Key issues, world economic meet

Many around the world look to the United Nations conference on the global financial and economic crisis this week with great expectations, as it should be the start of a process that could bring the UN into the forefront of tackling the greatest economic crisis in half a century.

The epicentre of the crisis is in Wall Street, a few blocks from the UN headquarters. But the developing countries that have no role in causing the crisis have suffered the most severe ‘collateral damage,’ with a loss of 6 percentage points of gross national income, as their economic growth is expected to fall from 8.3 pc in 2007 to 1.6 pc in 2009 on an average.  Moreover, this average figure hides the fact that many of them are already in severe recession.

There has been some international action on the crisis, but much of it has been by the G7 developed countries or the G20, which is an exclusive grouping. The UN conference on June 24-26 is thus the first time all the countries are gathering to decide what to do about the crisis. It is especially important for developing countries which have no other forum than the UN to mitigate the effects of the crisis and ensure it does not happen again.

Two main actions are to be discussed –how to help developing countries cope with the crisis, and reform of the international financial system. The focus should be on taking international initiatives and reforming the global system to meet the needs and interests of developing countries.

The conference will have to grapple with many key issues.  First is the foreign exchange shortfall facing developing countries, which could range from up to $1 trillion (World Bank estimate) to $2 trillion (UNCTAD estimate).  Besides falling exports and capital outflows, many countries are also facing increasing difficulties in obtaining fresh credit, all of which affect their foreign reserves position.

Special SDR

The efforts so far to help developing countries are not enough. They need greater amounts of quick-disbursing, unconditional external financing.  Furthermore, they should not be burdened with additional debt in order to respond to fallouts from a crisis they cannot be held responsible for.  These objectives can best be achieved by a special and sizeable SDR allocation. 

The agreement reached in the G20 summit on SDR allocation brings no more than $20 billion to low-income countries, but they need several times more.  Since many of these countries are on the verge of falling into an unsustainable debt trap, this should be provided through a no-cost special SDR allocation.

Second is the need for developing counties to avoid a new debt crisis. The World Bank and IMF have estimated that close to 40 developing countries are vulnerable to difficulties in having enough foreign exchange to service their loans or to pay for essential imports.

Countries experiencing large and sustained capital outflows should have the right to exercise temporary debt standstills and exchange controls, and should be granted statutory protection in the form of stay on litigation. 

Third, developing countries should be given the ‘policy space’ to enable them to take policy measures to address the crisis.  For many countries, this space has been blocked by conditions attached to loans from international financial institutions that usually impose pro-cyclical policies that worsen the recession.; forbid controls over capital outflows and debt standstill.

Fourth are the reforms needed to the global financial and economic systems.  Developing countries at the moment have little say over the decision-making process but suffer the ill effects when the systems malfunction. The required changes include: the governance, policies and roles of the IMF and World Bank; regulation of financial markets and capital flows; and creation of a new international reserves system.

On this last point, the present international reserves system based on national currencies is known to be inherently unstable, susceptible to generating unsustainable payments positions and exchange rate gyrations in countries enjoying reserve-currency status. It is essential to look into possibilities of establishing an international reserves system not based on national currencies, and the role that a redefined and broadened SDR could play in that respect.

This crisis has shown once again that globalisation has resulted in growing interdependence not only among countries, but also among various issues of concern to the international community.