How can poor countries fight the credit crunch?

There’s a curious report in this week’s Hampshire Chronicle of a lady in Alresford who saw “banknotes fluttering around in the sky”. She collected them up and handed £405 to PC Barham who said:

We are trying to establish who the money belongs to, where it may have come from, and how it came to be blowing about in Alresford

A Chronicle story on the same page hinted at a solution to the mystery. It refers to a Bank of England competition in which A-level economics students impersonate the monetary policy committee. A team from Peter Symonds College in Winchester reached the final held in Threadneedle Street.

The Winchester team expressed admiration for quantitative easing, the last resort money-printing strategy adopted by the Bank and this week replicated in New York. I imagined the Bank’s adjudicator to be so impressed that the students were sent home with their rucksacks stuffed with tenners with instructions to scatter them amongst the citizens of Alresford and report back on the impact on the local economy.

Critics of quantitative easing have labelled it as “Mugabe economics”, invoking visions of the overworked printing presses of Zimbabwe’s central bank. Development economists may reflect rather differently on the Zimbabwe experiment. Whilst Europe and US squabble over the strategy for economic recovery, poor countries simply don’t have the luxury of the full range of monetary tools available to the G20.

The UK can just about convince its creditors that the economy can stand the strain of the emergency measures. But any African government printing money or announcing stimulus spending plans would be dropped like a stone by the international financial institutions (IFIs).

Nevertheless, I do try to keep an open mind that somewhere amongst the scrambled financial initiatives spewing out of this crisis there is something that we could add to the development toolbox.

Government guarantees of loans are worth a look. These guarantees persuade reluctant banks to lend to businesses. The government takes the risk of default and charges the lender a fee.

Developing countries are generally unable to operate in international capital markets for the same fear of default that cuts out struggling companies. There have been exceptions. Ghana raised $750 million on the London stock exchange in 2007 but, in a credit crunch, even Nigeria with its oil wealth has had to tear up its fundraising plans.

A bond guarantee mediated by rich countries through one of the IFIs could make all the difference – much cheaper than aid and a circuit breaker against future debt relief. And the advantage of capital markets to developing countries is the absence of conditions that come attached to aid or deals with the IMF.

To avoid a repeat of the problem of unsustainable debt, guaranteed loans might be restricted to a particular sector of spending. Why not focus on the 2003 Maputo Declaration in which African governments committed to invest 10% of national budgets in agriculture by 2008. Making good the almost universal failure to meet this target would benefit a meaningful proportion of the world’s poor. It would address global fears for food security and tackle many of the priorities for adaptation to climate change in poor countries.

The cost would barely register on the current scale of G20 spending. The UK government’s £10 billion loan guarantee scheme for medium-sized companies alone would support the 10% Maputo target for over 50 countries the size of Zambia.

It’s very tricky to define the point at which a guarantee on sovereign debt would be exercised and no doubt the concept has other flaws. But I’m worried that the conventional options are vanishing. Richer countries will have no stomach for additional aid whilst angry African governments have had enough of the IMF.

The G20 London Summit is not going to answer these questions. Only one African country is part of this elite which will be preoccupied with rescuing immediate neighbours in Eastern Europe and Central America.

There’s a pecking order in this business of bail-outs. First, rescue the banks who caused the problem. Then the countries which owe money to the richest countries. Last of all, maybe, the countries which have most religiously followed the rules of macro-economics laid down by those who now are determined to flout them.

Welcome to global justice.


this article was first published by OneWorld UK