The G-20 and the IADB

DO NOT ASK WHAT THE WORLD CAN DO FOR LAC BUT WHAT LAC CAN DO FOR THE WORLD, AND THEN INCREASE THE CAPITAL OF THE INTERAMERICAN DEVELOPMENT BANK.

The world is facing two imbalances without clear coordination mechanisms, and significant consequences for mankind, particularly the poor and vulnerable. One is relatively shorter term: the global macroeconomic imbalances at the heart of the current crisis.  The other is longer term, related to the sustainability of our global growth given the energy and climate constraints (I discuss these two issues in somewhat greater detail in http://www.ifpri.org/pubs/dp/IFPRIDP00766.pdf).  The global coordination failure in macroeconomic matters is a central issue of world governance, with crucial implications for poverty alleviation. For the medium to long term, a second key topic of world governance is how to solve the market and institutional failures associated with energy issues, which over time will be more relevant for poverty trends in developing countries than the question of how to solve the shorter-term global macroeconomic imbalances. Building a world economy that is macroeconomically stable, based on sustainable energy, and capable of ensuring the benefits of progress to everyone requires that humankind properly address those two crucial issues.  In turn, their resolution requires better and more democratic global governance.

Here it is argued that LAC can play an important role among developing regions in the adequate handling of those two imbalances, and because the region is basically a community of democracies, LAC can contribute to that dialogue through democratic structures and processes.  The final point made is that the region has an important financial instrument, with democratic governance, that needs to be strengthened to contribute to that process: the Inter-American Development Bank.  Following, these three themes are briefly developed, as a background to the debate, in the G-20 and within the Bank, about a possible increase in the capital resources of the IADB.

First Imbalance: Macroeconomic Issues 

 

The next Chart shows changes in current accounts in different countries and regions.

image001_512_55.gif In http://www.ifpri.org/pubs/dp/IFPRIDP00766.pdf) I discuss in greater detail the cycles in global current account (CA) imbalances during the last decades. [1]  The points to be noted here are two. First, although the U.S. CA deficit, which reached in 2006 somewhat more than 1.6% of the world GDP, a level unprecedented in modern history, has come down, is still very high. Second, the current policies followed by the industrialized countries so far may not solve the imbalances and could well in part aggravate them, if the main stimulus takes place within the US, which should be reducing its external deficit rather than expanding it. What is needed is to sustain aggregate demand outside the US.  LAC can play a role in that regard, considering that its private consumption is larger than in other developing regions (see Table; it reflects the global structure for year 2005, the last one that has complete data).  We need to maintain financing to the region, in order to support consumption and general economic activity in LAC, as a contribution to global aggregate demand.  There are several possibilities to increases financing to developing countries, and the region, such as expanding SDRs.   But expansion of IADB lending capabilities should also be a central component of this approach.

image002_116.gif Second Imbalance: Sustainable Energy, Climate Change, Food and Natural Resources

Moving now to the consideration of longer-term world trends, the main challenges for development and poverty appeared linked to the interaction of energy issues, agriculture, the resource base, and climate change and environment (see next Figure).

image003_512_34.gif

The negative impacts of the current approaches to energy production and utilization on global warming, water availability, and extreme climate events have been documented. The challenges in the longer term are daunting. The next Table shows the evolution of population, GDP, and nonfood and food energy requirements from the 1950s–1960s to 2004, with long-term projections for 2050 under some variations of current trends. The three data points are separated by about half a century.

image004_512_26.gif

The combination of issues surrounding energy use, economic development, poverty alleviation, and climate change is also affected by a market coordination failure of global proportions, as forcefully argued in the Stern Report (2006), and, similarly to the shorter-term macroeconomic imbalances, that problem has no widely accepted international mechanism for resolution.It seems clear then that, for the medium to long term, a key topic of world governance is how to solve the market and institutional failures associated with energy issues, which over time will be more relevant for poverty trends in developing countries than the question of how to solve the shorter-term global macroeconomic imbalances.LAC is central to a proper resolution of those issues.*It is a region with a large availability of freshwater resources (24471 cubic meters per capita, more than double the average for developed countries and three times the average of developing regions).*Generates the main global trade surplus in agricultural and food products, which in 2006 reached about US$50 billion and US$35 billion, respectively; the next group of net suppliers is comprised by four developed countries (USA, Canada, Australia and New Zealand) which have net trade surpluses of about 30.5 billion (agricultural products) and 26.5 billion (food products).  Therefore, the Americas plus Australia and New Zealand, basically provide most of the net trade needed to supply the world with agricultural and food items, and the largest percentage comes from LAC.*LAC has lower CO2 emissions per unit of GDP (measured in PPP) than all developed countries and all other developing regions: 0.32 kg per 2005 PPP $ of GDP in LAC, against 0.41 in High Income OECD countries, and 0.66 for all developing countries (even disaggregating all developing regions, which is not shown here, LAC has lower emissions).

*Out of the ten top countries in plant biodiversity at the world level, 6 in total, and the top 2, are in LAC.

*About a quarter of the area of world forests is in LAC (about 960 million has, out of a world total of 3870 million has in year 2000, according to the WRI).  The Amazon forest is a crucial source of oxygen for the world.

*The LAC region as a whole is a net exporter of energy products, although is far smaller than the Middle East.  However, for the US, 2 out of the 4 top suppliers are in LAC (and, a third one, Canada, is in the region).

In summary, LAC has significant and positive global externalities in most, if not all, of the dimensions of the quadrangle shown above. If the region cannot face those challenges adequately, the negative implications of that failure for the rest of the world will be significant given the level of positive global externalities associated now with LAC. The possibility of keeping those positive externalities, while avoiding the negative impacts of climate change on its population, particularly the most vulnerable, requires substantial investments in the next decades, part of which can be provided by an expanded IADB.

Democracy

Another important value associated to the development process in LAC has been the sustained advance of democracy in the region, particularly since the 1980s.  While in the 1970s more than 70% of the countries were classified as non-democratic by the Polity IV data, now only one country in the region (not a member of the IADB) is classified as autocratic (http://www.systemicpeace.org/polity/polity06.htm#nam).  In other developing regions the largest percentage of countries is still classified as non-democratic according to those indicators.

The next Chart shows autocracies by regions (North America includes Central America and the Caribbean; from http://www.cidcm.umd.edu/pc/chapter04/graphs/figure_4_2.asp)

image005_512_11.gif The wave of democratization has reached deeper in the societal structures of most LAC countries, allowing the participation and enfranchisement of groups and peoples previously at the margins of the democratic process.

Although different countries suffered painful economic crises in the 1990s and 2000s, they emerged from those difficult events through democratic approaches. The evolving impact of the current global crisis will test again the strength of the institutional advances in the region.  The example of a developing region managing its development process (with all the ups and downs) through democratic means (even admitting frailties and weaknesses) should be appreciated and supported by the industrialized countries that are members of the IADB as contribution to global stability and civilized behavior.

Why the IADB?

We believe that a key reason to answer positively that question is IADB’s structure of governance.  It must be remembered that about half of the capital has been provided by LAC countries (which, therefore, own half of the shares), and the other half by the developed countries that are members of the Bank. Therefore, developed and developing countries share responsibilities about equally in running this institution; the President is elected through open competition within LAC countries, and the composition of staff is more balanced than in other IFIs. The structure of governance requires dialogue to forge consensus. Also, because the developing countries have substantial “skin in the game” (as taxpayers contributing half of the resources to the capital base and income, and not only as borrower of loans and recipient of technical assistance and institutional support), all incentives are aligned to avoid free riders and elicit collective responsibility.

An important part of the debate of the G-20 is how to make the global decision-making, including the financial aspects, more democratic by giving a larger stake to developing countries in the management of our integrated world.  One option, that seems to be receiving the largest attention, is to democratize the World Bank and the IMF.  However, a complementary approach is to strengthen the institutions that are already democratic, as it is the case of the IADB.


[1] Developing countries in the Chart do not include China and Middle East. Also, Hong Kong, Singapore, Korea, and Taiwan, labeled the newly industrialized Asian economies (NIAE) are considered separately.