International Herald Tribune
Philip Bowring: Credit for those who need it most
Tuesday, March 10, 2009

HONG KONG: The World Bank estimates that developing countries will need between $270 billion and $700 billion to sustain themselves through the global contraction. Whatever the figure, it is right to focus attention on countries that have limited capacity to help themselves but that can make the difference between a global recession lasting two years and one lasting five or more.

Unless the approaching G-20 meeting in London gives priority to this issue rather than arcane discussions of financial architecture, it will have failed. The onus is on the West and China.

At first glance the developing world may, for once, seem relatively well-protected. When the crisis set in, most of Asia and much of Latin America were in good shape. Foreign exchange reserves were at record levels, current accounts were in surplus, banks were mostly liquid, and fiscal rectitude was the order of the day.

But now these strengths are looking increasingly inadequate in the face of simultaneous collapses in exports, commodity prices and migrant worker remittances, and the contraction of international liquidity caused by trillion dollar write-offs by Western financial institutions and a flood of U.S. Treasury paper.

Trade figures are showing extreme declines - Japan's and Taiwan's exports plunged 40 percent in January, for example, but this may prove to be an aberration. These developed economies are in a strong position to sustain a shift to trade deficits. Nevertheless, two aspects are alarming. First is the direction of the declines, with sales to China falling faster than those to the United States and Europe. Second is the price collapse of commodities coming from the developing world, and from a deeply indebted Australia.

China has made much of the huge stimulus package announced in November. It continues to broadcast the fiction that GDP growth could reach 8 percent. Beijing is keeping its budget deficit at a modest 3 percent of GDP while proclaiming that 2009 will be an exceptionally difficult year. Instead of an expansionary impact on the world, China is at present having the opposite effect. Its imports have fallen even faster than exports. This may be temporary, due to disruptions of East Asian manufacturing supply chains caused by the credit crisis. But a big rise domestic demand will be needed to offset China's trade gains from the collapse of commodity prices.

The world needs a re-balancing of trade to end U.S. deficits and Asian manufacturing surpluses. But the burden of re-balancing is falling increasingly on developing countries - commodity exporters and those reliant on income from workers overseas and labor-intensive manufactures.

Before long, countries ranging from Indonesia and Vietnam to Malaysia and Mexico - even including India - will find that they have to drastically trim their economies due to actual or feared foreign exchange shortages.

Credit demands from the West are sucking money out of even the most developed East Asian economies, like Singapore and South Korea, and forcing less-developed ones to pay double digit rates to borrow in international markets. These borrowing costs are unsustainable and threaten a developing world crisis that will provide another hit to Western banks and further curtail trade.

The ideal way to address this issue might be for countries with excess reserves to lend the IMF, World Bank and other multilateral lenders $750 billion - a modest sum by Western bailout standards - enabling these institutions to provide both short-term stabilization funds and longer-term investment. To a limited extent this is happening. Japan is providing an additional $100 million for the IMF. But China is dragging its feet, waiting to gain greater influence over monetary fund. Most excess reserves are in Asia and the oil bloc, and the Asians are tempted to help their neighbors rather than the wider world. Europe has more limited reserves and is focused on its troubled eastern neighbors. The United States has modest reserves and is deeply engaged in rescuing its own financial sector.

The bottom line is that, in addition to more loans to the IMF, there must be a large allocation of special drawing rights by the fund to enhance global liquidity. This would enable the developing world to swap domestic currency into an internationally accepted one. This may be inflationary in the long run, but so will all the rescue packages in the U.S. and Europe. The revival of inflation looks like a small price to pay to avoid a strangling of world trade and the reasonable expectations of a developing world that did not create the crisis.