Tuesday, 4 November 2008

Beyond Bretton Woods

Gordon Brown's tour of the Gulf, seeking money to bolster IMF funds, suggests his plans for a Bretton Woods II conference are less ambitious than the occasion requires.

Brown says he's confident that the Saudis will assist with bolstering the IMF coffers – allowing it to lend to more cash-strapped economies like Iceland, Hungary, Pakistan and Ukraine. Good news for the IMF, which has suffered dry years as emerging lenders sprung up in the developing world and potential recipients shun the fund, justly frightened and indignant by the economic policies that will be foisted on them as a result of borrowing.

But resuscitation of the fund – and the wider Bretton Woods system – is decidedly not good for a more stable and equitable world. When joined other world leaders in calling for a Bretton Woods II conference, many hoped that this might signal fundamental reform of the "Washington Consensus" ideology which lies behind the international financial institutions and which has landed us in the current mess. The fear is now that what Brown and others mean by such reform is simply acknowledging the new global balance of power by allowing a handful of new countries "into the club".

Last week over 700 organisations from around the world signed a statement calling for fundamental reform of the Bretton Woods institutions (notably IMF and World Bank). This must include reform of tax, lending, banking and trade systems – and a total re-think of the role of the state in the economy. The actions of western governments' intervening to prop up their own economies is alone surely proof of the bankruptcy of these policies.

But in order to achieve this, it is essential to include those who have suffered most and had least say in the economic system up to now: poorer developing countries and representatives of citizens groups, social movements and trade unions.

The G20 meeting in Washington DC on November 15 has been posited as the first step on the path to reform. Unfortunately, most countries in the world won't be there. As such the conference can only be a first step towards what is needed, but it would be worthwhile nonetheless if it helps western leaders see what a critical condition the economic system is in.

It isn't a matter of resuscitation, the Bretton Woods institutions as currently constituted must be consigned to history and a new economic system be created on a very different sort of power dynamic.

This article first appeared on Comment is Free.

Wednesday, 24 September 2008

Markets should not rule us

Gordon Brown’s conversion to financial regulation this weekend is certainly better late than never. He has joined a wide range of statesmen who, despite their role in maintaining “hands off” global finance, have come to see the error of their ways.

In May the great and the good of European social democracy, led by Jacques Delors and Jacques Santer, both former Presidents of the European Commission, declared in a letter that “Financial markets can not govern us!”.

In fact much of the world has been governed by financial markets for decades, and the severe poverty which still exists in so many developing (and indeed developed) counties can in no small measure be laid at the door of all-powerful financial globalisation. Indeed the freeing up of the financial sector – to be as reckless as it chooses – has been the real essence of the globalisation project over nearly 30 years.

Real progress towards solving the world’s problems, poverty or climate change most prominently, would mean that the vast bailouts and injections of money that have been announced in recent days were not merely another form of ‘socialism for the rich’, but used to fundamentally reform global financial architecture.

A little discussed conference taking place in Doha in late November is a perfect opportunity for Brown to show his new-found credentials. The UN’s second Financing for Development conference will discuss the principles that should underlie aid, debt relief and funding for climate change. While campaigners currently fear the conference may represent a step backwards from the first conference held in Monterrey in 2002, it does have the potential to show the ‘have-nots’ of the world that global leaders are serious.

The starting point is the fact that financial globalisation allows massive transfers of money from developing to developed countries, with unprecedented ease. What in times past would have required guns boats and armies can now be achieved with a few clicks of a mouse.

To give a few examples, $160 billion is lost to the developing world every year through tax evasion, based on the fact that most trade takes place within global corporations and those corporations now have the ability to move that money around the world with few restrictions or questions asked. $250 billion is lost because $11.5 trillion of global assets are currently held in tax havens, like the UK, one of the centres of financial globalisation.

The global money markets turn over a mind-blowing $3.2 trillion every day – much of which is so-called ‘hot money’, speculative capital which moves very rapidly in and out of countries and currencies, causing immense damage. Indeed currency speculation played a large role in the South East Asian crash in 1997. Another $1.6 billion a day is transferred from poor to rich countries in debt ‘repayments’, based largely on loans recklessly thrust on newly independent countries in the 1960s and 70s by financial institutions which promptly raised interest rates to extortionate levels.

Needless to say these gigantic sums dwarf aid budgets.

Solutions to run-away finance are out there. A Currency Transaction Tax could be introduced to reduce volatility on the money markets or a restriction placed on the selling of developing country debt on secondary markets which would prevent ‘vulture funds’ profiting from the misery of developing countries.

It would be possible to prevent ‘capital flight’ removing the ability of countries to effectively tax corporate and individual activities within their jurisdiction through better policing and control of financial flows, allowing the international community to effectively shut down tax havens. A fair, transparent and participative mechanism could be introduced to work-out debt disputes and reduce the dependence of developing countries on financial markets and unelected, unaccountable organisations like the Paris Club.

These would be just the first reforms that would be necessary to put finance back in its box, return sovereignty to nations, and ensure a more equitable future for everyone.

The financial crisis does not mean that these solutions will be adopted, but there is an opening. Unfortunately many in the world of finance will push for business as usual as soon they have offloaded their problems onto the suddenly-so-necessary state. But there is now an opportunity. Last Thursday the Financial Services Authority temporarily banned some short-selling. Despite a few howls from the unruly children unable to take their medicine, the financial system has not collapsed, as would have been predicted in earlier times. So it has been proved that it is possible to intervene to stop unhelpful types of speculation. Much more unorthodoxy will also be proved in coming months.

What happens next is up to us. Public intervention is busy changing private debt into public debt. The price the public demands for this service should be clear – to re-take control of a financial sector which has caused so much misery for so long.

This article was first published on New Statesman online.

Thursday, 24 April 2008

The black hole of debt

In recent weeks, Haiti has been gripped by violent protest yet again. And yet again the inhabitants of this impoverished country are suffering the most brutal consequences of the fallout of the global economic crisis. This time it is the rise in global food prices, which has sparked riots in Port au Prince, Haiti's capital, where UN peacekeepers used rubber bullets and tear gas against protesters attempting to storm the presidential palace. Days later the prime minister was fired.

It is therefore particularly appropriate that on Tuesday this week -the anniversary of the death of Haiti's dictator, Francois "Papa Doc" Duvalier - hundreds of debt campaigners fasted for Haiti's debt to be cancelled. Haiti's fate has been tied up with the issue of international debt more than any other country. Despite the fact that it's debt is illegitimate by any standards and despite Haiti's sorry position as the poorest country in the western hemisphere, it still owes $1.3bn. Every year debt repayments flow from Haiti to multilateral banks, just as its resources once enriched the French empire.

Haiti became the world's first republic to outlaw slavery, after the slave population led a struggle for independence which they won in 1804. However, in 1825, in return for recognition, the new state promised to pay its former French overlords compensation amounting to $21bn in today's money. It did not finish paying this debt until 1947. Calls for restitution have been consistently rejected by French governments.

Some 40% of Haiti's current debt was run up by the Duvalier dictators - better known as Papa Doc and Baby Doc - who between 1957 and 1986 stole parts of these loans for themselves, and used the rest to repress the population. When the Americans flew Baby Doc out of Haiti in 1986, he is estimated to have taken $90m with him. The Duvaliers were anti-communist and all too happy to follow the economic policies prescribed by the west, so their misdemeanours were overlooked.

In the 1980s and 90s, like all indebted countries, Haiti had to follow structural adjustment policies designed by the World Bank and International Monetary Fund (IMF) - including cuts in government expenditure on health and education, privatisation and the removal of import controls. Indigenous Haitian industries were wiped out as American imports flooded into the country.

In 1995 the IMF forced Haiti to slash its rice tariff from 35% to 3%. According to Oxfam, this resulted in an increase in imports of more than 150% between 1994 and 2003, the vast majority from the US. Certainly this meant lower prices for Haitian consumers, but it also devastated Haitian rice farmers. Traditional rice-farming areas of Haiti now have some of the highest concentrations of malnutrition and a country that was self-sufficient in rice is now dependent on foreign imports, at the mercy of global market prices.

Today, 80% of Haiti's population live in poverty as defined by the World Bank (under $2 a day). Average life expectancy is just 52 years. Half of all Haitian adults cannot read or write. Yet Haiti failed to qualify for debt relief under the heavily indebted poor country initiative (HIPC), established in 1996 to make the debts of the most severely indebted poor countries more sustainable - surely the clearest proof of the arbitrary nature of the HIPC scheme.

Haiti was finally allowed to start the HIPC process in October 2006. It has to jump through numerous hoops before its debt is cancelled - significantly, more of the same economic medicine responsible for Haiti's food dependency. On average it has taken poor countries three years to complete these programmes - by which time the country will have paid hundreds of millions of dollars in debt service. And even then not much more than half of Haiti's debt will be cancelled. While some Haitians are reportedly eating dirt to quell their hunger, their government is forced to send almost $1m each week in debt service to wealthy banks supposedly established to fight poverty.

Haiti is not alone. Throughout April and May, Jubilee Debt Campaign supporters are fasting for 36 countries left behind by the debt cancellation process. Egypt, the Philippines and Pakistan have also experienced disturbances over sharp price rises made more severe by the fact that they are still sending huge sums of money in debt repayments back to the multilateral banks.

Ten years on from the 70,000-strong protest outside the Birmingham G8, which did so much to put debt on the international agenda, it remains a pernicious tool of injustice, taking a real and deadly toll on the lives of millions of the poorest people in the world. We cannot hope to permanently solve the food crisis or the political turbulence which continues to haunt countries like Haiti until debt is wiped out, unconditionally, once and for all.

This article was first published on Comment is Free.