The International Monetary Fund has a rarely used mechanism that could alleviate the economic crisis faced by the Global South in the wake of COVID-19.
This is a rush transcript and may contain errors. It will be updated.
Greg Wilpert: It’s The Real News Network. I’m Greg Wilpert in Arlington, Virginia. The global economy is facing its worst crisis since the so-called great recession of 2008, 2009. Economic forecast such as from the OECD state that the coronavirus outbreak could have global economic growth this year to 1.5%. That would be the slowest rate since 2009. Much of that prediction is based on the fact that China’s economy slowed down significantly already because of the government’s efforts to halt the spread of the coronavirus.
For example, Fortune Magazine conducted a survey recently which showed that already 94% of the world’s largest 1000 companies are experiencing problems in their supply chains because of the coronavirus epidemic. The effects of the economic slowdown is potentially devastating for countries of the Global South that make up an integral part of the global supply chain. Already, commodity prices for products such as oil, steel, natural gas, and pork, among others, have all plummeted.
As a result, unless the pandemic is overcome very quickly, countries in the Global South will face problems in what is known as their balance of payments. That is their ability to pay for badly needed imports with the income that they receive from goods that they export. Is there anything that can be done on an international level to help countries deal with this crisis?
Joining me now to discuss this question is Andrés Arauz. He is a senior research fellow at the Center for Economic and Policy Research and he is a former minister of knowledge and a former Central Bank general director of Ecuador. He joins us today from Mexico City. Thanks for being here again, Andrés.
Andrés Arauz: Hi, Greg. It’s a pleasure to be here and to talk about this.
Greg Wilpert: Before we get into what can be done about the impending global economic crisis, let’s take a closer look at what this crisis means for countries of the Global South. I mentioned that countries would have balance of payments problems. What would this mean for the lives of ordinary people in the countries of South America or Africa, for example?
Andrés Arauz: Like you mentioned, the balance of payments problems create a macroeconomic problem because most currencies of the Global South will have to depreciate or lose their value. That immediately impacts the populations of the Global South in terms of the purchasing power of their citizens. That’s the quickest way the macro problem will hurt them. But then the pandemia itself will imply very difficult times for the populations of the Global South in terms of the preparedness of their national health systems to deal with this.
There’s also an interrelation there between the preparedness of the health system and the balance of payments because many times the domestic economies of the Global South are not prepared in terms of their production and supply chains for the materials, the equipment, the capital goods, the beds, even basic hospital equipment that will surge in the short term and that is not produced locally, so that will imply imports.
Of course, with these same needs occurring at the same time all over the planet that will imply that they will either be very expensive or not accessible at all. That will impair the ability of national governments in the Global South to reply to the pandemic itself. Many other countries around the world also have a chronic lack of food sovereignty or food security.
Because there is now pressure to keep domestic resources within domestic economies, we’ve seen export restrictions. For example, from the European Union on medical equipment and soon to be probably even food items. This will also impact heavily those food insecure countries in the Global South. The situation can rapidly become a humanitarian crisis if society at large, and by this I mean the entire human species, doesn’t take into account the needs and the urgencies of the Global South.
Greg Wilpert: What can be done about this problem on a macroeconomic level? What can international financial institutions, for example, do to address this impending crisis?
Andrés Arauz: It’s very important to first have all the macroeconomic issues not be an actual issue right now. All the energy right now has to go into solving real-world food and the health issues and not balance of payments issues or lack of money. As we’ve seen in the first world and the center, we’ve seen politicians and central bankers saying, “We’ll do whatever it takes. We’ll print as much money as necessary so that the monetary dimension is not a problem when dealing with this global pandemic.”
That has to also be applied for the Global South. The difference is if you have a central banker from a central African country say, “We’re going to print as much money as necessary,” that will immediately create a devaluation of their currency, the balance of payments and macroeconomic issues that we all know about. That’s why we need the whatever-it-takes statement to come from international financial institutions.
In this case, it would be specifically the International Monetary Fund, not by saying, “We can lend you in exchange for conditionality and reducing size of your public sector,” when that’s absolutely not what is needed right now, but by issuing, what are called, special drawing rights, which is a global currency that the IMF issues out of thin air and have that money be available to all of the countries, central banks so that they don’t have those payments restrictions for international trade and so that the domestic macroeconomic problems are not added onto the already critical situation regarding the pandemia and the global health and food issues.
Greg Wilpert: Can you explain a little bit more about how these special drawing rights, the SDRs, as they’re known, how that works? Is it something that they can then use for imports? Do other countries or companies, businesses accept them? How would that work?
Andrés Arauz: This is a global currency that’s only used by central banks. It’s issued by the International Monetary Fund. It was created in the late ’60s and likely used in the early ’70s, but during a long time it was forgotten. It was parked on the Central Bank’s balance sheets and everybody ignored them. However, in 2008 and 2009 the United Nations General Assembly called on the International Monetary Fund to issue again these special drawing rights so they could be used for countries that were in balance of payments crisis. The IMF did so after a [inaudible 00:07:35] by the G20.
In summer of 2009, the IMF issued $187 billion worth of these SDRs that was around $250 billion at the time. It was allocated or distributed to all of the countries in the world. Of course, because the distribution mimics the IMF voting power, most of them went to the rich countries that didn’t use them at all. They just left them unused in the balance sheets. The poorer countries, for example, African countries, like the Democratic Republic of Congo, like Gambia, like Tajikistan, and even Ecuador, I was at the Central Bank at the time, we received around a $400 million worth of these SDRs.
We cashed those SDRs immediately, got dollars for them and used them to pay for imports. Companies and citizens don’t accept SDRs. They are only a currency to be used among central banks. But this is precisely the situation that we are facing now because most of the humanitarian and emergency trade that we’ll be seeing in the next few days will be interstates trade. They will be state- owned everything right now. It is reasonable to use SDRs to pay for international trade for settling even some certainly international debts related to [inaudible 00:09:06].
Greg Wilpert: Before I get into whether or not this is being considered, I wanted to ask another question that’s related. During the Great Recession of 2008, a lot of financial liquidity was created when central banks pumped extra cash into the global economy. Much of that money ended up in various forms in countries of the Global South, which is now leaving those countries. Talk a little bit about how this action and how the, so to speak, after effects of 2009 are effecting the economies of the Global South now.
Andrés Arauz: I will divide that question into two. First, how does that money… those quantitative [inaudible 00:09:52] and those whatever-it-takes moments from a decade ago, how’d that money reach the countries of the Global South? For that it’s very important to understand that a special channel, or a special road, or a special highway was set up between the US Federal Reserve and special certain countries that had access to, what are called, the foreign exchange swap lines, which allowed certain countries to have access to US dollars in exchange for giving local currency to the US fed.
Of course, the US fed wasn’t going to do anything with those local currencies, but it was a global bail out of certain countries in the Global South and typical US allies in the Northern Hemisphere. That path that was set up allowed for global investments or capital flows to go to those countries, but it wasn’t a generalized phenomenon. It wasn’t like the stock markets in Mauritania or in Bolivia also received those in flows. It was the most financialized, emerging markets that received those in flows.
What’s happening now is that after a buoyant decade of capital flows that have achieved those emerging markets, when there is a panic they withdraw immediately and go back from the periphery back to the center. That’s what we’ve seen. Over $80 billion worth of capital [inaudible 00:11:31] in only a few day, as reported by the [International Financial Institute 00:11:34].
This is very critical because it is four times larger than what we saw in the initial phase of the 2008 crisis when capital flew back from the third world countries to the core countries and the rich countries of the world. There is a grave situation there. That’s why we also need the SDRs so that these capital withdrawals do not become another issue in the minds of policymakers that already have to deal with on-the-ground, real life issues.
Greg Wilpert: I think that’s an interesting point. That makes the situation even more difficult on top of the problem of collapsing supply chains. Have you seen any kind of reaction or anybody picking up the ideas, particularly people in power, who might be able to implement this idea of issuing SDRs to countries of the South?
Andrés Arauz: Yeah, definitely. After the article was published there have been sequels published already two or more times in the Financial Times. There was an article this week and another one just today by Gallagher and Ocampo. Ocampo especially is a interesting character there because he is part of several UN-based commissions. He was also part of the [Stiglitz Commission 00:00:13:17] in 2009 that also pushed for the issuance of SDRs that year.
He is based in New York and he has the possibility to influence decision makers around the world. I have information also that in the IMF the situation is starting to be discussed, because this is the only universal mechanism of liquidity provision. Swap lines are, like I said, the few chosen ones that have access to the US fed swap lines. But not all of the countries in the world. They’re over almost 200 countries and only about 10% will have access to the fed.
We need this mechanism for the rest of the world and we hope that that happens as soon as possible in very large dimensions. This is not a time for small issuance of a few billion dollars. We need, like I mentioned in the article, $3 trillion that will set up a large enough number that will stave off speculators hedging against the domestic currencies that will give policymakers enough room to pay for these humanitarian-based imports. It has to be a huge issuance. This is not only about satisfying the financial markets.
Greg Wilpert: It would, of course, boost the global economy. We’re going to have to leave it there for now. I was speaking to Andrés Arauz, Senior Research Fellow at the Center for Economic and Policy Research. Thanks again, Andrés, for having joined us today.
Andrés Arauz: Thank you, Greg. Bye bye.
Greg Wilpert: And thank you for joining The Real News Network.
Production: Genevieve Montinar, Bababtunde Ogunfolaju
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