Discussing the G-192 Summit "Anatomy of a Crisis," world economic imbalances, and the Stiglitz Commission. A commission of experts set up by the president of the UN General Assembly on Reforms of the International Monetary and Financial System1 June 24-26.
|Nestor Stancanelli, Secretary for International
Negotiations, Ministry of International
Relations, Argentine Foreign Office.
As a leading member of the negotiation team for Argentina in both the G-20 and the G-192, Nestor Stancanelli has a unique perspective. His nation scores high on the Human Development Index (HDI)2 of the United Nations Development Programme (UNDP); its Gross Domestic Product (GDP) is small by G-20 standards but large by G-77 standards. Most importantly, Argentina’s recent economic traumas have led its government to accumulate vast experience in the handling of financial crises and their aftermath.3
Dr. Stancanelli says that in times of humanitarian crisis the United Nations is bound, under Chapter Nine of its charter (on International Economic and Social Co-operation)4 to create the conditions of stability and well-being necessary for peaceful and friendly relations among nations. It is therefore relevant that the Nicaraguan president of the General Assembly of the UN call a summit so that all of the affected countries on the planet can have their say.
Tony Phillips (TP): First I would like to ask you to introduce yourself and explain your role, especially as regards the global financial crisis and the G-20, G-192.
Nestor Stancanelli (NS): I’m deputy secretary for international economic negotiations for the Argentine Ministry of Foreign Affairs and Trade. I participate regularly in meetings of the G-20 from which I have just returned. The meeting I attended last week is called a Sherpa meeting. It is the technical level for the G-20. When you do not have Summits or Ministerial Meetings (Ministers of Economics or Foreign Affairs), you have Sherpa meetings. Sherpas provide guidance to the Summit.
TP: What has been the political economic role of the president of the General Assembly? Is there any precedence for calling such an economic crisis meeting?
NS: D’Escoto was right to call the conference. It is not unusual that the UN would call a meeting in moments of economic, social, or humanitarian crisis to consult the international community for their input on solutions. The United Nations Charter covers economic and social issues. It has a wide scope, not just financial or monetary matters. He has received a lot of support for calling it. Perhaps these kinds of meetings have not been regularly called, but it is up to the UN to take an interest in such important matters. Chapter Nine of its Charter calls for its competence in such matters.
TP: After various G-8 and the G-20 meetings on economic crises, why did President D’Escoto think that a General Assembly meeting was needed?
NS: The G-20 is more representative than the G-8. The countries governing the G-20 produce more than 80% of world GDP, but that is not enough. When resolving such an important crisis with huge social impacts, one needs to broaden dialogue to the whole international community. All countries should take up the matter, discussing and analyzing solutions (some proposed other forums). I believe it is necessary to broaden the number of countries discussing the issues.
TP: When we spoke earlier you mentioned differing reactions to the April Stiglitz Commission Report. Can you comment on the G-77 and G-8 reactions? Did the various groups like the first draft of the report? What did they not like? What caused the delays of the meeting, who was in favor and who against? What is happening with the current draft proposals for the full assembly?
NS: The [last draft before the meeting] had many differences on various proposals.5 Our negotiators are working on a common set of proposals, toward a final document agreed upon by everyone. Negotiation breeches gaps, positions have to be traded off with others resulting in a document which is the "mean" of the points of view. It will not satisfy everyone in the UN but it will be a measure of whether there is the political will to give the UN a role in overcoming the crisis. We need the United Nations on board with this crisis.
It is a very long document that is being discussed. [The draft before the conference was 113 pages and the post-conference draft6 16 pages.]7 We would prefer a short succinct document, something very precise, but it is very difficult with 192 countries. There is a lot of common ground but there are a number of countries with specialized economic activities such as tax havens, small islands partnered with financial institutions. How do you combine transparency with secrecy in industries such as offshore banking? In order to have a positive impact on the international community, a simple short document would be easier but it would imply that humanity is in a substantially better position than it currently is in. Such things are for the long-term future. For now, it is important to have dialogue.
TP: How is Stiglitz viewed by the G-77?
NS: Very positively. I welcome his suggestions. He offers suggestions that are not only very interesting, but they also come right to the point, and could evolve into practical solutions. We can use these as a blueprint for change to overcome the essential problem: addressing global macroeconomic imbalances. Put another way, changing the way income is distributed. This, in turn, involves changes to the International Monetary Fund (IMF) and the World Bank (WB). We need to address macroeconomic imbalances, wage distribution, changes to the financial system, changes in IMF and WB.
All of his proposals are very interesting, such as using IMF Standard Drawing Rights (SDRs) as a reserve currency and the generation of more SDRs. It is the position of Argentina that the IMF create substantially more SDRs and that they be allocated more to developing countries. The G-20 has taken this as a first step, the new SDR allocation of $250 billion8 among IMF members. Stiglitz says we should allocate more weight to the developing countries and not to the countries that do not need such an allocation.
TP: Is there a plan to change the currencies in the SDR?
NS: We are talking about two different things: one is the allocation of the SDRs, which, as you know, are valued according to a basket of currencies. Then there is the other idea, to transform SDRs into a reserve currency. All currencies would be valued with respect to SDRs.
That would mean that should a currency be devaluated it would lose ground in SDR terms. SDRs are valued based on a basket of seven or eight currencies. The currency being devalued will lose weight (in the basket). With a reserve currency based on SDRs, individual countries—especially those that have not been following strict fiscal, monetary, and other balances—will have to be more careful in the future regarding fiscal and balance of payment deficits. Those that do not would be punished.
Not only Stiglitz, but many countries, have been saying that the problems that we face are highly correlated to the lack of discipline of certain countries that print reserve currencies, certain European countries, and especially the United States.
TP: I would like to speak about some concrete proposals in the Stiglitz draft report. In particular some which are ecologically friendly such as taxing fishing on the high seas and others more specific to the problem, a proposal to tax speculative financial investments for example (similar to the Tobin Tax,9 a tax on currency speculation).10
First, the financial services taxes aimed at reducing fluctuations and currency movements. Do you see that being a possibility? Does the Argentine government support this proposal?
NS: Such a financial tax has been proposed many times, the idea being that to apply the tax would impinge on profits for short-term speculation with the welcome effect of channeling capital to productive use instead of speculative bets.
Such ideas need to be considered together with several other factors. First of all, what is required are changes in the international financial system such as transparency, shifting savings to productive use so as to divert investment to projects that are profitable from the point of view of society (health, education, hydroelectric power) while preserving the environment. Also if we do not strictly regulate rating agencies and deal with the problem of bank secrecy while imposing severe penalties for money laundering and tax evasion, the tax measure alone will not work. All of these reforms must come together in order to re-channel capital to production for social needs. An isolated tax measure will not have an important role in preventing speculative capital.
There needs to be substantial changes in the international financial system providing tough regulation, transparency, and rating agencies which do not give AAA ratings to companies that collapse a week later. Also important is making how they calculate country risk transparent, not just corporate financial risk. Calculating country risk correctly involves a reform of the IMF and the WB to ensure that countries are not suffering terminal crises such as those we have seen in the past (Mexico in ’95, South East Asia in ’97). Reformed institutions will mean that interest rates will not fluctuate in the way they have in the past. It is important is to ensure that a tax like this not only inhibit speculative flows of capital but also that it encourage social spending that respects preservation of the environment.
Reform is a package; isolated reforms will fail.
TP: What do you see as the current affects of the economic crisis on the developing world, and Latin America and Argentina in particular?
NS: The effects in Latin America are, first of all, a reduction in export demand. This is the first negative impact. The second is credit. Argentina doesn’t currently resort to borrowing from international capital markets. Instead it borrows from international organizations such as the WB or the Inter American Development Bank (IADB). Despite this, the reduction in capital lines from the capital markets still means restrictions on trade financing. It is difficult for companies to get credit lines for international trade. Financing exports is more difficult despite the fact that local banks take up some of the slack. The National Bank of Argentina11 or the Argentine Investment Bank for Exports and Foreign Investment (BICE) provide alternate credit. These are cushioning the impact. Argentine reserves are being used to finance exports.
In spite of this, the effect on Argentina in 2009, and perhaps part of 2010, will be lower rates of growth. Estimates being used for budgetary reasons show 4% growth this year, but other agencies that provide forecasts to the central bank are forecasting growth of one or 2%.12
The reason the effect is not so bad is the government has been very strict with budget discipline and financial paper. Also, for the last six years Argentina has run a balance of payment surplus and the government has built up $46 billion in reserves (starting from practically nothing in 2002). Foreign debt now represents around 40% of GDP when it was over 100% of GDP in 2002.13
That means that the country has its accounts in order but capitalization is also important. One of the things that led to the crisis was the privatization of pension funds. This meant that the government had to continue paying pensions while the receipts were in the banks and the private institutions that had control of the privatized pension funds.
Now the government has recovered all this capitalization of pension funds, by re-nationalizing pension funds in 2008.14 Argentina invests this money in the economy in infrastructure and productive projects. This economic activity means that workers continue to receive their salaries, they pay their pensions, and private companies maintain momentum. Capitalization was adversely affected when pension funds were privatized; now reversals of privatizations help to drive the economy.
Before the privatization, the pension system was in balance. However, having privatized the pension funds, you continued paying pensions. This involved borrowing, and the risk premium that Argentina had at this time meant that it had to pay seven or 8% on international borrowing to bridge the gap (when rates in the United States were three or 4%). This difference inflated mounting foreign debt and eventually the economy collapsed in 2001/2002.
TP: What do you see as the links between the global financial crisis and the energy and the climate crises? Do you see a link between the New York UN meeting and the Copenhagen COP-15 UN climate conference in December this year?15
NS: On the issue of the environment we have to realize that current patterns of consumption are not at all sustainable. By this I refer mainly to member countries of the Organization for Economic Co-Operation and Development (OECD) and the example of consumption patterns they offer the world. One example of this is automobiles. If China were to have the same number of private cars as the United States, the climate would collapse. The carbon emissions would be above a life-sustaining level.
Perhaps this crisis is giving us a moment to reflect on what kind of a world we seek. The levels of demand have been unsustainable. We need to have rising levels of demand in developing countries and a fall in the level of demand in OECD countries. We need to move toward public goods, traveling more in trains, underground [metros], changing the patterns of investments to move toward the public good in public transport, education, clean energy (protecting the environment), and so on.
This is vital in the discussion of the reform because it is not only financial reform that is needed. The problem we are facing is coming from the real economy because of these distorted patterns of consumption. This is one problem we are facing in Kyoto [Protocol]/Copenhagen.
In Argentina we have several new ongoing energy projects but we are also trying to change consumption. We will likely not face a shortfall in energy in the future. We have two big nuclear projects and the completion of two more thermal energy centers and various hydroelectric projects across the country, which could meet future needs. We need to rationalize consumption, introducing new technologies, for example in household appliances.
With this modernization on the side of demand and supply, we also need very important oil and gas exploration investments. But you also need to look to a change in consumption. It is more or less the same all over the world. In Copenhagen the Kyoto agreement will be replaced; the agreement was based on national emissions in 1990. Dropping from these levels by 20% in 2020 is not going to be enough. We have to try for more, but this implies a political will to change patterns of consumption.
The way economies operate needs to change and that is not easy. This affects entrenched interests that are benefiting from this consumption. You need structural reform and governments have to explain this to their citizens. For the sake of future generations, governments need to demonstrate leadership by combating vested interests.
That is the issue being faced. Parallel things are happening in international trade. Vested interests, for example, in agricultural production, encourage intensive agriculture when countries in Africa (for example) might be better off producing other agricultural goods or improving their self-sufficiency. For some a transformation of the agricultural production model might be more appropriate, higher quality food or non-intensive production. This might avoid the overuse of chemicals in fertilizers and pesticides, heavy machinery use and so on, all of which are environmentally unfriendly.
The problem is how to manage such interests and to convince citizens to support the structural changes that we need in international economies.
TP: Since the changes required will affect certain interests, will the balance between state and commercial interests have to change so that the state will be stronger?
NS: Substantially stronger. Governments have recently pulled back. They now need to take a greater role, but at the same time it is important to preserve democracy.
TP: The G-20 has given its blessing to the IMF. In richer countries and in some developing countries with large reserves (such as China and Brazil), leaders have agreed that they will go back to their governments to look for funds for the IMF [especially the SDR equivalent of $250,000 million funding which you mentioned in your analysis of the London G-20 meeting16].
Countries like Argentina have been treated particularly badly by the IMF, and recently ceased borrowing from the IMF. What has changed? How can this paradox be reconciled?
NS: We need to change how the IMF functions. The IMF must apply symmetric controls. With developing countries, the IMF has been very strict, while at the same time being totally passive with the United States and others who issue reserve currencies. These countries pay with paper and this has contributed to this global havoc. The IMF has to change. We believe it is important to restructure, to reform, and to apply symmetric disciplines. The global imbalances (in savings and consumption) have lead to this chaos.
But you also have immediate needs. Many countries are suffering and they do not have the options (as does Argentina, for now) of managing through strict discipline of balance of payments and in the fiscal budget. Many don’t have the funding to stimulate their economies in a counter-cyclical way. The IMF needs to play this roll, shoring up immediate balance of payment problems, or whatever is necessary, such as solving energy problems. It needs to be a compensatory body to help the international economy to grow together, which was its original role.
Little by little the role of the IMF has been distorted into a model that transfers substantial resources from the peripheral economies to central economies.17 This has been the case for two or three decades now.
TP: Lastly there has been talk recently about Green Shoots (the darling buds of May), talk of a possible bottoming out of the world financial crisis and positive sentiment in world stock markets. The monetarists are trying to advise governments and central banks to turn their attention to prevention of inflation and post-crisis measures. Meanwhile economists such as Wolfgang Münchau18 of the Financial Times and Paul Krugman19 are warning that this is what happened in 1931, and the change in policy led to a deep depression. What do you feel, what is your gut feeling about economic prospects for 2009-2010?
NS: This is a structural crisis coming from a pattern of unsustainable consumption that must change. We need to combat the unfair distribution of incomes among countries and within countries. You can observe the unfair distribution of incomes in Europe, the U.K., the United States, and Japan. Income and wealth disparity within countries is very important, in African countries, in the United States, Germany, wherever. Perhaps within Germany you don’t have such internal disparity, as you would see between income levels in Germany and those in African countries while in other developed countries, such as the United States, you see wider disparities in income.
I see that this structural change, patterns of consumption, and distribution of income means a lot of restructuring and a lot of pain, especially for the sectors that have benefited from the status quo. We shall only see the benefits from this restructuring in the long-term. In the short-term, what has been done was unavoidable, because the alternative was economic collapse. That would have left large enterprises and financial systems broken, with mounting unemployment, and terrible social damage. If your house is on fire you throw water on it. Later you can see how to rebuild it, to paint it. First, you must extinguish the fire.
What has been done is not a complete success but the worst has been avoided. We now need to determine how to avoid the repetition of such a crisis while working toward a fairer and more just international economy. Working on a new international economy which is sustainable, and which brings social justice. These structural reforms require complex solutions. We need to look at the big picture. Just one or two measures will not suffice; we need a total reform of international financial institutions so that markets can function properly.
TP: When you say that certain interests will resist such a change, who would you see are the major sectors or interests that resist such change? The financial sector, the luxury goods sector, which sectors?
NS: Certainly the financial sector. They have benefited hugely. For example the financial sector in certain countries is 20% of the economy. This is an incredibly large proportion of the cake. Yes, the financial sector without doubt.
But it is also necessary to highlight all of the unnecessary military expenditures in the United States. We have problems all over the world but we need to try to cooperate, to seek out political solutions, and not go on spending these extraordinary sums on military services, weaponry, and so on. This is also a vested interest. It is very difficult to convert a war economy into a peaceful economy.
One might argue that the U.S. economy is not a war economy; during the Second World War it was, but not now. This is simply not true. The production of weapons of mass destruction and the deployment of military servicemen all around the planet is incredible. When you take into account the scale of the investment in the military, what remains is just half of the [U.S.] budget for social investment.
What we see is that in order for everyone to have the standard of living of OECD countries, we will require the resources of more or less 10 planets. This is really unsustainable.
I remember when I was a child I used to go on vacations with my parents. We arrived at the train station in the provinces and took a taxi or a bus. Now everyone travels in their own vehicle. Habits are difficult to change.
- 38th World Position in 2007/2008: http://hdr.undp.org/en/reports/global/hdr2007-2008/.
- Since the Argentine economic collapse and default on international debt in 2001/2002.
- This interview was held the week before the meeting in New York when the draft document was still being negotiated.
- Sunday June 28, 2009.
- p1:Final declaration of London G-20 meeting, http://www.g20.org/Documents/final-communique.pdf.
- More stable and sustainable development finance (Draft Recommendations A/63/XXX 19th March 78). The international community needs to explore a variety of mechanisms of innovative finance, including regular emissions of a new global reserves (SDRs), revenues generated from the auction of global natural resources (such as ocean fishing rights and pollution emission permits), and international taxes (such as a carbon tax, which would simultaneously help address problems of global warming, or a financial services tax, which would simultaneously help stabilize international financial markets).
- Banco de la Nación (not the Argentine central bank, the BCRA).
- As compared with averages of about 8% for the past few years and negative growth in much of the developed world.
- Note: much of this reduction is due to increase in the size of the GDP and the acceptance of the default terms by some creditors.
- COP-15 the Framework Convention on Climate Change, http://en.cop15.dk/.
- http://www.cei.gov.ar/revista/11/revista.pdf (Spanish).
- The theory of the periphery and the center is a model of the world economy in terms of categories of economies and their interactions invented by Argentine UN economist, Raul Prebisch: Latin America’s Keynes: http://www.economist.com/books/displaystory.cfm?story_id=13226316&fsrc=rss.