Human Development and the Asia Crisis
The Asian financial crisis marks the start of a new challenge in international development – the effort to prevent the volatility of international financial markets from destroying the hopes and livelihoods of millions of the world’s poorest citizens.
Since the early 1980s, the main global development challenge has come from the public debt crises which produced a ‘lost decade of development’ in Latin America and even greater trauma in the least developed economies of Sub-Saharan Africa, where the debt still imposes a crushing burden on the poor.
Now a new threat has emerged. Since 1997, the livelihoods and futures of millions of families across Asia have been blighted by a new kind of crisis. The astonishing gains made over the last 30 years in poverty reduction, education and health provision have in many cases been reversed in a matter of months. While some economic indicators have rebounded, CAFOD’s partners on the ground are adamant that the social crisis is still worsening. The erstwhile ‘miracle’ economies of Asia are now witnessing millions thrown out of work, children dropping out of school and going without food, collapsing health services and numerous other social problems such as rising homelessness and drug abuse. Similar crashes have since spread to Russia and Brazil, and are likely to hit further economies during 1999.
The new economic models which are starting to emerge from the rubble of the Asia crisis also give grounds for concern, since they are likely to increase inequality in the region, and thus be less effective in bringing the benefits of growth to the poor.
The Asia Crash and Human Development The crash and the chaos of international financial markets which helped to precipitate it are issues of human development. This can be seen from their impact on the International Development Targets (IDTs), drawn up by the OECD in 1996 to provide benchmarks against which the performance of governments and international institutions can be assessed:
1. Poverty ?
Target: A reduction by one half in the proportion of people living in extreme poverty by 2015
Impact of crisis: Massive job losses, reduced working hours, falling wages and the shift from better to worse-paying work have severely reduced income in the crisis countries. Seventy percent of the world’s poor live in just four countries - China, India, Indonesia and Brazil. The crisis is already increasing poverty in Brazil and Indonesia alone. Even the most conservative estimates show that six million more people have already fallen below the poverty line in Indonesia, while other sources put the figure much higher. This number is liable to grow, especially if new economic policies result in increased inequality.
2. Education ?
Target: Universal primary education in all countries by 2015
Impact of crisis: The crisis has mainly hit secondary education, but has also affected primary provision, especially in the poorest urban areas. Poor parents are delaying the age at which their children start school to save money on fees and materials. CAFOD’s partners in Thailand and Indonesia report that poor children who manage to stay in school are under-performing through hunger.
3. Gender equality ?
Target: Demonstrated progress toward gender equality and the empowerment of women by eliminating gender disparity in primary and secondary education by 2005
Impact of crisis: Even before the crisis, Indonesian girls were six times more likely to drop out than boys. The increase in drop-out rates since the crisis is highest among girls, often because mothers pull them out of school to look after younger siblings, so they can go out to work.
4. Health ?
Targets: A reduction by two-thirds in the mortality rates for infants and children under age 5 and a reduction by 75% in maternal mortality, all by 2015. Access through the primary health care system to reproductive health services for all individuals of appropriate ages as soon as possible and no later than the year 2015
Impact of crisis: Higher drug prices, cuts in spending and increasing user fees have led to a sharp fall in the public’s use of the health service. The fall has been particularly abrupt in the private sector, which traditionally accounts for half of healthcare provision in Asia.
While there is generally a long lag-time before economic crises affect infant and maternal mortality rates, CAFOD has received worrying reports and other anecdotal evidence of rising malnutrition in Indonesia and Thailand which, along with the decline in healthcare provision, is likely to have a knock-on effect on both indicators.
5. The Environment ?
Target: The current implementation of national strategies for sustainable development in all countries by 2005, so as to ensure that current trends in the loss of environmental resources are effectively reversed at both global and national levels by 2015
Impact of crisis: There are widespread fears that a shift to a combination of export-led growth to pay off the debts incurred in the rescue packages, cutbacks in government spending on environmental protection and an opening to direct investment in extractive industries, is likely to increase pressure on an already over-exploited natural resource base.
The Need for Reform CAFOD believes the Asia crash, and the West’s response to it, has exposed the need for a profound rethink of the IMF’s structure and policies, the market mechanisms which contributed to the crisis, and the development paradigm which is now being pushed, by the IMF and others, on governments and finance ministries in the region.
Aid agencies, governments and many of CAFOD’s local partner organisations agree on the need for reform. Yet so far discussion at IMF and G8 level of the crisis and necessary reforms to the international financial architecture has been seen as predominantly a technical financial issue with little connection to development. The current official proposals consist of a blend of improved social safety nets for the poor and greater transparency and information in financial markets.
CAFOD believes this is insufficient both in terms of content and process. ‘Bolt-on’ extras such as social safety nets are entirely inadequate to the scale of the challenge, and will do nothing to prevent the new liberal economic model from increasing inequality in the region. The crash is a human development problem that must be resolved by society as a whole, not by a handful of finance ministers and IMF officials.
Just as the great depression and World War Two brought about the Bretton Woods conference, the Asia crisis makes change possible, but this brings both a threat and an opportunity. The threat is that the crisis will be used to erode further the economic sovereignty of nations and impose an even more extreme version of the model of indiscriminate liberalisation and de-regulation which bears so much responsibility for precipitating the crisis in the first place. This model is closely associated with the ‘Anglo-Saxon’ free market reforms introduced in the US and UK in the 1980s and early 1990s.
This process of ‘anglo-saxonisation’ risks dismantling many of the aspects of economic management which have over recent decades enabled East Asia to achieve both high economic growth and social equity, a feat which has eluded the rest of the world. The development baby is in danger of being thrown out with the bathwater of financial crisis.
The threat extends beyond the current crisis economies. China and India, home to over half of the world’s poor, have so far been partially protected by their regulation of capital flows. If forced to liberalise, for example to qualify for WTO membership, they will become more vulnerable to currency crashes, which would in turn almost certainly destroy the International Development Targets.
But the crisis also provides world leaders with the opportunity to turn back from this course, and build a new global financial architecture built on foundations of human development and social justice.
The starting point should be humility and humanity. The crisis shows that the powerful nations and the international institutions do not have all the answers. Human development is best served by enabling national governments, democratically elected and accountable to their own people, to design national policies suited to their own circumstances, within an international financial and economic system conducive to sustainable human development across the developing world as a whole. That is what powerful governments expect for themselves, and it must also go for others.
Recommendations
Reform of the International Monetary Fund Its failures over the Asia crisis have led to a profound loss of public confidence in the IMF, both in the North and in the crisis-hit countries. Deep reforms are essential if it is to salvage its reputation and serve the needs of the developing world by helping (rather than hindering) in reaching the International Development Targets. This requires institutional changes, but also a deep change in the institutional culture of the Fund. It must become open to the public, not closed; pluralist and open-minded, not dogmatic; it must listen, not lecture and it must learn from its mistakes.
1. Accountability The IMF should publicly release programme documents and policy papers before decisions by the board, as well as Article 4 consultations, IMF mission reports and minutes of IMF meetings. In its operations in programme countries, the Fund currently works almost exclusively with the ministries of finance. It should seek to amend its articles of agreement to require it to consult with social and environmental ministries, parliament and civil society organisations.
2. Independent Evaluation The IMF should follow the World Bank’s lead in establishing an independent evaluation unit, as recommended at the G7 meeting in Halifax in 1995. In the meantime it should commission, as a matter of urgency, an independent evaluation of its response to the Asia crisis, involving all stakeholders in designing and carrying out the study.
3. Mandate While broadening its consultation with stakeholders, the IMF should narrow its field of operation by returning to its original mandate and confining its attention to issues concerning the current account, rather than capital account, of member countries. It should minimise its use of policy conditionality in favour of a process of participation and dialogue with all stakeholders in programme countries. Adjustments in other areas, such as financial regulation and supervision, should be dealt with by the appropriate international authorities in each case.
4. Power and Voting Structure Developed countries account for over 60% of the voting strength at the IMF and World Bank, compared with just 17% in various UN bodies (roughly proportional to their share of the world’s population). A first step to improve the IMF’s representativity should be to overhaul the Fund’s power structure to give a fairer voice to developing countries, especially those most affected by the Fund’s operations.
5. Subsidiarity In the interests of democracy and accountability, decisions should be taken as close to the people affected as possible. IMF conditionality should not include issues related to economic and social development strategies and institutions which, by their very nature, should be decided by legitimate national authorities, based on broad social consensus.
6. Human Development The IMF has officially endorsed the International
Development Targets. It should now make them central to its policies. Appropriate
resources should be allocated to researching the progress on the key development
indicators. As a first step, the IMF should conduct social, environmental and gender
impact assessments of all programmes prior to the approval of the loan. In the case of
emergency rescue packages, if this is not possible, such assessments should be carried out
immediately the package is in place and used to modify the programmes as they develop.
The IMF should co-operate with the World Bank and UN Agencies in conducting these studies,
since the Fund does not necessarily have the internal expertise required. Interested
stakeholders, including civil society organisations, national parliaments and relevant
ministries, should be invited to provide input and help shape the IMF’s country
programmes.
Reform of the International Financial Architecture The reforms required go well beyond the
IMF. Financial systems should be at the service of the real economy, and the economy at
the service of the population, not the other way around. To achieve this the global
financial system should be reformed, both in terms of process and purpose.
7. Participation The current discussions on global reform are unacceptably exclusive. Reforms of this magnitude must be open to public participation, both in the North and, more importantly, in developing countries. Increased transparency, accountability and participation should also be an essential element of any new institutions or procedures introduced as a consequence of these discussions.
8. Speculation v Productive Investment Reforms should aim to reorient financial flows to developing countries from short-term to long-term, from speculative flows to productive investment in the real economy of jobs and services and from volatile towards more stable types of financing.
9. Human Development All discussions of reforms to the international financial architecture should take human development as their starting point. In particular, they should be based on the achievement of the International Development Targets. Full social and environmental impact assessments should be conducted of any reforms before they are introduced.
10. Debt Standstill and workouts The current anarchy surrounding currency and balance of payments crises in emerging markets serves the interests of neither creditor nor borrower. To bring order and justice to this issue, UNCTAD should be invited to develop a full proposal for the introduction of a global debt standstill and work-out mechanism. This should be discussed at the first opportunity at UN, G8 and IMF levels. The new mechanism should be administered by a new, independent body with the respect of both creditors and borrowers. The IMF should not be involved in its work, except by lending into arrears during the period devoted to debt renegotiation. G8 countries should take the lead in introducing collective action clauses into their bond contracts in order to facilitate future debt renegotiations.
11. Tobin Tax The Canadian parliament should be supported in its efforts to carry out a full feasibility study for the introduction of a Tobin Tax to curb capital market volatility. Such a study should include wide consultation with all stakeholders.
Conclusion
The global financial system is not working. Above all it is not working for the poor. If the governments of the rich nations are sincere in their desire to end world poverty and provide a decent life to all the world’s people, they must start with a thorough overhaul of the international financial architecture, including the IMF, but going well beyond it to construct a new economic model based on inclusion, justice and democracy. This is the challenge that faces world leaders during the last year of the millennium and against which their actions will be judged both by history and the world’s poor.
CAFOD
Public Policy Unit
April 1999