Talk of mere billions is for wimps these days. I’ve just read two proposals for ‘big numbers’ on bailouts to help developing countries get through the global economic crisis, one from the World Bank’s chief economist, Justin Lin, and the other from Washington thinktank CGD’s Nancy Birdsall.
Nancy’s paper, entitled ‘How to Unlock the $1 Trillion’, reckons ‘as much as $1 trillion would make sense’, and thinks it could be spent as follows: half for rolling over both sovereign (i.e. government) and corporate debts and so preventing defaults or bankruptcies; half to fill revenue gaps caused by falling tax income, or possible declines in bilateral aid (though we’re all still trying to prevent that happening), as well as emergency job and food programmes in the worst hit countries.
According to Nancy, $1 trillion is about 6% of all developing county GDP, on a par with the scale of the fiscal stimulus in the US (7% of GDP) and less than in China (10%).
The interesting bit is where the money comes from. She helpfully pulls together a variety of ideas from Dani Rodrik, Joe Stiglitz and other discussions around the upcoming G20 summit to show that the international financial institutions can between them magic up $900bn:
The IMF can generate $550bn by a new issue of special drawing rights (the global quasi currency it uses), worth $250bn, spending an uncommitted $150bn still sitting in its new shock facility, using the $100bn recently pledged by Japan, and borrowing a further $50bn. Nancy doesn’t mention it, but the IMF is also sitting on a pile of gold (over 3,200 tons of it) and could sell some of it (gold is about the only commodity whose price has gone up in the crisis as part of the rush to safety by investors).
The Multilateral Development Banks (World Bank, Asian Development Bank, Inter-American Development Bank, African Development Bank) can raise $300bn, plus an additional $50bn for low income countries by front-loading the grants from their ‘concessional windows’ e.g. the World Bank’s International Development Association (IDA}. This would of course mean less money in the IDA pot within a couple of years, unless it is topped up by the donors. The other $300bn money would be lent by the IBRD half of the World Bank and so would be non-concessional and only available for middle income countries.
The remaining $100bn may seem like small change, but is equal to the hard-won global aid budget. Nancy thinks it can come by arranging swaps to central banks in developing countries from the US Federal Reserve and European Central Bank (as the Fed did with Brazil and Mexico in the autumn), plus a contribution from China and the oil exporters.
Justin Lin, meanwhile, in a speech at the Peterson Institute for International Economics on 9 February, called for $2 trillion, albeit spread over 5 years. The most interesting aspect of his speech was his argument on why rich countries should bailout out poor ones. He identified two major problems with fiscal stimulus packages:
1. Most poor countries are constrained by either fiscal space and/or foreign exchange reserves. Many low-income countries entered the current crisis with fiscal deficits because of the fuel and food crises, which has led them to increase subsidies.
2. At the same time, most rich countries have the problem that a lot of their stimulus packages don’t get spent – people save the money instead. This is what happened in Japan’s ‘lost decade’ in the 1990s and Lin adds that only 15% of the US tax rebates in 2008 led to additional spending.
To make sure the fiscal stimulus results in increased demand and economic recovery, Lin advocates spending it on ‘high return shovel-ready opportunities to remove bottlenecks to growth’, i.e. easily identified projects to build crucial infrastructure such as energy and transport. And guess what, most of those are in developing countries, not rich ones. So globally, rich countries will get more recovery bangs for their bucks if they spend them in poor countries than in rich ones.
All well and good, and these are strong moral, developmental and self interest arguments for calling for a boost in official flows to poor countries, but how likely is it that such calls will succeed? Does Justin seriously think that the US, EU, Japan, China, and oil exporters are going to stump up $2 trillion on top of their existing bailouts, however strong the economic arguments? It seems to me there is a strong case for concentrating on those changes that become easier in an economic crisis, and those are primarily institutional – reforms are now possible to regulatory systems, financial institutions etc that would have been inconceivable a couple of years ago. Some examples – clamp down on tax havens, re-regulate the banks and rein in the ‘shadow banking sector’, get developing countries properly represented in the IMF and World Bank. In contrast, asking for more money, though undoubtedly warranted, is bound to be an uphill task. That’s where Nancy Birdsall’s paper has the edge, I think, since the money is (mostly) already there.