Money should serve development

Has the world been reacting properly to the biggest economic crisis in seventy years? During the past couple of months we saw growing criticism of the G20, the group of twenty leading and emerging countries, that seem to have received the task to handle the crisis. Criticism of the rather random composition of the group: which countries are part of the club and which are not? Is it possible for such an informal group to represent the world’s population, and especially the least developed countries, which have no representatives in the G20?
The measures the G20 proposed beginning of April were also criticized. Some think the measures are not going far enough and want the International Monetary Fund (IMF), one of the ‘failed’ institutions, to solve the problem. An IMF that until this day has been in the grip of the rich countries and has not said goodbye to his neoliberal ideology. Why did the developing countries accept from the G20 that the solution would be passed largely to an institution in which they hardly have anything to say?

The Stiglitz Commission wants to be the answer of the United Nations (UN) on these questions. A commission of eighteen experts was gathered after the UN’s General Assembly requested it. The General Assembly consists of 192 member states, the whole world actually. Furthermore the president of the General Assembly, the Nicaraguan Miguel d’Escoto, invited representatives of all continents to the Commission. The Sandinista d’Escoto choose commission members who, in the past, were doubting globalisation. The Commission is resided over by Economy Nobel Prize Winner Joseph Stiglitz, who has been criticising neoliberal globalisation and financial liberalisation. He left the World Bank as head economist for that reason at the time.

The recommendations of the Stiglitz Commission should be an important inspiration for the UN Conference on the world economic crisis held in New York from June 24th till June 26th. Although there is still a lot of political tug-of-war between the recommendations of the Commission and the final text of the UN summit. Whether the summit will also have practical consequences remains unclear.

Yu Yongding and Yaga Reddy, two eminent members of the Commission, came to Brussels end of May to defend the recommendations to representatives from the civil society. Yu is an economy professor, member of the Chinese Academy for Social Studies and manager of the Institute for Mundial Economy and Politics. Reddy is a former governor of the India National Bank. Mo* was there, recorded the exchange and asked both men some questions.
Why should the proposals of this Commission be better than the ones of the many other commissions?

Yaga Reddy: Our members come from all the continents, some have managerial experience, others are academics, some come from the financial sector, others do not. This is why we are more representative than other commissions. Furthermore we did not have an inheritance we had to take into account. We were free to search for the best answers in the short and the long term.
Yu Yongding: We do not agree on everything for 100%, but we do agree on the big issues, which is a pretty good experience.
What caused the crisis according to you?

Yaga Reddy: In the larger sense it was the belief that the markets would correct themselves. Apart from that there was the excessive growth of the financial sector, where the distinction between banks and non-banks got lost, while we realize now again that banks actually deliver a semi-public service. A service that is so crucial in an economy that you cannot ever let it end up in a crush. The financial world was globalized, but the regulations were not.

Yu Yongding: First of all, the consequences for other countries of the policy of systemically important countries, such as the US, were not taken into account. The Federal Reserve conducted a very free policy. When a bubble blew, they made a new one. Without much rules. Secondly, wages were stagnating for many years in a lot of countries. To compensate the lack of buying power, people started to loan, and a free financial policy answered to that. Global imbalances strengthened that trend. In the international financial system developing countries are very vulnerable for speculative attacks. They protect themselves by saving large reserves in foreign currencies, especially dollars. They loaned those dollars to American governments and families without almost any interest. Poor countries were financing the world’s richest country, which is bad and unjust.
What should happen?
Yaga Reddy: Without any resolute action we will end up in a depression. The current stimulating programmes are more than necessary. We propose that the richest countries spend 1% of their stimulating programme to developing countries, apart from their regular help.
How realistic is that if you know that aid is already decreasing?

Yaga Reddy: The difference is that rich countries acknowledge that their economy’s recovery is easier when also the developing countries are recovering more rapidly. Apart from that we propose that the IMF elaborates a new credit facility which will be at the disposal of the developing countries, without the usual conditions that worsen the crisis. When the rich countries with stimulating programmes can fight the crisis by public investments, you should not force developing countries to save, which is what the IMF is traditionally doing. The IMF’s policy shows a lot of deficiencies, but we do not have the time to create a new institution. Which is why we propose for the IMF personnel to observe the daily management of the credit facility, but that its management will evolve more democratically.

Yu Yongding: I also think that improving social protection is crucial in many countries. People should be able to protect themselves against the risks of unemployment, disease and age. Only then will they save less and spend more. Which will put a better division of wealth on the agenda. Market fundamentalists do not like hearing that, but it is really necessary.
Is China also thinking in that direction? Last year in September I concluded that the new labour laws are indeed improving the employee’s position, but will the government continue that approach?
Yu Yongding: I think so.
Is China more inclined to believe in the European model than in the American one?
Yu Yongding: We could say that the crisis has decreased the American model’s popularity, and that the interest is going to the other side. How far it will go, is not clear for anyone.
The Commission pleads for a new reserve currency to replace the dollar.
Yu Yongding: The current system suffers from internal contradictions. The world’s reserve currency is the dollar, the currency of the US where the money policy is tuned to their own fiscal and monetary needs. They strive for their own goals without letting something or someone discipline them. There also is no alternative: when the US have no shortages, and therefore do not spend more than they earn, the world does not even have dollars. That is a paradox: the US’s debt has to increase every year – which has a bad influence on the confidence in the dollar – to provide the global economy with its reserve currency. We think the solution is creating a new global currency. The crisis causes for Keynes’ idea to resurge. The governor of the National Bank of China introduced the idea. We would not mind for the IMF to write out obligations, in his own international reserve currency, the SDR. The Chinese National Bank already said that they would like to buy such SDR obligations.

Yaga Reddy: We also propose a global economic coordination board, an organ that can tune the policies of the specialized institutions better, such as the IMF, the International Labour Organisation, or their policies regarding environmental agreements. Also the IMF and the World Bank should get a more democratic voting distribution.
What will come from all those ideas?

Yaga Reddy: The existing institutions are still embedded well and have problems recognizing their failures. Our proposals are denied now because all the attention should go to stimulating programmes and because one should not be distracted by other things. That is not an argument concerning the content. I am convinced that it is hard to enfeeble our proposals content wise. We know that not all the recommendations can be implemented immediately, but a recovery without a thorough reformation will make the problems only worse. We hope that the public opinion will support our vision and that governments will have to give in.

Yu Yongding: The settled interests will not budge without a fight. But we believe that we will win. A Chinese saying wants the world to be for the young, and I see a lot of young people these days.
Are the developing countries actually supporting your ideas? If I can count correctly, the majority of the G20 countries are developing countries and still the text of the G20 in London differs a lot from yours.

Yaga Reddy: The G20 had to answer immediately, we see the broader picture.
But you do know if India supports this text?

Yaga Reddy: I do not want to comment on that, because I do not have an official position anymore.

Yu Yongding: I believe that the majority of the developing countries supports our report, at least when they realise that it is in their interest. If they do not, I will take my bags and go home.
Do you have an alternative for the Washington consensus?

Yu Yongding: We have to free ourselves from the market fundamentalism. China could protect themselves at the time from the Asian crisis by capital controls. It was impossible to speculate on the renminbi. Meanwhile the term “capital controls” was replaced by “management of border passing capital flows”, because the term is hard ideologically. We have to reject that indoctrination. The international financial institutions should help countries doing capital controls. Liberalisation of money traffic has not helped development much.

Yaga Reddy: The Washington consensus has failed morally and intellectually, but it is not so simple to replace it. Do not forget that it was promoted at the time by the governments of the powerful countries. This is not the case with our report. For the institutions which supported this consensus, it is not easy to admit they failed. With respect to financial regulation there is less discussion between the G20 and us. We think it is more fundamental that the financial sector should only support and serve the real sector. The financial sector should not only be efficient and stable but also contribute to development and help decrease poverty. In India every year 15 million jobs have to be dropped. That is our priority.