TWN Info Service on Finance and Development (Apr09/11)
9 April 2009
Third World Network

Current crisis needs a Global Green New Deal
Published in SUNS #6674 dated 3 April 2009

Geneva, 2 Apr (Kanaga Raja) -- Reminiscent of the New Deal introduced by the United States in the midst of the Great Depression seventy-six years ago, the current crisis, perhaps even more severe than the Great Depression, also needs a New Deal, but one with two additional adjectives - namely, being global to include developing countries and sustainable, both socially and ecologically.

This view is espoused by the UN Department of Economic and Social Affairs (UN-DESA) in its latest policy brief (No. 12).

UN-DESA notes that seventy-six years ago, in the midst of the Great Depression, the United States government introduced the New Deal, consisting of a number of mutually supporting initiatives.

The most prominent of these were public works programmes financed by deficit financing. The best known of these are:

* the Tennessee Valley Authority (TVA), which pioneered an integrated regional development programme in an underdeveloped region of the country, and laid the infrastructural foundation for energy provision as well as sustained industrial and agricultural growth in the region;

* a programme of new social contract to achieve greater security and rising living standards for working families, including in particular the social security system;

* and regulation of financial markets to protect the assets of citizens and channel financial resources into productive investment.

The UN-DESA brief said that the New Deal effectively harnessed the fiscal stimulus for environmental as well as developmental goals. Not only did it help pull the United States out of the Great Depression, it successfully addressed unsustainable agricultural practices that had caused widespread ecological, social and economic crisis in the Midwest, and helped usher in a new era of economic growth and expanding prosperity, especially in the relatively poorer regions.

"Today, we are in the midst of another crisis, perhaps even more severe than the Great Depression. This crisis too needs a New Deal, but a New Deal with two additional adjectives: global and sustainable."

First, said UN-DESA, it has to be global and must include developing countries. The current crises are global in nature and a response will be needed in virtually every country, especially in developing countries where the maintenance of high growth rates is essential to eradicating poverty and meeting the Millennium Development Goals (MDGs). Second, it has to be sustainable, both socially and ecologically. While most attention is focused on climate change, the sustainability of economic growth and development is also threatened by the loss of forests and biodiversity, air and water pollution, and the degradation of natural resources.

Therefore, said the brief, the New Deal should seek to direct the public works programme into areas that can place countries on a different developmental pathway, one that protects the natural resource base in an equitable manner.

According to the brief, the Global Green New Deal would have the same ingredients as the original New Deal, namely public work programmes, support for systems of social protection especially in developing countries, and mechanisms to protect the assets of ordinary people and encourage productive investment. Most critically, the public works programmes would be launched not only in developed countries, which have the resources to resort to deficit financing, but also in developing countries, whose resources are more limited which are particularly adversely affected by the systemic flaws in the global financial system.

At lower levels of development, they are less resilient and thus more vulnerable to fluctuations in world markets. With fewer resources, they are also more often forced to pursue pro-cyclical monetary and fiscal policies, imposing greater variability in their economic performance and affecting long-term growth, said the brief.

The Global Green New Deal would be part of the broader counter-cyclical response to the crisis and comprise three main elements:

* Financial support to developing countries to prevent contraction of their economies. This would be provided through the international system;

* National stimulus packages in developed and developing countries aiming at reviving and greening national economies. These would be put in place by national governments;

* International policy coordination to ensure that the developed countries' stimulus packages not only are effective to create jobs in developed countries but that these will also facilitate generating strong developmental impacts in developing countries. Those would be collaborative initiatives of governments of rich and poor countries.

The brief noted that in his letter to the leaders of the G-20, the Secretary-General of the United Nations has proposed to mobilize $1 trillion of financial support for developing countries to help them engage in an adequate response to the economic crisis.

During 2009 and 2010, $500 billion should be provided in the form of enhanced international liquidity for compensatory financing to allow developing countries to refinance their sovereign debts as well as existing bank and corporate debts of their private sectors and accordingly unlock their domestic credit markets and regain access to trade credits and international capital markets.

Another $500 billion would be needed in the form of enhanced long-term official development financing and development assistance to cover fiscal revenue gaps and provide developing countries the required space to protect social spending and finance fiscal stimulus packages (see below).

Currently, said the brief, most developing countries lack the capacity to undertake public works programmes through deficit spending as are being envisaged by the developed countries as well as a few emerging economies that have such capacity.

"Therefore, substantial increases in compensatory financing, official development lending and assistance are needed for developing countries to increase their fiscal space, enhance their scope for counter-cyclical responses and avoid having to cut into necessary public expenditures."

Even though the resources are needed to overcome immediate balance-of-payments problems and to provide stimulus for economic recovery, they can be simultaneously used to address long-term development challenges, said the brief, adding that this would include continued investment in education, health, and job creation to meet the MDGs.

In the short-run, resources would also need to be allocated to strengthen social protection systems. This will be critical to prevent millions of people in developing countries who are directly affected by rising unemployment, volatile agricultural prices and declining export demand, and other consequences of the crisis from falling deeper into poverty and thus prevent major setbacks in the progress made towards the MDGs.

The crisis and the required fiscal response should also provide an opportunity to make long-term investments in agricultural development to address the problem of food insecurity and in the "greening" of the economies of developed and developing countries in order to combat climate change, said the brief.

In this context, it pointed to making national stimulus packages "green" and equitable. The United Nations Environment Programme (UNEP) has demanded that one-quarter of the $3 trillion envisaged to be allocated to national stimulus packages by major economies be channeled into environmentally beneficial investments. Those include sustainable transport, energy efficiency, renewable energy, afforestation and reforestation, sustainable agriculture, and biodiversity protection.

According to UN-DESA, the UNEP proposal needs to be enhanced through attention to two additional dimensions. First, it is critical that developing countries can, as developed countries have done, develop fiscal stimulus packages to prevent their economies from contracting. Second, it also needs to be ensured that such investment is targeted especially at poor and vulnerable groups and regions within these countries.

The brief underscored that support for agricultural productivity and the creation of markets could be an important feature of national stimulus packages in developing countries, many of which are still highly dependent on agriculture such that shocks on agricultural markets can quickly put high proportions of the population into poverty. Special attention would be needed for investments that promote a shift towards ecologically sustainable agriculture. Measures to shield small farmers from price volatility on global markets can also act as important safety nets.

The third component of the Global Green New Deal would be collaborative initiatives of governments of rich and poor countries simultaneously to create jobs in developed countries while generating strong developmental impacts in developing countries. Such initiatives could be pursued in part by using the resources mobilized by developed countries' stimulus packages.

"But over the longer term, the reforms of the international financial and multilateral trading systems will need to support the investments required to manage the shift to low carbon economies in both rich and poor countries alike."

The brief noted that initiatives should follow three basic principles in order to maximize their contributions to development goals. First, they should come on top of and support existing development initiatives and projects in developing countries, by topping off development aid resources and supporting specific elements of national stimulus programmes, in order to avoid waste of resources and benefit from already constituted mechanisms for delivery on the ground.

Second, they should not result in promoting unfair competition or disguised dumping of goods or services produced by developed countries that would impede the development of local green industries in developing countries in the longer run. Third, in line with the nature of stimulus packages, they should be designed to allow for easy phase-out when the crisis is over.

For initiatives that have long-term horizons, they should be designed to allow for a smooth transition, with nationally-owned and implemented initiatives and programmes, and not result in additional dependence on developed country technologies, said the brief, highlighting six examples of such programmes that include amongst others investments in public transport in developing countries, human skills transfer programmes and reverse outsourcing, building the global IT highway, energy efficiency and a multilateral response to disasters.

A shift to clean public transport is desirable from economic, environmental, and social viewpoints, said the brief, adding that developing countries lack the resources to undertake the massive investments required for this shift. Much of the technology and production capacity lies in developed countries. For example, a subsidized programme of clean fuel buses could promote growth of jobs and incomes in developed countries, while potentially reducing greenhouse gas emissions compared to business-as-usual and relieving urban congestion in developing countries.

It will also reduce the import bill by reducing demand for imported fuel, and it will be socially equitable. For instance, a programme to supply 100,000 buses per year to developing country cities would cost around $10 billion per year, which would be a small fraction of the total stimulus spending.

Another example is a global feed-in-tariff regime in respect of a shift to electricity coming from renewable sources. It is expected that the costs of renewable energy will fall as the scale of production increases. However, the scale of production cannot expand unless technologies become competitive. A global feed-in-tariff programme would overcome this difficulty by establishing a global fund to provide guaranteed purchase prices to producers in developing countries for a period of 20 years.

The electricity would then be sold to final consumers at a lower price, which could be indexed to the income level of the country and of consumers. Such a programme will lead to a steep increase in demand for renewable energy equipment and infrastructure, and this will generate employment in developed and developing countries.

In another related policy brief (No. 13), UN-DESA elaborated on the $1 trillion that the UN has estimated developing countries would need for 2009 and 2010, half of which would be used for covering short-term financing needs, with the other half required for long-term development lending and assistance.

It said that the rapidly unfolding global financial and economic crisis will severely disrupt economic growth worldwide, affect the livelihoods of billions around the world and endanger progress toward the poverty reduction and other MDGs.

Major industrialised countries and some developing countries have put together massive financial sector rescue packages and large fiscal stimulus packages. Since the outbreak of the crisis up to March 2009, the total support is estimated at a staggering $20.8 trillion or 33.5% of the estimated World Gross Product (WGP) for 2008. The vast majority of these resources comprise government guarantees of toxic assets held by the banking sectors in the United States, Europe and elsewhere.

The fiscal stimulus plans total about $2.6 trillion or 4% of WGP to be spent, roughly, over the three-year period between 2009 and 2011. According to the brief, many observers, including analysts at the IMF and the United Nations, consider this amount of fiscal stimulus to be insufficient.

"Developing countries are particularly exposed to this crisis. They have less resilient economies and with fewer resources they are more typically forced to pursue pro-cyclical monetary and fiscal policies, imposing greater variability in their economic performance to the detriment of long-term growth."

Global responses should urgently redress this asymmetry. In the first place, this would require providing sufficient financial resources to developing countries to engage in counter-cyclical measures. If spent effectively, this could not only put the global economy on a more sustainable growth path but also help to meet poverty targets and development goals set by the international community.

With respect to meeting short-term liquidity needs of $500 billion, the brief said that according to the World Bank and the Institute for International Finance, private capital flows to developing countries declined by about $500 billion in 2008 from 2007 levels and a further decline by about $630 billion is forecast for 2009. The decline has been the result, inter alia, of a severe squeeze of trade credits, which is affecting trade and growth of developing countries directly.

The brief also noted that well over $1 trillion in corporate, external debt in emerging markets and other developing countries will mature in 2009 and will need to be rolled over. The World Bank estimates that 98 of 104 developing countries are expected to fall short of covering external financing needs, with an estimated gap which could be as high as $700 billion. For low-income countries alone, the IMF estimates that the balance-of-payments shock could amount to $140 billion in 2009.

UN-DESA suggested that the additional resources for compensatory financing could be mobilized through issuance of special drawing rights (SDRs), unused special borrowing facilities of the IMF and through the mobilisation of reserves and resources accumulated in sovereign wealth funds from surplus countries. It noted that the G-20 already seems to have neared an agreement on doubling (as proposed by the EU) or tripling (proposed by the United States) the IMF's existing lending capacity of $250 billion.

New SDR issuance could amount to $250 billion as has been proposed in the past, but failed to gain the backing of the United States government. Now, this seems more acceptable. The Japanese government has already lent $100 billion of its reserves to increase the IMF's lending capacity.

Countries with vast amounts of reserves, such as China or some of the major oil exporters, could contribute similarly, though this likely will require making sufficient progress towards governance reform of the IMF to make this politically more acceptable for these countries. Mobilising resources through regional reserve funds should also be considered.

The brief stressed that adequate oversight of the usage of resources will also need to be established, ensuring in particular that the compensatory financing is not subject to the kind of pro-cyclical policy conditionality which is typically attached to existing mechanisms.

In addition, another $500 billion in enhanced long-term official financing will be needed to cover fiscal revenue gaps in 2009 and 2010 (due to falling export revenues and slower growth) and provide developing countries with the necessary resources to protect social spending and finance fiscal stimulus packages, said the brief. Spread over two years, these resources would provide the means for a stimulus of about 3% per year of the combined GDP of developing countries (excluding China and major oil-exporting countries), which -- assuming a multiplier effect of about 1.7 from well-designed and internationally coordinated fiscal packages -- would support adequate growth recovery.

Half of the required resources could be mobilised by enhancing the lending capacity of multilateral development banks and the remainder through increased official development assistance through accelerated delivery on existing donor commitments.

According to the brief, the increase in development lending could be mobilised through the multilateral development banks. This could be achieved by optimising use of available capital -- the World Bank could make new development financing commitments for about $100 billion. And with a $60 billion replenishment of their capital and maintaining solid leverage ratios, regional development banks could expand development lending by about $150 billion.

The increase in ODA could be mobilised as follows: $50 billion could be mobilised by front-loading resources in the already replenished International Development Assistance (IDA) window of the World Bank and those in the concessional windows of the regional development banks; $200 billion would need to be mobilised through an acceleration of the delivery on existing ODA commitments.

The required resources can be provided on the basis of available resources and existing commitments, said the brief, pointing out that the World Bank's concessional window (IDA) was already replenished by $30 billion in 2008 to cover three years of credits and grants. This could be front-loaded to make these resources available during 2009 and 2010. Equally concessional lending windows of regional development banks (ADB, AfDB, IDB and others) could be front-loaded to provide the additional $20 billion.

The World Bank's proposal for a "Vulnerability Fund" of the size of 0.7% of the developed countries' stimulus packages (amounting to about $15 billion) might form a part of this broader proposal, said the brief. +