UN conference, a historic gathering

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The following is an analysis on the UN conference on the global economic and financial crisis held in June 2009 highlighting what the author considers as its main significant outcomes from a developing country perspective

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Bhumika MUCHHALA

The recently held UN Conference on the World Economic and Financial Crisis in New York is in many ways a historic conference for a number of significant reasons.

First, the Summit represented a legitimate and inclusive process, which achieved consensus on its outcome document while encompassing all 192 member states in the wake of the most severe financial crisis since post-World War II.

This inclusivity, translated into practice, means that the richest of the G8 countries as well as the poorest of the low-income countries are able to voice themselves in the fora of the UN.

Second, the UN conference occurred at a juncture where the role of the UN in economic affairs has diminished steadily over the last several decades due to the rise of the Bretton Woods Institutions (World Bank and International Monetary Fund) power in development financing and economic policy-making. As such, the potential of the UN to re-position its role and reassert its voice in the area of economics and finance may show openings that it had not shown previously.

The UN Conference is especially significant for the practitioners, academics and students of development work and development policy - because, unlike the preoccupation of the G20 forum with global growth recovery and the financial economy, the UN Conference focused on the recovery process for development; in essence, the development crisis within this financial crisis.

It did so by addressing the disproportionate negative impacts being experienced by developing countries in this crisis, contextualizing these impacts in the irony that this crisis is not rooted in developing countries but rather the rich countries, and by reaffirming developing countries need for adequate policy space in order to respond to the fallout from the crisis.

Another key reason why the UN Conference is significant is the several ways in which it supersedes the G20, in the areas of participation and accountability, as well as in the articulation of the crisis and the scope of how the crisis should be addressed.

The G20 versus the UN

In today’s financial and economic crisis, it is the G20 that is the predominant international and multilateral forum where national leaders are addressing the crisis. In clear contrast to the G20’s self-selected club of the richest economies, the UN, represented by the G-192, demonstrates that decision-making need not be restricted, and need not be carried out in a way that lacks political legitimacy. There is also an issue of citizen accountability.

For example, where would you send a letter to the G20? Is there a secretariat, or a response mechanism of any sort that could facilitate citizen participation in the G20?

While there have been myriad critiques on the G20, one of the key issues that is consistently raised by the global community is that the entire package of the G20’s US$1.1 trillion pledge was given to the international financial institutions, and in particular the International Monetary Fund (IMF), whose resources were trebled to US$750 billion. The fact that the G20 could give the IMF what is, in essence, a blank check, demonstrates the G20 countries’ lack of political will, or interest, in first demanding meaningful policy and governance reform at the IMF, which up to date has continued to attach pro-cyclical and contractionary conditionalities to its loans to developing and low-income countries, and continues to give authority to an Executive Board that is characterized by deep asymmetries of representation and voting power between developed and developing countries.

Unlike the G20, the UN addressed the specific transmission channels of the crisis in developing countries and outlined some of the measures that should be considered. While the UN Conference unfortunately did not result in more concrete commitments of financing and actions, and while many observers, especially in civil society, feel that the UN should have gone much farther in achieving commitments, the UN Conference did establish a working group to flesh out the key crisis mitigation measures for developing countries over the next one year. The negotiation process and the resulting drafts of the outcome document in the UN reflected key questions that might have been too politically sensitive for the G20 to address, such as the debt mechanisms, trade policies, and loan conditionalities that resonate with the poorest countries.

Development oriented policy

The UN Conference’s outcome document presents several areas where political space and opportunity for advocacy and exploration emerges for developmental policy measures to respond to the crisis.

Some of these positive opportunities that materialize through the document are policy space, debt mechanisms, loan conditionality and the follow-up process overall.

However, the document also includes areas that present challenges, such as the language on debt, the Doha Round of the WTO, and the blocking of the use of Special Drawing Rights (SDRs) to address serious financing shortfalls.

On policy space, the document unambiguously recognizes, in Paragraph 15, the right of developing countries facing severe shortages of foreign reserves to use ‘legitimate trade defence measures’ in accordance with WTO (World Trade Organization) provisions. This would include the right to raise tariffs within WTO bound rates and the ability to use balance-of-payment safeguard provisions.

Paragraph 15 also recognizes the right to “impose temporary capital restrictions, and seek to negotiate agreements on temporary debt standstills between debtors and creditors.”

Temporary controls over capital outflows are not only technically consistent with the IMF’s Articles of Agreements but have also been pursued by Asian countries during the 1997-98 financial crisis.

Debt crisis

While the document recognizes the right to negotiate temporary debt standstills, it does not go far enough in this measure, largely because debt standstills are to first be negotiated with creditors. For example, even the IMF’s Board stated in an agreement in 2000 that “in extreme circumstances, if it is not possible to reach agreement on a voluntary standstill, members may find it necessary, as a last resort, to impose one unilaterally.”

The threat of a new debt crisis in developing countries has been alerted to by various organizations ranging from the IMF to the Jubilee campaign for debt cancellation. In a March paper (The Implications of the Financial Crisis for Low-Income Countries) the IMF stated that as many as 31 countries would be pushed into a high level of debt distress by the financial crisis. A recent report by the German organization FES on the emerging debt crisis also states that many developing countries will be unable to weather the financial crisis without falling into new debt burdens. Although the outcome document, in Paragraph 34, calls for the exploration of “enhanced approaches to the restructuring of sovereign debt based on existing frameworks and principles,” a key problem in this language is that the very frameworks and principles that already exist need to be significantly reformed in order to address the debt overhang of developing countries.

However, the last line of the paragraph calls for further exploration of “a more structured framework for international cooperation in this area,” which could potentially open the path for the consideration of orderly international debt workout mechanisms, which can also be addressed in the follow-up process.

The call for a debt moratorium for developing countries has been voiced by UNCTAD (UN Conference on Trade and Development) Secretary General Supachai Panitchpakdai several times this year, and has also been used during the Asian financial crisis. This proposal was put forth by the G77 and China group during the negotiations on the outcome document. However, while it did not survive the opposition of the US, the EU and Japan, it can be pursued further in the follow-up working group.

The foreign exchange shortfall facing developing countries ranges from the World Bank’s estimate of US$1 trillion to the UNCTAD’s estimate of US$2 trillion. This serious financing gap is a result of a disastrous confluence of negative impacts being suffered by developing countries: large declines in exports, commodity prices and remittances, currency depreciations, reduced or even reversed capital inflows and Foreign Direct Investment (FDI) flows, and the reduced and more difficult access to credit.

To address this, developing countries in the G77 and China group proposed that US$100 billion worth of SDRs be allocated by the IMF to low-income countries at no cost to them, while another US$800 billion be disbursed to middle-income countries, which can be returned to the IMF when the crisis effects subside, in order to avoid inflationary impacts.

This could potentially enable a counter-cyclical, low-cost and relatively speedy way to pursue ‘quantitative easing’ at the global level (which the U.S. and other rich countries are doing through lowering their official interest rates).

The blocking of this proposal resulted in a missed opportunity to provide urgent liquidity to cash-strapped developing countries on the most beneficial terms possible - without creating additional debt and without imposing harmful conditionalities. Meanwhile, the G20’s proposal to allocate US$250 billion according to IMF quota shares rather than on the basis of need means that the overwhelming share of that amount will go to the very developed countries who least need the SDRs. However, the Conference’s follow-up process is given the ability to further study the role of SDRs for ‘development purposes.’

As the crisis has unfolded over the last one year, the acute need for developing countries to have the kind of flexibility that rich countries have in pushing counter-cyclical fiscal stimulus policies has been voiced frequently and by a diverse range of actors. The outcome document, in Paragraph 17, pays heed to the ‘unwarranted pro-cyclical conditionalities’ that many IMF loan programs still contain, and which restrict developing countries from pursuing fiscal stimulus. Similarly, trade-off between the loss of policy space and the adherence to international rules and commitments, particularly those within trade and investment agreements, are also called attention to in Paragraph 18.

While the document calls for the governance reform of the IMF and World Bank, it calls for the completion of the Doha Round of the World Trade Organization.

Many trade advocacy organizations have articulated that this would be problematic given the fact that the General Agreement on Trade in Services is a key part of the Doha Round, and it supports capital account liberalization and other financial liberalization measures which have played a critical role in instigating the crisis at its roots.

The establishment of the ‘ad hoc open-ended working group,’ is imperative because it is the key mechanism that prevents the UN Conference from becoming a one-time event with little effect. For the developing countries that do not have any other international venue for discussion and action on the crisis, the UN conference is an invaluable vehicle. The matter of how strong the working group will be, how much it is able to flesh out and develop further, and how much effective participation it can get will be an oncoming test of the UN. The President of the General Assembly, Miguel d’Escoto Brockmann, has already issued a draft resolution which calls for the establishment of the working group, driven by member states, as well as selected two Co-Chairs, one from the North and one from the South.

Paragraph 56 states: “Consider and made recommendations to the General Assembly regarding the possible establishment of an ad hoc panel of experts on the world economic and financial crisis and its impact on development.” A key potential of such a panel of experts is the ability to provide a menu of policy options, and thereby to challenge to the one-size-fits-all framework of neoliberal policies of the Washington Consensus and the Bretton Woods Institutions. Many members of civil society have been consistently advocating for a broader range of policy options and scenarios to be discussed with developing countries during the negotiation of loans and agreements.

It will be the task of civil society to push for ensuring that the panel of experts is representative, diverse and reflects development-oriented economic policies.

Paragraph 56 also calls for a “review of the implementation of the agreements between the United Nations and the Bretton Woods Institutions,” and a focus on “enhancing collaboration and cooperation.” Implicit within this is a strengthening of the role of the UN. While it may not occur overnight, or even in the near horizon, a certain momentum is nevertheless rendered here through the discursive and symbolic power of the document. - Third World Network Features