TWN Info Service on Finance and Development   (Apr09/06)
3 April 2009
Third World Network

Delegations respond to Commission's crisis proposals
Published in SUNS #6672 dated 1 April 2009

New York, 30 Mar (Bhumika Muchhala) -- Several country delegations to the United Nations presented their views during last week's General Assembly dialogue on the global financial and economic crisis. They also engaged in an interactive exchange with the Chair (Prof. Joseph Stiglitz) and other members of the Commission of Experts on the global financial system set up by the President of the General Assembly.

The main issues raised by the delegates included reforms to the IMF and World Bank, and the mechanisms and process by which financing would be provided to developing countries which do not have the fiscal space to pursue stimulus policies. There also appeared to be differences of views between developing and developed countries.

Australia, for the CANZ group, acknowledged that the world's most vulnerable countries are going to be the most impacted and that the global response must incorporate this fact. The Commission's report is an important document with significant ramifications.

Sudan, for the G77 and China, said that the Commission is biased towards immediate and short-term measures, which is worrying because the crisis should be an opportunity for fundamental change. The first task is to reform the Bretton Woods Institutions, on which the Commission "shies away from saying the hard thing," it said. It agreed that the IMF should undertake to adopt a double majority rule in governance. Another IMF reform needed is the "total abolition of conditionalities." The Fund's recent reforms in reducing conditionality fall short. They pitch their changes as a "new regime for conditionality," but the result still reflects a clear bias for the industrialized countries' agenda.

Substantive reform needs to be a precondition for the recapitalization of the IMF, it said. The financial crisis has presented new business opportunities for the IMF, but to recapitalize an institution that has not been reformed carries the danger that it will apply the same policies as before even more vigorously.

Uruguay said that this crisis has raised the most frightening reaction of protectionism. Trade protectionism will, for example, exacerbate trade distortions and the agricultural sector in developing countries will be most affected. It cited the ECLAC estimate that growth in Latin America will plummet to 1.6% in 2009 compared to 4.6% in 2008.

The United Kingdom said it would take time to set up a new credit facility, as suggested by the Commission. In the immediate period, the best focus for reform efforts would be on existing mechanisms and institutions, such as the IMF and World Bank. The G20 ministers agreed to bolster IMF resources and "we would like to see this go further," said the UK. The European Union has also agreed to provide a bilateral loan fund to assist Eastern European countries.

Japan said that it attached high importance to the upcoming June summit of the UN. Japan will honour its pledge to double ODA to Africa by 2012, despite the fact that Japan is also impacted by the crisis. Japan added that the Chiang Mai Initiative can be a model for regional cooperation aimed at providing liquidity. The CMI's funds have been recently increased from $80 billion to $120 billion. In the IMF, the voices of emerging economies must be strengthened. The capital base of the IMF must also be enhanced, and Japan has agreed to provide a loan equivalent to $100 billion to the Fund.

Although Japan acknowledged that the UN Commission recommends creating a new credit facility, it believed that existing mechanisms and institutions should be used rather than establishing new ones. Japan also asked the Commission what the proposed number of seats are for the global economic council proposed in their recommendations, and what the comparative advantage of such a council is in comparison to the existing bodies of the ECOSOC and G20.

Ethiopia praised the Commission's recommendations for being timely efforts to counter the wide-ranging adverse impacts on developing countries. Unless the most poor and vulnerable in Africa are also addressed, the response to the crisis will not be truly global.

China said that it is pursuing both national and regional responses to the crisis. The national stimulus plan aims to stimulate domestic demand, while at the regional level, China is committed to moving East Asian financial cooperation forward. China described the June UN meeting as important. Through the full participation of 192 member states, the UN meeting will send a positive signal of unity and determination to the international community, and mitigate the harm brought about by the crisis.

Brazil said that however imperfect the multilateral trade regime is, there is no other means to rein in protectionism. What defines the development component of the Doha round is trade finance, especially for South-South trade, which is an indispensable part of development finance. Trade finance should be a core component of the provision of liquidity to developing countries recommended by the Commission.

The Philippines raised several questions. First, if the measures recommended by the Commission are not implemented soon, what would be the impact of the crisis on growth and MDG attainment in developing countries? In the implementation process, what form of binding mechanisms will enable enforcement of the recommendations by the UN?

Norway said that while the developed countries are "vacuum cleaning the market for credits," the immediate term focus of the UN should be on creating policy space for those countries least equipped to implement fiscal stimulus policies. Norway also brought up the importance of illicit financial flows. The Doha conference on financing for development established that illicit capital flows out of developing countries are equivalent to several times the amount of capital flowing in to developing countries.

Nepal highlighted that the Commission's recommendations do not mention "vulnerable countries." The Commission's recommendations do not outline how the G-192 in the UN can stop the contagion of the crisis to LDCs, protect their markets, their exports and meet their specific needs. It asked the Commission to revisit this issue and put forth recommendations specifically for LDCs.

Jamaica said that the greatest urgency for multilateral institutions is the need to reform governance, without which an inclusive approach to finding solutions will not be possible. There should also be more opportunities for smaller developing countries to have a voice in the deliberations of the G20. The immediate concern is how to get out of this crisis. Substantially greater ODA levels are necessary to fight both the burgeoning debt problem but also the emerging deep recession in developing countries.

The urge toward protectionism needs to be resisted, particularly by developed country stimulus packages. Any regulatory regime in the Caribbean region should not follow a one-size-fits-all approach. It emphasized that regulations designed to serve the interests of discredited financial institutions should not be imposed on the Caribbean region. The urge to shut down offshore financial institutions in the Caribbean needs to be resisted. Instead, the larger and more established offshore banks should be monitored in the same manner as banks in the Western countries are.

India asked the Commission what would be the comparative advantage of the global economic coordination council they proposed over the ECOSOC. Before creating an entirely new body, India asked whether the UN might not first focus on improving the effectiveness of the ECOSOC.

Barbados said that while the Commission has affirmed developing countries' need for greater resources and variegated mechanisms for disbursing these resources, the Commission had not addressed how developing countries would access these resources.

Nigeria emphasized that "exclusiveness and creeping protectionism should be avoided," and that the collateral damage to the developing countries needs to be acknowledged by the developed countries. The current opportunity to reform the Bretton Woods Institutions should be taken.

Indonesia said that its experience after the Asian financial crisis of 1997-98 demonstrated that upon implementing substantive regulatory reform in the financial and banking sectors, there was improvement in the economy. However, it is also important to not over-regulate, which can stifle future economic growth. Indonesia notes the importance of mismatches between regulation and product innovation in the financial sector. While developing countries need national policy space, they should not use policy space as a protectionist policy.

Venezuela said that a "totalitarian economic policy by developed countries toward developing countries have marked the last few decades." A large part of the problem lies with the functioning of the Bretton Woods Institutions. It agreed with what Commission member Pedro Paez (from Ecuador) said regarding abolishing conditions that are imposed on access to development finance through the BWIs and regarding breaking the BWIs monopoly of credit.

Tanzania said that renewed political will is urgently needed to transform the governance of global institutions, regulate financial markets and pursue development. International financial institutions should stand ready to make available sufficient resources to help countries overcome the crisis, but also address the impacts of climate change in LDCs.

The European Union (EU), represented by the Czech Republic, said that IMF and World Bank reform needs to be accelerated. It agreed that top appointments to the World Bank and IMF should be an open procedure available to all qualified member country candidates. Governance reform in the World Bank and IMF should also address internal governance to ensure the effectiveness and even-handedness of IMF surveillance.

The IMF needs to have the means necessary to assist countries affected by the crisis, and for this reason there is an urgent need to increase IMF resources significantly, through an expanded New Agreement to Borrow and an accelerated quota review. The EU has agreed to contribute 75 billion Euros to the IMF, and allocate 50 billion Euros to the EU Balance of Payments facility which will assist Eastern European countries hit hard by the crisis.

An NGO, New Rules for Global Finance Coalition, said that the global reserve system proposed by the UN Commission should find a way to create and use SDRs outside the walls of the IMF. It is imperative that the IMF be comprehensively reformed across the areas of governance, accountability, transparency, participation and through establishing an external complaint mechanism. It also emphasized that the quality of conditionality attached to IMF lending needs to change. Currently, the IMF is changing post-hoc conditions to ex-ante conditions.

In response, Professor Stiglitz said that the ECOSOC could be empowered to address much of the functions of the proposed creation of a global economic council. However, a new council would be given the mandate of surveillance of the global economy, which is unique. A new council would also identify the gaps within the global economy, which other UN members could also report to.

Stiglitz reaffirmed that developing countries certainly need more space to maneuver their policies, particularly in light of restrictions placed on the ability of countries to manage their capital account. If they had this ability to control capital inflows and outflows in their capital account, developing countries could be less exposed to the instability of the global financial system. Stiglitz also emphasized that there should be not be any pro-cyclical macroeconomic policy conditionalities imposed on developing countries who need loans to counter the impacts of the financial crisis.

A few other Commission members also provided comments and responses to the country delegates. Pedro Paez, who is Ecuador's former Economic Coordination Minister, said that the problems of legitimacy are becoming increasingly deep. Paez said that when a society has entered a spiral of violence due to this kind of economic crisis, it cannot emerge in just 2-3 years, it takes decades.

Paez said it is possible to move forward on the proposed new reserves system in as little as six months, as making Special Drawing Rights accessible does not have to take longer than that. What the global community needs is to recover its decision-making capacity, and to recover the conditions for the depth of maneuver required to put in place counter-cyclical and social policies.

Commission member Yaga Venugopal Reddy, who is the former Governor of the Reserve Bank of India, said that some financial innovations are good, but many in the current generation have been mechanisms used to circumvent responsibility. This is a major problem is in regard to national regulation and sovereignty.

Reddy also highlighted that exchange rate management, capital account liberalization and reserve management are critical development issues in this financial crisis. As economies grow and financial markets deepen, the benefits of capital account liberalization could increase. However, he stressed that this should be done only when the time is right. +