Integrating fiscal and finance issues into a transformative post-2015 development agenda

The global development framework to be put in place following the expiry of the Millennium Development Goals in 2015 must not only address issues of finance but also accept a reinvigorated role for the state in pursuing financial reform.

by Rick Rowden

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Currently there are many efforts underway by the international donor agencies and the aid community to draft proposals and plans for establishing a new post-2015 global development paradigm to replace the Millennium Development Goals (MDGs) when they expire in a few years. One important set of issues that any new global development agenda must include is that of finance. The new agenda must ensure new mechanisms are in place to address the ways in which national and international finance systems affect the ability of governments to pursue just and inclusive economic development while protecting and supporting human rights. This article describes several exciting ways in which civil society groups and social movements are today linking up nationally and globally to advocate for more just and stable financial systems.

Central to their efforts, however, is a reinvigorated role for national governments in both domestic financial regulation and in the international financial architecture. Two important problems with the previous MDGs agenda were that: (1) they neglected the importance of finance to development and (2) the role of the nation-state in regulating markets was greatly downplayed. These mistakes must not be repeated in any post-2015 agenda.

Contributing to these blind spots in the MDGs were two different focuses of development with often competing areas of emphasis: one of these represents a prioritization of globalization and a country’s integration into the global economy, while the other is more fixed on community-level projects and programmes. While both of these are important and worthwhile in their own right, there was little discussion on the proper role of the state in promoting economic development – or the need for appropriate financial regulation. Many donor agencies promoting free markets and global integration believed that the state should have either no role or a minimal one in promoting economic development and should simply open up and integrate into the global economy.

However, as we can see from many examples of civic activism today in the wake of the 2008 global financial crisis, growing numbers of advocates are calling for measures which will require a reinvigorated state that is more inclusive, participatory, democratic, accountable and responsive to national economic development needs and more capable when it comes to better regulating finance.

After three decades of a free-market model that set out to weaken and undermine the state’s role in economic development, a stronger and more proactive state must be at the centre of a post-2015 framework, particularly when it comes to effectively regulating a host of financial issues that are inextricably tied to more successful development. Any such framework must address the shortcomings in several aspects of the international monetary and financial systems. Fortunately, there are many advocates around the world who have made very useful proposals that must inform and guide the post-2015 agenda.

These proposals promote solutions in such areas as: breaking apart the “too big to fail” banks and better regulating the remaining systemically important financial institutions and markets, including markets for commodity derivatives; establishing an international mechanism for orderly sovereign debt workouts; better regulating international capital movements, including with the use of capital controls; establishing better norms for regulating foreign aid and foreign direct investment (FDI) in developing countries; listening to the voices of developing countries which are calling for greater degrees of trade protection for their nascent domestic industries; rethinking the dominant export-led model of development and instead offering greater support for industrial policies to better promote new manufacturing and services industries; and ensuring that countries have the policy space and freedom to choose their own macroeconomic policies – aid should not be conditioned on economic policy reforms demanded by external actors.

The UNCTAD alternative

Those working on a post-2015 framework for development should take their lead from the United Nations Conference on Trade and Development (UNCTAD), which for years has warned about the flaws in the dominant development model promoted by the International Monetary Fund (IMF), World Bank, the G20 and commercial advocates of free trade and investment agreements based on rapid and premature trade, FDI and finance liberalization. As an alternative, UNCTAD has called for an overhaul of the global financial system to benefit developing countries and for rethinking the dominant export-led growth model for developing countries, and it has urged the poorest countries to prioritize domestic economic growth over exports. In a major break with the Washington Consensus model of laissez faire that has sought to weaken the role of the state, it has called for developing countries to use a strong “developmental state” which can effectively pursue an industrial policy to build up domestically owned manufacturing and service sectors over time. It has called for a range of alternative fiscal, monetary and financial policies targeted at better scaling up long-term public investment and employment.

For example, UNCTAD was the first to call for an internationally coordinated sovereign debt cancellation initiative, even when it was still taboo. It was the first to argue for orderly workout mechanisms for sovereign debt, more than a decade before this issue found a place on the IMF’s agenda (though those mechanisms have still not been established). But since the sovereign debt crisis erupted in Europe, civil society organizations and advocacy networks and UN agencies such as UNCTAD have been reasserting the need for the establishment of a fair and transparent sovereign debt workout procedure, also known as the “Raffer Proposal”, which has been endorsed and propagated by many noteworthy economists, NGOs and the Jubilee movement as a concrete way to solve the problems of economic and financial instability associated with sovereign debt crises.

UNCTAD has been ahead of the curve in its warnings about how global finance was getting too politically powerful and was no longer merely providing useful services to the real economy, but had turned into a dangerous and destabilizing global casino. UNCTAD forecast financial crises in Mexico in 1994 and 1995, warned of the 1997 East Asian crisis and the 2001 Argentine crisis, and has consistently sounded the alarm of the dangers of excessive deregulation of financial markets and stressed the perils of rapid, non-reciprocal trade liberalization by developing countries.

Today more than ever, UNCTAD’s overt call for moving away from the current finance-driven model of globalization is at odds with the policy advice of the IMF and World Bank, and with the proliferation of regional and bilateral investment treaties (BITs) and free trade agreements (FTAs) being negotiated between industrialized and developing countries. Instead of continuing to neglect these problems, those currently crafting a post-2015 development framework should heed these warnings and support efforts by advocates to reform key parts of the international financial architecture and the need to better manage international capital flows – indeed, UNCTAD’s longstanding call for the use of capital controls is today being vociferously called for by the BRICS countries (Brazil, Russia, India, China and South Africa). In fact, even the IMF has changed its longstanding opposition to the use of capital controls and now concedes its earlier blind support for capital account liberalization was wrong. Despite the flaws and limitations of the IMF’s new position, it is still remarkable that they are finally acknowledging there is indeed a role for the state in the regulation of capital flows. One hopes those designing the post-2015 agenda are listening.

Unfortunately, many of the biggest donor governments and lending agencies which are seeking to influence the shape of the post-2015 development agenda also remain politically committed to promoting financial liberalization and are at odds with this new acceptability for capital controls. Many of these governments are still pushing aggressively for explicit prohibitions on such capital controls within the rules of the General Agreement on Trade in Services (GATS) talks at the WTO and in many regional and bilateral FTAs and BITs. Under current and proposed agreements, rules stipulate that governments may not be allowed to adequately re-regulate their financial sectors to ensure stability, and may not be able to implement capital controls or use adequate levels of trade protection for their nascent manufacturing industries, thus blocking their capacity for economic development. Any post-2015 framework can address these problems by taking steps to ensure that countries are given the policy space to adequately regulate their financial sectors, and to renegotiate many of the current FTAs and BITs in this regard.

On the issue of FDI, those championing the free-market approach to development have long expressed a blind faith that any types of FDI are good for development and state regulations on such investments are unnecessary. Unfortunately, many developing-country leaders who were eager for FDI believed them, and the MDGs agenda was silent on the question. But it is by now clear that while some types of FDI can indeed be beneficial for development, other types of investments can destroy the environment, violate the human rights of local people and wipe out domestic businesses when there is a lack of effective regulation. Addressing this issue in September 2012, UNCTAD released its Investment Policy Framework for Sustainable Development (IPFSD), a document that intends to serve as a comprehensive point of reference for policymakers formulating national and international investment policies on how developing countries can use FDI most constructively. To complement this advice, advocacy networks such as the European Network on Debt and Development (Eurodad) have proposed contractual changes to foreign aid loan and private foreign investment contracts, such as the Charter on Responsible Financing. Again, those drafting a post-2015 agenda must take note and ensure such proposals are integrated into the next global development framework.

Useful proposals

More broadly, on these and a host of other issues related to reforms needed in the global financial architecture, there have been many useful proposals articulated, such as those by UNCTAD, the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System (the Stiglitz Commission) and the Group of 77 (G77), which is a group of some 130 developing countries that caucuses together in the UN General Assembly. The G77 has called for a host of policy and structural reforms to the foreign aid system and the global economic architecture.

In addition to the proposal by the G77, the post-2015 global development framework must also be informed by the voices of other groupings of developing countries, such as the Group of 33 (G33). The G33 is a group of 46 developing countries currently engaged in the agriculture liberalization talks within the WTO who are advocating for some of their goods to be designated as “special products” (SPs) for purposes of food security, and thus for the right to use a “special safeguard mechanism” (SSM), or temporary increases in tariffs, when their domestic producers are threatened by floods of cheaper imports. Just as the BRICS countries and others want to be able to use capital controls to protect themselves from the destabilizing effects of rapid inflows of speculative capital, the G33 countries want to be allowed to adopt better trade protection from rapid flows of agricultural imports that threaten their existing companies and farmers.

Similarly, the post-2015 framework must be informed by calls from the NAMA 11 countries, another group of developing countries opposed to the dramatic cuts in trade protection on manufactured goods currently being demanded by the rich countries in the WTO’s Non-Agricultural Market Access (NAMA) talks. One would think the experts on the Stiglitz Commission, and the developing countries themselves who comprise the G77 in the UN General Assembly and the G33 and NAMA 11 within the WTO, ought to know a few things about the necessary reforms to the global financial architecture, and those drafting a post-2015 framework should integrate their proposals.

Allowing a stronger role for the state in regulating finance and FDI as well as in trade protection for safeguarding the success of domestic industries is important for more successful development. In the absence of a strong state and with prohibitions against the use of industrial policies by developing countries, we have seen in the last few decades a failure of industrialization and development in many countries. This problem was noted by the African Development Bank’s Annual Development Effectiveness Review 2012: “… Africa’s growth tends to be concentrated on a limited range of commodities and the extractive industries. These sectors are not generating the employment opportunities that would allow the majority of the population to share in the benefits. This is in marked contrast to the Asian experience, where the growth of labour intensive manufacturing has helped lift millions of people out of poverty.” The Review also notes: “Promoting inclusive growth means finding solutions to some deep structural problems. It means broadening the economic base beyond the extractive industries and a handful of primary commodities.”

Donor agencies and the biggest donor countries which are currently seeking to influence the shape of the new post-2015 development framework simply must not continue with this failed free-market policy advice that keeps developing countries locked into dead-end primary commodities and extractive industries. As the Ghanaian presidential candidate Nana Akufo-Addo warned earlier this year: “About 30 years ago, some African nations, beginning with Ghana and Uganda, implemented liberal economic reforms to stop their economic decline. But in many cases we opened our markets to global competition when, beyond the extractive industries, we had nothing to compete with. So while the continent’s share of global foreign direct investment projects has improved steadily over the past decade, much of this investment has reinforced the structural deficits of our economies.” Therefore, a more successful global development framework can take heed of these insights and take bold steps towards supporting industrial policies of various kinds to promote a more rapid transition into manufacturing and services industries in developing countries. 

Financial reform

The post-2015 agenda must absorb the lessons about the need for a strong national state to effectively regulate the financial sector. It has become clear that states must have the regulatory capacity to avoid another near-implosion of the world economy and the new development framework must support the regulation of finance to avoid the dangers posed by unregulated markets, greedy traders, “too big to fail” financial companies, opaque credit instruments and shadow financial institutions. Sadly, little has been done to date to address these dangers and the outsized role of the finance sector in all major economies continues unchecked, drawing needed investment capital away from creating jobs and productive investments and into the global casino.

A post-2015 agenda can only be successful in supporting stable financial systems and economic growth if it goes further than the tepid proposals offered by, for example, the new global accord known as Basel III, which will require banks to hold higher reserves, or those of either Europe’s “High-level Expert Group on reforming the structure of the banking sector” or the “Liikanen Report”, which only calls for a partial separation of regular bank activities from institutional investment activities within the same companies. More fundamental reforms would include meaningful new internationally agreed regulations on speculative activities in financial markets and breaking apart the 29 global systemically important financial institutions (G-SIFIs) (17 European, eight American and four Asian firms), or those financial institutions deemed “too big to fail”. Indeed, as UNCTAD has suggested, a post-2015 global development framework cannot afford developing countries any meaningful protection from further financial crises unless steps are taken to “close down the big casino”.

Credit markets lie at the heart of many economic crises, shaping policy responses and reinforcing inequities. There are considerable power dynamics at play both in debt relationships – where there is a propensity for credit markets to create conditions of economic fragility – and in the interactions between financial markets and existing social stratifications. A September 2012 essay by James Heintz and Radhika Balakrishnan titled “Debt, power, and crisis” recently explored these power dynamics in case studies of credit markets and crises, such as racialized lending in the subprime mortgage markets in the US, the European sovereign debt crisis, the Latin American debt crisis and capital flight from sub-Saharan Africa. Like others who have called for the post-2015 framework to be based on internationally agreed human rights, Heintz and Balakrishnan propose suggestions for how economic and social rights can provide an alternative framework for financial governance. These insights are further reinforced by a task force of human rights organizations and global networks devoted to highlighting the growing concern about the impact of financial regulation on human rights and sustainable development. On Human Rights Day this year, the initiative – “A bottom-up approach to righting financial regulation” – launched a new information portal to expose direct and indirect human rights abuses involving the financial sector, and insist on the human rights duties of governments to properly regulate these bodies if sustainable and equitable development is to be achieved.

Similarly, in October 2012 the United Nations independent experts on extreme poverty, external debt, and the promotion of a democratic and equitable international order reminded European Union governments that economic reforms must be crafted in line with the human rights obligations of states, particularly on the issue of economic and social rights set out in the International Covenant on Economic, Social and Cultural Rights. The human rights experts noted that while Europe’s Liikanen Report recommends a set of regulatory measures to shield taxpayers from future bailouts and avoid shocks to the financial system, its proposals do not go far enough to provide real security or financial stability. The human rights experts urged EU authorities to ensure that vital public funds are not used on collapsing financial firms in the future, and a post-2015 framework must follow this advice. Between 2008 and 2011, European countries diverted €4.5 trillion (equivalent to 37% of EU economic output) from public expenditures into rescuing their failing financial institutions, and these levels of extra and unforeseen spending have pushed governments into debt sustainability crises. In response to these sovereign debt crises, governments have adopted harsh budget austerity plans which have created unbearable hardship for citizens, especially people living in poverty, and thereby contradict states’ legal obligations to realize economic, social and cultural rights for their people. The post-2015 development framework must avoid promoting the same old IMF approach to budget austerity that actually undermines economic and social rights, and instead recognize that states must protect budgetary resources from being compromised by future financial bailouts and commit to helping developing countries create a regulatory framework that ensures public resources are not redirected to failing financial firms.

Regarding the issue of food security in a post-2015 development framework, it is likewise necessary that global financial reforms be meaningfully addressed. Over the past several years it has become increasingly clear that global derivatives markets and instruments have played a large role in instigating the global food crisis that has been particularly devastating for the poorest food-importing countries. Those currently crafting a new post-2015 development framework who proclaim their intention to address food security in the poorest countries must integrate the findings of recent studies by Masters and White, Ghosh, Wise and, most recently, a paper co-authored by the World Bank, IMF, UNCTAD and the UN Food and Agriculture Organization (FAO) (among other agencies), which have all pointed to the role of speculative commodity index trading in aggravating the food price crisis in 2007-08 – perhaps by as much as 20% – as well as in the run-up in global food prices in 2011. Derivatives markets and instruments are thus implicated as levers of inequality, as food price volatility does not affect all people in the same way. Any meaningful post-2015 framework must effectively tackle the need for greater regulation of commodity speculation in derivatives markets.

Again, it is disturbing that many of the biggest countries seeking to influence the post-2015 development agenda are also resisting both calls for greater financial regulation or for breaking apart the G-SIFIs. For example, judging by the recent efforts of the US and other rich countries to quash the global finance reforms advocated by UNCTAD, the prospects for them having a positive influence on a post-2015 framework do not look good. In the run-up to UNCTAD’s thirteenth ministerial quadrennial conference in Doha in April 2012, Western states made a concerted effort to stop UNCTAD from working on global macroeconomic and financial issues. Although a last-minute deal was reached that safeguarded UNCTAD’s mandate to keep working on such issues, we must ask what this attitude towards UNCTAD reforms says about the quality of such inputs by these governments to the post-2015 framework.

Fiscal policy

On fiscal policy advice, the failure of the austerity programmes in Europe to achieve their stated goals of reducing debt-to-GDP levels and restarting economic growth is causing a rethink on the efficacy of the austerity approach. For several decades, the major bilateral and multilateral aid agencies would not give aid to a country if the IMF did not first deem its macroeconomic policies to be “prudent” and “sound”. This should be among the first features of the old system to be done away with in any post-2015 global development framework. But on 9 October 2012 the IMF made an historic and outrageous concession about how terribly wrong its models had been in estimating the degree of social and economic harm caused by the deep budget austerity it has long advocated. New IMF research found that the economic damage from aggressive austerity measures may be as much as three times larger than they had previously assumed, and now the IMF is actually warning the eurozone countries to ease up on their harsh budget-cutting because it is counterproductive to restoring economic growth (and eventually getting deficits down). Just as critics of the IMF have long argued, the Fund itself now concedes that deep public expenditure cuts in a time of recession actually make things worse, akin to digging oneself into a deeper hole, because the subsequent drops in employment, consumer demand and future growth rates all contribute to lower tax collections and thus make deficits bigger. The stunning concession left many developing countries that had previously fallen victim to IMF conditionality flabbergasted.

And then, just to highlight that politics and ideology continue to trump the facts, the IMF spoke out barely one week later admonishing Portugal to stay the course with its current harsh austerity programme – as if their newly announced research did not exist. This striking turn of events bears important lessons for any post-2015 global development framework: developing countries must have the policy space and freedom to choose their own macroeconomic policies and aid should not be conditioned on economic policy reforms demanded by external actors.

Wages

On the question of wages, too, a new post-2015 framework must do more than the MDGs to protect workers and ensure the basic working conditions the International Labour Organization (ILO) describes as “decent work” are better established and protected. In sharp contrast to the free-market philosophy which has long claimed driving down wages to make your exports more competitive is the best way to achieve higher economic growth, the approach taken in a post-2015 agenda must be based on important new research that is increasingly refuting these claims. For example, a recent ILO study shows that not only does pushing wages down actually lower overall economic growth rates, but when multiple major economies are all doing this at the same time, it has a cumulative negative impact on global GDP – just the opposite of what is needed at a time of global economic slowdown. This old view that it is good to lower wages is largely responsible for shifting the benefits of increased worker productivity into the hands of shareholders and exacerbating growing trends in economic inequality.

The policy conclusions of the ILO paper shed light on the limits of international competitiveness strategies based on wage competition in a highly integrated global economy, and point to the possibilities for correcting global imbalances through internally coordinated macroeconomic and wage policies in which stimulating domestic consumer demand plays a much more important role in achieving higher and more inclusive economic growth. Indeed, the post-2015 agenda must rethink the externally focused dominant export-led growth model and replace it with a model more focused on building new domestic industries and strengthening domestic consumer demand in developing countries.

While it may be the case that the most powerful countries and donor agencies currently seeking to influence the post-2015 agenda will be opposed to many of the reforms outlined above, it is also true that there are increasingly outspoken social movements and civic advocacy efforts around the world calling for these sensible reforms. These include the many groups that comprise the Europeans for Financial Reform coalition and its counterpart in the United States, Americans for Financial Reform, along with new social movements such as Strike Debt! and international efforts such as the Tax Justice Network. The growing strength of this movement inside the US was arguably reflected in the recent victorious US Senate campaign to elect Elizabeth Warren in the state of Massachusetts, despite overwhelming odds and tremendous counter-pressure by the US financial services industry.

Although the political struggle between advocates of greater financial regulation and those who wish to keep the global casino open for business is likely to continue, it is clear that any post-2015 global development framework must meaningfully address these and other national and international financial reform issues if it is to have any legitimacy or popular support. Moreover, these challenges will have to be confronted in the new agenda if it is to prove more successful than the previous MDGs.                                                        

Rick Rowden is a development consultant and doctoral candidate in economics at Jawaharlal Nehru University in New Delhi. Previously he worked on economic development policy at the United Nations Conference on Trade and Development (UNCTAD) in Geneva and at ActionAid in Washington DC. He is also a research consultant with the New York-based Center for Economic and Social Rights, from the website of which (www.cesr.org) this article is reproduced.

Third World Economics, Issue No. 541, 16-31 Mar 2013, pp 13-16