A new initiative to rewrite the rules of engagement with the IMF could mark the biggest change in creditor-debtor relations in a generation.
According to the present agreement with the IMF, Argentina would end the year with a “primary fiscal surplus” (i.e. before paying external creditors) of 3% of its Gross Domestic Product, some $10.8 billion. Since the Argentine economy is growing much faster than initially expected, an additional surplus of $7.8 billion is now expected and the IMF wants that money for itself, the World Bank and private holders of Argentine bonds. But Economy Minister Lavagna announced on 20 May that the additional money has already been allocated: $5 billion will go to social expenditures, support to local firms and infrastructure investment, while $2.8 billion will be used to cancel bonds without issuing new debt.
While Argentina is growing, reducing unemployment and holding tough negotiations with foreign investors, Brazil is struggling desperately to meet the 4.25% fiscal surplus demanded by the IMF. The economy is being suffocated by high interest rates, unemployment is rising and growth is zero. The enormous popularity of Brazilian president Lula is declining, while his neighbour Kirchner, an unknown figure a year ago, is becoming more popular every day.
biggest change in creditor-debtor relations in a generation
Yet the two leaders have found common ground in demanding a reformulation of the rules of the international economy. First it was their common stand in the Cancún ministerial meeting of the World Trade Organization that encouraged the creation of a solid group of developing countries to confront the major powers. Now they want the IMF to rewrite the rules, and are coordinating the demand from developing countries for substantial reform of the Bretton Woods system.
On 16 March in Rio de Janeiro, Lula and Kirchner signed the declaration for cooperation towards economic growth with equity, also known as the ‘Copacabana Act’. In it, the presidents denounce a “contradiction in the present international financial system between sustainable development and its financing”. To change that system, they agree “to negotiate with multilateral credit institutions in a way that does not jeopardize growth and ensures debt sustainability, allowing for infrastructure investment”. The declaration also demands the elimination of subsidies in developed countries; the right to discriminate in government procurement in favour of national and regional investors; and the freedom to stimulate domestic and regional savings, hinting at the creation of regional funds and perhaps even a common currency.
During the April meeting of the Interamerican Development Bank in Lima the demand to exempt infrastructure investment from IMF estimates of primary fiscal deficit received unanimous support from Latin American countries. For finance ministers this means being allowed to spend more in times of recession. This follows the classical Keynesian recipe of public investment in infrastructure to generate jobs and stimulate a stagnated economy. For the IDB and the Bank this might be an opportunity to increase their lending to middle income countries, now limited by debt sustainability considerations and IMF policies limiting government spending.
Ultimately a bigger issue is at stake that goes to the heart of development macroeconomics: how should national accounts deal with the concept of assets? When a private corporation invests in infrastructure, the investment is treated as asset creation. Only a small percentage of the total investment (the total value of the asset divided by the number of years of its expected life) is accounted for in the current year. In contrast, national accounts only register income and expenditure, therefore the entire cost of infrastructure investment is treated as expenditure in the year in which it is made.
The introduction of the concept of asset creation would allow for greater government expenditure during economic downturns, since the fiscal deficit would only be increased by a portion of the investment. The remainder of the ensuing liability would be expensed in future years as – hopefully – the economy recovers. Another implication is that the sale of state assets through privatisation would be treated not simply as income but also as the loss of an asset. The same would apply for the depletion of natural resources. In the original Argentine proposal, the formation of ‘human capital’ was also exempted from IMF-imposed expenditure ceilings. Health and education expenditures could be treated as investments in the same way as spending on infrastructure; many economists would argue this is an investment that pays more and faster than big conventional ‘development’ projects.
Debate around these issues is gaining momentum in the current political climate where the failure of IMF economic orthodoxy is challenged daily by social movements in the streets and the election of reform-oriented governments across Latin America.
Comment by Roberto Bissio, Socialwatch, Uruguay