Will the IMF take advice from the Pope?

 

In a major Papal Bull, Pope John Paul announced on the 1^st December, that wealthy nations should relieve the debts of developing nations in order to remove “the shadow of death”. This strongly worded appeal was made in the Incarnationis Mysterium (The Mystery of the Incarnation). It coincided with a report by the World Bank which forecast declining living standards for the poorest countries.

The Papal Bull on 1 December follows on from the apostolic letter Tertio Millennio Adveniente in which it stated:

“Christians will have to raise their voice on behalf of the poor of all the world, proposing the Jubilee as an appropriate time to give thought, among other things, to reducing substantially, if not cancelling outright, the international debt which seriously threatens the future of many nations.”

Despite reported pressure from the IMF, the Pope reaffirmed his commitment to debt cancellation by the Millennium. He said:

“Some nations, especially the poorer ones, are oppressed by a debt so huge that repayment is practically impossible.... It is clear that there can be no real progress without effective co-operation between the peoples of every language, race, nationality and religion.”

World Bank criticises IMF policy

The Papal Bull coincided with the release of a World Bank report, which made a very gloomy forecast for the development prospects of millions living in the developing world. The Bank forecast that more than a quarter of the population of developing countries—just over a billion people—will suffer falling living standards as a result of the global economic crisis. Indeed the one-year declines in industrial production of 20 per cent or more in Thailand and Indonesia are comparable to those in the USA and Germany during the Great Depression. At a press conference in London, Uri Dadush of the Bank's development prospects group said that developing countries would suffer most because the crisis had cut global demand for basic commodities, upon which the developing world depended for income.

The report, Global Economic Prospects and the Developing countries, tears apart the increasingly uneasy relationship between the World Bank and its sister institution, the IMF, with an implicit and searing assessment of how the latter misjudged the financial crisis that begun in Southeast Asia 18 months ago and prescribed economic policies that turned investor panic into deep recessions. Top officials of the World Bank reportedly decided to delete references to the IMF and the US Treasury from the final report, describing events and decisions but not the officials or institutions that made them. But the report leaves little doubt about what the Bank views as the key misjudgment: the IMF's decision—with the advice of the US Treasury—to press Thailand, Indonesia and South Korea to raise interest rates in an effort to stabilise their currencies. Joseph Stiglitz, chief economist at the World Bank, said that the high interest rates created a huge number of bankruptcies as small businesses could not pay off debts or buy raw materials.

World Bank economist Joe Stiglitz points to market failure

Joe Stiglitz, chief economist at the World Bank, said that the origins of the Asian crisis lay fundamentally in the interaction between two things: “the difficulties of domestic financial liberalisation and the problems associated with volatile international markets.” The huge capital flows had a massive destabilising impact on countries in the region, and Stiglitz lays the blame fairly and squarely on market failure, both domestic and international.

He went on to say that many improvements were needed in global financial architecture. These needed to include: “better bankruptcy laws; greater willingness to accept debt repayment standstills and arrangements entailing more equitable burden-sharing; and more recognition of the need for responses to crises that are better adapted to the circumstances of the country, and to protecting the most vulnerable within them.”

Bankruptcy laws need to be more effective and creditors have to accept debt standstills, allowing debtor nations the option of not paying when a crisis hits. When Joe Stiglitz refers to more equitable burden-sharing, he is saying that creditors must be ready to take their share of the losses, rather than inflicting them on the poorest, most vulnerable people in the debtor nation.

Time for the IMF to listen to the Pope?

The IMF has apparently attempted in the past to persuade Pope John Paul to stop his moral condemnation of the debt crisis. The Pope is clearly not to be dissuaded from his position, and the language he is using is becoming stronger. Following the IMF's failure in Asia and Russia, will they and other major lenders now pay closer attention to the voice from the Vatican?