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G20 starts work on long-term investment, but will the IFIs give the right advice?

Added 28 Feb 2013

The success of emerging markets in sustaining investment during the crisis has triggered a new G20 workplan on long-term investment, but with the IFIs and the OECD at the helm, it’s uncertain whether this will mean any new thinking.

This month, the G20 Finance Ministers set up a new “Study Group on financing for investment” to “determine a work plan for the G-20, considering the role of the private sector and official sources of long-term financing.” This is not a new theme for the G20 which has had a focus on infrastructure investment for some time, criticized for a bias towards controversial and expensive mega-projects, with significant social and environmental risks.

Though the group “will work closely with the World Bank, OECD, IMF, FSB, UN, UNCTAD and other relevant [international organisations]” it’s pretty clear which institutions are dominant.  The IMF wrote one background report for the meeting and the Financial Stability Board (FSB) another. The OECD is preparing a report on “long-term investment financing by institutional investors” for the upcoming G20 leaders’ summit in St Petersburg, while the World Bank and other multilateral development banks (MDBs) are the chosen vehicles, asked to “enhance the catalytic role they play in mobilizing long-term financing from other sources, including through [public-private partnerships].”

The FSB – one of the least accountable and transparent international institutions – starts its report with a mea culpa. Detailing its current work programme, it admits that “the reforms do not specifically target [long-term] finance”. The limited future role it proposes for itself – largely monitoring the effects of reforms on long-term finance – suggests a limited interest in this important topic.

The analysis of the issue provided in the IMF staff’s report, however, is concise and interesting. It finds that “investment in advanced economies fell sharply in the wake of the crisis (by more than 15 percent) and has recovered only very slowly thereafter”, in contrast to the resilience of investment in developing economies, as Eurodad noted last year.  In particular “in emerging Asia investment has accelerated since the crisis, on the back of substantial fiscal stimulus, particularly in China.”

The IMF also notes that “advanced economies have continued to rely on foreign saving, while emerging economies, on average, have generated positive net saving” – in other words, rich countries’ investment is dependent on external finance, while emerging economies and others have stronger domestic sources of investment.  In fact “surplus emerging economies have generally accumulated reserves” – these are largely invested in safe assets from rich countries, particularly US treasuries.  This huge stockpiling of reserves meant, according to UNDESA, that developing countries made a “net transfer of financial resources of approximately $826.6 billion to developed countries in 2011”.   Previous Eurodad research has shown how this stockpiling of reserves, caused by significant failings of the IMF-led international economic and monetary system, places a significant burden on developing countries.

The report finds that “bank credit in emerging Asia and Latin America has grown strongly, in line with strong investment”, suggesting, as others have noted, that the key to stronger investment policies in developing countries lies within the traditional – some may say boring – banking sector, rather than the development of capital markets and financial innovation, championed over past years by both the IMF and the World Bank.

Given this past track record and the controversy surrounding the World Bank’s new ‘flagship’ report on the financial sector, asking the IFIs to advise the G20 on long-term investment financing seems a bit perverse. As UNCTAD have noted, developing countries have also become major importers and exporters of foreign direct investment. Surely the emerging market countries in the G20 have more to teach the IFIs than to learn from them?

tags: imf, FDI, FSB