11:11 PM (9 hours ago)
Published: 2012/06/21 07:20:53 AM
THE Congress of South African Trade Unions’s (Cosatu’s) knee-jerk condemnation of the government’s decision to commit $2bn of SA’s foreign reserves to the International Monetary Fund’s (IMF’s) so-called firewall fund reflects poorly on the union federation, whichever way you look at it.
Either it is deliberately misrepresenting the situation by portraying the loan as a "donation" to rich developed economies and therefore a betrayal of poor South Africans, or it has a pathetically weak understanding of how the IMF and its various funds work. "Charity begins at home" might have amounted to reasonable criticism of the decision if this was actually charity, or if the money was in fact being allocated from the annual budget and therefore taken away from one or more government departments.
But neither is true, so the statement that SA is "one of the most distressed economies in the world, with massive levels of unemployment, poverty and inequality" is irrelevant. Unemployment, poverty and inequality are certainly major problems facing SA, but is Cosatu seriously advocating the use of our foreign exchange reserves to address these issues? That option was tried recently by Argentina, and it is an understatement to say that things are not working out well for them economically at present.
As for Cosatu’s assertion that SA should be a beneficiary of, rather than contributor to, the firewall fund, it should be careful what it wishes for. If that day ever arrives, Cosatu and its affiliates would be the first to suffer because such bail-outs invariably come with strings attached — either austerity measures that are seldom good for employment, or productivity demands that would not reflect well on the trade union movement.
By clinging to the African National Congress’s (ANC’s) coat-tails as an alliance partner, Cosatu enjoys the best of both worlds. It is part of the government and therefore enjoys considerable influence without the inconvenience of facing the electorate, but does not feel obliged to assume any of the responsibility that comes with power and is free to criticise without concerning itself too much with the veracity of its standpoint.
If SA wants to be part of the international community and have any influence in global affairs, we have to play our part, so the commitment to the fund is a gesture that could have immense diplomatic value. The fact that most of the 37 IMF member countries that have pledged money to the firewall fund are emerging nations is symbolically significant, illustrating the shift in global power relations from north to south and west to east. It is in SA’s interests to be seen in the right company as this occurs.
The firewall fund has not been set up specifically to rescue Greece or prevent the euro zone from collapsing — it could be used to shore up any country that found itself in dire need of liquidity, SA included. That said, it clearly would be in our best interest if the IMF was to step in to ensure that, say, Spain does not lose access to outside funding via the bond market. Spain is too big for Europe to rescue on its own, and the risk of contagion arising from a Spanish default spreading to countries such as Italy is considerable.
Europe remains SA’s most important trading partner, not just in terms of the total value of two-way trade, but because many of the goods we sell to Europe are manufactured products rather than raw, unprocessed commodities such as those that form the bulk of our trade with China.
A break-up of the euro zone and prolonged European recession would be devastating to SA, particularly for Cosatu’s members. As ANC spokesman Jackson Mthembu remarked yesterday, SA shed almost 1-million jobs in the last global financial crisis, and that was centred on the US. We would not survive a European implosion nearly as well as we did the 2008 market crash.
Published: 2012/06/22 09:31:14 AM
Presidential spokesman Mac Maharaj and African National Congress (ANC) spokesman Jackson Mthembu have justified the government’s lending $2bn to the International Monetary Fund (IMF) while Congress of South African Trade Unions (Cosatu) spokesman Patrick Craven has denounced the move.
Mr Maharaj said it was like lending money to a big bank. How does a developing country like SA with so many stupendous socioeconomic problems lend money to a big bank? Isn’t it like taking coal to Newcastle?
Mr Mthembu is an unsophisticated spokesman who seems not to understand that the Bretton Woods institutions such as the IMF and the World Bank were not set up to help the developing countries but the countries of Europe after the Second World War. And why should we bail out European and US banks who created the housing bubble through insecure lending and peekaboo finance?
As for Mr Craven, his federation runs with the hares and hunts with the hounds. Cosatu is condemning the ANC government, and rightfully so — however, come election time, it will be urging voters to vote for the ANC.
This government should reconsider and reverse the decision. The Pan Africanist Congress and Black Consciousness organisations are again silent when they should be defending the poor’s resources by speaking out against pouring SA’s money into a bottomless pit.
South African is set to provide US$2 billion to the International Monetary Fund’s war chest, but this has riled trade unions who say the country has more pressing problems.
The ruling ANC, the White opposition DA and economists welcomed the news but trade unions are outraged.
President Jacob Zuma made the announcement in Mexico at the G20 summit in Los Cabos, saying it was to help “avoid further global instability”.
“We believe that South Africa, as a member of both the United Nations and the G20, has an obligation to join hands with the rest of the world in averting a repeat of the last global economic meltdown,” Jackson Mthembu, ANC spokesman said.
Europe is South Africa’s largest trading partner and the African country’s finance minister has warned that the Eurozone crisis would have severe negative impact on the nation.
The Presidency was also quick to point out that the US$2 billion commitment was not “a gift but a sound financial investment”.
Spokesperson, Mac Maharaj said it was also “critical to keep the rand stable” and other countries like India, Brazil and China were pledging much more to the IMF.
Maharaj said the money would be paid back.
“We are supportive of the explanation of President Zuma that resources will be made available for the whole membership of the IMF and not earmarked for any particular region,” Maharaj continued.
Trade union federation, Cosatu says the country should be a beneficiary rather than a contributor to the world’s lender.
“The decision must be reversed and the US$2 billion used to alleviate the plight of the poorest South Africans and to invest in the restructuring of our economy,” Cosatu’s Patrick Craven said.
Economist, Chris Gilmour welcomed Zuma’s pledge and said it was the right thing and makes sense to pitch in.
According to media reports, at least US$430 billion had been set aside to stave off the risk of another financial crisis and IMF members could access the funds through a temporary loan, with conditions.
An important part of the policy rethink seen after the crisis was related to the IMF’s position regarding capital account regulations. In 2009, a staff paper recognised that large capital inflows “can lead to sharp appreciations, often followed by abrupt reversals and strong effects on balance sheets” (IMF, 2009a). Later, in 2010, it was acknowledged that, in some circumstances, capital account regulations should be part of the policy toolkit (Ostry et al., 2010). In 2011, a paper discussed the best design of capital account regulations in terms of effectiveness and efficiency (Ostry et al., 2011). The IMF’s policy advice on this area in 2010 would prove crucial as several countries were receiving significant capital inflows. These flows, apart from having major impacts in their economies, were subject to reversal – as happened in 2009 – risking throwing countries into banking and financial crises with very severe impacts on the development and well being of their citizens.
In the case of Egypt, IMF estimations indicate an average 7.3 per cent real exchange rate overvaluation. In addition, the report clearly shows that “further real appreciation driven by short-term capital flows could weaken medium-term growth prospects.” Nevertheless, the IMF concluded that there was no problem of competitiveness and its policy recommendations do not include capital controls, focusing instead on exchange rate intervention, exchange rate flexibility and fiscal consolidation.
IMF recommendations for India on how to deal with a possible increase in capital flows are also focused on exchange rate flexibility and accumulation of reserves. The IMF also recommends “deepening domestic financial markets”, “further developing the corporate bond market” and liberalising foreign direct investment (FDI), as these would have more benefits than short-term flows. However, these policies would only lead to a decrease in short-term flows if these financial and FDI-related flows were substitutes of short-term flows. Otherwise, it would result in an increase in total capital inflows. Capital account regulations were mentioned as a last resort only. The Indian authorities stated that these would be considered in case flows “exceed current levels by a large margin”.
South Africa’s report presents a deeper discussion on possible policies to deal with the exchange rate overvaluation. The analysis considers, for example, that: an interest rate decrease would not be very effective, as flows are directed to stock markets; a fiscal tightening would not help to support the economic recovery; and outflow controls should be removed only gradually, given the risk of sudden outflows. However, even this deeper analysis was not in line with the IMF’s most recent position and does not consider the possibility of implementing regulation on capital inflows, on the grounds that these are claimed to be ineffective.
Peter Chowla, guest blogger
Part of the Triple Crisis Spotlight G-20 series.
A joint statement by Brazil, Russia, India, China and South Africa (BRICS) released in the middle of the G20 summit in Los Cabos spelled out their plans for contributing to a boost in the resources available to the International Monetary Fund. The IMF wanted more money to backstop countries from the risks facing the global economy, most notably in Europe. Did the BRICS just cave in to pressure and, through the IMF, bail out European banks who lent recklessly? Or is it part of a broader agenda of emerging markets to reform global economic institutions?
The Los Cabos BRICS announcement was not new, but merely a spelling out of a commitment already made in April. That April meeting of G20 finance ministers noted “firm commitments” to increase resources to the IMF by over $430 billion, in addition to the IMF quota increase agreed in 2010. This April statement included $68 billion from “China, Russia, Brazil, India, Indonesia, Malaysia, Thailand and other countries”, showing “the commitment of the international community to safeguard global financial stability and put the global economic recovery on a sounder footing.” The breakdown of the contributions from the emerging markets was not announced at the time.
Now China has ended up committing $43 billion; Brazil, Russia and India each pledged $10 billion; while South Africa offered $2 billion. This slightly bigger than expected BRICS package of $75 billion bumped the IMF’s total funding increase to $456 billion. The contributions from India and Brazil especially have been criticised by civil society groups, who ask how so much money can be given, from countries with lots of poverty, to an institution which is viewed as having damaged their economies in the 1990s.
The entire resource increase is being accomplished through bilateral loan agreements and not through the IMF’s standing funding mechanisms, such as the paid-in quota or the New Arrangement to Borrow (NAB). This is partly because the US is unwilling to participate in the resource increase and partly because both the US and Europe don’t want new contributions to affect their outsized voting rights in the Fund.
However, the BRICS have not made new contributions without conditions, as their joint statement said: “these resources will be called upon only after existing resources, including the [NAB], are substantially utilised” and the money was provided “in anticipation that all the reforms agreed upon in 2010 will be fully implemented in a timely manner, including a comprehensive reform of voting power and reform of quota shares.” The contributions – unlikely to be ever drawn upon, as the IMF would first have to lend out both its entire existing war chest of $380 billion and a pending quota increase – are merely another enticement and reminder that the BRICS have money and are demanding change.
We should put the not-so-new money in context as well. As pointed out on this blog by Ilene Grabel, the May meeting of the ASEAN+3 group in Asia announced the doubling of a regional reserve pooling arrangement. That means China committed more than $38 billion in new money to the Chiang Mai Initiative, roughly on par with the IMF increase.
In the same Los Cabos announcement from the BRICS, we also learned that their leaders had “discussed swap arrangements among national currencies as well as reserve pooling”. The idea is that the BRICS would set up their own emerging market monetary fund to cushion each other against shocks in the global economy. Of course this is only an idea at this stage, and a long way from fruition. The BRICS finance ministers were instructed to study the swaps and reserve pooling ideas and report back to the next BRICS leaders’ summit in 2013. This study will coincide with the idea that the BRICS might set up their own development bank as well.
All in all it shows that the emerging powers are not taking for granted a world in which the IMF is at the centre of global economic governance. They are hedging their bets, waiting to see whether the traditionally Western-dominated institutions can be moulded in their own interests, and looking for some institutional plurality. At the very least it is good that the BRICS demand much deeper changes in IMF governance and policy, and that they use their vast resources to achieve it.
Of course it is unclear whether a world with competing centres of power and without centralised global coordination will prove more conducive to sustainable development and reductions in inequality than the IFI-dominated world of the past. A big question is how small economies will fare in such an environment. But given the records of the World Bank and IMF over the past 40 years, it’s probably worth a try.
Peter Chowla is Coordinator at the Bretton Woods Project, a London-based NGO that focuses on the World Bank and the IMF to challenge their power, open policy space, and promote alternative approaches.
The Triple Crisis blog invites your comments. Please share your thoughts below.
Add a Comment