Blog Post

The Ruses of the crisis

Jean Pisani-Ferry believes that while the G20 countries did not agree to change their individual policies, they did rally round what is starting to look like a global policy. He looks at the creation of Special Drawing Rights (SDRs); the significant increase in the resources of the international financial institutions; decisions and shortcomings regarding governance […]

By: Date: April 4, 2009 Topic: Global Economics & Governance

Jean Pisani-Ferry believes that while the G20 countries did not agree to change their individual policies, they did rally round what is starting to look like a global policy. He looks at the creation of Special Drawing Rights (SDRs); the significant increase in the resources of the international financial institutions; decisions and shortcomings regarding governance of the IMF and Wolrd Bank and finally regulation. For the author, the contours of economic and financial governance at a global level have been defined during the summit.

At the world economic conference of 1933 in London, it was with a killer telegram about the [monetary] ‘fetishes of so-called international bankers’ that Roosevelt put paid to already very wobbly international cooperation. Given a Barack Obama determined to break with the unilateralism of George Bush, the London summit did not have any such risk to contend with. But a limp compromise would have been sufficient to ignite economic nationalism.
The summit of 2 April clearly sought to project the opposite image. So what actually came out of it? On coordination of national stimulus packages, the divergent views were well known: the Americans wanted their partners to do more and Europe considers it is already doing enough. They had no chance of being reconciled, and were not. Beyond the rhetoric the summit took no action. But it was agreed that the IMF would be tasked with evaluating national initiatives and making proposals. So the ball is rolling. If growth does not recover in the coming months, the IMF will certainly be drawing attention to the failings and tabling a plan. It remains to be seen what will happen as a result but at least there now is a monitoring system in place.
In spite of IMF insistence, there was no reference either to a parallel assessment of national programs to rescue and restructure the banks. On this account there is ground for disappointment. A cleaning up of banks balance sheets is arguably the first priority, yet governments procrastinate as if they had not learned the lessons from Japan.
However, while the G20 countries did not agree to change their individual policies, they did rally round what is starting to look like a global policy. The significant increase in the resources of the international financial institutions is key because developing countries are facing an abrupt drying up of capital inflows – from 800 billion USD in 2007 to probably less than 200 USD this year – which for many of them implies balance of payments crises and recession. Public flows therefore had to step in to replace private money. The commitments made (250 billion USD for the IMF immediately, 250 billion more in the short term and 100 billion for development banks) are credible. Alongside this, the IMF is setting up a flexible credit line in order to lend for the first time without any economic policy strings attached. This is a genuine concerted global boost for the South worth potentially around four percent of the GDP of the countries eligible.
A more surprising decision is the creation of Special Drawing Rights (SDRs), the IMF-issued international quasi-currency, to a value of 250 billion USD. By distributing SDRs for free, the G20 is seeking to avoid countries acquiring such reserves by accumulating current account surpluses and thereby helping to deepen the recession. In doing so, they are dusting off a largely forgotten instrument with a circulation today of a mere 20 billion USD and which only the Chinese had shown any interest in recently. No one knows when the SDRs will actually be allocated and since the decision has been to go for a ‘general allocation’ in proportion of quotas, many countries will be handed over liquidity they do not need. But the symbolism is strong. Against this background decisions about the governance of the IMF and the World Bank fall short of what would be required to ward off widespread suspicion among the developing countries, especially in Asia. The commitment to a further quota reform is a weak one that mentions dates but does not set targets nor even a direction. In a similar vein the declaration indicates that the heads of the institutions


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