Efforts to pull the global economy out of its nosedive enter a new phase this weekend amid warnings the decline is steeper than previously thought and signs the cockpit crew continue to jostle for the joystick.

Activists are urging the heads of the World Bank (Robert Zoellick, above) and IMF not to attach strings to new emergency aid to poor countries. Credit: UN Photo/Mark Garten

Semi-annual meetings of the World Bank and International Monetary Fund (IMF) begin here Saturday with a warning from the fund that the world economy will fall this year for the first time since World War II.

“By far the deepest global recession since the Great Depression” will see an economic decline of 1.3 percent worldwide, according to the IMF. In January, it had projected negligible growth of 0.5 percent.

At the weekend talks and in separate sessions of the Group of Seven (G7) dominant countries and the Group of 20 (G20), which includes emerging economic powers, finance ministers and central bank chiefs will have a chance to flesh out a crisis-response agreement issued by G20 leaders three weeks ago – assuming they can reconcile differences glossed over at the Apr. 2 leaders’ summit in London.

The atmosphere remains contentious some 18 months after the recession became apparent. Even as officials seek to assure markets and consumers that recovery plans are in hand, Washington confronts resentment over a crisis blamed on U.S. corporate chicanery and regulatory absenteeism.

Timothy Geithner, the treasury secretary, acknowledged this in remarks here Wednesday. “We bear a substantial share of the responsibility for what has happened,” he said. “But factors that made the crisis so acute and so difficult to contain lie in a broader set of global forces that built up in the years before the start of our current troubles.”

Washington continues to push for more government spending to stimulate demand in wealthy countries but it does so against stiff resistance from deficit-averse Europeans. France and Germany, in particular, have rebuffed U.S. goading.

Agreement to increase the IMF’s finances has run up against competition for voice and voting power among the agency’s shareholders. In turn, accord on enlarging the fund’s role as a global economic regulator is frayed by disagreement over what specific powers of intrusion and enforcement it should be granted.

Even a G20 oath of loyalty to free trade, taken amid fanfare in November 2008 and reiterated with protestations of unanimity at the London summit earlier this month, has proven something of a joke. Earlier this year, the World Bank said that 17 of these countries had reacted to the downturn by erecting barriers to international commerce.

“Since the G20 meeting less than three weeks ago, nine G20 countries have taken or are considering 23 measures that restrict trade at the expense of other countries,” Robert Zoellick, the World Bank president, added Thursday.

Anti-poverty campaigners are joining the fray with demands that poor governments, not only rich ones, be allowed to boost spending and protect vulnerable populations.

“To address the crisis, the IMF has recommended big-spending stimulus programmes – but only for wealthy countries,” said Soren Ambrose, development finance coordinator at charity ActionAid International.

Activists, citing their own experience and a recent review of IMF lending by longtime Washington-based critic the Centre for Economic and Policy Research, add that although the fund is providing no-strings-attached financing for Mexico and other borrowers that have followed its policy advice, it has not eased up on deficit-trimming austerity measures in countries ranging from Latvia to Pakistan.

While questions of conditionality seem likely to dog the IMF for years, strain over the distribution of voting power among shareholders likely will have a more profound impact. Most immediately, it complicates the agency’s financial prospects.

At London, G20 leaders pledged 1.1 trillion dollars for international lenders. Five hundred billion dollars is to be handed over to the IMF for its New Arrangements to Borrow programme. In exchange for their contributions governments will receive interest-bearing assets backed in part by the institution’s gold reserves.

Major players, including China, Russia and Saudi Arabia, so far have withheld their commitments and are demanding that votes within the fund be redistributed to reflect emerging markets’ economic significance. European countries that face a corresponding loss of clout have yet to be won over.

Also at stake is a proposal to sell some of the IMF’s gold reserves. While emerging powers demand greater say in the institution, poor countries and aid groups want guarantees that the proceeds will be used to help regions that are reeling from twin economic and food crises and that lack access to other sources of capital.

In any case, aid groups want new money for the poor to be just that: new money, not money diverted from existing aid budgets. And they want the money doled out as grants and not as loans, which they say could pave the way for a fresh debt crisis.

“Everything must be done to ensure that poor countries are not landed with even more debt in their attempts to survive the economic crisis,” said Marita Hutjes, a policy adviser at Oxfam International.

Perceived and real imbalances of power among IMF shareholders also could play out in discussions about whether the agency should serve as a powerful new economic regulator or simply as a more robust monitor of members’ economies. Smaller countries will demand equality of treatment while more powerful ones will be reluctant to relinquish what many regard as an instrument of their macroeconomic and financial orthodoxy and interests.

The G20 includes G7 members Britain, Canada, France, Germany, Italy, Japan, and the United States plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the European Union.

Talks on the global economic crisis, to be held Thursday, could prove a timely reminder of the perils of hype.

Gordon Brown, the British prime minister and host of the Apr. 2 Group of 20 (G20) leaders’ summit in London, had promised the session would produce a “global New Deal” to pull the world out of its economic tailspin.

Potentially significant agreements to grease the gears of global trade and to expand the International Monetary Fund (IMF) likely will be announced. For the most part, however, leaders likely will gloss over fundamental and persistent differences, leaving these to their finance and central bank chiefs to sort out. Instead, Brown et al will seek to present a united front in a political exercise aimed at assuring markets and consumers.

Indeed, government spokespersons are busy letting some of the air out of the public-relations balloon in an apparent bid to align public expectations with the summit’s prospects, aptly invoked by that well-worn bureaucratic term of art, “incremental change”.

“We’re not going to see the world economy turned around on Apr. 3,” says Mark Malloch-Brown, a minister in the British foreign office. “Maybe it’ll be seen as the beginning of the end of the crisis and the moment where leaders were able to galvanise a new direction and a new authority.”

Not that the stakes have diminished since the leaders met here last November. Millions of jobs have been lost and millions more sit on the chopping block. More than a hundred million people have been pushed below the international poverty line of two dollars a day and tens of millions more stand on the cliff’s edge.

“There is not much time for world leaders to get their act together,” says Katinka Barysch, deputy director of the Centre for European Reform (CER), a London-based think tank. “The G20 heads of state and government must now focus on two things: how best to work together to prevent an even deeper global recession and how to avoid future crises of such magnitude.”

Mike Froman, U.S. deputy national security adviser for international economic affairs, outlines the summit’s priorities thus: “Putting in place significant stimulus to get growth going again; secondly, fixing each of our financial systems to get lending flowing; third, avoiding protectionism; and fourth, taking steps to minimise the spread of the crisis to emerging markets and developing countries.”

On each of these issues, deep divisions remain.

The United States and Britain continue to cajole Europe and Japan to increase domestic stimulus spending in order to boost global demand for goods and services. Their governments have ploughed far smaller portions of national income into stimulating the economy than have Washington, London, and Beijing but they have bridled at the pressure to do more. Germany, France, and others counter that they would rather see sums already spent take effect before throwing future generations further into debt.

U.S. and British officials say they remain convinced that far more needs to be spent to reverse the recession but they have decided to back off. Spokespersons for President Barack Obama now stress that, as a bloc, the G20 has committed a sizeable 1.8 percent of gross domestic product to stimulus spending. David Milliband, the British foreign secretary, says Britain and the United States will not push other G20 members to announce specific spending pledges on Thursday.

This accommodation owes much to diplomatic imperatives. It also comes amid doubts about London’s and Washington’s ability to sustain more deficit spending: The Bank of England has warned Brown that his budget already is too high and Beijing has begun to assail Washington’s creditworthiness as government borrowing skyrockets.

On other key issues, too, the G20 appears hobbled.

Europeans stress the need to overhaul business regulation across the globe to prevent the chicanery that sparked this crisis and the systemic failures that allowed it to spread so widely and stealthily. Embarrassed by the conduct of bailout recipients and singed by public anger over corporate opulence, their U.S. counterparts have chimed in about the need to improve coordination between countries and impose greater accountability on players. The Europeans, however, seek farther-reaching changes in the nature and rules of the global financial game.

G20 leaders have declared a unanimous commitment to keep trade open and to quash protectionism. A deal to provide financing critical for international commerce likely will be announced in London and could provide key relief to export-dependent advanced and developing economies. Yet, according to the World Bank, 17 of the 20 have thrown tariffs and other barriers in the path of foreign goods and services since the crisis began.

G20 members – Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States, and the European Union (EU) – account for 80-plus percent of the world’s economy and about two-thirds of its population.

The heads of the United Nations, World Bank, and IMF also will be on hand Thursday to plead for the world’s fragile economies and poor people and, by extension, their own institutions. The IMF could double its money, and not a moment too soon: Lending has surged in the past six months, as have calls for the fund to increase surveillance of member economies.

Brazil, China, India, and other up-and-coming players have said they will support this expansion so long as they and poorer counties are given more influence over the IMF. If this happens, the fund could emerge from the crisis not only with a new lease on life but with some measure of the political legitimacy many of its shareholders have long said it lacks – and which it needs to succeed in its expanded role as global financial watchdog.

Here, too, significant change remains to be seen. Lip service notwithstanding, Western powers “have appeared less willing to redress their own over-representation in international financial institutions,” says Barysch of the Centre for European Reform.

China also has questioned the stability and sustainability of the U.S. dollar as the world’s dominant reserve currency, saying it would favour a basket of currencies based on IMF special drawing rights.

On this as on the issue of burnishing the IMF’s multilateral credentials, Western officials say, significant movement is not imminent.

“I think it is within the IMF, it is within the international financial institutions, that these questions have to be discussed,” Benita Ferrero-Waldner, the European Union (EU) commissioner for external relations, told the Reuters news agency Sunday after talks with senior Chinese officials in Beijing.

Nevertheless, G20 leaders are expected to endorse IMF expansion as many favour using the institution to pump money into the global economy rather than increasing domestic spending and with it, national debt. Some members also have a visceral stake, as they may need to turn to the fund to stave off insolvency.

The world’s poorest people had nothing to do with the financial gimmickry that has brought the global economy to its knees but they are paying a heavy price for it and relief seems a long way off.

Poverty is increasing and the spectre of political upheaval looms over developing countries whose export earnings have dwindled amid tumbling commodity prices and sluggish global trade. Foreign investment and aid budgets are being cut. The resilience of remittances from migrant workers is being tested by a deep and still-unfolding recession.

As Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), puts it: “After hitting first the advanced economies and then the emerging economies, a third wave from the global financial crisis is now hitting the world’s poorest and most vulnerable countries.”

In jeopardy, he adds, are “the major achievements of higher growth, lower poverty, and greater political stability that many low-income countries have made over the past decade.”

Soaring food and fuel prices pushed 130 million to 155 million people in developing countries into poverty in 2008 and the World Bank reckons another 53 million people could join them this year. This would bring the total of those living at or below the international poverty line of two dollars a day to more than 1.5 billion people.

In Africa south of the Sahara this year, the crisis will rob 18 billion dollars from 390 million people who eke out a living below the international extreme-poverty line of one dollar a day. At 46 dollars per person the figure seems small but it represents fully one-fifth of their annual earnings, says the U.N. Educational, Scientific and Cultural Organisation (UNESCO).

An additional 200,000-400,000 children will die every year that the crisis persists, says the World Bank. By 2015, the additional death toll could rise to 2.8 million people. Those who survive will face cognitive damage inflicted by malnutrition as more go hungry. Yet, according to UNESCO, 43 of the world’s 48 low-income countries lack the money to provide a “pro-poor fiscal stimulus”.

Worse still, says the IMF, at least 22 of these countries could go bankrupt this year. Depending on just how bad things get, the cash-strapped governments will need an extra 25 billion to 140 billion dollars in grants and cheap loans to keep their external reserves at a “safe” level of around three to four months of imports. Even at its smallest, the sum represents about 80 percent of annual aid to all low-income countries in recent years.

Despite the additional need, the fund expects donors to cut their giving this year to 30 percent less than in 2008. The European Union (EU) has promised to provide 0.56 percent of national income in aid by 2010. Even if it keeps its word, the actual financial value of this commitment will shrink as member economies stall.

If current trends do not worsen in the interim, the EU commitment will have shrunk by 4.6 billion dollars, according to UNESCO. Kevin Watkins, the agency’s top expert on education financing, says donors “could clearly do more to protect the world’s poorest people from a crisis manufactured by the world’s richest financiers”.

Banks in rich countries lapped up 380 billion dollars of public money in the last three months of 2008 alone, he says. By contrast, seven billion dollars in extra aid would enable low-income countries to meet key education goals agreed by the international community.

Nor are global investors likely to be of use. Net flows of private capital to emerging markets – the wealthiest of the developing countries – plunged by nearly 50 percent from 929 billion dollars in 2007 to 466 billion dollars in 2008, according to the Institute of International Finance. The global banking lobby expects this year’s total to fall to 165 billion dollars.

In many cases, critical financing will have to come not from donors or investors but from migrant workers who send money to their families back home. In good times and bad, these remittances have eclipsed official aid to countries ranging from Jamaica to Pakistan and the Philippines, in some cases generating up to one-fifth of national income.

Migrant workers sent home 305 billion dollars in 2008, up from 281 billion dollars in 2007, even as private investment in the developing world collapsed, the World Bank reckons. Unlike donors, almost all of which have yet to honour 1970s promises to allot less than one percent of national income for aid, migrants typically remit around five percent of their earnings.

Here, too, the outlook is worrying. Remittances grew last year but at a slower rate. In Mexico, they actually fell by 3.6 percent. No one seems to know what impact a severe global recession would have but the bank expects remittances to fall by about six percent this year before recovering in 2010.

The bank’s prediction could prove overly optimistic. Jobs are evaporating everywhere as businesses fold or announce cuts in posts and plant. The International Labour Organisation (ILO) expects the global unemployment rate to reach 6.5 percent this year, with 30 million more people out of work than in 2007. The rate could rise further, to 7.1 percent for a loss of 50 million jobs since 2007, it says. Official figures tend to understate the problem.

Even those with jobs will find themselves increasingly vulnerable. Over the course of this year, says the ILO, 53 percent of people in formal employment could find themselves walking a high wire with no safety net to catch them if they suddenly lose their income.

If migrants lose their jobs and return home in significant numbers, remittances will swell as they repatriate their savings but then fall dramatically as a longstanding source of economic lifeblood dries up.

President Suharto’s nearly 33-year hold on power is near its end, say activists and Indonesia-watchers here. But as relative calm takes hold in riot-torn Jakarta, they are at odds over what will come next – and how the pivotal military will act.

At the optimistic end of the spectrum is Pius Lustrilanang, coordinator of the People’s Democratic Alliance. Between 200 and 400 people are believed to have died Friday, Jakarta’s fourth straight day of rioting. But Lustrilanang takes heart at news reports of soldiers mingling with demonstrators and members of Suharto’s own Golkar party adding their voices to the chorus for him to step down.

Lustrilanang left Indonesia in April after being held for two months by torturers he believes were members of the military, which has denied involvement. Last week, he met Amien Rais, widely considered Suharto’s leading critic. Their conversation convinced him that – with military backing – a coherent government could be formed to steer the nation of 200 million people through its toughest times in three decades.

Lustrilanang said that Rais, who has since returned to Jakarta, will be willing to work with Megawati Sukarnoputri, daughter of the late President Sukarno, and Abdurrahman Wahid, another Muslim leader, to form “a presidium to act as a transitional government after Suharto.” The three would have to be included in any credible transition team, he argues.

Suharto has portrayed Rais, a prominent academic and leader of an Islamist organisation claiming 28 million members, as a religious fanatic intent on creating an authoritarian Islamic state. Lustrilanang, a practising Catholic, insists the Muslim leader is committed to democracy.

Sukarnoputri, who has been disparaged by students for distancing herself from their protests, in recent days has “wanted to become more active” with the growing movement, Lustrilanang notes.

Suharto, who cut short a visit to Egypt and returned to his official residence Friday with a military escort of 100 vehicles, has offered at least three times in the past week to make room for a “constitutional” change in leadership. But that offer is not being taken seriously by the public, say observers, because it has been made before.

The military, however, is backing his plan for gradual change. “The armed forces will support reforms that are carried out in line with the constitution and are made peacefully,” Lt. Gen. Susilo Yudoyono, spokesman for socio-political affairs, was quoted as saying in reports Saturday.

Lustrilanang, who has called the military “the most opportunistic force in Indonesia”, is confident the troops will side with populist anti-Suharto groups. Others are less hopeful.

Analysts highlight a potential split between Suharto son-in-law and Army Strategic Reserve Commando (KOSTRAD) chief Lt. Gen. Prabowo, who is described as a hard-liner with presidential ambitions of his own, and defence minister and armed forces chief Gen. Wiranto, regarded as a pragmatic professional. KOSTRAD was Suharto’s own command when he took power in 1965.

Despite some differences, both officers are loyal to Suharto and likely will move to prevent any infringement on the military’s privileges. “Both have been very well taken care of and both want to keep the officer corps in an advantageous position,” says University of Washington political scientist Daniel Lev. “Neither is likely to undertake reforms unless forced…yet both are capable of overthrowing Suharto.”

The 300,000-strong military, through its ‘dual purpose’ role in national affairs, enjoys considerable influence in parliament, the bureaucracy, and several leading businesses in addition to its control over national defence and internal policing.

The balance of power on the ground does not favour reformists within the military, Lev notes. Wiranto has support outside Jakarta, but Prabowo’s elite troops have a dominant presence in the capital. Reform-minded commanders in the provinces have been ‘shadowed’ by underlings loyal to Suharto or moved to prestigious positions – such as head of the army think-tank, Lemhanas – where they command no troops.

“It seems like (Suharto’s) popular support has evaporated, but what will replace him?” asks William Hartung, senior research fellow at the World Policy Institute in New York. “Is it going to be Suhartoism without Suharto, or a more fundamental change?”

Whatever follows, the transition itself likely will be bloody, says Myriam Young, executive director of the Washington-based Asia Pacific Centre for Justice and Peace.

The government Saturday ordered Indonesia’s four private television stations to air only footage of demonstrations provided by the state-run news channel. Some analysts say Indonesian officials may fear dramatic images would fuel further unrest but others say the ban on independent filming could be prelude to a harsher crackdown.

In 1993 alone, the United States sold 30 million dollars in weaponry to Jakarta in direct government-to-government sales, according to Matthew Jardine, author of ‘East Timor: Genocide in Paradise’. Arms sales by U.S. corporations added an estimated 57 million dollars’ worth of weaponry in 1994, Jardine adds.

The crisis in Jakarta, like the fall of Iran’s Shah Mohammed Reza Pahlevi in 1979, should show once more the failure of U.S. military support to provide stability, says Hartung. “Now that his regime is literally going up in flames, (the United States) is searching for what to do. What they should have done is not arm him in the first place.”

The United States, barred by act of Congress from supplying the Indonesian military with small arms, armoured personnel carriers and training since a 1991 massacre in East Timor, has continued to teach psychological and urban warfare techniques under an obscure military instruction programme.

Washington agreed last week to suspend that training and, for the first time since the troubles began last year, called for political reform, restraint by security forces and demonstrators, and “dialogue” between the government and its citizens.

Washington now should deny Suharto all weapons and spare parts as part of an effort to push free and fair elections, says Hartung. But, he adds, the U.S. government’s credentials as an “arbiter of democracy” already could be damaged in Indonesia.

The U.S. administration could go further, says Lustrilanang, and convince Suharto directly that “now is the best time to step down,” as it did with Philippines President Ferdinand Marcos in 1986. As for the democratic opposition, he adds wistfully, “Maybe we can buy him a ticket to Hawaii.”