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Issue # 1421      29 July 2009

UN sets big agenda for economic crisis action

The path-breaking United Nations conference on the economic crisis has laid the ground for taking action, particularly to assist crisis-hit developing countries and reform the financial system. A new working group will follow up on the conference’s decisions. The United Nations conference on the global financial crisis ended on June 26 with an agreement to further consider translating many key issues into action. This reflects the disappointing fact that the conference failed to take immediate concrete measures to help developing countries tackle the crisis, but that such actions are on the agenda of a new working group under the General Assembly to follow up on the issues it raised.

The working group is open-ended (comprising all UN member states) and is to report back to the 64th session of the General Assembly which will begin in September 2010.

Many developing countries were represented at the conference by their Foreign or Finance Ministers, and a few by their Prime Minister or President. Most developed countries however sent low-level representatives.

Battle over role of UN

Perhaps the conference’s most important achievement is to make the United Nations an important venue again for all countries to discuss global economic issues. There is the potential for it to become the premier forum, if the new working group is allowed by the big powers to do its work well.

From the time the conference was being planned, some major countries, most notably the United States, tried to limit the scope of the discussion.

And even at the closing session, the US was placing points of concern about the final document that minutes earlier had been adopted by all countries, including itself. The US said it did not interpret the document as endorsing a formal UN role in decisions affecting the Bretton Woods institutions (the International Monetary Fund and the World Bank). In the document, the countries agreed on several aspects of reforming these two institutions.

In the recent meeting in London, the Group of 20 (comprising mainly developed countries) agreed on many concrete actions concerning these organisations, such as boosting the resources of the IMF by US$500 billion, and that their heads should be chosen by merit and not nationality.

As many conference participants remarked in the corridors and in panel discussions, if a small number of countries grouped in the G8 or G20 can agree on actions regarding the IMF and World Bank, it is unacceptable for leading members of these groups to prevent the United Nations, which is a universal and legitimate body, from similarly proposing actions concerning these institutions.

When the working group starts its work, one of the first issues it may have to settle is the legitimate and indeed the leading role of the UN in global economic affairs, and thus the right and indeed the duty of the group to discuss a wide range of actions that should be taken to address the global economic crisis.

Developing countries’ needs not met

One of these actions must be to provide funds to developing countries, since they face a massive shortfall in external financing of one to three trillion US dollars in 2009 alone.

The conference could not agree on concrete measures to provide the substantial liquidity required by the developing countries. Many of them will soon run out of foreign exchange to pay for imports or service their foreign debts.

Developed countries have the means to borrow or create money to fund the bailout of their banks and companies, and the fiscal stimulus to counter the recession. But most developing countries lack the means.

The conference called for “examination of mechanisms to ensure that adequate resources are provided to developing countries.” The working group must carry out this examination and set up those mechanisms as soon as possible to mitigate the effects of the crisis.

The developing countries under the G77 and China had proposed that US$100 billion SDRs (special drawing rights) be allocated by the IMF to low-income countries at no cost to them. Another US$800 billion should be allocated to middle-income developing countries which can be returned after the crisis is over.

The conference did not endorse these SDR allocations, and thus missed the opportunity to provide the needed liquidity to cash-strapped developing countries. This is a pity because the G20 had agreed on allocating US$250 billion of new SDRs, but since this will be allocated according to quota shares [based on wealth of country], the overwhelming share of that amount will go to the developed countries.

The developing countries’ proposal was that new SDR allocations be on the basis of need rather than quotas, and that the developing countries should be recipients.

Although this was not explicitly agreed to, the conference did recognise “the potential of expanded SDRs to help increase global liquidity in response to the urgent financial shortfalls caused by this crisis” and that “this potential should be further studied.” Thus the working group can take up this issue further, and hopefully with concrete results.

Call for debt moratorium

An issue that dominated the conference discussion was the need for action to prevent another debt crisis in developing countries. The G77 and China proposed a debt moratorium and a new international bankruptcy court so that countries facing debt payment difficulties could have a standstill in payments and a restructuring of their debts. This was supported during the conference by international organisations like UNCTAD and the South Centre as well as many NGOs.

The conference did not endorse these proposals, but agreed half way to consider them. The document recognised that “the deepening crisis threatens to increase the debt and therefore the debt sustainability of developing countries” and that there must be measures to “avoid a new debt crisis.”

It added: “We will also explore enhanced approaches to the restructuring of sovereign debt based on existing frameworks and principles, broad creditors’ and debtors’ participation and comparable burden-sharing among creditors. We will also explore the need and feasibility of a more structured framework for international cooperation in this area.”

This lays the ground for the working group to discuss the debt problem comprehensively and explore actions that include the G77 proposals.

Policy space

Another prominent issue at the conference as the need for “policy space” for developing countries, of the ability for them to choose between policy options and to make use of measures to counter the crisis. However, they are often constrained to use these measures because of conditions attached to their loans or to trade agreements or simply pressure from the developed countries or the markets.

An important part of the conference document states that developing countries facing an acute and severe shortage of foreign reserves “should not be denied the right to use legitimate trade defence measures in accordance with relevant WTO provisions, and, as a last resort, impose temporary capital restrictions and seek to negotiate agreements on temporary debt standstills between debtors and creditors, in order to help mitigate the adverse impacts of the crisis and stabilise macroeconomic developments.”

The conference also acknowledged the calls by some states for reform of the current global reserve system to overcome its insufficiencies and acknowledged the calls by many states for further study of the feasibility and advisability of a more efficient reserve system, including the possible function of SDRs in any such system.

It also acknowledged “the importance of seeking consensus on the parameters of such a study and its implementation”. This opens the door to the working group to discuss the reform of the reserves system, which has become a major concern especially for developing countries like China that hold large amounts of US dollars as reserves.

The conference also recognised the need to expand financial regulation and supervision with respect to all major financial centres, instruments and actors, including financial institutions, credit rating agencies, and hedge funds.

Call for IMF reforms

There is also a section in the document on the need for reforms to the International Financial Institutions, with details on changes to the governance of the IMF and World Bank so that developing countries have fair and equitable representation, and to “enhance the perspective and voice and participation” of these countries. They should also be better represented in major standard-setting bodies such as the Financial Stability Board and Basel Committee.

The conference also made proposals for strengthening the United Nations and its economic and social council. One proposal is to consider setting up a panel of experts on the world economic and financial crisis to give inputs to international action and political decision-making.

After the document was adopted, the US made a lengthy speech, detailing areas with which it had concerns, and it was supported by Canada.

Several developing countries, including Cuba, Nicaragua and Venezuela, also expressed concerns but these were the opposite to those of the US. They were disappointed that the conference did not go far enough either in action or in more fully asserting the authority of the UN.

The main priority now is for the UN General Assembly to establish the modalities of work of the working group, the issues it will take up, and how to translate them into action measures.

The immediate measures that need addressing are international measures to help developing countries to mitigate the effects of the crisis, especially the provision of liquidity; and the measures required to avoid a new debt crisis in developing countries.

These actions cannot wait for a report to be given to the General Assembly in September 2010. Even the formation of the international debt arbitration system should be put on the fast track.

The more structural issues such as reform of the international financial system and the reform of the reserves system could take longer to resolve, and can be reported on in September 2010.

Acknowledgements: South Bulletin, July 7, 2009

Martin Khor is the Executive Director of the South Centre,www.southcentre.org

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