Financing for Development Priorities Today

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jan 7 2025 (IPS) - The forthcoming fourth United Nations Financing for Development conference must address developing countries’ major financial challenges. Recent setbacks to sustainable development and climate action make FfD4 all the more critical.

FfD4

The FfD4 conference, months away, will mainly be due to efforts led by the G77, the caucus of developing countries in the UN system. The G77 started with 77 UN member states and has since expanded to over 130.

The 1944 Bretton Woods conference outcome was primarily a compromise between the US and the UK. In 1971, when its Bretton Woods obligations threatened to undermine its privileges, President Richard Nixon refused to honour the US pledge to deliver an ounce of gold for US$35.

Over two decades later, President Bill Clinton promised a new international financial architecture. It rejected Professor Robert Triffin’s characterisation of international monetary arrangements after the early 1970s as an incoherent ‘non-system’.

Foreign aid

Several issues are emerging as G77 priorities for FfD4. In 1970, wealthy nations at the UN agreed to provide 0.7% of their national income annually as official development assistance (ODA).

This was much lower than the 2% initially proposed by the World Council of Churches and others. Only 0.3% has been delivered in recent years, or less than half the promise.

Most ODA conditions reflect the priorities of donors, not recipient countries. New aid definitions, conditions, and practices undermine ‘aid effectiveness’, reducing what developing nations receive.

Despite breaking its ODA promises, the new European Parliament voted overwhelmingly to contribute 0.25% of national income to Ukraine. By early December 2024, Europe had provided well over half the USD260 billion in aid to Ukraine!

Some European nations now insist that only mitigation qualifies as climate finance. Although most developing countries are tropical and struggling to cope with planetary heating, little assistance is available for adaptation.

Debt

More recently, developing countries’ new debt has been more commercial and conditional but less concessional. With the transition to the Sustainable Development Goals (SDGs) in 2015, the World Bank encouraged much more commercial borrowing with its new slogan, ‘from billions to trillions’.

Following the 2008 global financial crisis, Western countries adopted unconventional monetary policies, eschewing fiscal efforts. Quantitative easing enabled much more borrowing, which grew until 2022.

However, most Western governments did not borrow much. Some private interests borrowed heavily, often for unproductive purposes, with some using cheap funds to finance shareholder buyouts to get more wealth.

Meanwhile, many developing countries went on borrowing binges as creditors pushed debt in developing countries in various ways. Rapidly mounting government debt would soon become problematic.

From early 2022 until mid-2024, interest rates rose sharply, ostensibly to counter inflation. The US Fed and European Central Bank raised interest rates in concert, triggering massive capital outflows from developing countries with the poorest worst affected.

Taxation

The Global South has long wanted the UN to lead negotiations on international taxation arrangements to provide more financial resources for development. However, the Organization for Economic Cooperation and Development (OECD) rich nations’ club has long undermined developing countries’ interests.

The OECD achieved this by misleading finance ministries in developing countries. It bypassed foreign ministries that had long worked well together on contentious Global South issues. With the OECD making up new rules for the world, developing country finance ministries signed on to a biased tax proposal on which they were nominally consulted.

At the FfD3 conference in mid-2015, the OECD blocked Global South efforts to advance international tax cooperation. An independent international commission proposed a minimum international corporate income tax rate of 25%.

Treasury Secretary Janet Yellen counter-proposed a 21% rate, the US minimum rate. However, at the G7 meeting he was hosting, Boris Johnson pushed this down to 15% while adding exemptions, reducing likely revenue.

Instead of distributing revenue as with a corporate income tax on profits from production, the OECD proposed revenue sharing according to consumption spending, much like a sales tax.

Poor countries would receive little as their population can afford to spend much less, even if they produce much at low wages. Rather than progressively redistribute, OECD international corporate income tax revenue distribution would be regressive.

Dollar

The US dollar remains the world’s principal currency for international transactions. US Treasury bond sales enable this, subsidising the world’s largest economy. Trump recently threatened the BRICS and others considering de-dollarization.

The leading BRICS proponents of de-dollarisation, Brazil and South Africa, have failed to persuade the other BRICS to de-dollarize. Instead, China’s central bank has issued dollar-denominated bonds for Saudi Arabia.

Special Drawing Rights (SDRs) should be issued regularly to augment discretionary IMF financial resources. This can be done without Congressional approval, as happened after the 2008 global financial crisis and the COVID-19 outbreak.

Such resources can be committed to the SDGs and climate finance.

But this cannot happen without collective action by the Global South seriously mobilising behind pacifist, developmental non-alignment. Inclusive and sustainable development is impossible in a world at war.

Available online here: https://www.ipsnews.net/2025/01/current-financing-development-priorities-today

Western Finance Ruining Economies of the Rest

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Nov 19 2024 (IPS) - Western financial policies have been squeezing economies worldwide. After being urged to borrow commercial finance heavily, developing countries now struggle with contractionary Western monetary policies.

Central banks

‘Unconventional monetary measures’ in the West helped offset the world economic slowdown after the 2008 global financial crisis.

Higher interest rates have worsened contractions, debt distress, and inequalities due to cost-push inflation triggered by ‘geopolitical’ supply disruptions.

Western central bank efforts have tried to check inflation by curbing demand and raising interest rates. Higher interest rates have worsened contractionary tendencies, exacerbating world stagnation.

Despite major supply-side disruptions and inappropriate policy responses since 2022, energy and food prices have not risen correspondingly. But interest rates have remained high, ostensibly to achieve the 2% inflation target.

Although it has no rigorous basis in either theory or experience, this 2% inflation target – arbitrarily set by the New Zealand Finance Minister in 1989 to realise his “2[%] by ’92” slogan – is still embraced by most rich nations’ monetary authorities!

For over three decades, ‘independent’ central banks have dogmatically pursued this monetary policy target. Once raised, Western central banks have not lowered interest rates, ostensibly because the inflation target has not been achieved.

Independent fiscal boards and other pressures for budgetary austerity in many countries have further reduced fiscal policy space, suppressing demand, investments, growth, jobs, and incomes in vicious cycles.

Debt crises

Before 2022, contractionary tendencies were mitigated by unconventional monetary policies. ‘Quantitative easing’ (QE) provided easy credit, leading to more financialization and indebtedness.

QE also made finance more readily available to the South until interest rates were increased in 2022. As interest rates rose, pressures for fiscal austerity mounted, ostensibly to improve public finances.

Policy space and options have declined, including efforts to undertake developmental and expansionary interventions. Less government spending capacity to act counter-cyclically has worsened economic stagnation.

Comparing the current situation with the 1980s is instructive. The eighties began with fiscal and debt crises, which caused Latin America to lose at least a decade of growth, while Africa was set back for almost a quarter century.

The situation is more dire now, as debt volumes are much higher, while government debt is increasingly from commercial sources. Debt resolution is also much more difficult due to the variety of creditors and loan conditions involved.

Different concerns

With full employment largely achieved with fiscal policy after the global financial crisis, US policymakers are less preoccupied with creating employment.

Meanwhile, the US’s ‘exorbitant privilege’ enables its Treasury to borrow from the rest of the world by selling bonds. Hence, the US Fed’s higher interest rates from 2022 have had contractionary effects worldwide.

As the European Central Bank (ECB) followed the Fed’s lead, concerted increases in Western interest rates attracted funds worldwide.

Western interest rates remained high until they turned around in August 2024. Developing countries have long paid huge premiums well above interest rates in the West.

However, higher interest rates due to US Fed and ECB policies caused funds to flow West, mainly fleeing low-income countries since 2022.

However, growth and job creation remain policy priorities worldwide, especially for governments in the Global South.

Protracted stagnation

Why has world stagnation been so protracted? Although urgently needed, multilateral cooperation is declining.

Meanwhile, international conflicts have been increasingly exacerbated by geopolitical considerations. Increased unilateral sanctions driven by geopolitics have also disrupted international economic relations.

Barack Obama’s ‘pivot to Asia’ started the new Cold War to isolate and surround China. National responses to the COVID-19 pandemic worsened supply-side disruptions.

Meanwhile, the weaponisation of economic policy against geopolitical enemies has been increasingly normalised, often contravening international treaties and agreements.

Such new forms of economic warfare include denying market access despite commitments made with the 1995 establishment of the World Trade Organization.

Trade liberalisation has been in reverse gear since rich nations’ protectionist responses to the 2008 global financial crisis. Globalisation’s promise that trade integration would ensure peace among economic partners was thus betrayed.

Since the first Trump presidency, geopolitical considerations have increasingly influenced foreign direct investments and international trade.

US and Japanese investors were urged to ‘reshore’ from China with limited success, but appeals to ‘friend-shore’ outside China have been more successful.

Property and contractual rights were long deemed almost sacred. However, geopolitically driven asset confiscations have spread quickly.

Financial warfare has also ended Russian access to SWIFT financial transaction facilities and the confiscation of Russian assets by NATO allies.

The Biden administration has extended such efforts by weaponizing US industrial policy to limit ‘enemy’ access to strategic technologies.

It forcibly relocated some Taiwan Semiconductor Manufacturing Corporation operations to the US, albeit with little success.

Canada’s protracted detention of 5G pioneer Huawei founder’s daughter – at US behest – highlighted the West’s growing technology war against China.

Unsurprisingly, inequalities – both intranational and international – continue to deepen. Two-thirds of overall income inequality is international, exacerbating the North-South divide.

Available online here: https://www.ipsnews.net/2024/11/western-finance-ruining-economies-rest/

SWIFT dollar decline

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. US-led sanctions are inadvertently undermining the dollar’s post-Second World War dominance. The growing number of countries threatened by US and allied actions is forcing victims and potential targets to respond pro-actively.

SWIFT strengthened dollar

The instant messaging system of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) informs users, both payers and payees, of payments made. Thus, it enables the smooth and rapid transfer of funds across borders.

Created in 1973, and launched in 1977, SWIFT is headquartered in Belgium. It links 11,000 banks and financial institutions (BFIs) in more than 200 countries. The system sends over 40 million messages daily, as trillions of US dollars (USD) change hands worldwide.

Co-owned by more than 2,000 BFIs, it is run by the National Bank of Belgium, together with the G-10 central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the US. Joint ownership was supposed to avoid involvement in geopolitical disputes.

Many parties use USD accounts to settle dollar-denominated transactions. Otherwise, banks of importing and exporting countries would need accounts in each other’s currencies in their respective countries in order to settle payments.

SWIFT abuse

US and allied – including European Union (EU) – sanctions against Russia and Belarus followed their illegal invasion of Ukraine. Created during the US-Soviet Cold War, SWIFT remains firmly under Western control. It is now used to block payments for Russian energy and agriculture exports.

But besides stopping income flows, it inadvertently erodes USD dominance. As sanctions are increasingly imposed, such actions intimidate others as well. While intimidation may work, it also prompts other actions.

This includes preparing for contingencies, e.g., by joining other payments arrangements. Such alternatives may ensure not only smoother, but also more secure cross-border financial transfers.

As part of US-led sanctions against the Islamic Republic, the EU stopped SWIFT services to Iranian banks from 2012. This blocked foreign funds transfers to Iran until a compromise was struck in 2016.

US financial hegemony

Based in Brussels, with a data centre in the US, SWIFT is a ‘financial panopticon’ for surveillance of cross-border financial flows. About 95% of world USD payments are settled through the private New York-based Clearing House Interbank Payments System (CHIPS), involving 43 financial institutions.

About 40% of worldwide cross-border payments are in USD. CHIPS settles US$1.8 trillion in claims daily. As all CHIPS members maintain US offices, they are subject to US law regardless of headquarters location or ownership.

Hence, over nearly two decades, CHIPS members like BNP Paribas, Standard Chartered and others have paid nearly US$13 billion in fines for Iran-related sanctions violations under US law!

Exorbitant privilege

The USD remains the currency of choice for international trade and foreign reserve holdings. Hence, the US has enjoyed an “exorbitant privilege” since World War Two after the 1944 Bretton Woods conference created the gold-based ‘dollar standard’ – set at US$35 for an ounce of gold.

With the USD remaining the international currency of choice, the US Treasury could pay low interest rates for bonds that other countries hold as reserves. It thus borrows cheaply to finance deficits and debt. Hence, it is able to spend more, e.g., on its military, while collecting less taxes.

Due to USD popularity, the US also profits from seigniorage, namely, the difference between the cost of printing dollar notes and their face value, i.e., the price one pays to obtain them.

In August 1971, President Nixon unilaterally ‘ended’ US obligations under the Bretton Woods international monetary system, e.g., to redeem gold for USD, as agreed. Soon, the fixed USD exchange rates of the old order – determining other currencies’ relative values – became flexible in the new ‘non-system’.

In the ensuing uncertainty, the US ‘persuaded’ Saudi King Feisal to ensure all oil and gas transactions are settled in USD. Thus, OPEC’s 1974 ‘petrodollar’ deal strengthened the USD following the uncertainties after the Nixon shock.

Nevertheless, countries began diversifying their reserve portfolios, especially after the euro’s launch in 1999. Thus, the USD share of foreign currency reserves worldwide declined from 71% in 1999 to 59% in 2021.

With US rhetoric more belligerent, dollar apprehension has been spreading. On 20 April 2022, Israel – a staunch US ally – decided to diversify its reserves, replacing part of its USD share with other major trading partners’ currencies, including China’s renminbi.

Sanction reaction

The EU decision to bar Iranian banks from SWIFT prompted China to develop its Cross-border Interbank Payment System (CIPS). Operational since 2015, CIPS is administered by China’s central bank. By 2021, CIPS had 80 financial institutions as members, including 23 Russian banks.

At the end of 2021, Russia held nearly a third of world renminbi reserves. Some view the recent Russian sanctions as a turning point, as those not entrenched in the US camp now have more reason to consider using other currencies instead.

After all, before seizing about US$300 billion in Russian assets, the US had confiscated about US$9.5 billion in Afghan reserves and US$342 million of Venezuelan assets.

Threatened with exclusion from SWIFT following the 2014 Crimea crisis, Russia developed its own SPFS (Financial Message Transfer System) messaging system. Launched in 2017, SPFS uses technology similar to SWIFT’s and CIPS’s.

Both CIPS and SPFS are still developing, largely serving domestic BFIs. By April 2022, most Russian banks and 52 foreign institutions from 12 countries had access to SPFS. Ongoing developments may accelerate their progress or merger.

The National Payments Corporation of India (NPCI) has its own domestic payments systems, RuPay. It clears millions of daily transactions among domestic BFIs, and can be used for cross-border transactions.

Sanctions cut both ways

Unsurprisingly, those not allied to the US want to change the system. Following the 2008-9 global financial crisis, China’s central bank head called for “an international reserve currency that is disconnected from individual nations”.

Meanwhile, China’s USD assets have declined from 79% in 2005 to 58% in 2014, presumably falling further since then. More recently, China’s central bank has been progressively expanding use of its digital yuan or renminbi, e-CNY.

With over 260 million users, its app is now ‘technically ready’ for cross-border use as no Western bank is needed to move funds across borders. Such payments for imports from China using e-CNY will bypass SWIFT, and CHIPS will not need to clear them.

Russia has long complained of US abuse of dollar hegemony. Moscow has tried to ‘de-dollarize’ by avoiding USD use in trade with other BRICS – i.e., Brazil, India, China and South Africa – and in its National Wealth Fund holdings.

Last year, Vladimir Putin warned the US is biting the hand feeding it, by undermining confidence in the US-centric system. He warned, “the US makes a huge mistake in using dollar as the sanction instrument”.

The scope of US financial payments surveillance and USD payments will decline, although not immediately. Thus, Western sanctions have unwittingly accelerated erosion of US financial hegemony.

Besides worsening stagflationary trends, such actions have prompted its targets – current and prospective – to take pre-emptive, defensive measures, with yet unknown consequences.

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