Will G-20 Help Arrive in Time?

April 13, 2009

AlmostThe G-20 pledged in London late last month that they would make an additional $1 trillion available through the International Monetary Fund and other institutions to help developing countries cope with the global economic crisis. If this and other commitments materialize quickly, that’s good news indeed. But moving fast and sensibly won't be easy.

"The problem with the international community response is not the direction but the speed," CGD visiting fellow Nora Lustig writes in a blog post. She argues that the additional resources and the new more flexible approach to its stand-by and other lending facilities announced by the IMF are crucial for helping low-and middle-income countries cope with the financial crisis.

"Increased resources and the right instruments to deliver them can prevent lots of pain for millions of poor people," she writes. "The mere existence of these options will give many developing country governments more leeway to make counter-cyclical policy responses and reduce the impact of the crisis on economic growth."

Unfortunately, the record on international coordination for timely responses to crises is spotty at best. In a new CGD working paper, Coping with Rising Food Prices: Policy Dilemmas in the Developing World, Lustig offers an example of the tough trade-offs that developing countries face when international support is lacking in a time of crisis--in this case, the 2008 surge in global food prices during the boom that preceded the financial crash.

Alarmed that rising global food prices would drive up inflation, worsen poverty, and spark social unrest, many food-exporting developing countries imposed export tariffs or otherwise restricted food exports. These and other "beggar-thy-neighbor policies" hurt food-importing countries and undermined a rules-based trading system, Lustig writes.

For a blow-by-blow description of one of the outcomes of these policies—and the costs that they imposed on poor, food-importing countries, see Tom Slayton's new CGD working paper Rice Crisis Forensics: How Asian Governments Carelessly Set the World Rice Market on Fire.

Lustig argues, in effect, that the food-exporting developing countries were not so much careless as they were rationally responding to the serious domestic problems facing them, given the possibility that the spike in prices was temporary and in the absence of effective international measures to reduce volatility in food prices.

Current international agreements—and even the World Trade Organization's troubled Doha Round agreement—do not actually prevent some of the worst beggar-thy-neighbor behavior. CGD senior fellow Kim Elliott notes that most of the protectionist measures put in place since the start of the crisis are WTO-compliant. (For example, tariff ceilings are much higher than actual tariffs, so countries can raise tariffs without violating WTO rules.)

Perhaps more fundamentally, as Aaditya Mattoo and Arvind Subramanian argued in a controversial CGD working paper, Multilateralism Beyond Doha, the Doha process has focused on issues of limited significance while the burning issues of the day—including the recent financial crisis—are not on the negotiating agenda. Mattoo and Subramanian have further developed these ideas in a renewed call for a "Crisis Round" of trade talks.

Elliott argues that such a "crisis round", while perhaps desirable, is unrealistic but she likes their idea of an an accelerated mechanism to settle trade disputes.

Something clearly needs to be done. "In a globally integrated economy such as ours, quick and sensible support to developing countries to help them cope with the crisis is not only good for them; it’s in everybody's interest," says CGD president Nancy Birdsall. "As always, the devil is in the details."