Monday June 22, 2009

Key issues in meeting on financial crisis

The United Nations will hold a major conference this week on the economic crisis and how it affects developing countries. The developing countries have made some key proposals, but so far the developed countries have been resistant or lukewarm.

THE big event this week will be the United Nations conference on the global financial and economic crisis and its effects on development. Many people agree that the economic crisis is the defining issue of the past year and will be a major preoccupation of the next few years at least.

The epi-centre of the crisis has been the United States and Wall Street in particular. The first fallout was in Europe and Japan, which also have large financial institutions. But developing countries which have no role in causing the crisis have suffered the most “collateral” damage, with a loss of 6 percentage points of gross national income as their economic growth is expected to fall from 8.3% in 2007 to 1.6% in 2009 on average.

There is some international action on the crisis, but much of it has been by exclusive clubs like the G7 developed countries or the G20 (which is dominated by developed countries, although a few developing countries are also included in its Summits). The UN conference from June 24 to 26 is thus the first time all the countries are gathering to decide what to do about the crisis.

Two main actions are to be discussed: how to help developing countries cope with the crisis, and reform of the international financial system. Diplomats at the UN in New York have been meeting day and night to forge a document for the political leaders to sign. There has been a lot of wranglings over the issues.

Developing countries grouped under the G77 and China have been fighting to get recognition of their needs and of the need to reform the global financial system. But major developed countries have been resisting basic changes, preferring the status quo and wanting only marginal changes to existing institutions and policies.

There are some key issues to settle. First is the follow-up mechanism. Developing countries strongly believe in building a central role for the UN and that the process should not end with the conference. Many substantive issues cannot be resolved by the conference since there is too little time. The G77 and China want a working group to ensure that the conference’s decisions are turned into actions.

Most developed countries, however, prefer the G8 or G20 to be the sole authority and are against any “competition” from the UN. They have thus resisted any strong follow-up process or a specific working group.

Second, developing countries want extra external financing to make up for the US$1,000 billion (RM3,548bil) shortfall in their countries from reduced exports and capital outflow caused by the crisis. They are proposing that part of the funds come from new SDR (special drawing rights) that the IMF can issue to developing countries. The SDR is a kind of money that the IMF issues to countries which can exchange them for the dollar or other major currencies.

The US in particular has been against new issuing of SDRs. The US seems to fear that this may be the start of partial replacement of the US dollar as the global reserve currency.

Third is the fear of a new debt crisis. The World Bank has estimated that nearly 40 developing countries are vulnerable to difficulties in having enough foreign exchange to service their loans or to pay for essential imports. The list may grow if the recession continues.

The G77 and China has proposed a temporary moratorium on debt payments for countries that face problems as well as the setting up of an international debt court that can allow countries in trouble to declare a debt standstill. All the developed countries have resisted this approach.

Fourth, the G77 and China have asked that developing countries be given the “policy space” to enable them to take policy measures to address the crisis. This space has been blocked by IMF and World Bank loan conditions that usually forbid controls over capital outflows and debt standstill, impose low tariffs, and pro-cyclical policies (fiscal austerity and tight monetary policy) that worsen the recession. Developing countries that face balance of payments constraints also cannot take counter-cyclical policies.

Another contentious issue is the setting up of a global economic council under the UN to coordinate economic policies. The G77 and China believe that the G20 is too exclusive a club which few developing countries can participate. They want to start a process to consider setting up a Global Economic Council under the UN to enable developing countries to participate in discussions and decisions on the present crisis as well as other issues. The developed countries however are against the UN to even consider setting up such a council.

Fifth is the reforms needed to the global financial and economic systems. The G77 and China want the reforms to cover the governance and policies of the IMF and World Bank, the regulation of financial markets and capital flows, strengthening of surveillance over developed countries’ policies and the creation of a new reserves system based on the SDR.

The G77 and China have put up proposals for the reforms, but the developed countries are adamant that these important issues not be discussed in the UN.

These issues are likely to top the agenda of the UN conference. Even if there continues to be disagreement at the conference, they can continue to be discussed, with decision taken, if a follow-up process is agreed upon. There is a lot at stake.

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Monday June 22, 2009

Key issues in meeting on financial crisis

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