Turbulence in Emerging Economies: From Easy Money to Hard Landing?
This issue of South Bulletin focuses on the deepening economic problems in emerging economies. There is a concern that emerging economies may be the ones facing the next financial and economic crisis. The South Centre’s chief economist, Yilmaz Akyuz, in his article, proposes urgent steps needed to avoid or deal with a potential crisis in these economies.
The Centre’s Executive Director, Martin Khor, in his article, also talks about new problems confronting several developing countries which faced sharp currency depreciation and capital outflows at the start of 2014. He also argues the case for capital controls over capital outflows in countries facing potential flight of capital to avoid a potential crisis.
China seems to be preparing to play a bigger role in global economic affairs, but not at the cost of giving up its developing country status. This was the impression made at the conference Transformative Global Governance: China and the United Nations, held in Shanghai on 13-14 January 2014. An article on this is in the Bulletin.
Other articles in the bulletin include:
Latin American and Caribbean Leaders Create a Zone of Peace and Unite Against Poverty and Inequality
A step forward for Asian Cooperation
Equity, climate change and sustainable development – South Centre-Ecuador Side Event at COP 19
WIPO at Crossroads: Results of the General Assembly 2013
South Centre pledges continued support to the G77 and China
G15 to be engaged in post-2015 Development Agenda
Welcome to the real world, by Humberto Campodonico
To download the entire South Bulletin, please click here. To read individual articles, please see below.
Turbulence in Emerging Economies: From Easy Money to Hard Landing?
Urgent steps are needed to deal with an economic crisis in the emerging economies that South Centre had warned of earlier.
By Yılmaz Akyüz, Chief Economist, South Centre
Before the world economy has been able to fully recover from the crisis that began more than five years ago, there is a widespread fear that we may be poised for yet another crisis, this time in emerging economies (EEs). Once again, most specialists on international economic matters have been caught unawares. In fact, the signs of external financial fragility in several emerging economies have been visible since the beginning of the financial crisis in the US and Europe. The South Centre has constantly warned that the boom in capital flows that had started in the first half of the 2000s and continued even after the Lehman collapse is generating serious imbalances in the developing world along with the danger of a sudden stop and reversal.
Policy choices in advanced economies, notably in the US as the issuer of the main reserve currency, in response to the crisis are key to understanding what is going on. Reluctance to remove the debt overhang caused by the financial crisis through timely, orderly and comprehensive restructuring, and an abrupt turn to fiscal austerity after an initial expansion, has meant an excessive reliance on monetary means to fight the Great Recession, with central banks entering uncharted policy waters, including zero-bound policy interest rates and the acquisition of long-term public and private bonds (quantitative easing).
This ultra-easy monetary policy has not been very effective in reducing the debt overhang or stimulating spending. It has, however, generated financial fragility, at home and abroad, notably in emerging economies.
The US itself is vulnerable because the Fed may not be able to exit from the ultra-easy monetary policy and normalize the size and structure of its balance sheet without market disruption and it cannot continue without creating bubbles. Tapering does not yet signal a return to monetary tightening and normalization of the Fed’s balance sheet. It reduces not the level of long-term assets on the Fed’s balance sheet but monthly additions. Besides, the policy rates are pledged to remain at historical lows for some time to come, even after unemployment rate falls below 6.5 per cent, if inflation remains low. Thus, ultra-easy money is still with us. But the markets have already started pricing-in the normalization of monetary policy and this is the main reason for the rise in long-term rates and the turbulence in emerging economies.
In several emerging economies, policies pursued in recent years have no doubt made a significant contribution to the build-up of external vulnerability. Many commodity-dependent economies have failed to manage the twin booms in commodity prices and capital flows that started in the early years of the millennium and continued until recently, after a brief interruption in 2008-09.
These countries, and several others, have stood passively by as their industries have been undermined by the foreign exchange bonanza, choosing, instead, to ride a consumption boom driven by short-term financial inflows and foreign borrowing by their private sectors and allowing their currencies to appreciate and external deficits to mount. Hastily erected walls against destabilizing inflows have been too little and too late – and neither wide enough nor high enough to prevent build-up of imbalances and fragility.
The IMF, the organization responsible for safeguarding international monetary and financial stability, has also failed to promote judicious policies not only in major advanced economies, but also in the South. It has been unable to correctly identify the forces driving expansion in emerging economics and joined, until its recent U-turns, the hype about the “Rise of the South”, arguing that major emerging economies are largely decoupled from the economic vagaries of the North and have become new engines of growth, thereby underestimating their vulnerability to shifts in policies and conditions in the North, notably the US. Even when it became clear that capital inflows posed a serious threat to macroeconomic and financial stability in these economies, its advice was to avoid capital controls to the extent possible and introduce them only as a last resort and on a temporary basis.
Policy response to a deepening of the financial turbulence in the South and tightened balance of payments should be similar in many respects to that recommended by the South Centre in the early days of the Great Recession. The principal objective should be to safeguard income and employment. Developing countries should not be denied the right to use legitimate trade measures to rationalize imports through selective restrictions in order to allocate scarce foreign exchange to areas most needed, particularly for the import of intermediate and investment goods and food.
Emerging economies should also avoid using their reserves to finance large and persistent capital outflows. Experience suggests that when global financial conditions are tightening, countries with large external debt and deficits find it extremely difficult to restore “confidence” and regain macroeconomic control simply by allowing their currencies to freely float and/or hiking interest rates.
Nor should they rely on borrowing from official sources to maintain an open capital account and to remain current on their obligations to foreign creditors and investors.
They should, instead, seek to involve private lenders and investors in the resolution of balance of payments and debt crises and this may call for, inter alia, exchange restrictions and temporary debt standstills. These measures should be supported by the IMF, where necessary, through lending into arrears.
The IMF currently lacks the resources to effectively address any sharp contraction in international liquidity resulting from a shift to monetary tightening in the US. A very large SDR allocation, to be made available to countries according to needs rather than quotas, would help.
But a greater responsibility falls on central banks in advanced economies, notably the US Fed, which can and should – as the originators of destabilizing impulses that now threaten the South – act as a quasi-international lender of last resort to emerging economies facing severe liquidity problems through swaps or outright purchase of their sovereign bonds. The Fed could buy internationally issued bonds of these economies to shore up their prices and local bonds to provide liquidity; and there is no reason why other major central banks should not join this undertaking.
The extent to which these tools – exchange restrictions and temporary debt standstills, IMF lending into arrears, a sizeable SDR allocation and provision of market support and liquidity by major central banks – should be used would no doubt depend on the specific circumstances of individual EEs. However, these unconventional mechanisms need to be included in the policy arsenal and deployed as and when necessary in order to break away from the muddle-through approach that characterised past interventions in currency and balance of payments crises in the South and to avoid unnecessary pains.
The world economy is facing bleak prospects largely because the systemic shortcomings in the global economic and financial architecture that gave rise to the most serious post-war crisis remain unabated.
The Outcome Document of the 2009 UN Conference on the “World Financial Crisis and Economic Crisis and Its Impact on Development” had clearly recognized that “long standing systemic fragilities and imbalances” were among the principal causes of the crisis and proposed “to reform and strengthen international financial system and architecture” so as to reduce the likelihood of the occurrence of such crises.
It pointed to many areas where systemic reforms are needed including regulation of “major financial centres, international capital flows, and financial markets”, the international reserves system including the role of the SDR, the international approach to the debt problems of developing countries, and the mandates, policies and governance of international financial institutions. So far the international community has failed to address any of these issues in a significant way. They need to be put back on the agenda if recurrent financial crises with severe international repercussions are to be averted.
This is a summary of the author’s paper on “Crisis Management in the United States and Europe: Impact on Developing Countries and Longer-term Consequences” published by the South Centre as Research Paper No. 50 (http://www.southcentre.int/research-papers-50-february-2014/) .
Developing countries facing new economic problems
New economic problems are confronting several developing countries which faced sharp currency depreciation and capital outflows at the start of 2014. These are caused by the boom-bust cycles in capital flows originating in profit-seeking investor behaviour in developed countries.
By Martin Khor
The year 2014 began badly for several developing countries as their currency and stock markets experienced sharp falls.
Countries whose currencies were affected include Argentina, Turkey, Russia, Brazil and Chile.
An American market analyst termed it an “emerging market flu” and several global media reports tend to focus on weaknesses in individual developing countries.
However the broad sell off was a general response to the “tapering” of purchase of bonds by the US Federal Reserve, which marks the slowdown of its easy-money policy that has been pumping many hundreds of billions of dollars into the banking system.
On 29 January, the Fed reduced its monthly asset purchase by another $10 billion to $65 billion, following the $10 billion reduction in December. It gave a new boost to the weakening of emerging market currencies.
A lot of the Fed’s money pumping had earlier been taken up by American investors and placed in emerging economies as they searched for higher yield.
With the tapering expected to raise yields in the US, money is flowing out from bonds and stocks in the emerging economies, putting pressure on their currencies. The capital flows have reversed direction.
The “emerging markets sell-off” thus cannot be explained by ad hoc events. It is a predictable and even inevitable part of a boom-bust cycle in capital flows to and from the developing countries, which originates from the monetary policies of developed countries and the behaviour of their investment funds.
This cycle, which has been very destabilising to the developing economies, has been facilitated by the deregulation of financial markets and the liberalisation of capital flows which in the past had been carefully regulated.
This prompted massive and increasing bouts of speculative international flows by Western investment funds, motivated by the search for higher yields. Emerging economies, having higher economic growth and interest rates, attracted the investors.
Yilmaz Akyuz, chief economist at the South Centre, analysed the most recent boom-bust cycles in his paper “Waving or Drowning”.
A boom of private capital flows to developing countries began in the early years of the 2000s but came to an end with the flight to safety triggered by the Lehman collapse in September 2008.
However, the flows recovered quickly. By 2010-12, net flows to Asia and Latin America exceeded the peaks reached before the crisis.
This recovery was largely caused by the easy-money policies and near zero interest rates in the US and Europe.
In the US, the Fed pumped US$85 billion a month into the banking system by buying bonds. It was hoped the banks would lend this to businesses to generate recovery, but in fact investors placed much of the funds in the Western stock markets and in bonds and shares in developing countries.
The surge in capital inflows led to a strong recovery in currency, equity and bond markets of major developing countries. Some of these countries welcomed the new capital inflows and the boom in asset prices.
But others were upset that the inflows caused their currencies to appreciate (thus making their exports less competitive) and that the ultra-easy monetary policies of developed countries were part of a “currency war” to make the latter more competitive.
In 2013, the capital inflows into developing countries weakened due to the European crisis and the prospect of the US Fed “tapering” or reducing its monthly bond purchases.
This weakening took place at a bad time — just as many of the emerging economies saw their current account deficits widen. Thus, their need for foreign capital increased just as inflows became weaker and unstable.
In May-June 2013 there was a preview of the sell-off when the Fed announced it could soon start “tapering”. This led to sudden sharp currency falls including in India and Indonesia.
However, the Fed postponed the taper, thus giving a breathing space. But in December, it finally announced the tapering – a reduction of its monthly bond purchase from $85 billion to $75 billion, with more to come.
There was then no sudden sell off in emerging economies, as the markets had already anticipated it and the Fed also announced that interest rates would be kept at current low levels until the end of 2015.
By 2014, however, the investment mood had already turned against the emerging economies. Many of them were now termed “fragile”, especially those with current account deficits and dependent on capital inflows.
Many of the so-called fragile countries are in fact members of the BRICS that had been viewed just a few years before as the most powerful emerging economies driving global growth.
In this atmosphere of deepening concerns, it just required a “trigger” to cause a simultaneous sell-off in currencies and markets of developing countries.
Several factors were to emerge which together constituted a trigger in January. These were a “flash” report indicating contraction of manufacturing in China; the sudden fall in the Argentinian peso; and expectations of further tapering by the US Fed.
For two days (23 and 24 January) the currencies and stock markets of several developing countries were in turmoil, which spilled over to the US and European stock markets.
The turmoil continued into the following week, seeming to confirm investor disenchantment with emerging economies, and a reversal of capital flows.
The depreciation in currency and the capital outflows could put strains on the affected countries’ foreign reserves and weaken their balance of payments.
The accompanying fall in currency would have positive effects on export competitiveness, but negative impacts in accelerating inflation (as import prices go up) and debt servicing (as more local currency is needed to repay the same amount of debt denominated in foreign currencies).
In the following months, the situation improved for most of the affected developing countries. This may be due to the US and Europe having their own economic problems and thus the pressure on developing countries was reduced relatively. However, the market turmoil involving emerging economies may return sometime later this year.
Martin Khor is Executive Director of the South Centre. Contact: director@southcentre.int .
Policy Dilemmas and the Case for Capital Controls over Outflows
In the past year, the currencies of major countries like Indonesia, India, Brazil, South Africa and Turkey have fallen by 15 to 20 per cent against the US dollar, as at the end of January. There has been an improvement in recent months. But there are also fears that the market and currency turmoil may reappear sometime this year.
Policy makers face a dilemma or trade off. To stave off further currency decline and capital outflows, they decide to raise interest rates (hoping to retain the country’s attractiveness to investors and local savers).
The increase in rates serves another useful objective, to reduce inflationary pressures. However, the rise in interest rates has the negative effect of also putting a brake on economic growth, especially if the rate increase is significant.
This is because it is more costly for businesses to borrow to invest and for consumers to borrow to spend.
The deterioration in the real economy (or expectation of this) can offset the investors’ incentive to retain their assets in the country. If so, the capital outflow and the fall in currency will continue.
Capital flight may come not only from foreigners but also residents. How to maintain the confidence and funds of locals are equally important.
A country facing currency fall and capital flight that drain the foreign reserves to dangerously low levels can consider capital controls.
When too much hot money is flowing into the country, controls over capital inflows are quite commonly used.
However, in the present situation when countries instead face excessive outflows, it is control or restrictions over capital outflows which may be needed. These are more rarely used.
Malaysia provides a good example of selective capital controls over outflows that worked successfully during the 1997-99 crisis.
An IMF working paper published in January cites the Malaysian case as an exception of capital controls on outflows that worked.
“Following a tightening of restrictions in September 1998, capital flight came to a halt, allowing reserves to rise back to pre-crisis levels, the exchange rate to stabilise, and interest rates to fall,” according to the paper, Effectiveness of Capital Outflow Restrictions.
The Malaysian policies should be studied by countries that today face a similar crisis. These are countries with significant current account deficits, thus making them dependent on large inflows of foreign capital to finance these deficits.
When global conditions are favourable, the inflows continue, and make the country more dependent.
When conditions change (as is now happening), the country is vulnerable to a reduction or stoppage of inflows or worse still to large capital flight.
Interest rate hikes may not be enough and in any case could induce a recession. In such a situation, especially when reserves are running low, a resort to capital controls may be needed.
The restrictions must however be administered properly and selectively, with the right accompanying policies, and the country must be prepared for bad media coverage and a negative market response for some time.
The policies may then work, to stem capital flight, stabilise the currency exchange rate, save the country from the emptying of reserves that necessitates an international bail out, and allow the country to set interest rates at a level that facilitates economic recovery and growth.
This, in any case, was the Malaysian policy and experience which is worthwhile for other countries, especially those facing financial turmoil or crisis, to reflect upon.
Latin American and Caribbean Leaders Create a Zone of Peace and Unite Against Poverty and Inequality
The Second Summit of the Community of Latin American and Caribbean States (CELAC) successfully concluded on 29 January 2014 in Havana, Cuba. It was a landmark Summit for leaders of a region that includes Latin America and the Caribbean.
In their Declaration the leaders declared the CELAC region as a Zone of Peace. In their statements, they promoted CELAC integration as a key strategy for the future of the region. They also stressed the need to ensure the sovereignty of CELAC countries over their territories and natural resources; ensuring that their economies move away from raw materials exportation and achieve balanced distribution of incomes within countries and throughout the region.
The summit was preceded by a Senior Officials’ Meeting on January 25 and 26 and a foreign ministers’ meeting on January 27, as a result of which 30 documents were prepared for adoption by the leaders. These include the proclamation of Latin America and the Caribbean as a zone of peace (see below), the creation of the China-CELAC forum, supports for the peace process in Colombia, the rejection of the unilateral economic embargo by the United States against Cuba and of the inclusion of Cuba in the so-called list of countries that sponsor terrorism, among others.
Below are 3 documents: (1) Closing remarks by the President of Cuba at the closing of the CELAC Summit; (2) Proclamation of the region as a Zone of Peace; (3) Interview with the South Centre Executive Director on the significance of the CELAC Summit, on teleSUR television station.
Closing Remarks of Cuban President
Below is an excerpt of the closing remarks of Army General Raul Castro Ruz, President of the Council of State and Ministers of the Republic of Cuba, at the Second Summit of the Community of Latin American and Caribbean States (CELAC), Havana, 29 January 2014:
The celebration of the Second Summit of our Community marks the end of Cuba’s one year Pro Tempore Presidency, which we tried to carry out in a serious and responsible way.
We have received a valuable support from all of you and I would like to convey to you the deepest gratitude of the government and the entire Cuban people for your participation in these days of broad and profound discussions of our countries’ biggest concerns.
The documents adopted at this Second Summit have reaffirmed our commitment with the values that led to the foundation of CELAC and our strong belief that unity amid diversity as well as the Latin American and Caribbean integration are the only viable alternatives for the region.
We have reached important agreements on transcendental issues, such as the promotion of a “Zone of Peace” in the region and the rules and regulations required to ensure that the intraregional and extraregional cooperation bring about tangible benefits for this community.
CELAC has reiterated, among other aspects, the unrestricted respect for the Purposes and Principles contained in the Charter of the United Nations and International Law.
It has reaffirmed that, in order to eradicate poverty, it is indispensable to change the present world economic order, promote solidarity and cooperation and demand compliance with the development assistance commitments that have been entered into.
Emphasis has been made on the importance of the State’s permanent sovereignty over their natural resources. We intend to establish the best ways to exercise that right.
We likewise expressed our firm determination to work in order to cope with the challenges posed by the international situation and make every effort to promote equity and social inclusion, eradicate discrimination, inequalities, marginalization, human rights violations and the infringements of the Rule of Law.
Cuba will continue to work indefatigably within CELAC, and particularly as a member of the Quartet during the present year, to ensure the continuity of the process of consolidation of our Community.
Once again, thank you very much to all of you for your presence and your contribution to the works of CELAC in 2013 and at this Summit.
And now I have the honor to proceed to hand over the Pro Tempore Presidency of CELAC to Her Excellency Mrs. Laura Chinchilla, President of Costa Rica, to whom we wish every success in her endeavors.
Proclamation of Latin America and the Caribbean as a Zone of Peace (Original signed by the Heads of State and Government of the Community of Latin American and Caribbean States)
The Heads of State and Government of the Community of Latin American and Caribbean States (CELAC) gathered in Havana, Cuba on January 28 and 29, 2014 at the Second Summit, on behalf of their peoples and faithfully interpreting their hopes and aspirations,
Declare:
1. Latin America and the Caribbean as a Zone of Peace based on respect for the principles and rules of International Law, including the international instruments to which Member States are a party to, the Principles and Purposes of the United Nations Charter;
2. Our permanent commitment to solve disputes through peaceful means with the aim of uprooting forever threat or use of force in our region;
3. The commitment of the States of the region with their strict obligation not to intervene, directly or indirectly, in the internal affairs of any other State and observe the principles of national sovereignty, equal rights and self-determination of peoples;
4. The commitment of the peoples of Latin America and the Caribbean to foster cooperation and friendly relations among themselves and with other nations irrespective of differences in their political, economic, and social systems or development levels; to practice tolerance and live together in peace with one another as good neighbors;
5. The commitment of the Latin American and Caribbean States to fully respect the inalienable right of every State to choose its political, economic, social, and cultural system, as an essential condition to ensure peaceful coexistence among nations;
6. The promotion in the region of a culture of peace based, inter alia, on the principles of the United Nations Declaration on a Culture of Peace;
7. The commitment of the States in the region to guide themselves by this Declaration in their international behavior;
8. The commitment of the States of the region to continue promoting nuclear disarmament as a priority objective and to contribute with general and complete disarmament, to foster the strengthening of confidence among nations.
Transcript of the interview of Martin Khor (South Centre Executive Director) with teleSUR on the CELAC Summit, 30 January 2014
Positive Evaluation of the 2nd CELAC Summit from the South Centre
From the Swiss headquarters of the South Centre, the Malaysian Intellectual Martin Khor, who is its Executive Director, valued highly the contributions of the second summit of CELAC to Latin American and Caribbean integration. The South Centre is an intergovernmental agency of developing countries with its headquarters in Geneva. Mr. Khor pointed out the meaning of Latin America and the Caribbean being proclaimed a zone free of nuclear weapons and a Zone of Peace, and hoped that the desire of the Declaration of Havana to resolve disputes among states without interference from extra-regional powers sets an exemplary precedent.
teleSUR: To discuss the advances and challenges of CELAC we talked with the Executive Director of the South Centre. Mr. Khor, to start, in your opinion, what is the importance of this new mechanism of integration in the context of international relations?
MK: I think that the Summit of CELAC is extremely important and we congratulate the region for this very important event that had the attendance of almost all heads of state. Surely, among the most important themes, there is peace and security of the region. In this regard, we wish to congratulate the region for declaring a zone of peace and free from nuclear weapons. Furthermore, it is important, and we consider this to be a great achievement, the fact that in case there is a problem in the region it will be solved in the region before becoming a conflict. If all this is implemented it will be a great contribution to world peace. Secondly, CELAC will be very important for the development of the region as countries will prosper more by trading among themselves. They will increase relations of investments and cooperation in education, medical assistance and many other areas of economic and social development not only for the region but for all the developing countries. We hope that the region will also reach out to other parts of the world such as Africa and Asia.
teleSUR: Mr. Khor, Cuba has been isolated from its Latin American and Caribbean neighbours for a good time as a result of pressure from the US but was elected to the pro tempore presidency of CELAC during 2013. What is the historical importance of this gesture towards Cuba?
MK: Well, Cuba is a very important country of the developing world. Cuba is an active Member of NAM and the G77, considered as a sister nation by all the nations of the developing world. The fact that CELAC was established with Cuba not only as a member but also accepted by the countries to lead the second phase after Chile (pro tempore of the first CELAC Summit) is something symbolic, with an important significance not only for Cuba but for all the region and all developing countries. We wish to congratulate Cuba and we believe Cuba has been responsible to advance CELAC.
teleSUR: Mr. Khor, Latin American and Caribbean countries are meeting to discuss its own issues and plan/draw the lines for its development without a call by or presence of the US. How do you judge this fact/event?
MK: The region comprises developing countries. They have all been colonized in the past at political or economic levels. This is why we share a common history and have some similar problems. This is why we also need to unite to fight poverty and underdevelopment in all the regions of developing countries. The fact that CELAC countries are getting united in a spirit of self-confidence and independence to combat together the problems that have historically affected us is an important element because I do not consider that CELAC is an anti-US organization, but a pro-Latin American and Caribbean organization established to deal with its own problems and that is consolidating through its integration and also, that is capable of thinking independently and of coordinating policies that will enable them to become strong partners. I think this is the historical role that CELAC can play: to boost integration and strengthen allowing the region to have better relations not only with the US, but also EU, Japan, and the developing countries. For Asia, Africa and Latin America and the Caribbean this Summit is certainly a great move ahead/leap forward and we all at the South Centre wish the region and its people all the success after this summit.
teleSUR: Good, this is the wish of all the countries. Many thanks Mr. Khor, Executive Director of the South Centre who shared with us his views on the 2nd CELAC Summit.
Watch this interview of Mr. Martin Khor (on the significance of the CELAC Summit) on the teleSUR TV station ( http://multimedia.telesurtv.net/web/telesur/#!es/video/valoracion-positiva-de-la-2a-cumbre-celac-hace-el-centro-del-sur , in Spanish only).
A bigger global role for China?
China seems to be preparing to play a bigger role in global economic affairs, but not at the cost of giving up its developing country status.
By Martin Khor
After years of being rather low key in economic and social affairs at the United Nations, it looks as if China is now ready to upgrade its role in the future.
This is the impression I got after taking part in a conference on Transformative Global Governance: China and the United Nations, at Shanghai on 13 – 14 January 2014 .
For decades China has been careful not to assert itself at the forefront of the UN’s economic and social affairs, focusing instead on its own economic development, and insisting that it is a poor or average developing country.
It has played an active role as part of developing country groupings, particularly the Group of 77 and China, which is the umbrella body for over 130 developing countries.
In recent years there have been calls especially by Western leaders for China to play a “leadership role” in international affairs. And a debate has been taking place in China itself on how to respond to this.
The Shanghai conference debated this as its central theme. The meeting was organised by UNITAR (the UN institute for training and research) and the UN Association of China and several Chinese research institutes.
But equally telling, it was hosted by and held at the China Executive Leadership Academy Pudong, which is a leading institution which trains senior government bureaucrats and officials of the Chinese Communist Party, thus giving the workshop a high-level official stamp.
Participants included senior officials of the Foreign Ministry, Chinese international affairs scholars, diplomats and academics from foreign countries including the US, European and African countries, and high-level UN staff including senior advisors of the UN Secretary General, the head of the UN’s political affairs department, and representatives of UNCTAD and UNDP.
In my session, I gave the view that China is still very much a developing country and its high standing as the world’s number two economy and number one trading nation is due more to its large population.
In per capita terms, China is average, being Number 90 to 100 out of 200 countries in terms of per capita income, human development index, and carbon dioxide emissions.
At the same time, in absolute terms, China has become economically important and its actions significantly influence the global economy and environment. Thus, the calls for it to contribute more.
It would be best for China and for the developing world if the country remains, in identity and behaviour, firmly within the family of developing countries, while taking a leadership role in advocating the cause of these countries and their development aspirations.
A question was raised as to how to respond to calls for China to increase its contribution in global affairs. My response, which received support from those present, was that it depends on what contribution was being asked of China, and what are the related conditions.
Many developed country leaders and diplomats when asking China to play a greater role are asking it to give up its status as a developing country, and to take on the obligations of a developed country.
Such obligations may include slashing tariffs and helping to create new rules at the WTO and taking on similar commitments on reducing climate-related emissions as the developed countries. Agreeing to this may constrain the country’s “policy space”.
At the same time, China is not being offered a corresponding increase in power in global governance. For instance, China’s share of quota (and voting weight) in the IMF and World Bank has risen only slightly, and not in line with its increasing weight in global GNP.
But it is asked to contribute loans to the IMF for recycling to countries in debt crisis, which in recent years have been in Europe. China has provided US$100 billion.
Also, China is being called on to provide aid to other developing countries, and attach conditions similar to the aid provided by developed countries.
China is already providing massive amounts of loans and grants to many developing countries, usually without the many conditions of Western aid. South-South aid is also provided by India, Brazil and others, but on a basis of solidarity rather than obligation.
There are implications for other developing countries if China were to agree to give up its developing country status. Many of them, including Malaysia, have higher GNP per capita than China. If China gives up its status, they too will be pressurised to take on same obligations as developed countries.
If the developed countries are willing to cede some of their privileged positions of dominance in decision-making in global institutions, and open up the space for China and other developing countries, this would be most welcome.
There are few signs that this will be forthcoming anytime soon. Thus the “democratic deficit” in global governance continues.
China should thus take a leading role, through the G77 and China, to expand the power of developing countries in global affairs.
At the Shanghai conference, most of the Chinese participants indicated that their country is now ready to assume a greater role, pointing for example to its increasing share in the UN budget and in the UN’s peace-keeping activities.
However all of them stressed that China is a middle income developing country, citing the existence of 150 million poor people, and wide imbalances between the urban and rural people. It was definitely not willing to be considered a developed country.
The Chinese participants also showed great interest in the issue of global governance, voicing dissatisfaction at how developing countries as a whole are still very under-represented in decision-making and influence in global institutions and in economic and social affairs.
I was also struck by the attitude of the UN officials and Western diplomats and thinkers.
Almost all of them were impressing on the Chinese how important it is for China to be a leader in the UN and global affairs.
Perhaps there is a perception that China can fill in the monetary void caused by the decline in funds from cash-strapped Western countries.
It could be more than that, however. China has not been very assertive at the UN previously, and there is a willingness among UN officials to see a more active role for it in the future.
A step forward for Asian cooperation
ESCAP’s Ministerial Conference on Regional Economic Cooperation and Integration in Asia and the Pacific 2013 held on 17-20 December 2013 in Bangkok could be the start of a regional coordinated response to the many big problems facing the Asia-Pacific region.
This is the Asian century, many books and articles have proclaimed. Many others around the world often look at Asia, economically, with some envy.
On the other hand, in the wake of the global economic slowdown, some Asian countries are bracing themselves for tough times ahead.
They include countries like India and Indonesia which have current account deficits and are expected to face difficulties when the United States reduces the pace of its easy-money policy.
For China, the era of guaranteed rapid growth of exports to the United States and Europe is over. It is changing direction from export-led to domestic growth, and from investment-based to consumption-based domestic demand.
Economic growth as a goal in itself in Asia is also being challenged on many fronts: by the need for more equitable sharing of benefits, by environmental degradation such as health-threatening air pollution, natural disasters, and climate change.
One weakness is that the Asian and the Pacific countries do not have the practice of thinking and working together as one region. There are separate sub-regional organisations, such as ASEAN (for Southeast Asia), SAARC (for South Asia) and the Pacific Islands Forum.
But there isn’t an organisation of the developing countries for the whole region. ASEAN-plus-3 and the East Asia Summit come nearest, but these are informal gatherings and even then they cover mainly East Asia.
By contrast, Africa has the African Union with its Commission, that unites the various sub-regions. In South America there is UNASUR; and most recently the emergence of CELAC (which groups together South and Central America plus the Caribbean countries).
In the policy-making vacuum for our region has stepped in ESCAP, the United Nations Economic and Social Commission for Asia and the Pacific.
It used to be little noticed. But in recent years ESCAP has grown in profile and stature, under the leadership of Dr. Noeleen Heyzer, a Singaporean with close family ties with Malaysia.
In December 2013, ESCAP Ministers took a step forward by adopting a four-pronged programme to link up the countries of West, Central, East, and Southeast Asia and the Pacific.
The Ministerial conference adopted a Bangkok Declaration on regional economic cooperation and integration in Asia and the Pacific.
Dr. Heyzer highlighted the four pillars for regional cooperation – an integrated regional market, seamless connectivity, financial cooperation and regional response to vulnerabilities.
In the opening ceremony, East Timor’s Premier Xanana Gusmao pointedly said that the context and circumstances of each country are different, which should be taken into account when advocating regional cooperation.
Moreover, the aim should be development for the people, not the benefit of transnational companies or a corrupt global financial elite.
He struck a cautionary tone, that the plans for regional integration should result in mutual benefits including for the weaker countries, and should not pry open the economies to powerful economic entities and the global financial markets.
Leaders from less developed countries, such as Samoa, Laos and Tuvalu, stressed the need to give leeway and special treatment for the smaller and weaker countries when negotiating trade agreements, so that they do not get further marginalised.
The Bangkok Declaration was a good blend of four action areas:
Moving forward towards forming an integrated market, including bringing down trade barriers (but with special treatment for weaker economies), recognising the importance of migration flows and intra-regional tourism.
Enhancing financial cooperation, including mobilising Asia’s immense financial resources towards short-term liquidity support (to help countries with foreign exchange problems), trade finance, and funds for infrastructure development.
Increasing cooperation to address shared vulnerabilities and risks, including the issues of food security (through a new regional agriculture network), economic shocks, natural disasters, environment and climate change.
Developing ‘seamless connectivity’ in the region in the areas of transport (including an Asian Highway Network and a Trans-Asia Railway Network), energy (to be developed through an Asian and Pacific Energy Forum), and information and communications technology.
To avoid this Declaration from being only another document at just another meeting, the Ministers agreed to a follow-up plan. This includes setting up four expert working groups (to propose actions for each of the issues), convening a second Ministerial meeting on regional cooperation in 2015, and having an inter-governmental process open to all ESCAP member states to receive the expert group reports and to prepare for the Ministerial meeting.
The understanding is that there will be a Ministerial conference every two years on regional cooperation and integration to review progress on the actions in the four areas.
With the Bangkok conference, ESCAP is thus set to get concrete action going on Asian-Pacific regional integration and cooperation.
Pursuing this cooperation agenda is “an important step towards realising a broad long-term vision of an economic community of Asia and the Pacific,” says the Bangkok Declaration.
Malaysia’s delegation was led by Deputy International Trade Minister Datuk Hamim Samuri, who described the conference as very useful, and stressed the need for “action with concrete outcomes” and called on the four expert groups to come up with solid deliverables.
At the final session, the conference chairperson, Samoa’s former Finance Minister Faumuina Tiatia Liuga, said: “For us to be stronger, to be the Number One region in the world, we need to support one another, and help the weakest.”
It remains to be seen whether this conference lives up to its promise of sparking a process for Asian Pacific countries to talk with one another and generate region-wide cooperation in concrete ways in finance, connectivity and addressing vulnerabilities.
If it does, then policy making in the region will become more mature, which is what’s needed in this complex globalised world with its many big challenges in the near future.
By Martin Khor
South Centre pledges continued support to the Group of 77 and China
Below is the statement delivered by Mr. Vicente Yu on behalf of the South Centre at the G77 and China Geneva Handover Ceremony on 24 January 2014 at the Palais des Nations, Geneva.
We would like to congratulate Ambassador Carbo for his able and distinguished leadership of the Group in 2013 and express our full confidence that under the Chairmanship of Ambassador Abbas of Chad, 2014 will be another year of activity and success for the Group of 77 and China in Geneva.
As many of you know, the relationship between the Group of 77 and China and the South Centre is a long-standing and organic one. The South Centre’s work derives its credibility and importance from the value and use that the Group of 77 and China makes of our work. As the intergovernmental policy research institution of the South, the South Centre has long prioritized working closely with the Group of 77 and China as one of its main mandates.
Most recently, we had worked closely with the Group and many of your missions and delegates in the preparations for UNCTAD XIII. We have also been working very closely with the Group of 77 and China in New York on issues that are dealt with there but which are also highly relevant here in Geneva and UNCTAD – such as on climate change, sustainable development goals, and the post-2015 development agenda.
This year, here in Geneva, we look forward to continuing this relationship with you as preparations for UNCTAD XIV start and as UNCTAD and the Group of 77 and China celebrate their twin 50th anniversaries. Coincidentally, this year is also the 20th anniversary of the opening for signature of the treaty that established the South Centre. We will fully support and help in the efforts of the Group as well as of UNCTAD in making these twin anniversaries very relevant and substantive. We would like to thank Mr. Miguel Bautista and his team, with whom the South Centre has worked closely, as the focal point for UNCTAD’s support to the Group of 77 and China, and we also look forward to working with UNCTAD’s other units, such as the Division on Globalization and Development Strategies under Dr. Kozul-Wright.
There will also be many opportunities for the Group of 77 and China, its individual members, and the South Centre to work together on many issues other than those in UNCTAD. Just to highlight a few, the global economic situation is still very fragile with developing countries being adversely affected more and more; trade negotiations at the WTO have revived after its ministerial conference in Bali last month, as will also the EPA negotiations that African countries are faced with; negotiations on the SDGs and the post-2015 development agenda in New York will also ramp up this year, as will also the climate change negotiations; there continue to be major policy discussions taking place at WIPO. On these issues and more, the South Centre stands ready to work together with the Group of 77 and China to promote and protect developing countries’ rights and interests.
Finally, the South Centre is the South’s own research institution that is tasked with promoting the views of the South on various development issues. We take this mandate seriously. We look forward to interacting closely with the Group and your missions, either through meetings such as this one, or joint activities, or even individual visits and discussions.
G15 to be engaged in post-2015 Development Agenda
The Group of Fifteen announced plans for heightened South-South Cooperation and engagement with Geneva-based institutions at their Annual Meeting of the G15 Foreign Ministers in New York.
The Ministers of Foreign Affairs of the Group of Fifteen held their 36th annual meeting on the sidelines of the 68th UN General Assembly on 27 September 2013 in New York where they renewed their commitment for enhanced engagement and cooperation among themselves, as well as with the relevant Geneva-based institutions including the South Centre. Agreeing to expand cooperation in step with the evolving Post-2015 development agenda, the Group decided to include information and communications technology, intellectual property, migration for development and renewable energy as new areas for G15 cooperation.
The meeting was chaired by Professor G.L. Peiris, Minister of External Affairs, Sri Lanka. Ministers/Heads of Delegations of the G15 member states reviewed and unanimously approved recommendations spanning the new thematic and other areas of cooperation including formalizing the ongoing working relationship with the South Centre.
Established as a Summit Level group of developing countries in 1989, following the conclusion of the Ninth Non-Aligned Movement Summit in Belgrade, the Group comprises 17 developing countries from Asia, Africa and Latin America and the Caribbean. The aims and objectives of the Group are to harness the latent potential of the member states for mutually beneficial cooperation, besides serving as a forum for the conduct of regular consultations in pursuance of their common agenda.
Sri Lanka’s Permanent Representative to the United Nations in Geneva and the Chair of the Personal Representatives of the Group, Ambassador Ravinatha Aryasinha, while presenting the highlights of the activities undertaken by the Group, made special mention of the common positions arrived at by the Group on vital global issues delivered during the year at the sessions of the WHO, ILO, FAO, ECOSOC and UNCTAD with more in the pipeline. Noting the dire need for enhanced cooperation, engagement and solidarity among nations of the Global South for securing bargaining power and leverage, Ambassador Aryasinha pointed to the need for developing countries to engage more unitedly towards framing the international development agenda, in order to forestall it from being “imposed” by the developed countries as a fait accompli.
The Sri Lankan External Affairs Minister G.L. Peiris, noting the ongoing deliberations in shaping the global development landscape beyond the year 2015, called for a collective voice in articulation of common interests and convergence across a wide spectrum of fields, including eradication of poverty, balancing economic development with environmental protection, access to technology, reforms in international financial institutions, sustainable growth, among others. He reaffirmed that the Group not only has the potential to be an active contributor to the Post-2015 Development Agenda, but can also be a voice on behalf of the Global South.
The Group unanimously accepted Kenya’s offer to be the next Chair of the G15 following the Summit of the Heads of State and Government of the G15 scheduled to be held in the last quarter of 2014 in Colombo.
Equity, climate change and sustainable development: Perspectives of Developing Countries – South Centre-Ecuador Side Event at COP 19 Warsaw November 2013
By Mahlet Melkie
ASouth Centre side event to the Nineteenth Meeting of the UNFCCC’s Conference of the Parties (COP 19) took place in Warsaw on November 21, 2013. The side event which addressed different conceptions and approaches to operationalizing equity in the ongoing climate negotiations was held in conjunction with the Ministry of Environment and Ministry of Foreign Affairs, Government of Ecuador. Side event speakers from delegations of diverse developing countries addressed questions such as ‘Equity as the gateway to mitigation ambition – Why and how?’, ‘How can equity be operationalised in the negotiations and the 2015 Deal?’ and the role of a rights-based approach to sustainable development.
The moderator, Dr. Mariama Williams of the South Centre, opened the discussion by remarking that equity is a key issue in the ongoing negotiations. She noted that a high level of frustration and disappointment with the process had led to the walkout from COP 19 of over 800 representatives of NGOs that very day. Williams highlighted that climate change does not affect every one equally – those from countries such as the Philippines, the LDCs, SIDS and African countries are highly vulnerable. Particular groups, such as women, due to existing inequalities between men and women, and Indigenous Peoples, with a long history of marginalization and dispossession, are already suffering from the impacts of climate change as well as from some of the solutions being imposed in response to the climate challenges. She reviewed that sustainable development as a concept is defined as meeting the needs of the present generation without compromising the needs of the future generation. Hence equity in the context of climate change has multiple dimensions including intergeneration, intrageneration, gender and North and South aspects.
At the international level, Williams said that the UNFCCC recognised that developed countries had contributed to the accumulation of GHG and hence bear historical responsibility. Developing countries who had contributed the least to climate change historically must now bear the disproportionate negative effects. Thus, under the Convention, which is grounded in equity and common but differentiated responsibility, developed countries have the commitment to take the lead in mitigating GHG emissions and modifying long-term trends so as to protect the climate system and prevent catastrophic climate change. These countries also have the commitment to finance, technology transfer and other means of implementation to support developing countries in adapting to climate change and in transforming their economies to clean and efficient energy pathways.
Mr. Daniel Ortega, Undersecretary of Foreign Affairs, Ecuador, led off the panel discussion by stating that equity is not a mathematical formula, rather it is a political definition in which the implementation of the principle of CBDR should be ensured without affecting the main priority of poverty eradication of developing countries such as Ecuador. When looking at equity in the context of climate change it should not compromise the needs of the people and should not transfer the responsibility to communities in the developing world. There should be a rights-based approach that includes rights to nature which are also included in Ecuador’s Constitution. The Undersecretary further argued that the 2015 climate deal should comprise rights in terms of human rights, poverty eradication and human development, and the rights of mother earth.
Ortega said that the President of Ecuador introduced the concept of net avoided emissions at the 2010 Cancun meeting of the COP as a means of financing the Yasuni Initiative which Ecuador offered as part of its contribution to the global mitigation effort. He said that this was an alternative to the Kyoto Protocol and its market mechanisms which do not reduce emissions that are already in the atmosphere. Hence the essence of the Yasuni Initiative—to leave the oil in the ground. However, while Ecuador would like to do this it needs to be compensated so that it can continue to deal with pressing poverty and other development issues. Ecuador is also supportive of the Daly-Correa Tax (i.e., a small tax on oil exporters to support developing countries). However, in the negotiations there is no opportunity to discuss the sources of finance.
Undersecretary Ortega also flagged the iniquitous situation of the multinational company Chevron which had polluted and created destruction in Ecuador with damages far exceeding that which occurred with Exxon in Alaska. The communities won the case against Chevron. But then Chevron turned around and sued the government of Ecuador under an international (investment) arbitration tribunal.
Undersecretary Ortega reminded the audience that Ecuador and other Latin American countries champion the right of nature. He argued that the 2015 deal should have rights and justice at its center.
Ortega added that climate change is not only an environmental issue but also a political problem. But if all (governments, CSOs, academia and others) work together a solution can be found.
Prof. Zou Ji, Deputy Director of the National Center for Climate Change Strategy and International Cooperation in China, in his intervention during the side event, stated that equity as a concept has been there for a long time; it is also mentioned in the IPCC reports. Equity is a normative and a value judgment at the same time; it is very diversified. The basic question for China is how the international climate regime reflects the spirit of equity in terms of equity rights. The other question is: do developing countries have adequate opportunity to move to a low carbon development path?
Prof. Ji said that in history North America and Europe had experienced the high growth curve. Carbon emission levels become lower and lower in developed countries and now others are blaming China while comparing China’s emissions with those of Germany, UK or France. However, China has lower per capita emissions.
Prof. Ji argues that with the urgency of the need to act on climate change, developing countries should not repeat the classic emission trajectory of developed countries to achieve the same development goals. However, this is not easy and is more risky for developing countries. Therefore equity should be elaborated with a focus on an opportunity for low carbon development. There are two pre-conditions here: equity within two groups of people—the most vulnerable and the future generation.
He highlighted that in the negotiations in Warsaw there were three main points that needed to be given emphasis:
1. Historical responsibilities
2. Equity Reference Framework
3. Principles of the Convention
Mr. Rene Orellana, Head of the Delegation of Bolivia, further deepened the discussion on equity in the climate governance by saying that developing countries have concrete demands and needs. He further elaborated that in general when one makes an evaluation of mother earth, the concept and visions of development must be taken into consideration. He also linked it with the ‘Future We Want’ document of the ‘Rio+20’ mentioning that there are interesting elements to discuss with regards to sustainable development and stressed climate change to be included in these discussions. He said that it was important that we interrogate the tools that we are using for development in order to better understand in the context of the pre