By Mark Weisbrot
The G20 summit meeting in London on April 2 will have a very busy agenda and will certainly not live up to expectations. The last item on the agenda is aid for the poorest countries, which, through declining credit, deterioration in exports and falling prices of raw materials, pay the highest price in humanitarian terms because of from a disaster caused mainly by the richest people in the richest countries.
The G20 summit meeting in London on April 2 will have a very busy agenda and will certainly not live up to expectations. (The G20 is an expansion of the G8 countries, a group that includes Canada, France, Italy, Japan, Russia, the United Kingdom and the United States, to include Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Arabia Saudi, South Africa, South Korea, Turkey and the European Union). There is a global recession - the worst in more than 60 years - and there is also the immediate problem of how to get out of it through fiscal and monetary stimulus, as well as the possibility of carrying out coordinated action to repair the global financial system. In addition, there is the issue of a regulatory reform. And sadly, the latest in the program is aid for the poorest countries, which, through declining credit, deteriorating exports and falling raw material prices, pay the highest price in humanitarian terms. because of a disaster caused mainly by the richest people in the richest countries.
The G20 will also have to make decisions about the International Monetary Fund: How much money will it receive and what will its role be in the coming months and years? The Obama administration has proposed $ 100 billion, in the hope that this will raise $ 500 billion in new funding. The European Union has promised a similar amount (75 billion euros).
This could be a mistake, unless the IMF is forced to remove the damaging terms embedded in its loans. Ten years ago, in the last great international economic crisis - which began in Asia - the US led a huge increase in funding for the IMF, and the results were disastrous. The fund made the crisis in Asia worse, mainly by conditioning its loans on damaging economic and structural objectives for the countries most affected by the crisis - including Indonesia, Thailand, South Korea and the Philippines. The IMF was wrong in at least the same way in Russia and other countries, and especially in Argentina, during the same period.
These countries learned their lesson and built up reserves to avoid the need to go to the IMF again. The Fund, without taking responsibility or firing anyone (as have some US corporations recently), claims to have learned some lessons and changed its policies as well. But there are many alarming signs that it has not.
For example, at least nine agreements the Fund has negotiated since September 2008 - including with Eastern European countries, El Salvador and Pakistan - contain some elements of contractionary economic policies. These include cutting budget expenditures, raising interest rates, freezing the salaries of public employees and other measures that will reduce aggregate demand or impede the implementation of economic stimulus programs in the current economic slowdown.
The IMF has long had a double standard when it comes to dealing with economic slowdowns. For rich countries, it can be quite Keynesian: it is currently recommending a global fiscal stimulus of 2% of GDP. But for developing countries, those who are in fact forced to follow the Fund's advice, there is often a different story: these countries "cannot afford" to implement these expansion policies during a recession.
This attitude can defeat the purpose of lending money to developing countries during a downturn, which is to enable them to continue expansionary policies. The main reason these countries "cannot afford" to do what the US or other rich countries do during this recession - for example, run a large budget deficit - is because their reserves may run out. international currency (mostly dollars). In other words, if they grow at a normal pace while other economies contract, their imports will grow faster than their exports, and their trade balance will worsen. The purpose of foreign aid is to allow this to happen, rather than for the economy to contract to improve the trade balance.
In one sense, it is not entirely fair to blame the IMF for the failure of its policies since the Fund has a boss: the US Treasury Department. Although the IMF has 185 member countries, Washington gives the orders. This structure was established with the creation of the Fund in 1944, when Europe was in shambles and most of the developing world was still colonized. China today has the second largest economy and 1.3 billion people, but only 3.7% of the IMF's voting shares. That's after a decade-long struggle to reform voting shares, and for China to receive the largest increase in shares among developing countries during the Fund's reforms last year. Europe, Japan and the other rich countries could outvote the US, but they prefer not to create problems for fear that any challenge to Washington's control over this institution (and the World Bank) could result in developing countries have a voice.
There was understandably discontent in the US when the Obama administration appointed people who had been largely responsible for the current economic disaster to top positions. The IMF has the same problem, but much worse. Individuals appointed by Obama will be pressured to resign if they fail, and Democrats have to worry about re-election. There is no comparable responsibility at the IMF.
What hope, then, is there for reform? For immediate reforms, there is pressure from organized civil society that has been successful in forcing the cancellation of debt for poor countries of some $ 88 billion in the last decade. Coalitions like that of 138 organizations, Put People First, in the UK are pressuring the IMF and the World Bank to refrain from imposing harmful conditions on poor countries and to cancel more debt. They are asking the richest countries to honor their aid commitments. In the US, the religiously based organization Jubilee USA and allied groups are lobbying Congress to authorize the IMF to sell part of its tens of billions of dollars in gold reserves, and use that money for the cancellation of the debt of poor countries.
More ambitious proposals for long-term reforms come from the United Nations Commission headed by Nobel laureate in economics, Joseph Stiglitz. This commission is proposing a Global Economic Council, an expansion of the global reserve system and other agreements - even constant aid to poor countries - that would not be subject to the censure of rich countries as the IMF and the World Bank are today. This week the Chinese government announced its support for a global reserve currency to replace the dollar.
Meanwhile, the most important reforms will take place at the national and regional levels, beyond the G7 and the nominally expanded G20. In recent months, China has extended multi-billion dollar foreign exchange agreements to South Korea, Hong Kong, Indonesia, Malaysia and Belarus, after rejecting requests from rich countries to give the IMF more money in the absence of an institutional reform. The ASEAN +3 countries (the Association of Southeast Asian Nations plus China, Japan and South Korea) are moving towards creating a $ 120 billion Asian Monetary Fund. And the Bank of the South of South America is expected to open in May with seed capital of $ 10 billion from Argentina, Brazil, Venezuela, Bolivia, Ecuador, Paraguay and Uruguay.
If developing countries are willing to show the G7 that they can walk away from any deal that could harm them, while generating alternatives of their own at the national and regional level, rich country governments will finally see the need for serious international financial reforms.
Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, D.C. - This article was published in The Guardian Unlimited newspaper on March 25, 2009. To view the original version in English, please click here.