Impact of the Financial Crisis on 3rd World Economies

11-20-08, 10:16 am

Emerging nations need their own stabilization funds, independent of the IMF, and its parent – the US Treasury which provides most of its financing. That was the conclusion of two experts at a seminar sponsored by the Service Employees International Union (SEIU) this week in Washington, D.C. Mark Weisbrot is a distinguished economist from the Center For Economic and Policy Research (a pro-labor think tank) and Martin Khor is a Cambridge-trained economist, author and Director of the Third World Network – a network of several NGOs in different parts of the developing world. Both spoke at length on the structural obstacles to serious reform of the IMF.

Despite recent leniency with Russia and Brazil in the credit crisis, the IMF has returned to its preferred role as debt collector in the proposed contractionary loans to Iceland, Hungary and Pakistan. The IMF loans will enable them only to service their debts, even if their economies sink further into crisis as a result. There will be no ability to build local savings, local investment, public health, housing, security and education services – all critical to long-term economic health. The IMF austerity policies were shaply criticized following the 1997-1998 Asian financial crisis as doing more harm than good. Further, the IMF has been tainted by repeated US 'redlining' of political adversaries.

What Secretary Paulson did in the US is prohibited in developing countries by the IMF. Thus even though the toxic financial system is (hopefully) being dismantled in the US – it is being exported to the developing countries. Nonetheless – it persists. Why? Dr. Khor explained that the IMF acts as agent for creditor nations that dominate its leadership. Its record of debt collection is good. So even non-IMF nations that lend will often require IMF approval on borrowers. While both argue for aggressive reform of the IMF governance and lending policies, Weisbrot and Kohl are convinced that what is needed is a competing stabilization fund, made practical by the emergence of many 'Southern' nations with a current surplus of hard currency reserves: Brazil, Argentina, Chile, China, India, Russia, oil-rich states like Venezuela, UAE, and others. With such a fund, Latin America and Asia need not go into deep recession, nor submit to the harsh medicine of the IMF for underdeveloped nations. Without independent stabilization funds, the impact of more or less protectionist (government subsidized) stabilization measures in the US, UK and EU will cause a swift capital flight from emerging countries to relative safety in countries with protected banks. In fact this flight is already underway. Action with the legitimacy of the United Nations, not just the G-20, or G-7 is needed to implement a new Bretton-Woods type system where limits to speculation in international exchange rates, and in capital flows unrelated to real production or trade, are enforceable, and where an international lender of last resort with an emphasis on sustainable growth not just the shortest path to debt repayment can emerge and prosper. This should result in an overall reduction of financialization privileges populating many North-South trade agreements, and an advance in trade balanced more towards trade in good and non-financial services. All over the world NGO's are being networked and mobilized to prepare for the next summit set by the G-20 to be held in April, where more substantive steps will be discussed and the US will be represented by an administration quite different than the current one.