be quickly reviewed and changed. The right of developing countries to take counter-cyclical macroeconomic policies, and if necessary capital controls and temporary debt standstills to deal with the crisis, should be recognized and barriers to exercising their rights removed.
Fourth are the reforms needed to the global financial and economic systems. Developing countries at the moment have little say over the decision-making process but suffer the ill effects when the systems malfunction. The required changes include:
-The governance, policies and roles of the IMF and World Bank,
-Regulation of financial markets and capital flows,
-Strengthening international surveillance of developed countries’ policies,
-Creation of a new international reserves system.
On this last point, the present international reserves system based on national currencies is known to be inherently unstable, susceptible to generating unsustainable payments positions and exchange rate gyrations in countries enjoying reserve-currency status. It is essential to look into possibilities of establishing an international reserves system not based on national currencies, and the role that a redefined and broadened SDR could play in that respect.
Fifth is the need to fill in the vacuum caused by the lack of a proper system or mechanism for global economic governance, in which developing countries have a fair representation.
This crisis has shown once again that globalisation has resulted in growing interdependence not only among countries, but also among various issues of concern to the international community including development, trade, investment, employment, money, finance, climate, technology and property rights. At the global level these issues are addressed by specialized institutions established by intergovernmental agreements. This creates systemic incoherence because there can be trade-offs among the objectives pursued by different agencies, and failure in certain areas of global policy has broader implications for the multilateral system as a whole.
Efforts to improve coherence of policies in such diverse but interrelated areas remain sporadic and ineffectual in large part because they rely on ad hoc cooperation among specialized agencies. There is thus the need to establish a mechanism such as a global economic council to secure policy coherence and coordination. This task falls on the United Nations as the only universal and democratic forum with an explicit mandate and purpose to resolve “international problems of an economic, social, cultural and humanitarian character.”Â
Sixth, there is the need for the Conference to set up a clear follow-up mechanism to take forward the decisions, proposals and issues arising from the Conference and translate them into action.
The issues the conference will discuss are many and complex. The conference itself would be a success if it defined the issues arising from the crisis and gave directions on the way forward in mitigation its effects and in working out broadly the reforms needed to the system, but it will not be able to make concrete decisions on many points.
The Conference should thus set up a working group or committee, preferably under the General Assembly itself, to further elaborate the issues and measures, the discussion on which the Conference started but understandably could not conclude. The working group could then work out in greater detail the actions needed and report back to the General Assembly for the decisions to be taken.
There is much at stake for all, especially the people in developing countries, as well as for the UN in this conference. Let us hope the right decisions are taken, in the interests of all. (END/COPYRIGHT IPS)
(*) Martin Khor, Executive Director of the South Centre, Geneva.