It was announced that the IMF would get $500 billion including $100 billion dollar each pledged earlier by Japan and the European Union.

The Summit did not announce where or when the rest of $300 billion will come from, but unconfirmed reports indicated that the United States would put in $100 billion and China $40 billion. These loans from these countries to the IMF will be recycled to crisis-hit countries running out of foreign exchange reserves.

According to a former UNCTAD chief economist Yilmaz Akyuz, developed countries should not provide loans to the IMF because this would compromise the IMF`s ability to carry out its surveillance and to discipline the policies of the loan-providing countries. It should obtain resources from the market or from the issuance of Special Drawing Rights (SDRs).

The G20 meeting agreed to the IMF issuing $250 billion in SDRs, but decided to allocate this among the 186 IMF members according to their quotas or voting shares, instead of using it to assist countries in need. As a result, 44 per cent of it will go to seven rich countries, while only $80 billion will go to middle-income and poor developing countries.

Besides many critics point out that it would be dangerous and counter-productive to provide more funds to the IMF for re-lending to crisis- hit countries if the agency does not reform its policy conditions that lead the countries deeper into crisis, as had happened during the Asian crisis a decade ago. Unfortunately, the G20 did not insist on any IMF policy reform while boosting its resources. This may be the most serious error.

The G20 communique states that it will make available $850 billion to the global financial institutions in order to support emerging market and developing countries, including finance for counter cyclical spending.

“Counter-cyclical spending” is normally used to mean the kind of significant increases in government expenditure that the United States and Europe are engaged in, as the “fiscal stimulus” to jump start economic recovery.

The IMF is presumably charged with the new resources to enable cash strapped developing countries to participate in this fiscal stimulus.

However, an analysis by the Third World Network of the nine most recent IMF loans to crisis-hit countries (including Pakistan and several East European countries), clearly demonstrates that the IMF is still prescribing “pro -cyclical policies” (policies that accentuate the downturn in a recession) of fiscal and monetary tightening.

“The Fund`s crisis loans still contain the old policy conditions of cutting public sector expenditures, reducing fiscal deficits and increasing interest rates which is the stark opposite of the expansionary stimulus policies being supported in the G20 countries,” according to TWN researcher Bhumika Muchhala.

Earlier Asia Russell of the US based Health Global Access Project, said that “the IMF has imposed disastrous conditions on poor countries that have contributed to massive under-investment in health and education, particularly in sub-Saharan Africa. The G20 must make sure that the IMF abandons these policies before infusing the fund with new resources.”

The IMF has suspended crisis lending to Latvia, “until it sees more progress in cutting public spending”. Latvia had agreed to limit its budget deficit to five per cent of the GDP when the IMF loan was extended last December. The GDP is expected to drop by 12 per cent this year against earlier estimate of five per cent. The budget deficit could now jump to 12 per cent of GDP.

The incoming government hoped to persuade the IMF to accept a slightly higher budget deficit of seven per cent of GDP, but the IMF insisted on sticking to the target and suspended its lending. Latvia is now “racing to prepare more spending cuts”, according to a report in the Financial Times.

The Latvia case indicates the IMF`s lending policy has not changed and that funds channeled through the IMF are likely to lead to greater economic contraction in countries that take the IMF loans on the attached conditions.The G20 Summit has strengthened the IMF instead of other more appropriate organisations that can help developing countries with economic recovery.

There are several issues that the Summit failed to resolve, besides the biggest omission---the ailure to reform IMF policies.

First, it failed to produce anything tangible on a coordinated fiscal stimulus policy, which the Americans wanted but which Germany and France objected to.

Second, it did not come up with an action plan to clean up the crisis-hit banking systems.

Third, there was no plan for regulating cross border activities of financial institutions or cross border financial flows, nor an acknowledgement that a framework should be created that facilitates developing countries` ability to regulate the flow of cross border funds.

Fourth, there was no move to assist developing countries to avoid wrenching debt crises through plans to establish an international system of debt standstill and debt work out, through an “international bankruptcy mechanism.” Without this, developing countries would be deprived of the kinds of schemes by which banks or companies in trouble pay back only a portion of their loans whose market values would have fallen.

One positive aspect of the Summit is that a few leading developing countries have become an accepted part of a G20 which thus have better representation than the G8 as a forum for global economic decision making.

Countries like China, India, Brazil and South Africa are now participants. China in particular was able to have its influence felt, having argued a few weeks before the Summit for the need to have a new global reserves system, and together with the other developing countries being able to argue for a greater say in the affairs of the IMF and World Bank.

However, the developing countries are grossly under-represented in the IMF and World Bank and in the G20. Moreover, the vast majority of developing countries are absent from the G20 table, and thus the G20 does not have international legitimacy.

Courtesy South North Development Monitor.