Mar 26, 2009
summit meeting in London on 2 April will have a lot on its plate and
will certainly fall short of expectations. There is a world recession -
the worst in more than 60 years - and the immediate problem of how to
get out of it through fiscal and monetary stimulus, as well as possible
coordinated action to fix the global financial system. Then there is
regulatory reform. And sadly, last on the agenda is aid for the poorest
countries who, through the drying up of credit, shrinking exports and
falling commodity prices, pay the biggest price in human terms for a
disaster caused mainly by the richest people in the richest countries.
The G20 will also have to make some decisions about the International Monetary Fund:
how much money will they get and what will be their role in the coming
months and years? The Obama administration has proposed an additional
$100bn, in the hope that this will raise $500bn of new funding. The European Union has committed a similar amount (75bn euros).
This could be a mistake, unless the IMF
is required to eliminate the harmful conditions that it often attaches
to its lending. About 10 years ago, in the last major international
economic crisis - which began in Asia - the US led a large funding
increase for the IMF, and the results were disastrous.
The fund worsened the crisis in Asia, mostly by attaching harmful
economic and structural conditions to its lending in the countries
hardest hit by the crisis - including Indonesia, Thailand, South Korea
and the Philippines. The IMF did at least as badly in Russia and other countries, and especially Argentina, in the same period.
countries learned their lesson and piled up reserves so as to never
need to go back to the IMF again. The fund, without taking
responsibility or firing anyone (much like some American corporations
recently), claims to have learned some lessons and also to have changed
its policies. But there are too many disturbing signs that it has not.
For example, at least nine agreements
that the fund has negotiated since September 2008 - including with
Eastern European countries, El Salvador and Pakistan - contain some
elements of contractionary policies. These include fiscal (budget)
tightening, interest rate increases, wage freezes for public employees
and other measures that will reduce aggregate demand or prevent
economic stimulus programs in the current downturn.
The IMF has
long had a double standard when it comes to dealing with economic
downturns. For the rich countries, it can be quite Keynesian: it is
currently recommending a global fiscal stimulus of 2% of GDP. But for
the developing countries that are actually forced to follow the fund's
advice, there is often a different story: they "cannot afford" these
expansionary policies during a recession.
This attitude can
defeat the purpose of lending money to developing countries in a
downturn, which is to enable them to pursue expansionary policies. The
main reason they "cannot afford" to do what the US or other rich
countries do during this recession - eg run large budget deficits - is
that they may run out of foreign exchange reserves (mostly dollars). In
other words, if they grow at a normal pace while other economies
shrink, their imports will grow faster than their exports, and their
trade balance will worsen. The purpose of external support is to allow
that to happen, rather than shrinking the economy to improve the trade
In some sense it is not really fair to blame the IMF
for its failed policies, since the fund has a boss: the US Treasury
department. Although the IMF has 185 member countries, Washington
pretty much calls the shots. This arrangement was established with the
creation of the fund in 1944, when Europe was in ruins and much of the
developing world was still colonised. China now has the world's
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 China's getting one of the largest increases in
voting shares among developing countries in last year's fund "reforms".
Europe, Japan and the other rich countries could outvote the US, but
prefer not to rock the boat for fear that any challenge to Washington's
control over this institution (and the World Bank) might result in developing countries' gaining a voice.
was, understandably, discontent in the US when the Obama administration
appointed people who had a large responsibility for the current
economic mess to top positions. The IMF has the same problem, but much
worse. The Obama appointees will be pressured to resign if they fail,
and the Democrats have to worry about re-election. There is no
comparable accountability at the IMF.
What hope, then, for
reform? For immediate reforms, there is the pressure from organizsed
civil society that successfully forced some $88bn of poor-country debt
cancellation over the past decade. Coalitions such as the UK's
138-organisation Put People First
are pressuring the IMF and World Bank to refrain from inflicting
harmful conditions on poor countries and to cancel more debt. They're
asking the rich countries to live up to their aid commitments. In the
US, the religious-based Jubilee USA
and allied groups are lobbying Congress to authorise the IMF to sell
some of its tens of billions of dollars worth of gold reserves, and to
use the money for debt cancellation for poor countries.
More ambitious proposals for longer-term reform come from the UN commission headed by Nobel-laureate economist Joseph Stiglitz. This commission is proposing a Global Economic Council,
an expanded global reserve system and other institutional arrangements
- including steady aid to poor countries - that would not be subject to
the veto of rich countries as are the IMF and World Bank. This week the
government of China announced its support for a new global reserve
currency to replace the dollar.
In the meantime, the most
important reforms will take place at the national and regional levels,
bypassing the G7 and the nominally expanded G20. China has in recent
months extended multi-billion-dollar currency swaps to South Korea,
Hong Kong, Indonesia, Malaysia and Belarus, after refusing the
rich-country pleas for more money for the IMF in the absence of
governance reform. The ASEAN + 3 countries (10 Association of
South-East Asian Nations plus China, Japan and South Korea) are moving
toward a $120bn Asian Monetary Fund. And South America's Bank of the South
is expected to be launched in May with $10bn in start-up capital from
Argentina, Brazil, Venezuela, Bolivia, Ecuador, Paraguay and Uruguay.
the developing countries are willing to show the G7 that they can walk
away from any agreements that can harm them, while creating
alternatives on the ground at the national and regional level, the
governments of the rich countries may eventually see the need for
serious international financial reforms.
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