Tuesday, April 28, 2009

Africa to Recover Slowly From Global Crisis

Africa to recover slowly from global crisis

Apr 26 2009 17:54

The global crisis has hit African countries harder than initially anticipated and the continent will lag the rest of the world in recovery, the African Development Bank (ADB) said on Sunday.

Africa has seen a sharp decline in investment flows while credit financing has dried up, chipping away at infrastructure development, ADB president Donald Kaberuka told reporters on the sidelines of the International Monetary Fund/World Bank spring meetings.

"At the beginning of the crisis we thought maybe it would take a year and a half for the effects to reach us. The effects have been faster than expected on African currencies and investment flows," he said.

"What is most damaging in this is, we have been hit faster than expected and my expectation is that once the recovery sets in, African countries will recover much more slowly than the rest of the world."

The global financial and economic crisis, stemming from the collapse of the US housing market, has decimated African exports. That, combined with declining commodity prices, foreign direct investment flows and worker remittances, has exerted fiscal pressure on many governments.

Kaberuka said there had been sharp pull backs in mining investments, with the most affected areas being in Zambia's Copper Belt, the south western Democratic Republic of Congo, Liberia and Guinea, where aluminum and iron ore projects worth billions of dollars had been scaled down by half.

"The other area, which is quite unfortunate, is infrastructure. We are beginning to see a lot of sudden retrenchment here," said Kaberuka.

Maintaining infrastructure spending is critical to attracting foreign investment in Africa, especially after years of neglect in some countries.

The World Bank on Saturday launched two new funds with an expected financing of $55-billion over the next three years to try and ensure infrastructure projects in developing countries do not dry up in the financial crisis.

The funds are expected to focus largely on projects in Africa. The World Bank estimates the financing gap for infrastructure projects could range from $140-billion to $270-billion. - Reuters

Source: Mail & Guardian Online
Web Address: http://www.mg.co.za/article/2009-04-26-africa-to-recover-slowly-from-global-crisis

Can the IMF now feed the world?

HEATHER STEWART - Apr 26 2009 07:51

Dominique Strauss-Kahn, the dapper former French finance minister who runs the International Monetary Fund, is finding it hard to conceal a certain swagger in Washington this weekend. If there is one big winner from the wrenching financial crisis of the past year, and the scramble by shell-shocked governments to tackle the turmoil, it is the IMF.

At the London summit of G20 countries this month, heads of state signed up to an extraordinary tripling of the IMF's resources, handing it the responsibility of acting as a giant economic shock absorber, to prevent a string of countries falling victim to crises. As one Oxfam campaigner said at the time: "The IMF is big, it's bad and it's back".

"I think you can say that the IMF is playing its role -- and that is the rationale for the tripling of resources," Strauss-Kahn said this weekend.

Gordon Brown claimed in London that leaders had banished the "Washington consensus" of neo-liberal economics promulgated by the US-dominated IMF and World Bank. Yet the IMF was handed a massive new mandate, and given until 2011 to finish crucial reforms of "quota and voice" -- the power each of its member countries have in the IMF's decision-making bodies.

Two years ago, the IMF, set up in the aftermath of World War II, seemed to have lost its mojo. Before the credit crunch, during the calm years that became known as the "great moderation", the IMF's twin jobs, of emergency lender to hard-pressed countries and guardian of the global system, were both in abeyance. And as lending declined, its key source of income, from interest payments, fell away.

The IMF periodically issued warnings about the risks of the "global imbalances" in the international economy -- live-now-pay-later consumption in the US and over-sized trade surpluses and vast foreign currency reserves in rapidly expanding emerging countries such as China. But plenty of thinktanks offered their own analyses of the world economy without the need for the IMF's considerable staff and resources, and governments -- including Britain's -- felt free to disregard its advice.

In the past 12 months, as a little local difficulty in the US mortgage markets spiralled into a worldwide recession, and with the global economy now expected to shrink in 2009 for the first time in 60 years, the IMF has been triumphantly reborn.

Iceland was the first desperate country to call on it for help -- and the first developed country to borrow from it since the UK, in 1976. Several others, including the Ukraine and Latvia, soon joined the club; more, including Turkey, are in fraught negotiations with IMF staff.

Strauss-Kahn arrived at the IMF in the autumn of 2007 determined to rescue it from irrelevance, but it was the credit crunch that really gave it back its job, as what he this weekend called the world's "fire-fighter".

Even the most ardent campaigners for reform agree he has made a number of key reforms. "You have to say things are changing faster than they have before -- but it's still at a snail's pace," says Peter Chowla, of the Bretton Woods Project, a UK thinktank that monitors the IMF. "A lot of the credit goes to Strauss-Kahn for pushing changes through."

Nevertheless, there is profound concern about the IMF's new, beefed-up role, especially among those with long memories. During the Asian crisis of the late 1990s, it imposed stringent conditions on many countries that came to it for help, forcing them to target unrealistically low inflation rates and implement what economists call "pro-cyclical" policies -- spending cuts and interest rate rises that can exacerbate a downturn, instead of helping. It used its financial leverage to impose the Washington consensus recipe of financial liberalisation, privatisation and tight budgets; in many cases, the results were catastrophic.

The IMF's own independent evaluation office admitted that, in the case of Indonesia, for example, "the depth of the collapse makes it difficult to argue that things would have been worse without the IMF".

The 21st-century IMF would argue it has learned its lessons. Strauss-Kahn stressed this weekend that countries receiving its loans today are not required to sign up to a lengthy list of specific policy conditions. He also published a paper saying that the IMF would give countries additional leeway, to ensure they are not forced to cut back on social spending to meet arbitrary macroeconomic targets. "I have insisted that we're focusing on core conditions, not spending too much time on things that may be good for the country, but have nothing to do with the current situation," he said.

But an analysis of the new wave of loans, by Mark Weisbrot and colleagues from the Washington-based Centre for Economic Policy Research (CEPR), finds that every one contains pro-cyclical policies. While the IMF has led the argument for large-scale fiscal stimulus in the rich world to kick-start economic growth, at the same time, the CEPR argues it is still forcing the countries that come to it for emergency loans to cut back on spending and reduce budget deficits.

For example, Pakistan had to promise to cut its deficit from 7,4% of GDP last year to 4,2% this year. "While this might be a desirable goal, it is questionable whether this reduction should all be done this year, when the economy is suffering from a number of external shocks that are reducing private demand," Weisbrot and his co-authors say.

After examining each new crisis loan, they warn that, "the re-establishment of the IMF as a major power in economic and decision making in low- and middle-income countries, with little or no voice for these countries in the IMF's decision-making, could have long-term implications for growth, development, and social indicators in many countries".

Duncan Green, head of research at Oxfam, says that whatever the message from HQ in Washington, IMF staff on the ground can't help handing out tough medicine: "It's in their DNA."

The IMF's heavy-handed tactics during the Asian crisis arguably played a role in the chain of events that created the credit crunch. It was their determination to avoid being forced into the arms of the IMF again that prompted many Asian countries to pile up huge cushions of foreign currency reserves, deliberately running large trade surpluses.

This "savings glut", as it became known, is one side of the so-called global imbalances that left the world economy dangerously out-of-kilter over recent years. Having all these savings sloshing around encouraged the world's financial system to become increasingly innovative in finding ways of investing it -- including in sliced-and-diced sub-prime mortgages and the full range of other toxic assets at the heart of the financial crisis.

It is partly this harsh lesson that has prompted one of the IMF's most important innovations -- a new lending arrangement called the Flexible Credit Line (FCL), which can effectively act as an overdraft for countries the IMF believes have generally sound policies.

In the past, borrowing from the IMF under its traditional "stand-by arrangements" has immediately been interpreted by financial markets -- and voters -- as a sign of deep distress, but the new facility is meant to remove that stigma. Mexico, Poland and Colombia have already signed up and others are soon expected to follow.

Jim O'Neill, chief economist of Goldman Sachs, says the FCL is aimed partly at providing countries with an insurance policy so that they no longer feel they have to accumulate such large foreign currency reserves at home by keeping their currencies cheap and running giant trade surpluses.

"To the extent that the FCL and similar facilities will induce emerging markets to rely less on external demand as the main driver of growth, this should boost consumption and imports in emerging market economies, and help rebalance the global economy," he says.

Marita Hutjes, senior policy adviser at Oxfam, agrees that it's a good thing for governments that qualify, reducing the specific conditions they face on loans. But she argues that it still leaves a large number of the poorest economies out in the cold.

"We do think there are serious issues, and countries need access to funds, but it needs to be broader, or something else needs to be available for the poorer countries," she says. "The IMF constantly says financial stimulus is the right thing to do for those countries that can afford it, so it's never for the poorest countries, because there's the assumption that they can't pay for it."

Donald Kaberuka, head of the African Development Bank, who was invited to the London summit, told a press conference at the IMF that efforts to protect the poorest countries from the credit crunch have so far been "timid". He warned: "They're either debt-creating, not adequate, or not likely to be effective within the time frame that's needed. We don't see how an international crisis of this magnitude can be resolved by ignoring 900-million people in Africa."

Sir Bob Geldof, who was in Washington this weekend to press a plan for the IMF to devote more resources from proposed sales of its gold reserves to the poorest countries, let loose a furious outburst about the perils of ignoring the plight of Africa in the credit crunch.

"All those arguments the activists and the politicians had for many years about aid, or debt cancellation, we can lay them to rest, because we're all begging for aid, we just call it fiscal stimulus. And we're all begging for debt relief, we just call it disposing of toxic assets," he said.

In the depths of the worst financial and economic crisis for 60 years, rich countries have so many problems to fix at home -- and among their crisis-ridden neighbours, in Eastern Europe, for example -- there is a risk that many millions of others are still unable to make their voices heard.

Brown had hoped to reach a grand bargain on the future of the Washington financial institutions at the G20 -- indeed, in the early planning stages, the London summit was envisaged as a new Bretton Woods, echoing the gathering after World War II that set up the IMF and the World Bank. Britain was optimistic that emerging economic powers, especially China, with its huge foreign currency reserves, could be persuaded to stump up more cash for development in exchange for more influence in decision-making.

What emerged was a giant sticking plaster. There was little new up-front money: much of the trumpeted trebling of IMF resources is still to be found, and the inevitable arguments about influence at the table in Washington were left to another day. China and Russia said they wanted to see a serious examination of the problems caused by the dominance of the dollar -- and by implication the US -- over the world economy; everyone else quietly ignored them.

In fact, the G20 gave Brown himself the job of coming up with sealing the next stage in the process. He has promised to "consult widely in an inclusive process and report back to the next meeting with proposals for further reforms to improve the responsiveness and adaptability" of the Bank and the IMF.

Chowla says the IMF's future will be mapped out over the next 12 months, as developing countries battle for control over its decision making, and a new generation of desperate governments are thrown into its clutches. "It's all to play for," he says.

One thing Britain could do to help seal a reform deal is offer to give up its own seat, and some of its voice, at the IMF, along with France, Belgium and others. But the more mischievous among the NGOs say that Brown is just as likely to lay the groundwork for a new posting for himself in Washington should the next general election not go Labour's way.

Strauss-Kahn is clear that he has more plans for radical reform over the next few months. Referring to a recent magazine article that summed up the reforms he has instituted as building "IMF 2.0", he insisted: "We will go further than that: we will have IMF 3.0."

It may be many years before it is clear whether Brown is right and the old Washington consensus has been supplanted by a kinder economic system -- or if unleashing the mighty power of a reinvigorated IMF is laying the groundwork for Credit Crunch 2.0. - guardian.co.uk © Guardian News and Media 2009

Source: Mail & Guardian Online
Web Address: http://www.mg.co.za/article/2009-04-26-can-the-imf-now-feed-world

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