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“Decisions should not be made in Paris and Washington”
– by Jürgen Kaiser
What effect is the international banking crisis having on the world’s poorest countries?
Over the past decade, a number of heavily-indebted developing countries were able to access loans again thanks to HIPC debt relief. They have since been treated like newly industrialising countries, but new loans are now becoming more expensive. That will make a significant difference once existing credits expire. The countries concerned will need fresh funds – not right away, but in the foreseeable future. Solvency problems can therefore already be anticipated for 2010 or 2011.
The financial crisis goes hand in hand with a dramatic economic downturn in rich countries. What does that mean for developing countries?
There are several dimensions. First of all, budgets for official development assistance (ODA) might be cut, as tax revenues in rich countries decline. Furthermore, there is less demand for the commodities poor countries export. Zambia, for example, had benefited from high copper prices on the global market in recent times, but those prices have fallen below their 2005-levels again. It is now evident that the economic success many countries experienced in recent years was entirely cyclical in nature, but not the result of genuine change in the economic and societal structure. In some cases, therefore, the World Bank is again identifying a high risk of over-indebtedness.
But lower commodity prices also mean that food and energy are becomming less expensive – two areas in which rapidly rising prices caused concern in 2008. Doesn’t that limit the negative impact to a certain extent?
Yes, but the emphasis is on “to a certain extent”; and that extent varies greatly from one country to the next. There are winners and losers depending on what a country imports and exports.
Basically, therefore, we will face well-known problems once again.
Similar problems, to be precise, because history does not simply repeat itself. Several countries have skilfully diversified their economies and are implementing more prudent fiscal policy. Such countries – Brazil, for instance – are in a stronger position now. But unfortunately the hardships troubling Argentina, for example, seem very familiar. Argentina’s recent increase in prosperity was mainly sustained by the high price for soya on the world market.
What should poor-country governments do to mitigate the crisis?
There is not much they can do compared to the rich nations. They have much less fiscal scope, because they only get loans on tougher terms. Their options in monetary policy are also very limited, because relaxing interest rates has a much greater impact on their currencies’ exchange rates. Their ability to act at the macroeconomic level is thus limited. At the same time, we must not forget that these countries are falling victim to a global crisis they did not cause.
What must rich-country governments do to keep crisis effects in poor countries at a manageable level?
It is essential that they maintain their ODA budgets. The ministers in charge must defend their funds as best they can. In times of crisis, ODA reductions hurt poor countries particularly bad. Moreover, we can already foresee future solvency problems. Therefore, the governments of rich nations must swiftly take action to set up new procedures to resolve such problems fast and in fair terms. Doing so is in their own interest, by the way. Unless something is done, we are once more heading for a needlessly tough process which, with inadequate measures, will drag on for decades – as was been the case after the crises of the early 1980s.
What do you propose?
The new model must improve on the old model in two respects. First, it must involve all creditors, in other words, nation states, multilateral institutions, the private financial sector and investors who have underwritten loans. There has been a free-rider problem in the past: if countries and multilateral institutions forgive debts, the other parties involved have a greater chance of recovering their money. The donor countries – provided they are OECD members – are organised in the informal Paris Club. In the past, they would agree, for example, to forgive an over-indebted country two thirds of its debt. Then they’d oblige that country to get the same reduction level from its other creditors too. However, countries that are over-burdened by debt do not have a strong enough negotiating position to achieve that. Little has been heard for years from the London Club, the informal group of private creditors. It is bizarre, moreover, that World Bank and the IMF seem to believe that the HIPC initiative has settled everything for good.
How can the necessary multi-party involvement be achieved?
The debt-relief procedures must emanate from the debtor, not from the governments of rich nations. And decisions on the extent of forgiveness and terms should not be made by a circle of creditors in Paris or Washington, but in an impartial process , idally in the capital of the country in question.
So you want to strengthen the position of the debtors.
The second point I want to make is that we need independent decision-making. The IMF and the World Bank determine HIPC policy and, as they are major creditors themselves, they are not independent. What is needed instead is an arbitral procedure, with creditors and debtors each appointing an arbitrator, and those arbitrators than jointly appointing a third one. This type of procedure works well in other kinds of international disputes. What we need, in other words, is something like an international insolvency procedure.
That has been discussed internationally for some time with the buzzword “sovereign debt restructuring mechanism” – with little substantial progress.
But that doesn’t mean that the subject is dead. The Monterrey Consensus called for a process of this kind, and the final document of the second UN Conference on Financing for Development in Doha in December did so too, I am very pleased to note. Germany and South Africa fought hard to make sure that the international community wouldn’t fall back behind Monterrey, and so did some other countries. As you are probably aware, Heidemarie Wieczorek-Zeul, Germany’s development minister, and Trevor Manuel, South Africa’s finance minister, were the special envoys of UN Secretary General Ban Ki-moon for Doha. In November he appointed Joseph Stiglitz, the globalisation-sceptic and Nobel Prize winning economist, to head a commission to investigate the impacts of the financial and economic crisis on developing countries. So there is hope of seeing some momentum.
What is the role played by China, India and Brazil, increasingly important creditor countries in their own right?
The picture is ambivalent. Most experts from developing countries welcome their engagement, emphasising for good reason that creditor competition gives the developing countries more room for manoeuvre and that, all summed up, more money is being made available. However, it is apparent that the new donors are not shy – quite the opposite, they often take a more hard-nosed approach and apply even tougher gagging clauses than some of the Europeans.
It seems to me that major emerging-market governments have already accepted the role of the IMF and other international financial institutions at the G20 summit in Washington in November. Of course they want to have more voting rights but, in principle, they have fallen into line with the G8 nations.
In my view, that debate is still going on. What has been proposed, so far, in the “voice-and-votes” discussion at the IMF cannot satisfy the Chinese government. It is also obvious that Beijing does not want to get involved in the Paris Club. It is too early to tell where China is heading. I think its government would probably join a sensible and fair multilateral arbitration process that is not dominated by competing creditors.
If China does not join forces with the established creditor governments, will it not be even more difficult to get all creditors together for debt relief?
That is by no means certain. As already mentioned, decisions should not be made in Paris or Washington, with all other parties then expected to toe that line. That is important in any event. The discussion over an Asian Monetary Fund as an alternative to the IMF has recently been revived. It is perhaps a good thing if there are several fora striving to reach solutions. That may yet create opportunities for a more prudent debt-relief procedure.
In 2008, governments in Europe and the USA put together packages worth several hundred billion dollars or euros to save banks threatened by insolvency. Isn’t that also a signal for international debt relief?
It does at least raise interesting questions about the responsibility of governments. However, the bail-out packages do not serve as a model. The over-indebtedness crisis of many poor countries over past decades had to do with the fact that their governments had saved systemically important companies, but then turned out to be over-burdened by those companies’ international obligations.
If the USA is able to mobilise $ 700 billion dollars to save Wall Street, it should also be in a position to forgive the debts of poor countries. And that is no different for other rich nations.
Of course they could forgive debts. But the domestic financial sector and the global financial system matter much more to rich economies than the debt burden of some small country overseas. The collapse of one single systemically important bank puts the entire global economy into a spin, as we saw in the case of Lehman Brothers. As far as the governments of the rich nations are concerned, the payment difficulties of a comparatively wealthy emerging-market country such as Argentina do not really matter in comparison.