Rethinking Bretton Woods | Wed, Jun 13, 2007
In this article Aldo Caliari analyzes the results coming out of the Group of Eight Summit 2007 in the city of Heiligendamm, Germany.
by Aldo Caliari, Center of Concern
Last weekend the Group of Eight leaders of industrialized countries (G8) held their annual summit in the city of Heiligendamm, Germany.Â A plethora of statements, as it has now become a trademark of G8 Summits, emerged from the meeting. A brief assessment of the development-related issues (debt, aid, trade, hedge funds, the "outreach-five," and climate change) follows:
DEBT: For so many statements coming out of the Summit, the G8 did not accomplish much about debt this time. According to one of the statements, the implementation of the historic multilateral commitment of up to US$ 60 billion "is well underway." This vague assessment could easily seem to be hiding what a more detailed analysis would reveal about how the initiative as such and its predecessor-the Heavily Indebted Poor Countries Initiative-are really faring. Growing evidence of the pitfalls of these initiatives is well-documented by civil society and academics, but was ignored by the G8. In fact, among the G8 documents there is one progress report that merely points out that "18 African countries have already received 100% debt relief, and another 15 African countries will receive similar debt cancellation when they reach the required standards." Never mind that less than 100% of the debt was cancelled.Â Civil society has repeatedly brought to attention the limited number of creditors the initiative covers. And never mind that in the intricate technicality of the debt relief implementation, beneficiaries will receive the total cancellation over a period of forty years, and then only if donors continue to reimburse the World Bank's International Development Association (IDA) for the lost reflows.
Earlier this year, the terrible threat of "vulture" funds"”funds that specialize in buying debt at market prices and enforcing in court, or otherwise pressing the debtor government into paying its full value-- was brought to light once again by the action of one of these funds in Zambia, a country scheduled to benefit from debt relief. The action of vulture funds is not a new issue, and was quite present in the reality of debt relief before Gleneagles. The vivid example of Zambia could have been used by the G8 (in case it needed any justification) to take some action. Since most debt claims are enforced by vulture funds in the courts of G8 countries, the laws of these countries are the ones that apply. The vulture funds are, in many cases, based in G8 countries, or could be the subject of regulation as soon as they decide to operate in one of those countries. The Finance Ministers of the G8, in a meeting last month, expressed their concern over this issue, but failed to guarantee any real action would be taken, only that they would "identify measures to tackle this problem, based on the work of the Paris Club." This solution is too weak for a long-standing problem that is so damaging to developing countries. The G8 should have pledged concrete legislative measures that G8 countries could easily follow on their own, and collectively, to give clear signals that the G8 really wants countries to benefit from debt relief and enjoy the extra fiscal space rather than lose the benefits of debt relief to commercial investors.Â
Though not as sinister as vulture funds, the actions of other private and public creditors have come to undermine the benefits of the debt relief initiative in an equally damaging way. Countries with less debt, but also without access to enough concessional funding, find themselves in need and are able to appeal to a new range of creditors. Among these actors are new lenders, such as emerging market nations, but also "old lenders," such as Export Credit Agencies. Among bilateral debts "forgiven" by G8 countries in the past, were debts to Export Credit Agencies, which lend at no subsidy, in order to promote their countries' exports. Yet, in most cases, they became part of debt relief programs where they were accounted as Official Development Assistance (ODA) and at face value (far above their real market value).
The G8 response to the problem has been to "encourage the use of the debt sustainability framework by all borrowers and creditors in their decisions." A "Charter for Responsible Lending" that seems to be in the making (although little or no public consultation on it has taken place) was mentioned by the Finance Ministers of the G8 last month. In reality, this amounts to continuing to blame the debtor for joint debtor "“creditor mistakes, and to let the creditor off the hook about their risk-taking, against all the market principles that the G8 espouses when it comes to other issues. The debt sustainability framework is especially problematic. Methodologically and procedurally flawed, developed mainly by the IMF and the World Bank, at a time that these two institutions enjoying their lowest point of credibility since their foundation, the appeal to voluntary implementation of such a framework amounts to a comfortable euphemism for inaction. But lack of action, in this case, is not neutral. Debtors have an incentive to continue borrowing and creditors have an incentive to lend due to the extra profit gained by lending in the knowledge that they are subsidized by debt relief measures-the stage is set for a new debt crisis. Only a binding framework that forces creditors to share in the losses due to irresponsible lending will realign the incentives. Unfortunately, the G8 prefers to continue punishing the debtor instead of chastising both sides equally.
AID: Just days before the Summit there were embarrassing rumors that the G8 may not even be able to recommit to its Gleneagles target of doubling aid to US$50 billion by 2010. Indeed, what credibility could such a commitment have had if two years after Gleneagles the OECD reported that aid after Gleneagles was actually in a decreasing, rather than increasing trend? According to that organization, ODA in 2006 was 1.8 percent below the ODA in 2005, even after subtracting from the 2005 figures the one-off debt relief to Iraq and Nigeria that was inflating them. In a "razzle-dazzle" fashion, G8 leaders planned to unveil a new commitment to increase financing for AIDS in Africa to US$60 billion "over the coming years."
In the final communiquÃ©, the commitment to the Gleneagles target is still there. However, when one looks at the extreme and unlikely actions OECD countries will need to make in the next three years, this looks as a simple way to postpone the embarrassment for another day.Â (Or one wonders if this is why China and other emerging donors have been invited to join the OECD, so their aid can also be counted in the pot"¦)
TRADE: Trade deserved its own separate declaration this time. In it, the G8 urged Ministers in charge of trade to provide "a solid platform for a multilateral negotiation leading to an agreement on modalities." The new target for concluding the Doha Round is, according to the declaration, the end of 2007.
The last time we knew something about the different Doha negotiating positions, they were leading to an outcome where total income losses from industrial tariffs alone for developing countries were projected at three to ten times the projected benefits from the whole round. Reports from Geneva convey a certain sense of momentum building up for a conclusion of the round, but nothing in them conveys clarity about what actually is being achieved and in which way those results will be more pro-development.
HEDGE FUNDS: The hedge funds industry showed its growing muscle is not only financial, but also political. Before the summit began, attempts by the German Finance Minister to push for an agreement on the need to regulate hedge funds were quickly opposed, mainly by the US and the UK governments, and were soon watered down to mere calls for disclosure in the interest of greater transparency. In the eyes of many analysts, transparency measures would fall far short of what would be needed to prevent the damage that may come from unchecked hedge fund activity feeding systemic financial risk, the negative impacts of hedge funds on the longer term prospects of the real economy, and their potential to undermine workers' rights and facilitate fraud. A group of US Congress members sent a letter to the White House calling attention to such concerns.Â A similar letter was sent by European parliamentarians to Angela Merkel, the German Chancellor.
As the G8 Summit drew closer, it seemed that even modest transparency requirements were too much to enforce on hedge funds. By then the discussion had taken a surreal turn into whether governments should promote a voluntary Code of Conduct or whether the industry itself should be relied upon to design such a Code and then self-monitor compliance.Â The G8 communiquÃ© merely settled for taking note of an updated report on the matter prepared by the Financial Stability Forum, and promised further work.
THE "OUTREACH-FIVE": One of the enduring challenges to the Group of Eight has always been the critique to their nature as a self-selected club of countries, with no formal platform for participation from those in the developing world who are impacted by their decisions. While the practice of having "by invitation only" developing country participants over the last few years has been part of the G8 response to such criticism, it was a novel move that this year the G8 Presidency signed a joint statement with leaders of Brazil, China, India, Mexico and South Africa initiating a formal two-year dialogue on selected issues.
But the step, while important, seems to be motivated more by necessity than for a concern about legitimacy. In fact, analysts repeatedly called attention to the futility and ineffectiveness of holding conversations on the global economy without China, or on trade without Brazil and India. In this sense, the decision is more a product of "realpolitik" than an attempt to take a more ethical approach to global governance where the interests of the poorest and marginalized are taken into account in global affairs. Regardless of its inspiration, this step will not achieve such a purpose. Mexico is already an Organization for Economic Co-operation and Development (OECD) member and the other four were invited to join the OECD last month.Â Make no mistake, governance of the rich, by the rich and for the rich, is still very much alive and kicking.
CLIMATE CHANGE: One good way to measure the real achievements at this G8 Summit is to analyze closely the decision that was hailed as its biggest success, that is, the one on climate change. The host country government, Germany, had proposed a stabilization goal of ensuring global temperatures should not rise more than 2 degrees.Â Strict emission cuts would be required to meet this goal. The Kyoto protocol expires in 2012, and taking into account that it took over 5 years to be adopted and eight more for its entry into force, Germany had taken the position that a successor protocol should be negotiated soon, and within the UN, as the previous one. With three major reports in the last year pointing out the seriousness of climate change and the catastrophic, global consequences it will have, backed by significant scientific data, Germany's proposal did not seem an unreasonable goal for this G8 Summit.
However, the US resisted the emission cuts approach, and objected to the UN-oriented nature of the proposal.Â Instead, President Bush proposed to initiate a new process that would establish a major global framework with all major emitters. The proposal rightly raised fears that it was simply seeking to throw sand in the wheels of a post-Kyoto process, and to water down whatever agreement emerged. Only later did the US announce that its proposed process would "feed into" the UN process that Germany and others supported. Lingering suspicions were not quelled by the idea of a country that has remained adamantly outside the multilateral approach to climate change convening a separate process to "feed into" a multilateral approach.
So the "triumph" came in the form of a compromise where the call for major cuts and temperature rise limits was sacrificed in exchange for a joint agreement that "the UN climate change process is the appropriate forum for negotiating future global action on climate change." Understandably, observers who have seen the US operate in global UN conferences were not very satisfied by the fairness of the trade-off. They recall that committing to negotiate does not mean committing to get anything done.
Thus, whether this particular commitment will mean anything good for the Earth, remains to be seen. In the meantime, judging by the results of this Summit, one cannot help but think the carbon emissions released in travel and preparation for it could have well been saved.