The Hindu Business Line : Fund-Bank meet

This year's annual Fund-Bank meeting has sent no strong signals of co-ordinated initiatives to strengthen recovery and restore the growth momentum. For developing countries, even the modest expectations raised in Doha, Monterrey and Johannesburg failed to get a strong reaffirmation, let alone a renewed commitment by the developed nations, says S. Sethuraman

TRADITIONALLY, industrial nations hold sway at the annual meetings of the IMF and the World Bank, given their economic might and dominance of the Bretton Woods twins, which have, through the decades, functioned as guardians of an iniquitous world order. But even these institutions have come to realise the basic challenges and harsh realities of the poor two-thirds of the world, for which globalisation cannot provide instant solutions in the existing structure of economic relationships between the `have' and `have-not' nations. Much as its champions in the advanced countries would disagree, the fact remains that successive shocks and turmoil in the financial markets have taken the sheen off globalisation, whose risks are now perceived to be far more serious than the covetous opportunities it may seem to offer. Hence, one sees calls from the IMF for the urgency of structural reforms in the developed nations (the US, Europe and Japan) for a stable world economy and sustained growth before the developing countries could be expected to integrate themselves as one world. There are now signs of a greater willingness within these institutions to come to terms with the resistance that has built up in civil society against the one-size-fits-all approach.

This year's annual meeting in Washington took place (September 28-29) in the context of the continuing slowdown in the world economy with several grim elements in the situation, the collapse of equity markets, corporate and accounting scandals, tremors in exchange rates, volatility in oil prices, dwindling capital flows (of deep concern to developing countries), and above all, the beating of war drums by the Bush Administration to unseat the Saddam Hussein regime in Iraq.

The confidently assumed recovery in the world economy has not materialised in the first three quarters of 2002. The IMF had warned in its World Economic Outlook that concerns about pace and durability of recovery had risen significantly. How to stabilise the world economy, boost investor confidence and provide the sinews for growth of the poorer countries ought to have been the focus of the 184 finance ministers who had gathered. But no strong signals of co-ordinated initiatives to strengthen recovery and restore the growth momentum, at least in 2003, came out of the two-day session.

The US Treasury Secretary, Mr Paul O'Neill, who cavils at policies of other countries, contended that the American economy was "firmly rebounding" and vigorously putting measures in place to improve corporate disclosure, enhance accountability and strengthen audit independence. He made a bald assertion that all industrial nations should implement sound macroeconomic policies and structural reforms to promote sustained growth. With its own corporate, fiscal and current account weaknesses and negative economic indicators, the US is hardly in a position to spell out what all of them (the US, Europe and Japan) have to do to create confidence and become `multiple engines of growth'. But did he have anything to offer to the poor countries in terms of the economic superpower playing a more constructive role in aid and trade issues that were uppermost in the presentations of the IMF and Bank chiefs besides those of African and other developing nations? All that he did was to urge all countries to work with the US in trade cooperation "as we seek to make substantial progress in the Doha Development Round". There was plenty of `advice' to emerging markets and other developing countries on what they should do "to rule justly, invest in people and expand economic freedom". The IMF Managing Director, Mr Horst Kohler, voiced concern at the meetings that benefits of globalisation have not been shared equally around the world, and said globalisation has to become "better and inclusive". While the World Bank President, Mr James Wolfensohn, called for a "new multi-lateralism" which would include voices of the civil society and the private sector, he also urged the international community to begin to deliver on the commitments made in Doha (trade), Monterrey (aid) and Johannesburg (environment).

However, the deliberations in Washington were largely limited to crisis prevention, sovereign debt default, strengthening the IMF-Bank debt initiative for heavily indebted poor countries and "in-house" reform of the Fund — surveillance, conditionality, and so on. Mr Kohler has been at pains to emphasise that the IMF is going through a process of change, learning lessons from the past, making itself more open to dialogue, strengthening its surveillance with "core" indicators aimed at crisis prevention and evolving clearer and more predictable policies on access to Fund's resources. The revised guidelines on conditionality approved by the IMF Executive Board lay emphasis on national ownership of reforms and tailoring of programmes to member-country's circumstances and clarity in the specification of conditions. The IMF, which used to advocate liberalisation of capital account, is now reconciled to a more cautious approach by countries, saying it could be safer to start with liberalising longer-term flows (FDI) than with the more volatile short-term flows. Mr Kohler, however, regards the outcome of the Fund-Bank meetings as "productive and successful" and notes there was "realistic confidence" that economic recovery would continue, though none of the series of downside risks the IMF has listed has disappeared. His own inference is that everyone now wants "better globalisation", a direction in which the IMF would now carry on its future work.

The only tangible outcome would appear to be the International Monetary and Finance Committee's agreement on restructuring sovereign debt in a "timely, orderly and less costly manner while promoting asset values and creditor rights", as Mr Kohler put it. The high-powered IMF committee has approved the first part, collective action clause (CAC), which could be included in international debt instruments allowing for renegotiation when the borrower is in debt difficulties. The IMF has been asked to prepare a concrete proposal on the controversial second part, namely, sovereign debt restructuring mechanism (SDRM), to be considered at the 2003 spring meetings of IMF/World Bank Committees. Bankers and investors are strongly opposed to the induction of "bankruptcy procedure" of the US' Chapter11 type, which they contend would choke the flow of new funds to developing countries, or to any outside institution being given the right to authorise a standstill on interest payments. They prefer debt restructuring to be based on a contractual rather than statutory approach.

Even if these proposals are beaten into some shape next year, it can offer little hope for Latin America, especially Argentina, which for nine months has been trying desperately to secure a rescue package from the IMF. After the biggest debt default in history, Argentina is in deep distress, with its economy contracting by 20 per cent in 2002. Mr Wolfensohn, who vehemently argued the case for large development flows and removal of trade barriers by industrial countries, had the limited satisfaction of some countries agreeing to fill the gap of roughly $1 billion in the trust fund to provide debt relief to the heavily indebted countries, especially in sub-Saharan Africa. But what 15 countries had offered was only a fraction of the shortfall. The US takes its time to do its part, if it is agreeable.

While developing countries look forward to the twelfth review of IMF quotas which they hope would better reflect the relative positions of countries in the world economy, Mr Paul O'Neill virtually shot it down saying that limiting financial resources is "key tool for increasing discipline over lending decisions". This should be of no surprise as the US has been consistently opposed to enlarging quotas or making any special allocation of Special Drawing Rights even when the IMF makes a technical case on grounds of liquidity needs of world economy. Mr Kohler had argued the need, saying it would not be prudent to allow the size of the Fund to shrink in relation to the global economy. The IMF expects to proceed with the technical work in the hope of decision at an "appropriate time".

Unfortunately, for the developing countries, even the modest expectations raised in Doha, Monterrey and Johannesburg failed to get a strong reaffirmation, let alone a renewed commitment by the developed nations. It is becoming increasingly irrelevant for developed nations, notably the US, to insist on market opening and structural reforms in developing countries when they are not implementing what is expected of them for their domestic economies and when they are not willing to make sizeable contributions toward the Millennium Development Goals, especially poverty reduction.

The virtues of free trade will fall flat so long as industrial countries do not lower their tariffs on agricultural products and manufactures of developing countries and doggedly stick to huge subsidies to their farmers. Mr Nicolas Stern, Chief Economist of the World Bank, called it "hypocrisy" to encourage poor countries to open their markets while imposing protectionist measures that cater to powerful interests. He said that rich countries should lead by example.

(The author, former Chief Editor of PTI, is a New Delhi-based freelance journalist.)

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