TWN Info Service on Finance and Development (Oct12/04)
17 October 2012
Third World Network

Analysis of G24 Ministers communiqué at IMF-World Bank Annual General Meetings in Tokyo

G24 developing country Ministers express multiple concerns on economic recession, IFI governance and development finance

(Bhumika Muchhala – Tokyo) The communiqué issued by G24 central bank officials and finance ministers at the IMF-World Bank annual general meeting in Tokyo last week highlighted three major issues, that of securing global economic recovery, the contraction of development finance and the pending governance reforms in the IMF decision-making executive board.

The G24 group is composed of African, Asian and Latin American country clusters. There are 9 African countries, 5 Asian countries and 8 Latin American countries. The chair of the G24 is India, and the First and Second Vice-Chairmen are, respectively, Mexico and Egypt.

The Group of 24 (G24) ministerial meeting was chaired by the Finance Minister of India, P. Chidambaram. He opened the meeting by calling on all advanced economies to take immediate and concerted policy actions to securing global economic recovery. The G24 identified policy uncertainty, particularly in the Euro region, as the key factor impeding the restoration of confidence.

The communiqué states three areas through which recovery should be pursued - that of “appropriate macroeconomic policies, the promotion of open trade and investment, the repair of financial sectors, particularly in the major financial centers and vigorous structural reforms, while preparing the foundations for credible medium-term fiscal consolidation, once the recovery is on a sound footing.”

The global crisis of unemployment was emphasized in the communiqué, which agreed to “focus on job creation and the establishment of effective and fiscally sustainable social safety nets that protect the poor and vulnerable.” The communiqué makes note of the findings of the World Bank’s World Development Report which says job creation is the “most effective means to reduce poverty, empower people, and promote social cohesion.”

At the press conference of the G24, the G24 Chairman said that the problems in the Euro area are significantly affecting developing countries. He said that “when we last met six months ago things were very bad. Today, it doesn’t seem any better, in fact it may have become slightly worse. Europe must recognize the impacts it has on middle-income and small and vulnerable countries.”

Alarms raised on commodity price volatility and speculation

G24 ministers raised alarms on the excess volatility of commodity prices, especially in food and energy, which adversely affects all of their developing countries, especially the most poor and vulnerable segments of their societies. Their communiqué stated, "We continue to urge AEs (advanced economies) to adopt policies that reduce volatility of capital flows and speculation in commodity prices, while resisting protectionism and phasing out export subsidies." However, the communiqué refrained from making any explicit connection between volatile commodity prices and the speculative financial trading that has skyrocketed in commodity markets since the outset of the financial crisis in late 2007.

The link between food price rises and financialisation was made at a G24 press conference, where Indian Finance, P. Chidambaram, called for curbing the role of speculators in the commodity futures market, saying that action must be taken against the “excessive financialisation of commodity prices.” Rising food and commodity prices and commodity prices have adversely affected growth and social stability, as well as health, nutrition and education in poor countries, he said.

In response to a question from the press on the impacts of developed country monetary policies on developing countries, the G24 Chairman stated at the press conference that developing countries are concerned that the liquidity injected into Europe, as well as into the US and Japan, may further elevate prices and increase speculation, especially in commodities such as crude oil, wheat, cotton and metals.

A key area in which the G24 communiqué remained silent in this meeting, though it was covered in previous communiqués, is that of the IMF’s framework for capital controls, which would be used as staff advice to member countries on managing capital flows and get included in IMF surveillance reports. In 2011, the G24 stressed that the IMF must adopt an “open-minded and even-handed approach to the management of capital flows and take into account policies in capital-originating countries,” in particular the systemic financial centers in the US and the Eurozone.

Developing countries repeat longstanding call for governance reform

The G24 Ministers expressed concern that the 2010 IMF quota and governance reforms did not achieve the required voting power majority for approval by the deadline set of the current Annual meeting of October 2012. “This can result in serious reputational risk for the Fund,” the communiqué stressed.

G24 Ministers also expressed concern that the reconfiguration of the Board will not effectively result in an increase in the number of chairs held by emerging market developing countries.

A longstanding call for a third chair for Sub-Saharan Africa on the IMF’s decision-making Executive Board was reiterated, with a caveat consistently repeated by the G24 that this third chair does not come at the expense of a chair held by an emerging market developing country.

This statement alludes to discussions among the G24 Ministers that a third African Executive Director must be in place of a chair held by an advanced economy, for example, one of the several European countries that possesses its own chair, without having to represent a group of countries the way all developing countries, and many developed countries, have to. Alternately, the 24-seat Executive Board could expand to 25 seats; however, there are several countries both developed and developing, that do not favour this option.

The G24 communiqué stressed that “the ultimate goal” of governance reforms in the IFIs must be to “better reflect the growing role of emerging market developing countries as a whole in the global economy, while enhancing the voice and representation of poor and small low- and middle-income countries.” For the G24 Ministers, addressing the legitimacy deficit in IMF governance requires addressing the deficiencies in the existing quota formula.

The G24 has long asserted that the IMF’s quota formula, by which voting power is allocated to countries, does not reflect the relative weights of IMF members in the world economy. The communiqué points out that the world economic landscape has “changed substantially in view of growth in the dynamic emerging market developing countries.” The communiqué states that the G24 believes that “GDP at PPP (purchasing power parity) terms is the most robust measure of comparable economic weight and that it will be imperative to increase its role in the formula, while reducing the size bias through adequate compression and to eliminate or address the serious shortcomings in the openness and variability measures.”

At the G24 press conference, the Chair of the G24 and Indian Finance Minister P. Chidambaram emphasised that there is broad agreement among G24 countries, and among the BRICS countries in particular, that PPP has to be prioritised in a revised formula. Chidambaram said that while many developing countries are open to considering a blend of PPP and market prices, there is a general view among developing countries that the “variability of trade openness should not be a factor” in an improved quota formula.

The G24 continues to note that increased voting share for one developing country should not come at the expense of another developing country, which is what had occurred in a previous increase in the voting weight of some middle-income developing countries. The communiqué states that it is “equally important to consider how the quota formula can ensure equitable representation of all members, especially poor and small low- and middle-income countries.”

Surveillance and lending

The G24 Ministers communiqué recognized the adoption of the 2012 Decision on IMF Bilateral and Multilateral Surveillance as a “further step in adapting the Fund’s surveillance to the evolving global landscape and to allow the Fund to engage more effectively with members.”

However, the communiqué underscored that “the effectiveness and traction of IMF surveillance will depend on the quality and even-handedness of its analytical work and advice, its focus on bilateral surveillance and multilateral spillovers that have global systemic effects, and on further progress on governance reforms.” This echoes many previous calls by the G24 for greater efforts by the IMF to be “even-handed” in the economic assessments of member countries, so that developed countries are also judged and advised by the same criterion and rigor that developing countries are.

The IMF announced in late July a new decision, titled “integrated surveillance decision (ISD),” which establishes a comprehensive framework for the Fund’s bilateral and multilateral surveillance of member countries and the global economy. Set to come into effect in January 2013, the ISD sets out how the IMF will interact with each member and what analyses it will make of their economies. The new principle guiding the ISD is that “a member should seek to avoid domestic economic and financial policies that give rise to domestic instability.” However, there is no clear definition of what exactly constitutes domestic instability, and there is skepticism on the scaling up of the IMF’s interventions in domestic policymaking and reform.

With regard to IMF lending, G24 communiqué welcomed the recent decision of the IMF Board to allocate the remaining windfall gold sales profits for concessional lending to low-income countries through the Poverty Reduction and Growth Trust (PRGT). The G24 also repeated their “strongly held view that financing from IFIs should be based on their development merits, and not on political considerations.”

A projected decline in World Bank lending concerns the G24 at a time when many developing countries require “stepped-up and longer-term financing at affordable cost.” The communiqué thus reiterates calls from 2011 for new solutions to bolster the financial capacity of the World Bank and the International Financial Corporation, including a discussion by the shareholders on the adequacy of their capital.

The G24 Ministers also “welcomed the increased attention being paid by the World Bank to remain engaged with middle-income countries (MICs) to both serve their own development needs and to draw upon their capacity as development partners.” They urged the Bank to improve the flexibility and responsiveness of its policies and instruments.

Broader international support was called upon by the G24 Ministers for the Arab countries’ reform efforts, and on the IMF and World Bank to “step up their analytical work, policy advice, technical assistance, training and financial support to the Arab countries in transition.” However, the G24 also cautioned that “due regard should be given to social and political realities” in the Arab region, and that “policy options” should be given by the IFIs which support domestic policy efforts to boost confidence and growth.

At the end of the communiqué mention is made of the need for a more “comprehensive and durable solution through support for long-term development including investments in sustainable agriculture.” The Bank and Fund are called on to provide adequate support to countries and regions affected by food shortages and other calamities, including in the Sahel.

New G24 demand for infrastructure financing

In the wake of growing gaps in development financing, overall credit crunch in commercial banks and impending declines in World Bank lending, the G24 ministers stressed the importance of mobilising resources and investments, particularly in infrastructure.

The communiqué invites public-private partnerships to leverage private resources for infrastructure financing while also emphasising support for South-South cooperation. The G24 specified that “private sector engagement in infrastructure investment (including through the creation of a pipeline of bankable projects)” is vital, as is the acknowledgement of the “important role that multilateral development banks play in helping to catalyze private sector financing for infrastructure.”

The communiqué stresses that the existing financing architecture and institutions must be strengthened, including through governance reforms.

Development processes under the United Nations welcomed

The outcomes from the recent UN Conference on Sustainable Development <http://www.un.org/en/sustainablefuture/index.shtml> (Rio+20) and the establishment of an intergovernmental process under the UN General Assembly to assess development financing needs was welcomed by the G24 Ministers. The Ministers reiterated the “importance of developing countries having steady and predictable access to adequate financing from a variety of sources, in order to sufficiently support them in their efforts to promote sustainable development.” The forthcoming UN report proposing options on an effective Sustainable Development Financing Strategy is anticipated.

On the internationally agreed Millennium Development Goals, the communiqué reaffirms a commitment to making every effort to accelerate the achievement of the MDGs by 2015 and to strengthening international cooperation to address the persistent challenges related to sustainable development.

The shortfall in aid is of “extreme concern” to the G24 and a call on all donors to meet their commitments fully and on a timely basis is asserted.

Another concern is the growing gap between the scale of climate finance needs and the delivery of resources that advanced economies had committed to provide, including the initial fast-track commitments, which will expire this year. The communiqué reiterates the importance of the UNFCCC Green Climate Fund for mobilizing proposed international climate financing and calls for it to be made fully operational.

The text of the G24 communiqué is available at: http://www.imf.org/external/np/cm/2012/101112.htm