New York, 22 Jun (Martin Khor*) – On the eve of the UN Conference on the Financial and Economic Crisis, many issues remain unresolved, even after marathon sessions that go on to near midnight.  After an all-day session last Friday, the second reading of the draft outcome document concluded at four in the morning on Saturday.

The epicentre of the financial crisis has been the United States, and Wall Street in particular, just some blocks from the UN headquarters. The first fallout was in Europe and Japan, which also have large financial institutions.

But the developing countries that have no role in causing the crisis have suffered the most “collateral damage”, with a loss of 6 percentage points of gross national income, as their economic growth is expected to fall from 8.3% in 2007 to 1.6% in 2009 on average.

There is some international action on the crisis, but much of it has been by exclusive clubs like the G7 developed countries or the G20 (which is dominated by developed countries, although a few developing countries are also included in its summits).

The UN conference on 24-26 June is thus the first time that all the countries are gathering to decide what to do about the crisis. It is an especially important meeting for the developing countries, the vast majority of which have no other forum but the UN to discuss the most serious economic crisis in 70 years.

Two main actions are to be discussed at the Conference - how to help developing countries cope with the crisis, and reform of the international financial system.

Diplomats at the UN in New York have been meeting day and night to forge a document for the political leaders to sign on to. There has been a lot of wrangling over the issues. The developing countries grouped under the G77 and China have been fighting to get recognition of their needs and of the required reforms to the global financial system.

But the developed countries, as a bloc, have been resisting any basic reforms. In the UN negotiations, they made clear their preference to retain the status quo and showed willingness for only marginal changes in existing institutions and policies.

In the negotiations on the draft outcome document prepared by two co-facilitators, the Ambassadors of the Netherlands and of St. Vincent and the Grenadines, many opposing views were put forward by various parties. A new draft will be issued on Monday and the talks will continue, perhaps well into the Conference itself.

There are still many issues to settle, with five or six being crucial. First, is whether the conference will decide to have a follow-up mechanism. Developing countries strongly believe in building a central role for the UN and that the process should not end with the Conference.

Many substantive issues cannot be resolved by the Conference, since there has been too little time for negotiating such important and complex issues. There are less than three months between mid-April when the negotiations began to the start of the conference. The G77 and China wants the conference to set up a new working group to elaborate on the decisions and issues arising from the conference so that there is real action.

However, most developed countries prefer the G8 or G20 and the Bretton Woods institutions to be the only authorities to deal with the crisis. They are against any “competition” from the UN. They have thus resisted a strong follow-up process or a specific working group.

Second, the developing countries want extra external financing to make up for the $1,000 billion shortfall in their countries from the reduced exports and the outflow of capital caused by the crisis. They want to be able to join the practice of fiscal stimulus packages to stimulate economic recovery, and this can happen only if the external financing is forthcoming to fill the trillion-dollar gap.

The G77 and China is proposing that part of the funds come from new SDRs (special drawing rights) that the IMF can issue to developing countries. The SDR is a kind of money that the IMF issues to countries, which can exchange these SDRs for the dollar or other major currencies, and then spend the funds.

During the UN talks, the United States has in particular been opposed to new issuing of SDRs. It argues that this will lead to inflation, but its real unspoken objection may be due to its fear that this may be the start of partial replacement of the US dollar as the global reserve currency, used for trade and for savings in foreign currency.

Third, is the concern that developing countries will be plunged into a new debt crisis. The World Bank has estimated that nearly 40 developing countries are vulnerable to difficulties in having enough foreign exchange to service their loans or to pay for essential imports. The list may grow if the recession continues.

The G77 and China has proposed a temporary moratorium on debt payments for countries that face problems, as well as an international debt court that can allow countries in trouble to declare a debt standstill, and that will arrange a debt restructuring between the debtor country with its creditors. So far, all the developed countries have resisted this approach to debt during the UN talks.

Fourth, the G77 and China has asked that developing countries be given the “policy space” to enable them to take policy measures to address the crisis. This space has been blocked by IMF and World Bank loan conditions that usually forbid controls over capital outflows and debt standstill, impose low tariffs, and pro-cyclical policies (fiscal austerity and tight monetary policy) that worsen the recession.

Many free trade agreements contain provisions that would curb the use of policy measures to address financial stability. Developing countries that face balance-of-payments constraints also cannot take counter-cyclical policies.

The G77 and China has proposed that the IMF change its policy conditionalities. It also wants the Conference to recognize the right of developing countries to undertake trade measures within WTO rules and to undertake debt standstill and temporary capital controls. This is opposed by the developed countries.

Fifth, is the contentious issue of setting up of a global economic council under the UN to coordinate policies and to ensure coherence of the policies undertaken by various international agencies. The G77 and China believe that the G20 is too exclusive a club which only a few developing countries can enter.

It wants to start a process to consider setting up a Global Economic Council under the UN to enable developing countries to participate in discussions and decisions on the present crisis as well as other issues. The developed countries, however, are against the UN to even consider setting up such a Council. They may be fearing that such a Council will threaten their domination of the system.

The sixth issue comprises the proposals for the reforms needed to the global financial and economic systems. The G77 and China wants the reforms to cover the governance and policies of the IMF and World Bank, the regulation of financial markets and capital flows, strengthening of surveillance over developed countries’ policies and the creation of a new reserves system based on the SDR.

The lack of regulations and reforms in these complex areas contributed to the crisis. Once the crisis appears to be over in developed countries, they may lose interest in reforms, as happened, for example, after the Asian financial crisis.

The G77 and China has put up proposals for the reforms, but the developed countries are still adamant that these important issues not be discussed in the UN.

The new draft is unlikely to resolve the above key issues, as positions are still wide apart on them. The negotiations in the week will thus be crucial in determining not only the success of the conference but whether there can be international cooperation for actions on the crisis.

(* ) Martin Khor is the Executive Director of the South Centre, and a former Editor of the SUNS.

Financial crisis, U.N. reform, UN Conference on the world financial and economic crisis, United Nations