Reality behind G20 Summit
Martin Khor
The G20 Summit in London on April 2 was projected by the organisers
and the Western leaders as having agreed to a US$1.1 trillion package of
measures to boost the sagging world economy and especially to help
developing countries.
The G20
Summit on April 2 was projected as a success because it agreed
to provide US$1 trillion to help developing countries. The
reality is far more sobering. |
The trillion dollar figure was what caught the headlines. But as
serious analysis shows, this figure purporting to be new money was more
hype than reality. Some of it had already been decided long before the
Summit, and some of it reflected only an intention rather than concrete
pledges.
Inflation
As an incisive Financial Times article by Chris Giles commented
caustically: “Figures at the end of any international summit need to be
examined closely, particularly those presented by the UK Prime Minister.
His reputation for numerical inflation, repeat announcements and
double-counting precedes him.
“The emphasis on quantities rather than concrete agreements also
serves to mask the big missing element in the communique: a new and
binding commitment to specific measures to clean up the toxic assets of
the world’s banking systems.”
G20 has better representation than the G8 as a forum for global
economic decision-making |
Rather than the US$1.1 trillion announced, the new commitments were
estimated by Giles to be below $100 billion and most of those were
already in train without the G20 summit. While the inflation of small
and old commitments into an enormous amount “does not render the summit
a failure, the desire to produce large headline numbers as the main
result of the gathering suggests the splits on other issues were
considerable,” he wrote.
IMF
The biggest winner was the International Monetary Fund. It was
announced that the IMF would get $500 billion more funds. Japan and the
European Union had already offered about $100 billion each.
The Summit did not formally announce where or when the other $300
billion will come from, but unofficial and unconfirmed reports indicated
that the United States would put in $100 billion and China $40 billion.
These would be loans by the countries to the IMF, which will recycle
them as loans to crisis-hit countries that are running out of foreign
reserves.
There are questions whether countries should give loans to the IMF
and whether the IMF will impose the wrong conditions when it recycles
the funds to crisis-hit countries. According to former UNCTAD chief
economist Yilmaz Akyuz, countries should not be requested to provide
loans to the IMF to augment its resources because this would compromise
the ability of the IMF to carry out its surveillance function and to
discipline the policies of countries that provide the loans.
Loans
It can obtain resources from the market or from the issuance of
Special Drawing Rights (SDRs), instead of obtaining loans from
governments.
The G20 meeting did agree for the IMF to issue $250 billion in SDRs,
but instead of its use to assist countries in need, it was decided to
allocate this to the 186 IMF members according to their quotas or voting
shares. As a result, 44 percent will go to the richest seven countries,
while only $80 billion will go to middle-income and poor developing
countries.
Crisis
As many critics of the IMF had pointed out before the Summit, it
would be dangerous and counter-productive to augment the funds to the
IMF for re-lending to crisis-hit countries if the agency does not reform
its policy conditions but continues to insist on policies that lead the
countries deeper into crisis, as had happened during the Asian crisis a
decade ago.
Unfortunately, the G20 did not insist on any IMF policy reform, but
boosted its resources. This may be the most serious error of the Summit.
The G20 Communique states that it will make available $850 billion to
the global financial institutions in order to support emerging market
and developing countries, including to finance counter-cyclical
spending.
Counter-cyclical spending’ is normally used to mean the kind of
significant increases in government expenditure that the United States
and Europe are engaged in, as the ‘fiscal stimulus’ to jump-start
economic recovery.
New resources
The IMF is presumably charged with the new resources to enable
cash-strapped developing countries to participate in this fiscal
stimulus, which is the newly re-discovered policy formula to get a
country out of recession.
However, an analysis by the Third World Network of the nine most
recent IMF loans to countries affected by the crisis (including Pakistan
and several East European countries) clearly demonstrates that the IMF
is still prescribing ‘pro-cyclical policies’ (policies that accentuate
the downturn in a recession) of fiscal and monetary policy tightening.
“The Fund’s crisis loans still contain the old policy conditions of
cutting public sector expenditures, reducing fiscal deficits and
increasing interest rates - which is the stark opposite of the
expansionary, stimulus policies being supported in the G20 countries,”
according to TWN researcher Bhumika Muchhala.
Poor countries
Asia Russell, of the US-based Health Global Access Project, said that
“the IMF has imposed disastrous conditions on poor countries that have
contributed to massive under-investment in health, HIV/AIDS and
education, particularly in sub-Saharan Africa. The G20 must make sure
the IMF abandons these policies before infusing the Fund with new
resources.”
The same day that the G20 Summit was giving a boost to the IMF
supposedly to help countries undertake counter-cyclical policies, the
IMF suspended lending to Latvia (one of the countries it has recently
extended emergency crisis loans to) “until it sees more progress in
cutting public spending”, according to a news report.
Latvia had agreed to limit its budget deficit to 5 percent of GDP,
but due to the sharp fall in its GDP (by 12 this year, according to
latest estimates compared to the 5 percent estimate when the IMF loan
was made last December), the budget deficit could now jump to 12 percent
of GDP.
The incoming government had hoped to persuade the IMF to accept a
slightly higher budget deficit of 7 percent of GDP, but the IMF insisted
on sticking to the target and suspended its lending, and thus Latvia is
now “racing to prepare more spending cuts”, according to the report in
the Financial Times.
The Latvia case indicates that the IMF has not changed, and that
funds channeled through the IMF are likely to lead to greater economic
contraction in countries that take the IMF loans and the attached
conditions.
Economic recovery
It is thus unfortunate that the biggest result of the G20 Summit is
to boost the IMF instead of other more appropriate organizations that
can help countries with economic recovery.
The G20 Summit made some progress, though not significant, in other
areas, such as expanding the membership of the Financial Stability Forum
(renamed the Financial Stability Board) to include developing countries
that belong to the G20, agreeing that the heads of the IMF and World
Bank need not be from Europe or the United States, and initial measures
to regulate hedge funds and rating agencies and to take note of the
status and reports of tax havens that the OECD will publish.
There are several issues that the Summit failed to resolve, besides
the biggest omission - failure to reform IMF policies.
First, it failed to produce anything tangible on a coordinated fiscal
stimulus policy, which the Americans wanted but which Germany and France
objected to.
Banking system
Secondly, it did not come up with a plan of action to clean up the
crisis-hit banking systems.
Thirdly, there was no plan for regulating cross-border activities of
financial institutions or cross-border financial flows, nor an
acknowledgement that a framework should be created that facilitates
developing countries’ ability to regulate the flow of cross-border
funds.
Fourthly, there was no move to assist developing countries to avoid
wrenching debt crises through plans to establish an international system
of debt standstill and debt work-out, through an ‘international
bankruptcy mechanism’.
Without this, developing countries would be deprived of the kinds of
schemes by which banks or companies in trouble pay back only a portion
of their loans whose market values would have fallen.
One positive aspect of the Summit is that a few leading developing
countries have become an accepted part of a G20 which thus has better
representation than the G8 as a forum for global economic
decision-making. Countries like China, India and Brazil are now
participants.
Nevertheless, the vast majority of developing countries are absent
from the G20 table, and thus the G20 does not have international
legitimacy.
- Third World Network Features
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