Changing the paradigm: What Brazil wants from the G20Original
Changing the paradigm is the most important issue: it’s time to stop with the 'pain ideology' that imposes unrealistic conditionalities on 'irresponsible governments'.
The French president's priorities for the G20 meeting in Cannes this week involve a discussion of actions to reform the international monetary system, strengthen financial regulations and support measures that promote economic development, among others.
The meeting will take place at a critical moment. Economic indicators released in 2011 show that the fiscal efforts of the advanced economies from 2008 were not enough to avoid recessionary trends. The perception is that the financial crisis has been replaced by a sovereign debt crisis and the economic recovery will be slow. In the US, the most acute problem is centered on the political confrontation between Democrats and Republicans, an issue that will only be solved (or not) with the upcoming presidential elections. In Europe, the crisis in the eurozone flirts with the hitherto unthinkable dissolution of the common currency. In Asia, pressured by inflationary tendencies, China tends to slow down the pace of economic growth, which has partially offset American and European retractions.
In spite of that, the large global macroeconomic imbalances have not been addressed. Surplus countries like China, Japan and Germany are unwilling to reduce their balances in favor of deficit countries like the US and the UK. The weakness of the hegemonic dollar results in predictions of a future monetary system fragmented, competitive and without a dominant currency. Lack of effective leadership favours the explosion of unilateral protectionist measures, competitive devaluations and 'currency wars' that can be converted into 'trade wars'. As a result, some emerging countries have accumulated international reserves as a form of self-insurance, even though these reserves may be another factor in worsening a global recession.
Is the G20 ready to face these problems? Unlikely. This group was formed in 1999 as a way to attract the emerging countries to involve them in the rescue of the credibility of the IMF, which seemed to be turning into an anachronistic institution after its performance during the Asian crisis. The worsening of the international crisis in 2008 has effectively transformed the G20 into a forum for discussion and submission of proposals, while the IMF has become its operational arm. Its effectiveness was clear at the April 2009 meeting in London, when broad monetary and credit measures were taken to remove what was seen as a real possibility of worldwide economic depression. The edge of the abyss was a good counselor for action, but since then the momentum for reforms has slowed and unilateralism has once more manifested itself with force. It seems that policy coordination is effective only in times of acute crisis. Outside these times, multipolarity is an expression associated more with the dissent than cooperation.
Still, we must make room for a positive agenda. In this sense, here are some points that could be in the discussions in Cannes.
The first refers to strengthening the IMF's financial capacity to face, in particular, the eurozone crisis. Consistent with the past financial fragility of Brazil and with the memory of the pain of inflicted adjustments, we should be favourable to this point, but without losing sight of the multilateral and not regional character of the fund.
There are several ways to invest resources in the body and different ways to use them. Brazil can, for example, accept a new round of quota increases or the IMF can borrow against the issuance of medium- and long-term bonuses. Brazil should not, however, accept the French suggestion to leave untouched the New Arrangements to Borrow (NAB). These new resources have recently been transferred for regular quotas. Reopening what has just been negotiated in the 14th General Review of Quotas and still being subjected to the approval of national parliaments is not acceptable. Insisting on this point should be conditioned to a redistribution of voting power in the IMF. As to how to apply those resources, Brazil has to fight for the creation of credit lines for rapid disbursement, along the lines of the Flexible Credit Line (FCL), with realistic macroeconomic conditionalities.
This issue of macroeconomic conditionalities is the second point to be highlighted. IMF reform is not only about creating new methods of intervention, it is also a process to change the dominant economic view of its political and technical framework. From the year 1980, neoliberalism diminished international economic relations and led to great dramas such as the Asian and Latin American crises of the 1990s. The same is true today in the periphery of the eurozone. The heavy demand for fiscal surplus in Greece, an insolvent country, only adds to the aggravation of a downward spiral, where the revisions made by the stand-by arrangements of the IMF are always overcome by reality. The problem on the eurozone periphery is in the loss of competitiveness to Asia. Requiring macroeconomic discipline by Greece through the generation of primary surpluses to enable it to serve its debt is unrealistic in the short term. A programme to rapidly return to economic growth is the way to go. It is necessary to have a grace period on conditionality, before the crisis countries can pay their commitments. This is a lesson that Latin America and emerging Asia learned from the obligations imposed on them in the past.
One last point refers to the need to capitalise the European banks, which are moving toward making a recessionary adjustment in their balance sheets: selling assets rather than raising capital. There are a few criticisms of the form of IMF loans during the recurrent crises of the capitalist system. In this line of reasoning, the loans must be used to cope with imbalances in the current accounts of deficit countries. The multiplication of instruments to cope with capital account imbalances in these countries, which has become common practice since the 1990s, has only served to protect the interests of investors and private banks. That’s why the recapitalisation of European banks should be left to private markets, the region's governments and the European Financial Stability Fund (EFSF). The IMF should be used only to assist in rebuilding the external accounts of the periphery of the eurozone, so it can regain its competitive edge.
In conclusion, changing the paradigm is the most important issue: it’s time to stop with the 'pain ideology' that imposes unrealistic conditionalities on 'irresponsible governments'. Recovering the growth capacity of countries in crisis is essential and so is the involvement of a strong IMF, encouraging surplus countries to adjust the external accounts of the deficit countries. Recapitalising banks and increasing the EFSF resources should be kept in the public and private European scope. Will it take place in Cannes? Only if the fear of a new abyss becomes present. Let us remember Keynes who said: 'The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.'
Luiz Afonso Simoens Da Silva is professor in the post-graduate programme in international relations at São Paulo State University and a member of the Group for Conjuncture Analysis in the International Relations Institute of São Paulo University.
IPPR has commissioned a series of original articles to mark the 2011 summit of the G20 (Group of 20) countries in Cannes, France. We have asked representatives from participating nations for their take on the priorities and perspectives that should underpin the summit's agenda.