Global Trends by Martin Khor

Monday 22 June 2009

Key issues in UN meeting how to tackle 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.

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The big international 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 the developing countries that 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 on 24-26 June 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 on to.  There has been a lot of wrangling over the issues. The 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 the major developed countries have been resisting basic changes, preferring the status quo and wanting only marginal changes in existing institutions and policies. On the eve of the Conference, the hard negotiations are still taking place.

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 wants a working group to ensure that the Conference’s decisions are turned into action. 

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

Second, the developing countries want extra external financing to make up for the $1,000 billion shortfall in their countries from the reduced exports and the outflow of capital 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 these SDRs for the dollar or other major currencies, and then spend the funds.

During the UN talks, the United States has in particular been opposed to new issuing of SDRs.  It seems to fear that this may be the start of partial replacement of the US dollar as the global reserve currency, used for trade and for savings in foreign 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 an international debt court that can allow countries in trouble to declare a debt standstill, and that will arrange a debt restructuring between the debtor country with its creditors.  All the developed countries have resisted this approach to debt, during the UN talks.

Fourth, the G77 and China has 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.

The G77 and China has proposed that the IMF change its policy conditionalities.  It also wants the Conference to recognize the right of developing countries to undertake trade measures within WTO rules and to undertake debt standstill and temporary capital controls.   This is opposed by developed countries.

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 enter.

It wants 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.  They may be fearing that such a Council will threaten their domination of the system.

Fifth are the reforms needed to the global financial and economic systems.  The G77 and China wants 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 lack of reforms in these areas led to the crisis. Once the crisis appears to be over in developed countries, they may lose interest in reforms, as happened for example after the Asian financial crisis.

The G77 and China has 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 top figure prominently in the UN conference.  Even if the countries continue to disagree at the conference, they can continue to be discussed, with decision taken, if a follow-up process is agreed on.

There is a lot at stake at the Conference, which is a test whether the nations of the world can agree to assist developing countries to handle the crisis, and to reforms needed to prevent future crises.