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Deadlock at Summit on trade, finance and debt

Against a backdrop of spreading financial instability and mounting debt crisis, the continuing North-South divide on trade, debt and finance resulted in a stalemate on these critical issues at the WSSD.

Goh Chien Yen & Celine Tan

AFTER negotiations were stalled at the final preparatory meeting in May in Bali over the critical issues of trade, finance and debt, these three ‘roadblocks’ to sustainable development were taken up again in Johannesburg for a final resolution.

The bulk of the Draft Plan of Implementation still in brackets and bold print were those relating to the three economic issues, which are the crux of the means of implementing sustainable development. [In UN practice, when text appears in bold this means that it is in contention and is subject to change. When it is square-bracketed, it means that some countries are adverse not only to the language but to the concept as well and want it deleted altogether.]

Talks were deadlocked because developed countries, particularly the US-led Juscanz group (Japan, US, Canada, Australia and New Zealand), refused to commit to crucial paragraphs spelling out the relationship between globalisation and sustainable development and language firmly committing developed countries to concrete action on debt, financial contributions and fair trade.

Hopes and concerns

There were hopes that Johannesburg would build further on the outcomes of the UN Financing for Development (FfD) conference in Monterrey in March 2002, and mitigate the negative aspects of the WTO Ministerial Conference in Doha last November. While the WSSD Plan may not have the binding force of a WTO agreement or a multilateral environmental agreement (MEA), the programme of action endorsed by heads of government and by the UN does represent an expression of political will and commitment on the part of all UN member countries.

At  the  same  time,  there  were deep concerns that the WSSD’s emphasis  on market-based,  private  sector  financing  of  the Summit’s  five priority programme outcomes - water, energy, health, agriculture and biodiversity (WEHAB) - would undermine government commitments.

The shift towards private-public partnerships in both the Type I (obligatory on governments) and Type II (voluntary) outcomes of the WSSD represents part of a wider abdication of responsibility on the part of developed countries to fulfil their commitments to facilitate sustainable development in the South. Furthermore, allowing agencies such as the World Bank to initiate the implementation of crucial programmes and totally endorsing the WTO work programme would once again limit the policy choices of developing countries in their attainment of sustainable development.

Out of the 27% of the Chairman’s Text that was finally resolved at the Summit, most of the contentious paragraphs were in Chapter V on ‘Sustainable development in a globalising world’ and in Chapter IX on the ‘Means of implementation’. In addition, almost every contentious paragraph  included at least one proposed alternative formulation, showing completely opposing positions.

The text and debates were indicative of the North-South divide in the area of trade, finance and debt, with developed countries staunchly opposed to positive language and constructive solutions in favour of the South.

Proposals put forward by the Group of  77 and China  to address the systemic flaws in the international financial architecture and global trading system were consistently objected to by developed countries, especially by the Juscanz group. The G77 argued that these problems, including the debt burden precipitated by declining terms of trade, volatile global capital flows, and iniquitous multilateral trading rules, must not be decoupled from attempts to resolve the ecological degeneration faced by the world’s populace.

These arguments were countered strongly by the Juscanz bloc which refused to incorporate any committal language on these issues. In particular, the Juscanz countries were opposed to references to specific institutional solutions to the problems, such as stronger language on debt relief, debt restructuring and arbitration; calls for the establishment of an international mechanism for the stabilisation of commodity prices, and the explicit commitment to achieve the target of earmarking 0.7% of gross national product (GNP) as official development assistance (ODA) to developing countries.

There was a concerted push by Juscanz countries to keep the language on debt, trade and finance vague and general, and thus non-committal. The US and Canada were particularly adamant that the WSSD Plan of Implementation should not go beyond the Monterrey Consensus nor the Doha Ministerial Declaration and that there should be no attempts to renegotiate those provisions.

The G77 - which some observers note may have conceded too quickly on crucial issues at Monterrey - had pressed for a more progressive and comprehensive action plan that would reference the Monterrey Consensus and the Doha Ministerial Declaration but would go beyond these two texts where these documents fell short of concrete action-oriented language facilitating sustainable development.

Norway was the country that appeared the most supportive of the G77’s proposals on debt-related issues, and on concrete ODA commitments. Whilst the US position was ‘hardline’, the EU attempted a ‘compromise’ with the G77.  However, on the trade issues and the Doha agenda, the EU’s position largely undermined the interests of the South. Thus the hard line taken by some EU members on agricultural subsidies totally disrupted informal negotiations at one stage in Johannesburg.

External debt

The total outstanding debt of developing countries and countries in transition showed little change since 1998. It was estimated at the end of 2001 to be at US$2,450 billion. While the growth of the external indebtedness of the developing countries has stabilised, they are still faced with a mountain of debt, at about close to 40% of the GNP.  Furthermore the problems of Heavily Indebted Poor Countries (HIPCs) are far from being resolved and other developing countries have been adversely affected by the continual financial and economic crises in emerging markets. Many of these crisis-stricken emerging markets are consequently suffering from domestic as well as external debt difficulties.

The agreed text in Chapter IX on ‘Means of implementation’, Paragraph 83 calls for a reduction of ‘unsustainable debt burden through such actions as debt relief and, as appropriate, debt cancellation and other innovative mechanisms geared to comprehensively address the debt problems of developing countries, in particular the poorest and most heavily indebted ones’.

‘Therefore, debt relief measures should, where appropriate, be pursued vigorously and expeditiously, including within the Paris and London Clubs and other relevant forums, in order to contribute to debt sustainability and facilitate sustainable development, while recognising that debtors and creditors must share responsibility for preventing and resolving unsustainable debt situations, and that external debt relief can play a key role in liberating resources that can then be directed towards activities consistent with attaining sustainable growth and development.’

The proactive language of Paragraph 83 captures the pressing concerns and challenges faced by the developing countries. 

The text that went to Johannesburg tied the assessment of debt sustainability of all developing countries to the Millennium Development Goals. This would have been an important improvement from the Monterrey Consensus on Financing for Development, which arguably makes the point of linking debt sustainability to the MDGs only within the context of the HIPC debt relief initiative. As mentioned above the fact that many developing countries are faced with crippling indebtedness underscores the need for speedy and orderly debt relief and debt cancellation for all developing countries. However, the final negotiations saw the removal of the reference to any MDGs.

Paragraph 83 also reaffirmed support for the provisions on external debt in the Monterrey Consensus. This can be helpful as the debt issue has been dealt with more comprehensively there. Para 83(a) which deals with the debt of the Heavily Indebted Poor Countries calls for greater urgency in implementation of the HIPC initiative and recognises the impact of the external economic environment on the performance of these countries in satisfying the criteria of the initiative.

Under the HIPC initiative, debt relief is provided by both multilateral and bilateral creditors to bring down the total stock of debt to within ‘sustainable’ levels. When the total stock of debt is more than one-and-a-half times the value of exports, the country is deemed to have an ‘unsustainable’ level of debt. However not only has the HIPC initiative’s progress been painfully and disappointingly slow, the process to date is a failure even by this narrow criterion of debt sustainability. Accordingly 31 out of the 42 HIPC countries continue to fall short of this standard. More worrying, several countries that have qualified partially for the HIPC initiative have had their interim relief suspended by the IMF as a result of so-called ‘policy slippages’ from their IMF programmes.

Many NGOs such as Jubilee Research have long criticised the HIPC initiative for failing to meet its stated objectives, for being designed in the interests of creditors, for imposing excessive and structural adjustment type conditionalities on poor countries and for disregarding the human development needs of the HIPCs, as set out in the MDGs.

It would have been useful to build on the inclusion of the MDGs, in assessing the extent of debt relief to be given to the HIPCs at Monterrey, and acknowledge the plain fact that these countries simply cannot afford to make any debt service payments. According to Jubilee Research estimates, even if all the debts are cancelled, the HIPCs will need an additional US$30 billion in aid each year if there is any hope of meeting the first Millennium Development Target of halving poverty by 2015. However, MDGs are absent from Paragraph 80.

Paragraph 83 goes beyond HIPC countries and recognises that ‘debt relief arrangements should seek to avoid imposing any unfair burdens on other developing countries’. There is acknowledgement of the problems of the debt sustainability of some non-HIPC low-income countries, in particular those facing exceptional circumstances (though these are not defined). However, no progress was made to concretely deal with the plight of these countries.

The growing number of middle-income countries falling into the debt trap was recognised, and there is  agreement in Paragraph 83(e) to ‘encourage exploring innovative mechanisms to comprehensively address the debt problems of developing countries, including middle-income countries and countries with economies in transition. Such mechanisms may include debt-for-sustainable-development swaps’. But again, there are no specific steps or commitments made, only an exhortation to explore ‘innovative’ mechanisms. Given the scale of the growing problems, as seen in Latin America, the WSSD response is weak indeed.

Equitable debt management 

Developing countries tried to include strong language on the notion of equitable burden-sharing in debt resolution. Building on Paragraph 60 of the Monterrey Consensus, where the involvement of the private sector in debt resolution is premised on the need for fair burden-sharing and to minimise moral hazard, the WSSD offered a good opportunity to recognise that the international community has not made significant progress in providing orderly debt workout mechanisms to ensure that creditors and investors bear the consequences of the risks they have taken, and that the burden of crises be distributed equitably between debtors and creditors and among different classes of creditors. The escalation of the Argentinian crisis and the contagion in Latin America could have been happening in another planet when one listened to the WSSD negotiations, however.

Developing countries had a formulation that was more consistent with the sentiment and understanding that the magnitude and urgency of the debt problem requires a comprehensive solution.  It read: ‘Further restructure outstanding indebtedness through appropriate debt relief, cancellation and other arrangements, bringing institutional debtors and creditors together in relevant international fora to restructure unsustainable debt in a timely and efficient manner, taking into account the need to involve the private sector in the resolution of crises due to indebtedness, where appropriate.’

The clause in bold italics was resisted by the developed countries and finally dropped.  Thus the legacy of the WSSD is Paragraph 83© in the Plan of Implementation, which  merely calls for actions to bring international debtors and creditors together in relevant international fora.

The full range of possibilities in dealing decisively with the debt problem should not be beyond the consideration of the international community but the WSSD failed to take that extra step.

Box Artice:

WSSD skirts over global financial instability

Goh Chien Yen

THE treatment of global financial instability within the WSSD’s Plan of Implementation is remarkably timid in recognising the depth and extent of the problem, is inadequate in substance in terms of its recommendations, places the bulk of the burden on developing countries despite the imbalance between international debtors and creditors, and generally makes light of the severe consequences suffered by the crisis-stricken developing countries and the poor.

This critical issue is dealt with in Chapter V on ‘Sustainable development in a globalising world’, and in Chapter IX on ‘Means of implementation’.

Inadequate response

The increased frequency and virulence of international currency and financial crises clearly demonstrates that instability has become global and systemic. Yet acknowledgement of this predicament does not even constitute a paragraph of its own and is obliquely captured in Chapter V, Paragraph 45 that addresses globalisation. The entire chapter was highly contentious, with major developed countries objecting to any language that appeared to portray globalisation as ‘negative’.  Frustrated negotiators from developing countries remarked on the hypocrisy of some developed countries, especially as heads of state at the UN Millennium General Assembly less than two years ago had made strong statements on the adverse impacts of globalisation.

The Group of 77 and China had proposed language that included a statement that ‘There is further fear of increasing instability in the international economic and financial system,...’ With the Latin American financial crisis unfolding as a backdrop to the WSSD process, this was a factual observation. But it was unacceptable.  The counter-proposal of developed countries made no reference at all to international financial instability.

Paragraph 45 now opens with a litany of the benefits of globalisation followed by a sentence that ‘At the same time, there remain serious challenges, including serious financial crises, insecurity, poverty, exclusion and inequality within and among societies’.

The only concession by the developed countries is in Chapter IX on the ‘Means of implementation’, with Paragraph 80 stating that States will ‘Make full and effective use of existing financial mechanisms and institutions, including through actions at all levels to: ...(b) Promote, inter alia, measures in source and destination countries to improve transparency and information about financial flows to contribute to stability in the international financial environment. Measures that mitigate the impact of excessive volatility of short-term capital flows are important and must be considered; ...’ This is a much diluted form of the G77/China original proposal that called for the provision of ‘a more predictable and secure international financial environment that can contribute to the sustainable development of developing countries, by inter alia, measures to mitigate the impact of excessive volatility of short-term capital flows’.

Arguably this was the only sentence in the entire draft text that captured some of the concerns of developing countries on this issue. In order to establish a more secure global financial system the international community should be calling for greater transparency in the way the financial markets operate. Specifically, there should be more disclosure of the players and deals in the various markets, including trade in currencies. In particular, the funds available to and the operations of highly leveraged institutions such as hedge funds should be made public and subject to regulation.

At the global level, there should be a system of monitoring of short-term capital flows, tracing the activities of the major players and institutions, so that the sources and movements of speculative capital can be publicly known.

There should be greater regulation of the behaviour and operations of financial institutions. A distinction should be made between legitimate forms of investment that lead to genuine development, and unethical methods of speculation and market manipulation. Regulatory measures should be taken to prevent, prohibit or control the latter.

Unsurprisingly this sub-paragraph in its original form was not acceptable. Some developed countries were particularly insistent that the reference to short-term capital flows be dropped altogether.  This runs counter both to the acceptance that short-term flows are debilitating and to the traumatic experiences suffered by developing countries as a result of sharp and rapid inflows and outflows of massive amounts of capital.

The final compromise is weak. Although it calls for measures in source and destination countries to improve transparency and information about financial flows, this is not enough. Considered from the standpoint of systemic reform, there are no measures at all in the text to reduce volatile capital flows at the source. It does not address the concerns of developing countries over the usually supply-driven nature of volatile capital flows, which are strongly influenced by monetary conditions in the major industrial countries, particularly the US, and the herd behaviour of lenders and investors in those countries.

What is urgently needed is an international policy environment which should have been enunciated at the WSSD that treats the use of capital controls as a normal part of national financial policy with the aims of shielding a country from the turbulence of potential volatile flows of funds and of having greater stability in the exchange rate. With a more sympathetic international environment, developing countries can then feel comfortable with using the option of selectively maintaining capital controls to regulate inflow and outflow of funds. Instead the Plan of Implementation merely acknowledges that such measures are ‘important and must be considered’.

Thus, uncertainty surrounds whether there will be any adequate reforms to the international financial system and developing countries continue to be subjected to volatile capital flows. However, the small political opening from the WSSD can still support developing countries to establish a national policy framework to deal with international capital flows, if sustainable development is to take root.

Reform of BWIs

Paragraph 80(a) calls on States to use existing financial mechanisms and institutions to ‘Strengthen ongoing efforts to reform the existing international financial architecture, to foster a transparent, equitable and inclusive system that is able to provide for the effective participation of developing countries in the international economic decision-making processes and institutions, as well as for their effective and equitable participation in the formulation of financial standards and codes’.

In the draft Plan developing countries had wanted to include the use of non-financial mechanisms and institutions for this purpose, too, which meant that the UN could have had a role in financial reform. But this was not acceptable.

Calls for more transparent, accountable and participatory governance are not new and have consistently fallen upon unsympathetic ears, with the basic modalities and procedures for taking decisions largely unchanged. Hence it is unclear how the WSSD outcome can actually lead to real change, especially when developed countries jealously guard their dominance over the Bretton Woods institutions (BWIs).

It is paramount that the BWIs should give greater weight to the views of developing economies, since the raison d’etre of these institutions is now to be found mainly in their mandates and operations which take them further and further into influencing the domestic policy choices of developing countries.

If reforms to the existing financial structures are to be credible they must provide for greater collective influence from developing countries and embody a genuine spirit of cooperation among all countries, facing many different problems but sharing a common desire to see a more stable international financial and monetary system. No less than a fundamental reform of the governance of multilateral institutions is therefore necessary.

Conclusion

The WSSD text on the international financial system does not meet the much-needed reform agenda and many issues of immediate concern to developing countries. Objectives commonly shared by developing countries include: more balanced and symmetrical treatment of debtors and creditors regarding codes and standards, transparency, regulation and crisis management; more stable exchange rates among the major industrial countries, especially with respect to their effects on capital flows, exchange rates and trade flows of developing countries; less intrusive conditionality; and above all, more democratic and participatory multilateral institutions and processes.

2nd Box Article:

No progress on ODA

Goh Chien Yen

THE perpetual battle over official development assistance (ODA) once again reared its head at the WSSD. Rio Principle 7 on common but differentiated responsibilities clearly states that ‘developed countries acknowledge the responsibility that they bear in the international pursuit of sustainable development in view of the pressures their societies place on the global environment and of the technologies and financial resources they command’. The debate at the WSSD was over the intensity of the language on the commitments to make good the pledges made at the International Conference on Financing for Development in Monterrey to increase ODA and morally holding the developed countries to the formal and political target of 0.7% of GNP.

Three formulations to the paragraph on ODA commitments by developed countries were taken from the Bali preparatory process to Johannesburg. In terms of substantive content there were marginal differences. The main controversy to Paragraph 76 - eventually to be Paragraph 79(a) of the Plan of Implementation - was over the increase in ODA pledged by the US government at Monterrey. The US delegation objected to any reference in the Plan to their pledge. The US had tried to argue, during the last preparatory negotiations in Bali, that they have never linked their ODA increase with the International Conference on Financing for Development. Moreover, they argued, the plan to increase ODA has to be approved by their Congress before it can be referred to by the WSSD text.

The first point is simply counter-factual. The pledge to increase US ODA was deliberately announced at the Monterrey Conference by President Bush when he presented his official statement there on 22 March 2002. Similarly, Alan P Larson, US Under-Secretary of State for Economic, Business and Agricultural Affairs, held a press conference for this very purpose during the Monterrey Conference. The announcement was made by the head of state, who has the apparent authority to make such an international commitment. The United States is therefore bound by the representation to act in good faith to honour the pledge. Whether this succeeds or fails within its own domestic process is a separate question.

The President of the US has the ostensible authority and has made a prima facie commitment on behalf of his country. Furthermore, he was contradicted by neither any member of his Administration nor the Congress after he made his announcement in both the US and Mexico. In addition, if every international policy and decision can only be adopted after ensuring that it does not contradict the laws and processes at the national level, this will leave multilateralism a hollow and futile exercise. [Contrast this to the situation in the WTO or Bretton Woods institutions where developing countries are often compelled to change national policies, laws and even their constitution to comply with trade rules or loan conditionalities.]

Such political manoeuvrings should not distract us from the more fundamental problems concerning ODA. First, despite the announced increases, aid remains woefully inadequate. The UN and World Bank have estimated that aid has to be approximately increased by an additional US$40-60 billion per year in order to achieve the Millennium Development Goals by the internationally agreed deadline of 2015. The total increase in aid promised by the EU and US would only add up to US$12 billion, starting only from the year 2007. Even then, it is unclear that the financial resources would be forthcoming. Already at this early stage the US is refusing to internationally commit itself to live up to the pledge made at Monterrey. With very few exceptions, the developed countries have also consistently failed to deliver on their obligation of earmarking 0.7% of their GNP as ODA.

Secondly, while ODA has declined steadily over the last 20 years, reaching its lowest this year, the number of conditions attached to the aid has grown exponentially. More worrying, there is a growing convergence among the donors to impose structural adjustment type conditionality on the recipient countries. Take, for example, the additional US ODA, which is to be tied to the policy conditions of deepening market liberalisation and expanding the role of the private sector. This contradicts the current understanding that genuine country ownership of any programme is key to reforms that would benefit the poor.

Given the historical lack of accountability on ODA delivery and the asymmetrical relationship between donor and recipient mentioned above, it was encouraging that in the draft Plan of Implementation there was a paragraph inviting the UN Secretary-General ‘to monitor and report regularly on ODA commitments and pledges in order to ensure a higher degree of predictability, transparency and long-term planning’.

It was no surprise that this was opposed by the developed countries on the facetious ground that such monitoring is extant and is undertaken by the Organisation for Economic Cooperation and Development (OECD), in other words by themselves. The whole paragraph was dropped in Johannesburg.

More conditions?

While enhancing the effectiveness of ODA is necessary and agreed upon at the WSSD, there were concerns that some of the proposals by developed countries could be readily interpreted as further conditions for burdensome financial reforms and externally imposed constraints on the setting of national budgets. Secondly, the proposal to make use of ODA to ‘leverage additional financing for development’ also raised objections from developing countries. While it appears attractive, under the current neoliberal economic climate such a move would lead to deeper financial liberalisation and privatisation, and hence more vulnerabilities for developing countries. Fortunately, these proposals were removed after intense negotiations.

However, the third issue of concern made it to the final text in Paragraph 79(b). This is the endorsement of poverty reduction strategy papers (PRSPs) initiated by the World Bank for aid delivery. Such a move is premature and unnecessary. The international financial institutions themselves admit that it is too early to make a decisive assessment as to whether PRSPs have been beneficial. As a matter of fact, independent reviews by some UN agencies and NGOs on PRSPs show clearly that they have not lived up to their stated objectives.

Negotiations pulled in two directions: those that wanted genuine ownership of recipient countries so that ODA truly meets the needs of those countries, and others who sought to use aid as an instrument of donor countries’ policies and priorities.

The final compromise was an agreement to ‘make ODA disbursement and delivery more flexible and more responsive to the needs of developing countries, taking into account national development needs and objectives under the ownership of recipient countries, and to use development frameworks that are owned and driven by developing countries and that embody poverty reduction strategies, including poverty reduction strategy papers, as vehicles for aid delivery, upon request’.  Returning from the WSSD, the reality remains that there are unequal  power  relations  between  recipient and donor countries, and strong vested interests of the private sector  that  reaps  the  benefits  of ODA.            

 


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