G77 advised to work for changing crisis management, debt policies

by Chakravarthi Raghavan

Geneva, 25 Sep 2001 - A High Level Advisory Group of the Group of 77 has advised that the current approaches to managing the external debt and financial crisis of developing countries have only heightened recessionary pressures in crisis-hit countries, and developing countries should work for systemic changes and credible alternative strategies of crisis management.

The High Level Advisory Group of Eminent Personalities and Intellectuals on Globalization and Its Impact on Developing countries was convened by the Group of 77, in pursuance of the Havana Summit of the Group of 77 last year, and formulated their conclusions and recommendations on a range of issues including Trade and Development, Finance and Development, Environment and Development and Global Governance.

The report and recommendations of the Group which met in Geneva on 12-14 September, chaired by the Chairman of the Group of 77, Ambassador Baghder Asadi, Permanent Representative of Iran to the UN, will be before the next annual meeting of the Foreign Ministers of the Group of 77 and China at the UN in New York. The recommendations on Finance have been made in the context of next year’s UN-convened Financing for Development Conference (FFDC), and the need of developing countries both to address immediate problems and issues and systemic changes by using the FFDC to set in motion a process and formulating guide lines and principles and followup for systemic changes and better ways of providing more stable and effective means to finance social and economic development.

The HLAG recommendations come at a time when some of the policies and ideas advocated by the UN Conference on Development, including for application at the international level of processes similar to those of Chapter 11 of US bankruptcy law, have now been advocated by US Treasury Secretary Paul O’Neill.

UNCTAD first made the proposal for international measures akin to those in Chapter 11 of the US bankruptcy law in its Trade and Development Report 1986.  UNCTAD returned to these ideas in 1998 TDR, in the context of the East Asian crisis, and has been advocating the need for independent assessment of debt problems in developing countries, a debt standstill by debtor country, pending a solution including debt write-offs by involving creditors and debtors. The UNCTAD view was picked up by Jubilee 2000 and other NGOs campaigning on debt and reform of IMF and World Bank policies and processes.

Treasury Secretary O’Neill, in testimony before the US Senate, in the context of the Argentine crisis, said on 20 September that “in the long run he would favour the establishment of an international bankruptcy law, so that countries with excessive debt burdens could work out agreements with foreign creditors to reduce their debts instead of depending on IMF bailouts.”

In their conclusions and recommendations to the Group of 77, the HLAG said that the creation and full utilisation of domestic financial resources is a key component of any successful development strategy. However, in an increasingly interdependent global economy, the external financial environment may be as important to achieving this objective as domestic policies designed to raise domestic savings to support rapid capital accumulation and growth.

The HLAG recognized that financing development through private financial markets has become a central feature of the contemporary globalization process, and that this has occurred in an environment of steadily declining official development assistance (ODA). Although there was an upsurge in private flows in the 1990s, this represented no more than a return to trend after the blighted years of the 1980s and those inflows have increasingly been concentrated in a small group of emerging markets. Moreover, an important part of private capital inflows, motivated by speculation, has proved highly unstable triggering boom-bust cycles in some countries.

“Even the surge in FDI to developing countries has been heavily weighted towards acquisitions of service sector firms rather than greenfield investment in export sectors,” the HLAG pointed out.

As a result of capital account liberalization, “a growing proportion of net private capital inflows to developing countries is absorbed by activities that add little to productive capacity, including the accumulation of reserves as a safeguard against speculative attacks.”

The FFD Conference, to be held next year in Mexico, the HLAG said, “provides an unprecedented opportunity to find better ways of providing more stable and effective means to finance social and economic development.”

In approaching the Conference and while not ruling out specific proposals, the HLAG has recommended adopting broad guidelines and principles to ensure that the process reflected those systemic issues of concern to developing countries rather than designing a detailed blueprint of reform. “Given that any broad principles and specific proposals will have to be translated into action across a number of multilateral institutions, follow-up will be particularly important,” HLAG said.

“In light of the unbalanced representation in existing multilateral financial institutions, the HLAG sees the desirability of a new forum to monitor the outcomes of the Conference and to further pursue, on a continuous basis, the concerns of developing countries on matters of international finance.”

A guiding principle for developing countries at the FFDC must be that private financial markets cannot be relied upon to provide all their development finance needs. Accordingly:

·        The Group repeats the urgent call to raise ODA to the target levels already agreed by the international community and to make that aid more effective by decoupling it from donor demands;

·        Reiterates that while greater reliance on grants for poverty alleviation programmes in LDCs is desirable, this should not come at the expense of continued multilateral lending to middle income countries; and

·        Calls for additional financing to be made available to meet the needs arising from trade liberalization in developing countries;

On debt, the HLAG says: “It is generally recognized that the debt of many developing countries is not fully payable. To date the resolution of such debt problems has been left entirely to the discretion of creditors. As a result middle-income countries facing similar debt burdens have been excluded, and, even for those involved, excessive and intrusive conditionality has greatly slowed the process. The Group, therefore:

·        Insists that this is against the principles established in most industrial countries which recognizes debtor’s rights and extends protection to all of them;

·        Recommends an independent assessment of the debt problem in developing countries with a view to its full and swift resolution; and

·        Insists that debt relief should not be at the expense of ODA.

Financial instability is global and systemic, and the HLAG insists that reforming the international financial system cannot be left exclusively to major creditor countries. The reform of the international architecture designed to bring greater stability to international financial markets should include:

·        greater transparency of the international financial markets and institutions, including the activities and operations of currency traders and hedge funds; and

·        a more effective regulation and supervision of international capital flows, including the activities of international lenders and investors in the source countries.

The current approach to managing financial crises, aiming to keep open the capital account and meet the demands of the creditors, and policy advices flowing from this, have often heightened recessionary pressures in crisis-hit countries, and debt-restructuring programmes have all too often shifted the burden onto taxpayers by de facto government guarantees for private debt.

The HLAG therefore urged “a search for credible alternative strategies for involving the private sector in crisis management and resolution.”

The HLAG noted that a combination of temporary standstills for countries experiencing financial crisis along with stricter limits on access to IMF resources for capital account financing could offer an alternative basis for crisis management. It suggests that such limits should only be exceeded when there is a risk of systemic crisis and the explicit involvement of creditors, recognizing that current IMF quotas have lagged far behind the growth of global output, trade and financial flows, and may not provide appropriate yardsticks to evaluate the desirable limits to normal access;

Given the increased instability of the external trading and financial environment of developing countries, an effective reform of the Bretton Woods institutions should seek to improve, not eliminate, counter-cyclical and emergency financing for trade and other current transactions, the HLAG said.

In international finance, the HLAG pointed out, power and influence is heavily biased in favour of the industrial creditor countries, in particular, the three major financial powers or G3 who set their macroeconomic and monetary policies independently of their impact on capital flows to and debt burden of developing countries. Instability and misalignment among the currencies of the G3 is a major source of disruption for developing countries in the management of their exchange rates.

Given these, the HLAG insisted on making the exchange rate system integral to any discussion of financing development; and called for strengthening surveillance of the macroeconomic policies of industrial countries and suggests creating procedures and mechanisms for ensuring the coherence of those policies with stable flows of finance for development.

Pointing to the absence of effective global arrangements to achieve greater financial stability, the Group reaffirms the importance for developing countries to retain their policy autonomy with respect to the choice of exchange rate regime and capital account liberalization.

On the issues of Environment and Development, the HLAG recognized that the environment is an important issue both for the world as well as for developing countries, as the crises of resource depletion, pollution, climate change, water scarcity and so on have immense effects and implications for developing countries. As set at UNCED 1992 and the Rio Declaration, environment-related issues have to be integrally related to development, within the context of sustainable development, and by upholding the principle of ‘common but differentiated responsibilities.

Negotiations and treaty-making in the area of environment and development, the HLAG said, are very much part of the processes of international relations and have profound implications for developing countries, which should thus seriously build their capacity in this area. The forthcoming Rio+10 World Summit on Sustainable Development (WSSD) in 2002 was thus of vital importance. Whilst recognizing the worsening global environmental trends, developing countries should uphold the framework of working towards solutions to environmental problems in conjunction with development objectives and needs, and in line with the principle of common but differentiated responsibilities, the HLAG advised.

The on-going discussions on international environmental governance should be conducted within the overall context of sustainable development, by strengthening the environmental activities of the UN system and of environmental governance, for example through better coordination among the multilateral environmental agreements. And for balance to be maintained between environment and development, there should be a corresponding strengthening of the UN system’s development activities and capacity, and the enhancement of the framework and capacity of the UN in managing sustainable development, including the Commission on Sustainable Development.

On the relation between trade and environment, the HLAG pointed to the concerns about both the possible adverse environmental effects of trade and the need to prevent environmental issues from being used as the basis for protectionism against products of developing countries. International trade, and trade liberalization, under some conditions, the HLAG said, could contribute to unsustainable patterns of production and consumption. There was thus the need to integrate environmental concerns in economic and trade policy making at national and international levels, to ensure that development is sustainable.

However, in handling the trade-environment relation, developing countries and their export products should not be penalized. The issue of ‘environmental standards’ (and related concepts such as processes and production methods, PPMs, internalization of environmental costs and eco-dumping) were “extremely complex” and should not be the subject of negotiations in the WTO as they could be the basis for protectionism against developing countries’ products. In discussions of environmental standards, the principle of common but differentiated responsibilities should apply.

The HLAG advised developing countries to pay close attention at the WTO, to the relation between the multilateral environment agreements and the WTO agreements (for example, between the Convention on Biological Diversity and the TRIPS Agreement); the effects of the TRIPS agreement on the environment and on human development (including on the rights of farmers and local communities to their traditional knowledge and the use of their seeds and other resources); and the issue of domestically prohibited goods.

Developing countries should be supported to increase their capacity to participate in negotiations in the existing multilateral environment agreements, such as the Climate Change Convention and the Convention on Biological Diversity, as well as in the future processes involved in new agreements, so that they could protect and promote their interests. They should also be supported for the effective and beneficial implementation of these agreements. – SUNS4974

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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