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Rich and Poorer Nations Clash Again— at WB/IMF 50th Anniversary

ALONG MY WAY

SB Chaudhuri
RICH and poorer nation* clashed at the World Bank and the Interna tlonal Monetary Fund (IMF) annual meeting which ended on October 6. Thia year s annual meeting was held tn Madrid World Bank and IMF usually hold two consecutive annual meetings tn Washing ton, where their headquarters are. and then in the third year ln a member country. The Madrid meeting also marked the 50th anniversary of the founding of the two institu lions and lasted for nearly two weeks As it happened it also turned out to be one of the most contentious annual meetings of the World Bank and IMF
The main controversy centred on the IMF proposal for ap expansion of global liquidity by way of a substantial augmen tation of reserves of SDRs (Special Drawing Rights) for a general distribution among the member countries. SDRs are also called the IMF's currency The Fund maintains the ac counts of the member coun tries in SDR units. A composite of the US dollar. German mark. Japanese yen. Frenc.h franc and British sterling. SDR Is really an artificial cur rency unit. At the time of the World Bank and IMF annual meeting, one SDR was worth about US $1.47.
A strapped international liquidity situation provided the rational for creation of SDRs in the late 1960s. New stocks of SDRs can now be injected into international reserves only If there is a global need for augmenting liquidity. This time, the IMF had felt that there might be shortage of international liquidity in the coming years unless stocks of global non-gold reserves were expanded. The way to do this was to create new SDRs and allocate them to all the member countries of IMF. It was pruned out that international reserves were adequate Tor
less than three months of Im port requirements of 55 per cent of the countries repre seined In the Fund. The situa tion of the former communist slates was even worse and 67 per cent of them had reserves equivalent to the minimum three months ol import It was estimated that the need for non-gold reserves of all IMF member countries would ex pand by about 400 billion SDRs over the next five years.
Compared to the perceived needs. IMFs plans for increasing stocks of SDRs were rather modest The Fund proposed a general distribution of addl tlonal 36 billion SDRs over the next five years to its 179 member nation The amount Is equivalent to about $52 bllllori and would have met only about 9 per cent of the anticipated additional global need for re serves The new allocation would have gone to all the member nations — both rich and poor. However, the poorer nations only were understandably enthusiastic about the IMF proposal, modest though It was. Any accretion to their reserves was welcome It would increase their capability to fl nance much needed Imports and service past debts. It would be an Indirect form of development assistance. De veloping countries, therefore, backed the IMF proposal stoutly.
The rich nations at first would have none of It, The Group of Seven leading Indus trialized countries (G-7 — Bri tain. Canada. France. Germany. Italy. Japan and the United Slates) dismissed the IMF proposal outright, declaring it to be unnecessary. With the growth of global capital mar-
ket, they said, there was no need Io augment international liquidity through a big expan sion of the IMF's currency, which the worlds central banks could cash in for dollars and other freely convertible currencies Rather, creation of such new mdney by the IMF would exert an expansionary influence on the world's stock of free currencies, which was potentially inflationary, they averred. They even said that the IMF's move could set a dangerous precedent which presumably, would lead to resurgence of financial indiscipline the world over
The poorer nations were up in arms and strongly berated the attitude of the G-7. There was also another dimension to this Issues The last Infusion of SDRs took place in 1981. Since then, some 37 nations, mostly former communist states — or. economies in transition, as they are apt to be called these days — have joined the Fund. These newcomers had no opportunity to gain access to SDR's to supplement their reserves, for the simple reason that there had been no fresh allocation after they joined the IMF. The rich nations conceded that this was not quite fair. All the same, it was perhaps more in the na ture of a damage-control exer else that persuaded a couple of G-7 member countries to advance a compromise pro-
posal Besides Ibe former communist stales, the priori pal beneficiaries are also next door neighbours of the Euro pean members of G-7
The compromise proposal called for a special allocation of 16 billion SDRs equivalent to about $23 billion. The new comers would undoubtedly have been the main benefit la rles. Certain poorer nations possessing, good track records with the IMF. would also have shared the benefit. Developing countries naturally viewed the compromise proposal as re strictive and took a strong stand against it. At the same
time, they continued to give full backing to the original IMF formulation for allocation of new SDRs. As in other global forums, the developing coun tries are in a numerical major tty in the IMF. However, they command barely 30 per cent of the IMF votes while the G-7 countries represent about 45 per cent. New SDR allocation requires approval of 85 per cent of IMF votes. Thus the compromise proposal could not be carried through without the support of the developing countries.
The proposal for new SDR allocation was perhaps the only major initiative at the 50th anniversary meeting of the World Bank and IMF In the event, the move fell through or at least got stalled for another six months. At the end of the
meeting hopes were ex pressed that there was still a measure of cooperation be tween the rich and rer nations which might yield a for mula'ion acceptable to ail the member countries Ai the same time it became quite clear that it was no longer possible for any particular grouping of countries to im pose its will on the others It is also to be noted that both the proposals would have brought benefits to lhe poorest countries like Bangladesh There is an estimate which says that the G-7 compromise package would have added more than $4 billion to the reserves of the poorest countries. How ever it lacked the trans parency and automaticlty as envisaged in the original for mulation with regard to access to the new stock of SDRs Anyway, developing countries opted to stand together on this Issue
Analysts in the West read In the developing countries' attitude on the SDR allocation Is sue. another proof of .a new assertiveness of the poorer na tions. They hark back to the Uruguay Round negotiations where developing countries had resolutely opposed west ern moves to link trade to labour standards, human rights and environment. Developing countries, on the other hand, tend to interpret the West's attitude as Its continued failure to appreciate the needs of the poorer nations.
During the imbroglio over the SDR allocation Issue, the world's leading Industrial nations told the developing countries in more or less clear terms that they should go the global capital market to raise
additional funds It is true that the flow of ktreiffi private capital to the developing countries has more than doubled aver the three years since 1990 Estimates of annual inflow of foreign direct Investment 'FDD in developing countries in 1993 vary from the World Bank s $56 billion to the UNC TAD s (I.mted Nations Conference on Trade and Development) $80 billion These differences aside there Is no denying the fact that FDI tn the developing countries has surged In recent years. The point is could the flow of pn vate foreign capital be considered adequate even at Its cur rent higher levels to meet the needs of the poorer nations for financing development. In other words, can these countries do without increased offi ria) development assistance"7
Estimates of the developing countries annual requirement of additional funds for flnanc ing infrastructure Investment over the coming years range from $200 to $300 billion. De veloping countries need to build up Infrastructure facilities not only to Improve the living conditions of their people. but also to attract FDI.
True, cheap labour attracts foreign investors to developing countries. However, the cost advantage to the foreign investor accruing from cheap labour could as easily be wiped off when Infrastructure facili ties such as dependable power supply, adequate transportation network, are lacking. The gap between the level of inflow of FDI and the perceived needs for infrastructure Investment Is clearly too wide to be met by the developing countries from their own savings The time has not come yet for the rich nations to choke off new avenues for the developing countries to augment their resources through such measures as additional allocation of SDRs