One small step forward for all

 
Last week, something unusual happened: the international community, coming together at the UN to discuss the global financial crisis and its impact on the developing world, reached a consensus on an agreement. This spelled out the issues to be addressed and laid out the way forward.

Many had said it would be difficult for 192 countries to reach consensus, and that was why discussions should be limited to a self-selected group of 20. In fact, the UN agreement was stronger and more forceful than the G20 communique.

It also demonstrated why it was important to have an inclusive process: the G192 were willing to raise key issues that the internal politics of the G20 may have made too sensitive. For instance, while G20 focused attention on the role of bank secrecy in tax evasion, the UN agreement highlights corruption. The G20 recognised the need for a global response to the global downturn. But responses are framed at the national level, and often take insufficient account of the effect on others. As a result they have been too small and they are structured to maximise domestic impacts, not global ones.
 Moreover, developing countries do not have adequate resources for coping with the crisis. The G20 committed themselves to providing generous support, mostly through the IMF. But they did not take adequate note of the risk of poor countries undertaking more debt, and the reluctance of many to turn to the IMF for support – partly because of its history of demanding borrowers undertake counterproductive procyclical policies.
Participants at the UN conference emphasised the importance of more grant funding. The hundreds of billions (perhaps trillions) of dollars spent on bailing out the banks has put a new perspective on government expenditures. It makes claims that there are insufficient funds to finance development assistance ring hollow.

But developing countries are constrained not just by a lack of money, but a lack of “policy space”. The meeting concluded that: “Countries must have the necessary flexibility to implement countercyclical measures and to pursue tailored and targeted responses to the crisis.”

Global imbalances
One of the factors contributing to the crisis was longstanding global imbalances, and one of the sources of these was the dollar-based global reserve system. This contributes to an insufficiency of global aggregate demand, as countries divert purchasing power into precautionary savings – and such an insufficiency may impede the world's ability to regain robust growth.
While the UN meeting was not the occasion to devise a new system, it acknowledged calls for “further study of the feasibility and advisability of a more efficient reserve system”.

Unsurprisingly, some countries with large dollar reserves were concerned about the current system, the low returns and high risk – increasing with America's rising debt and the Federal Reserve’s ballooning balance sheet.
The UN meeting reinforced the need for reforms in the governance of the international economic institutions – some of which pushed policies of financial market and capital market liberalisation that were in part responsible for the crisis and its rapid spread. But it also delved into controversial issues of enormous importance to developing countries, such as migration.

The meeting reflected what is now a global consensus: “The current crisis has been compounded by an initial failure to appreciate the full scope of the risks accumulating in the financial markets and their potential to destabilise the international financial system and the global economy …” But discussion highlighted the shortfalls in the proposed regulatory reforms – for instance, the reluctance in some countries to do enough about the too-big-to-fail banks. While everyone talks about the need for transparency, some participants raised concern about changes in accounting in the US that have made matters worse.

Perhaps the most important conclusion was the most obvious: “The ongoing crisis has highlighted the extent to which our economies are integrated, the indivisibility of our collective well-being, and the unsustainability of a narrow focus on short-term gains.” We have allowed economic globalisation to outpace political globalisation – we do not have the institutions or the mindset to respond collectively in ways that advance the wellbeing of all. The UN meeting represented a small, but important, step forward.