7:06 AM Apr 30, 1997
G-24 STRIKE CAUTIONARY NOTEGeneva, 30 Apr (Chakravarthi Raghavan) -- The Group of 24, the developing-country grouping at the International Monetary Fund and the World Bank, have injected a cautionary note to the effusive and rosy view of the world economy projected by the IMF and the Group of 7 industrial nations, and policy recommendations flowing from them The G-24 view, on this and other issues, is in the communique, issued after the meeting on 27 April, of G-24 Ministers which preceded the meetings of the Interim and Development Committees. But while the IMF might give greater weight to the developing countries in calculating and projecting world output, but the G24 view is not very much reflected in the IMF Interim Committee's communique. In its semi-annual World Economic Outlook published on the eve of the meetings, the IMF has projected a rosy view of the world economic prospects -- projecting a 4% output growth in 1996 and 4.4% in 1997 and 1998. And while the IMF analysis of globalization did strike a note on the uneven effects, including the marginalisation of many countries and peoples, its remedy was the very same neo-liberalist medicines (open markets, reduce labour market rigidity etc) that is responsible for the negative effects of globalization that outweigh its possible pluses. A counter-view to the IMF official rosy line about the future came in a statement to the G-24 by the UN Conference on Trade and Development which said: "Current prospects for either faster growth or reduced unemployment remain problematic." The UNCTAD statement, by Deputy Secretary-General Carlos Fortin, noted that for the third successive year, world economic growth had fallen "somewhat short of expectations" and that the world economy had not yet entered into a new era of sustained growth in excess of the three percent that would allow lowering unemployment in the North and raising average per capita incomes in the South. As predicted by in the UNCTAD 1996 Trade and Development Report, slow growth continued in 1996, with more rapid expansion in some regions but feeble growth in others. Growth in the developing world, UNCTAD said, remains uneven and fragile. Latin America, while recovering from the depressed conditions of the post-Mexican crisis, had a modest 3% growth. Even in East Asia, a continuing bright spot, growth has slowed down with weakening of exports. Policies in some East Asian countries have been reoriented towards curbing external deficits and price levels and, in some cases towards handling difficulties in the financial sector. And growth in both Latin America and East Asia continues to remain, to an important degree, on capital inflows to finance increasing current account deficits. Africa, Fortin noted, had enjoyed growth in excess of 3% through a combination of factors including favourable commodity prices, substantially improved weather conditions, diminished civil strife and greater domestic factors - many of them of a "one off character". Commodity prices are levelling off, weather can't keep on improving every year and there is a limit to the peace dividend. Sustained economic growth in Africa depends, as in poor countries elsewhere, on combining policy efforts with adequate external financing. Referring to the Heavily Indebted Poor Countries (HIPC) debt initiative (which will benefit sub-Saharan Africa and could help growth, and where both the Fund and the Bank have patted themselves), Fortin drew attention to "some potential pitfalls" in terms of 'appropriate flexibility' of conditions determining country eligibility and timing of enhanced multilateral actions. Completion dates, Fortin noted, have been pushed into the future even for countries whose track records attract unanimous praise. "We should avoid giving rise to the sentiment that goal posts are being moved and that as a result relief may end up by being too late." The application of eligibility and sustainability criteria under the approved HPIC initiative also pose problems, and may result in too restrictive an approach. The eligibility thresholds in the chosen indicators of debt sustainability and the introduction of 'vulnerability factors' raising the danger that the threshold may tend to move towards the upper limits, which are too high for many countries. And sustainability is defined in rather narrow terms, which in particular exclude the fiscal burden of debt or its impact on social and human development of debtor countries. "One of the lessons of the debt crisis of the 1980s," the UNCTAD statement added, "is that muddling through raises costs for both debtors and creditors." As for the outlook in the industrial world (with its effect on the external environment for growth of developing countries), the UNCTAD statement stressed that growth in major industrial countries continued to be below rates of the 1980s. While expansion in the US has been more persistent, and Japan has finally reaped benefits of its fiscal packages, the widely expected recovery hasn't appeared in continental Europe where unemployment is at record levels. And policy in Europe continues to focus on requirements of the monetary union, rather than on employment and growth. The combination of disparities in demand growth and appreciation of the dollar has started to produce global trade imbalances similar to those in the 1980s - a growing US deficit and surpluses in western Europe and Japan. But unlike in the 1980s, expansion in the US is associated with falling rather than rising fiscal deficits. A return to a more sustainable pattern of global demand and trade balance therefore requires some expansion in the surplus countries, rather than a contraction in the US. But policy continues to be tight in continental Europe since economic performance in 1997 will determine participation in the EMU. And expansion in Japan isn't based on permanent factors: the growth stimulus of the emergency budget package has been exhausted, and current plans are to cut budget deficit through higher taxes. Thus the contribution of Europe and Japan to a more balanced pattern of global demand still seems remote. The tightening of monetary policy in the US, Fortin warned, may not be limited to widening the global deflationary gap. Coming on top of an ongoing upward pressure on the dollar, its likely effect will be to increase rather than reduce the trade imbalances. And a combination of slow growth, rising unemployment and increased trade imbalances could make it more difficult to resist protectionist pressures in the North and avoid trade frictions. The more restrictive monetary policy in the US could also lead to a generalized increase in interest rates which could cut short recovery in Europe (as it has already done twice in the recent past) and could compromise the ability of developing countries to continue as a major source of global demand expansion. The most pressing problems of today are slow growth, high unemployment and widening income inequalities. Core consumer price inflation in the US has shown no tendency to rise, and reaction of financial markets to monetary tightening has been a sharp reduction in asset prices -- not what should occur if policy action were interpreted as producing a fall in expected future inflation rates. Continental Europe has its lowest inflation for decades, but also its highest unemployment. Above all developing countries are extremely susceptible to hikes in interest rates and reversal of capital flows. Welcoming the IMF Board's decision approving the New Arrangements to Borrow, UNCTAD said the policy options should not be limited to initiatives designed to avoid default by the debtor country and the macroeconomic adjustment agreed in accordance with procedures under which financing is made available. They should also allow for a more active approach towards capital movements at the national level. Prudential regulation and supervision is a must, but more is needed than that. Several developing countries have shown that regimes involving taxes and controls directed at capital transactions can reduce the likelihood of speculative capital movements, and can slow them if they begin. The IMF Articles of Agreement have provisions for policy autonomy on capital movements "and we consider that maintenance of such autonomy for developing countries should continue to be a feature of international monetary and financial system," the UNCTAD official added, in effect opposing the IMF management's push for changes in the Article VIII of the IMF charter to promote capital account convertibility in the developing world as an obligation, with restrictions only after IMF sanction. In its statement before the G-24, the chairman of the Group of 77 (at the UN in New York), Amb. Daudi N. Mwakawago of Tanzania called for strengthening of the collaboration between the UN system and the BWIs. In such collaboration, the G77 attached priority importance among others to poverty eradication, stimulating and sustaining economic growth in developing countries, sustainable development and "people-centred structural adjustment programmes". The UN system and the Bretton Woods Institutions, the G77 said, should jointly explore the alternative models of structural adjustment, especially those that have built-in the social dimension in the adjustment process, rather than devising measures to deal with social consequences of structural adjustment after the fact. In their communique, the G-24 said that the pre-emptive monetary tightening (in the US) to deal with risk of inflation, should not be pushed to the point where it will lead to higher international interest rates that constrain investment and growth. The simultaneous pursuit of fiscal consolidation in the runup to the EMU in a number of European countries, and the withdrawal of fiscal stimulus in Japan, are placing at risk the growth momentum in large parts of the industrial world, with significant spillover effects on developing country exports and growth, the G-24 said urging these countries to "calibrate" their macro-economic policies towards a sustainable growth-oriented stance. While globalization brings both opportunities and risks, "presently it appears that these are unevenly distributed because of imperfections in factor and product markets." A more equitable distribution of benefits and mitigation of risks require careful management of public policies and coordination of national policies dealing with markets, as well as stronger international support for improvements in infrastructure and human resources in developing countries. The consequences of a single currency in Europe as a result of EMU are bound to be far-reaching for the international monetary system, and there is hence an urgent need for the IMF to exercise leadership to ensure that the transition to a tripolar currency system proceeds with much closer international coordination to minimize instability in exchange and capital markets, and enhance the prospects for global prosperity. "There are major implications of the EMU for Fund surveillance, and it is important to ensure that the current, undesirable asymmetries in the application of surveillance are not further intensified by the advent of the EMU," the G-24 said. On the HIPC initiative and the Extended Structural Adjustment Facility (ESAF) of the IMF, the G-24 called for expediting the HIPC initiative and for its terms to be made more flexible to enable more indebted countries to reach debt sustainability as early as possible. The time frames in getting countries to the decision and completion points need to be shortened and conditionality made more realistic. Prolonged delays in dealing with debt overhand will undermine the effectiveness of the initiative, endanger sustainability of adjustment efforts and erode domestic political support. There is need to ensure maintenance of adequate concessional resources to HIPC beneficiaries, with more equitable burden-sharing arrangements among creditors that take into consideration financial integrity of the multilateral financial institutions. The G-24 called for early agreement on financing the interim ESAF and special ESAF operations under the HIPC initiative. Bilateral commitments to ESAF to date remain inadequate and enough bilateral contributions need to be provided in the context of equitable burden sharing among all Fund members so as to remove pressures limiting eligibility and scope of debt relief. The sale of a portion of the Fund's gold holdings would be a valuable supplement to bilateral contributions. On capital account liberalization, while welcoming the IMF work and leadership in this area, the G24 underscored the importance of reaching consensus on a wide variety of issues before considering any possible amendment to the IMF Articles. These issues include inter alia a clear and workable definition of capital account transactions to be covered under such an amendment; the advantages of permanent price-based controls; consideration of restrictions placed for prudential reasons; the need for flexibility to reimpose restrictions under specific circumstances; and the confidence that IMF assistance would be available to all members facing volatile capital flows. Several conditions need to be in place to ensure success of liberalization, including a sustainable macroeconomic framework, well-capitalized banking institutions, and clearly defined legal and institutional arrangements. On the Governance issue (which the Fund and Bank are making into conditionalities), the G-24 noted that the principles of good governance of nations include transparency, accountability and the rule of law. "International financial institutions, in following these principles in their own operations, should adhere strictly to the mandates embodied in their respective Articles of Agreement," the G-24 said and called in addition "for the fuller participation of developing countries in the decision-making process of the institutions, as well as in their management and staffing patterns". In other comments and views, the G-24: * noted that while private capital flows to developing countries was expanding, they continue to be channelled to only a few, while ODA was showing a disturbing downward trend; * stressed the critical importance of ODA for the poorest countries and noted that private capital flows are no substitute for official flows for facilitating growth and alleviating poverty; * expressed their deep concern that IDA-11 contributions are not adequate even to support current levels of lending, and urged the Development Committee to work towards modalities to provide adequate long-term financing for IDA; * welcomed draft outline of the amendment on special SDR allocations, and urged early agreement on current proposals for a special allocation of a minimum of SDR 22.4 billion; * urged expediting efforts to reach agreement on IMF's 11th General Review of Quotas, leading to a substantial increase in quotas; The ministers were concerned over relative decline in quota share of developing countries, and underlined the importance of maintaining the existing balance in representation of members and regions on the Executive Board. The distribution of the 11th quota revision should be predominantly "equiproportional" and a review of the number of basic votes is long overdue. * the Fund's net income targets should be reduced so as to bring down the rate of charges, in view of the large accumulation of reserves and precautionary balances in the Fund; * expressed their concern over the slow progress in finding long-term solutions to the resource constraints of MIGA (the World Bank's multilateral investment guarantee agency) and urged urgent attention to this critical issue in view of its constraining impact on beneficiary countries.