The G20 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.
These 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 balance.
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.
There 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.
If 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.