Leaders of G20 nations reached consensus on a set of measures to address current and emerging global economic and financial challenges during their 26-27 June meeting in Toronto, Canada. Raymond Gilpin and Amanda Mayoral with USIP’s Sustainable Economies Center of Innovation examine some implications for conflict-affected states.
Leaders of G20 nations reached consensus on a set of measures to address current and emerging global economic and financial challenges during their 26-27 June meeting in Toronto, Canada. Raymond Gilpin and Amanda Mayoral with USIP’s Sustainable Economies Center of Innovation examine some implications for conflict-affected states.
- How could the decisions reached in Toronto affect conflict-affected states?
- Should the G20 not be focused on broader global issues and leave country-specific impacts in conflict-affected states to national governments, development banks and aid agencies?
- Do you think the fiscal tightening 2013 targets set out in the agreement are likely to increase conflict?
- You mentioned that fiscal tightening could reduce foreign aid. Is there any evidence of this?
- What could be done to forestall some of the adverse effects?
- What would you propose for the next G20 meeting in Seoul, Korea on 11-12 November?
Q. How could the decisions reached in Toronto affect conflict-affected states?
The main issues leaders of G20 countries sought to address in Toronto were growing deficits and mounting debt in major industrialized countries, which threaten to plunge the global economy into another (potentially deeper) recession. There was broad agreement on the need to halve fiscal deficits in G20 countries by 2013 via “synchronized fiscal adjustment.” Ideally, a balanced global approach would require those countries with deficits and borrowing constraints to rein in spending, while those with surpluses to stimulate economic activity through spending. Available evidence suggests that this is not likely to be the case. The Obama administration has made it clear that the bulk of global expansion will have to come from somewhere else, as America gets its own house in order. Germany plans to tighten its fiscal policy even though it had relatively unconstrained borrowing capacity and is running a surplus. In addition, we are facing drastic budget cuts in major economies. The UK’s deficit has to fall by an astonishing GBP150 billion by 2013 --- dropping from 11 percent of GDP to 5.5 percent. It is unrealistic to assume that such belt-tightening will not impact jobs and growth. This G20 agreement is likely to precipitate a global economic slowdown that could impact fragile, conflict-affected economies adversely. This is partly because the adjustment is self-policing, with each G-20 country determining pace, direction and size of the adjustment. Conflict-affected states (like Afghanistan, D.R. Congo and Sudan) require sustained financial assistance and expanded trade opportunities if they are to rebuild successfully. Measures that constrain OECD economies could jeopardize opportunities open to them, primarily by reducing foreign assistance dollars and limiting trade options.
Q. Should the G20 not be focused on broader global issues and leave country-specific impacts in conflict-affected states to national governments, development banks and aid agencies?
Worsening outcomes in conflict-affected states could have dire global outcomes. Economic challenges and the absence of tangible peace dividends are important factors in explaining why a significant proportion of post-conflict states slide back into conflict within a few years. Continuing conflict requires costly interventions, increases refugee flows, and could potentially disrupt world trade. It is important to note that conflict-affected states are heavily dependent on G20 countries for aid and trade. Policies that could affect energy and food security, diminish remittances, worsen unemployment and reduce the quality of life in conflict-affected states could have regional and global effects. This is why it is important for G20 policymakers to be aware of some of the intended and unintended consequences that could impact global outcomes directly and indirectly.
Q. Do you think the fiscal tightening 2013 targets set out in the agreement are likely to increase conflict?
Possibly. Reducing deficits can be a good thing but we must be cognizant of the potential costs. In Europe, austerity measures could increase poverty among vulnerable groups and deepen inter-group inequalities. USIP recently published a peace brief on “Group Inequality and Conflict [http://www.usip.org/resources/group-inequality-and-conflict-some-insights-peacebuilding],”
which outlines how such issues could precipitate violent political conflict. Immediate steps should be taken to ensure that social safety nets are available to vulnerable groups. These concerns are echoed in a 28 June 2010 article in the Financial Times by David Oakley and Peter Gamham which concluded that the G20-induced fiscal adjustment scheme is likely to cause a global slowdown that could sharply increase unemployment, reduce living standards and precipitate civil and political unrest.
Q. You mentioned that fiscal tightening could reduce foreign aid. Is there any evidence of this?
Aggregate levels of foreign aid fell following global economic slowdowns caused by the oil shocks of the late 1970s, the debt crisis of the 1980 and the East Asian financial crisis of the 1990s. Also, levels of foreign assistance roughly track GDP, so it is reasonable to expect a reduction in the wake of the 2008/9 crisis. Given the severity of the current crisis the impact on foreign aid pledges/disbursements could be more pronounced and prolonged. There are two reasons for this. First, budget cuts in OECD countries would also affect governments’ ability or willingness to provide additional assistance. Second, actual aid disbursements could be delayed as budget offices grapple with the changes. This is particularly important because disbursements schedules could be determined by realities in the donor countries and not by requirements in receiving states. Even minor delays/variance in programmed receipts could be potentially destabilizing for fragile economies.
Q. What could be done to forestall some of the adverse effects?
A helpful first step would be taking steps to ring-fence foreign aid dollars to preserve anticipated levels. Multi-donor trust funds provide a useful vehicle to de-politicize and preserve assistance flows. In addition, they could also facilitate monitoring and harmonize outcomes/expectations. Second, aid should move beyond humanitarianism and focus on development through capacity building and institutional strengthening. The overarching goal for foreign aid should be to help build capable and dependable states; not conflict-ridden and aid-dependent nations.
Q. What would you propose for the next G20 meeting in Seoul, Korea on 11-12 November?
Three issues could be highlighted for consideration. First, G20 leaders should play closer attention to the potentially adverse consequences of uncoordinated fiscal tightening and its wide-ranging effects on the most vulnerable. IMF Managing Director Dominique Strauss Khan is quoted as saying “It would be a disaster if all countries were tightening.” Second, they should design and adopt mechanisms to mitigate potentially destabilizing social consequences. This could include the provision of social safety nets. Third, there should be a firm commitment to preserve levels of foreign assistance --- particularly for conflict-affected states.