Published in SUNS #6676 dated 7 April 2009
Bonn, 5 Apr (Martin Khor*) -- The G20 Summit in London last Thursday was
projected by the organisers and the Western leaders as having agreed to a
US$1.1 trillion package of measures to boost the sagging world economy, and
especially to help developing countries.
The trillion dollar figure was what caught the headlines. But as serious
analysis shows, this figure purporting to be new money was more hype than
reality. Some of it had already been decided long before the Summit, and
some of it reflected only an intention rather than concrete pledges.
As an incisive Financial Times article by Chris Giles commented caustically:
"Figures at the end of any international summit need to be examined closely,
particularly those presented by the UK prime minister. His reputation for
numerical inflation, repeat announcements and double-counting precedes him.
"The emphasis on quantities rather than concrete agreements also serves to
mask the big missing element in the communique: a new and binding commitment
to specific measures to clean up the toxic assets of the world's banking
systems."
Rather than the US$1.1 trillion announced, the new commitments were
estimated by Giles to be below $100 billion and most of those were already
in train without the G20 summit. While the inflation of small and old
commitments into an enormous amount "does not render the summit a failure,
the desire to produce large headline numbers as the main result of the
gathering suggests the splits on other issues were considerable," he wrote.
The biggest winner was the International Monetary Fund. It was announced
that the IMF would get $500 billion more funds. Japan and the European Union
had already offered about $100 billion each. The Summit did not formally
announce where or when the other $300 billion will come from, but unofficial
and unconfirmed reports indicated that the United States would put in $100
billion and China $40 billion.
These would be loans by the countries to the IMF, which will recycle them as
loans to crisis-hit countries that are running out of foreign reserves.
There are questions whether countries should give loans to the IMF and
whether the IMF will impose the wrong conditions when it recycles the funds
to crisis-hit countries.
According to former UNCTAD chief economist Yilmaz Akyuz, countries should
not be requested to provide loans to the IMF to augment its resources
because this would compromise the ability of the IMF to carry out its
surveillance function and to discipline the policies of countries that
provide the loans. It can obtain resources from the market or from the
issuance of Special Drawing Rights (SDRs), instead of obtaining loans from
governments.
The G20 meeting did agree for the IMF to issue $250 billion in SDRs, but
instead of its use to assist countries in need, it was decided to allocate
this to the 186 IMF members according to their quotas or voting shares. As a
result, 44% will go to the richest seven countries, while only $80 billion
will go to middle-income and poor developing countries.
As many critics of the IMF had pointed out before the Summit, it would be
dangerous and counter-productive to augment the funds to the IMF for
re-lending to crisis-hit countries if the agency does not reform its policy
conditions but continues to insist on policies that lead the countries
deeper into crisis, as had happened during the Asian crisis a decade ago.
Unfortunately, the G20 did not insist on any IMF policy reform, but boosted
its resources. This may be the most serious error of the Summit.
The G20 Communique states that it will make available $850 billion to the
global financial institutions in order to support emerging market and
developing countries, including to finance counter-cyclical spending.
"Counter-cyclical spending" is normally used to mean the kind of significant
increases in government expenditure that the United States and Europe are
engaged in, as the "fiscal stimulus" to jump-start economic recovery.
The IMF is presumably charged with the new resources to enable cash-strapped
developing countries to participate in this fiscal stimulus, which is the
newly re-discovered policy formula to get a country out of recession.
However, an analysis by the Third World Network of the nine most recent IMF
loans to countries affected by the crisis (including Pakistan and several
East European countries) clearly demonstrates that the IMF is still
prescribing "pro-cyclical policies" (policies that accentuate the downturn
in a recession) of fiscal and monetary policy tightening.
"The Fund's crisis loans still contain the old policy conditions of cutting
public sector expenditures, reducing fiscal deficits and increasing interest
rates -- which is the stark opposite of the expansionary, stimulus policies
being supported in the G20 countries," according to TWN researcher Bhumika
Muchhala.
Asia Russell, of the US-based Health Global Access Project, said that "the
IMF has imposed disastrous conditions on poor countries that have
contributed to massive under-investment in health, HIV/AIDS and education,
particularly in sub-Saharan Africa. The G20 must make sure the IMF abandons
these policies before infusing the Fund with new resources."
The same day that the G20 Summit was giving a boost to the IMF supposedly to
help countries undertake counter-cyclical policies, the IMF suspended
lending to Latvia (one of the countries it has recently extended emergency
crisis loans to) "until it sees more progress in cutting public spending",
according to a news report.