Analysis: The need of reform
Developing countries are the big losers in a financial system they have little influence upon. International Finance Institutions (IFIs) such as the World Bank and the International Monetary Fund, as well as informal fora such as G20, set the agenda for the global economy.
Their conditions for aid, loans and debt cancellation define the framework for the political and economic potential of developing countries. Despite this, developing countries have minimal influence on these institutions, and any reform of the way IFIs are governed in an attempt to give poor countries more sway has been cosmetic. As it stands the financial system enables large amounts of resources to be transferred from the South to the North. It is estimated that an amount equivalent to ten times the aid from the North to the South annually finds its way back to the North through illicit capital outflows (NOU2009:19 Tax Havens and Development). The global financial crisis has made evident the damaging effects of this undemocratic financial system, a system in which Norway has both vested interest and influence.
The World Bank, the International Monetary Fund (IMF) and the regional development banks limit the space within which national politicians can act. Mainstream economic analyses form the basis for the IFIs’ advice, and they have led many poor countries through an enforced process of privatisation and market liberalisation as a result of demands placed on loan-takers and aid recipients. Critics have pointed out how the conditionality in itself is basically undemocratic and have also shown how the nature of the demands has been damaging for several countries. Among other things, demands for stringent public budgets have led to under-investment in teachers and health personnel, and demands for deregulation and the opening of the economy has made many countries less well equipped to deal with global economic unrest. Women and vulnerable groups are most often hit hardest by cuts in the public sector.
The IFIs have admitted that some individual conditions have been unsuccessful. But despite reforms and promises toreduce conditionality, these institutions still impose strict macroeconomic demands on developing countries, including those of privatisation and liberalisation. Several studies illustrate this, amongst them a report written by the University of Oslo’s Centre for Development and the Environment for the Ministry of Foreign Affairs in 2006. During the past four years, the government of Norway has declared that their policies are against this type of conditionality, but a report from the Nordic-Baltic Office at the IMF shows that the Nordic-Baltic constituency, which Norway is a part of, was critical of reducing macro-economic demands during issues dealt with by the Executive Board in 2009.
In addition, enormous sums of money are stolen from developing countries’ public budgets as a result of illicit financial flows). Global Financial Integrity calculates that approximately one billion dollars disappears from developing countries each year. Tax evasion and the payment of illegitimate debts are the two main channels.
Tax Justice Network estimates that the world’s richest are hiding a sum in tax havens equivalent to the US’s gross national product. This is again detrimental to developing countries, due to factors such as reduced tax income and negative impact on institution building and economic growth (NOU19:2009). Two of the main problems are the lack of transparency and almost secret accounting. Norway has promoted itself as a driving force behind increased transparency and clearer regulations, but the Norwegian authorities’ statements and initiatives on this subject have yet to have any consequences for the Government Pension Fund – Global (the Petroleum Fund) which invests large amounts of the oil assets in companies registered in tax havens.
Debt servicing also eats up a large amount of developing countries’ public budgets. It is estimated that the total debt burden of these countries is five times as high as annual aid budgets (“Unfinished Business”, Jubilee Debt Campaign 2008). The current definitions of what can be designated as sustainable debt burden are restrictive: social development and human rights are not included, but debt which is a detrimental obstacle to the fulfilment of a population’s basic rights must be considered as unpayable. A large part of the debt is also illegitimate: down-payment of debt taken up by undemocratic regimes, loans given to unsuccessful projects or loans that did not benefit the population, must be counted as illicit capitalal outflows). The G20 wants to introduce ethics into the financial markets. This would imply that the lenders accept their share of responsibility for the debt crisis. A first step is to recognise and cancel unpayable and illegitimate debts.
As of today there are no international mechanisms to solve debt disputes and no mechanism that holds irresponsible players accountable. This in a market that Norwegian companies and the Government Pension Fund – Global are part of, and in which, therefore, Norway has strong economic interests.
The international financial crisis hits poor countries hardest. The UN stands on the sideline when response is needed, and it is the G20 that has taken the international leadership with the World Bank and the IMF as supporting players and implementers. The solutions given by the G20 and the IFIs, usually consist of providing a new loan and the IMF reports that many countries are now on their way into new debt crises. The authorities and civil society in the South emphasise that this is not a new crisis, but that it exposes and increases existing challenges that will not disappear even in the event of a new upswing in the global economy.
The financial crisis has, however, also created opportunities for change. The need for regulation of the financial markets, debt-cancellation, a stronger nation state and a right to be involved in political dealings, have all appeared on the agenda. Norway can now be a driving force to change the structures that are the basis for an unstable and undemocratic financial system. Responsibility within the international finance institutions requires democratic governance, openness and recognition of the harmful effects of the current practice of conditionality. A responsible Norwegian foreign policy implies supporting those institutions and programmes that protect space for political involvement by developing countries. The Norwegian welfare state is a recognised economic model and Norway can contribute with empirical and economic analyses that are alternative to those currently coming from the offices of the international finance institutions. Norwegian authorities can also show their support for alternative financial institutions that build on democratic principles, for example the Latin America initiative Banco del Sur.
Until 2010, Norway and Zambia will lead the follow-up of the UN General Assembly’s summit on the financial crisis. This gives Norway a golden opportunity to contribute to making the UN into a relevant and influential organ in the global financial architecture. It also creates an opportunity to support progressive proposals related to regulation of the financial markets, including stricter regulation on tax havens and the introduction of a new debt cancellation mechanism.
The role of Norway as a ‘driving force’ demands an active, ambitious and knowledgeable civil society. We are in a good position to be a central and key source about these themes thanks to ForUM’s national and international networks. As a coordinating body and think tank, ForUM plays an important role in the surveillance of Norwegian financial institutions and Norwegian policy related to capital flight.