martes, mayo 26, 2009

Temporary debt moratorium: constraints of a proposal

At the end of last month, the Secretary-General of UNCTAD, Supachai Panitchpakdi, a strong advocator of global free trade, proposed to implement a temporary moratorium on the servicing of the public debt of developing countries, so as to help them successfully face the international economic and financial crisis. This proposal has attracted the attention of several civil society organisations since it would seem quite reasonable to support such an initiative, nevertheless, there are some points of Mr. Supachai’s proposal that need to be more broadly revised and discussed so as to improve it or replace it for a better proposal.

The news

At the end of last month, the Secretary-General of UNCTAD, Supachai Panitchpakdi, a strong advocator of global free trade, proposed to implement a temporary moratorium on the servicing of the public debt of developing countries (DC), so as to help them successfully face the international economic and financial crisis(1). This proposal has attracted the attention of several civil society organisations since it would seem quite reasonable to support such an initiative, so long as the aim is to achieve greater degrees of freedom for DCs in their management of public expenditure policies with a view to investing in the social sectors that have long been left behind in these countries: education and health care for most people in their societies.

The components of the proposal

Nevertheless, there are some points of Mr. Supachai’s proposal that need to be more broadly revised and discussed so as to improve it or replace it for a better proposal. Previously, however, it is necessary to understand that the proposal is not constrained to the issue of a temporary debt moratorium. This is only one part of a broader proposal presented by Mr. Supachai at the ECOSOC meeting that took place at New York on April 27 of this year, which is made up of two components:

- Temporary debt moratorium for DCs: according to Supachai, the temporary debt moratorium for DCs is aimed at using the scarcer foreign exchange earnings in developing countries for the purchase of imports rather than for debt servicing. This part of the proposal is presented as a win-win strategy, using the game theory jargon, where DCs would obtain a favourable response to a historical demand on their public debt management; and industrialised countries would obtain an additional incentive in order to dynamise their stagnated economies from these released resources.

- IMF supplementary funding should serve to expand the economies of DCs: this proposal in fact had already been mentioned at the G20 meeting in April. During that meeting, the need to change the principles that have ruled the IMF in the past had been pointed out, thus making its loans to be free of conditionalities and its governance more representative of member countries, particularly DCs. Supachai thus underlines the recommendation that IMF supplementary funding should serve to stimulate and expand DC economies, the same as in developed countries, liberating public expenditure and relaxing the monetary policy. This proposal would also include a win-win strategy conceived by the world’s 10 per cent of most powerful countries for the rest of the world.

Constraints of the proposal

With regards to the first part of the proposal, it is worth highlighting in the first place that the demand to release DCs of the debt burden has never been proposed in temporal terms. The idea is to cancel 100 per cent of debt in a permanent way. The tsunami experience –which affected several countries in Southeast Asia- has taught that temporary debt reliefs, once the crisis has abated, have allowed debt-related conditionalities to be re-applied with greater harshness than before the crisis(2). Another important lesson learned from the same experience is that, under the pretext of receiving the benefit of temporary debt relief, debtors have been forced to open up to foreign investment, which has literally swept away any possibility of recovery of those domestic economies that provided work to the thousands of families that survived in those places before the disaster. That is why the demand of the Jubilee 2000 campaign –the total and permanent cancellation of debt– would be a key requirement for DCs to successfully face the crisis.

In the second place, it should be pointed out that even in the case a temporary moratorium on external debt was supported, the resources released should serve to address the substantial social debt taken on by the States of DCs(3). In fact, the lack of capacity to self-finance the basic public services offered to the population (education, sanitation and health care), owing among other reasons to a low tax pressure, has contributed to the generation and intergenerational reproduction of poverty in DCs. In this sense, debt service has competed against social services for a larger allocation of public budget, thus forcing governments to continuously fall under social moratoriums(4), above all in times of crisis. Therefore, the State’s mechanism of ongoing indebtedness should be replaced for an increased tax pressure on DCs in order to adequately finance the public services offered to the population.

Finally, if we evaluate the second part of the proposal referred to the IMF, it is clear that its reform possibilities in view of the current crisis appear to be very limited. Neither have conditionalities been eliminated from IMF loans, nor the recommendations to reform the power and representation within the Fund have varied: to constrain public expenditure and toughen the monetary policy continue to be the usual recipe of the institution, even when the industrialised world does exactly the opposite –and advisable– to promote its economies. In order to make these changes effective, the representation and voting formula within multilateral institutions, specifically the IMF, should be reformed first. Then, it would be necessary to analyse the financial reforms needed so that the future operation of the Fund turns out to be fairer for the world’s poorest nations. Until then, who is to bell the cat?

By way of summary

To sum up, the proposal for a temporary debt moratorium is quite impressive but constrained in view of proposals that are more coherent with the reality of developing countries such as the total cancellation of existing debts to date, including odious and illegitimate debts. The resources released from debt should serve in the first place to reactivate domestic markets, thus preventing the increase of poverty as a result of the crisis. Once this process has been unleashed, it will bring about an increased demand for new imports(5). On the other hand, the new role given to the IMF could not turn out to be effective unless reforms regarding the distribution of power within the institution are also put in place. In this way, it is to be expected that reforms regarding funding policies for DCs in times of crisis end up being fairer and more adequate to their needs.

Notes:

(1) www.unctad.org/Templates/Page.asp?intItemID=4819〈=1
(2) www.fpif.org/media/opeds/2005/0110Engler-debt.html
(3) In this case, we should separate the cases of illegitimate and illegal debt which should be sued for and immediately cancelled for undoubtedly violating the human rights of all Peruvians.
(4) By ‘social default’ or ‘social moratorium’ we understand that situation in which the State fails to comply with the minimum payment necessary to cover the public services of citizens. It is a concept complementary to the idea of ‘social debt’ (a concept of stock) which is shown by the accumulation of poverty in a certain society.
(5) It is necessary to evaluate the report drawn up by the UNCTAD’s Secretariat entitled “Global economic crisis: implications for trade and development”. May 2009.www.unctad.org/en/docs/cicrp1_en.pdf. This is particularly important in view of the Secretary’s recent remarks that the economic encouragement plans for industrialised countries should be used to stimulate developing-country exports.
www.un.org/spanish/News/fullstorynews.asp?newsID=15515&criteria1=comercio

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