Today the World Bank issued a statement advocating the formation of what they are calling a “Vulnerability Fund” for developing countries hit particularly hard by the economic crisis. The Bank says that the purpose of the Fund would be to “help developing countries that can’t afford bailouts and deficits.” The resources in the fund would go to classic stimulus measures: infrastructure projects, safety net, and finance for small and medium sized businesses.Â
There are a number of notable elements in this proposal. One, of course, is simply the name: Vulnerability Fund. At one level, there is absolutely nothing new or interesting about the structure of this project. Many programs that were meant to respond to financial crisis also included this kind of spending — even the earliest structural adjustment programs had emergency social spending in them (including the infamous programs in Bolivia, where Jeffrey Sachs first came crashing onto the international scene). And yet, it seems to me that there is something new here. As I have written in my book on Russia, the initial problematization of structural adjustment was very much oriented to the idea that, yes, in the short term, there is a need for emergency financing for countries that have been buffeted by external shocks. But the fundamental problem was thought to be structural rigidities in the institutions of these countries themselves. Curiously, that does not seem to be part of the current discussion. “Vulnerability” really just designates fiscal incapacity — the inability to raise emergency funds — not structural problems with the organization of the economy. Whether that is the product of short term crisis or a longer term shift in problematization will be interesting to watch.
One other note: A student of mine at the New School has been working on the emergence of vulnerability as a classification for small island nations trying to qualify for development aid in the United Nations. Previously, country qualifications were based purely on current levels of socio-economic development (poverty rates, education rates, etc.). But these countries — which are vulnerable to both natural disasters and economic shocks — are arguing that vulnerability should be a separate qualifying criterion. In any case, another corner of international development practice in which vulnerability seems to be gaining significance.
It makes sense that a requirement for structural changes towards greater flexibility would be removed or downplayed, if the current economic turmoil has been interpreted to mean that now no one knows the right economic model. At least, countries with previously disparaged economies could argue that their own system shouldn’t disqualify them for aid. In your student’s finding, they seem to be going one better with the vulnerability criterion: despite vulnerability and because of vulnerability to dual natural/economic disaster, aid should be made available
Given the context, the significance of the vulnerability fund seems to be in marking the limits of flexible currency exchange rate regimes that have been introduced in the 90s as a solution to pegged currency regimes. One of the interesting things with the current crisis is that the value of the currency of the nation that is going through the crisis is rapidly increasing, and as we know, and I personally know coming from Turkey, this is something quite peculiar to the US thanks to her special position in the current global economy (not only the US is the most significant reserve currency for central banks and regular individuals in the third world, but also because of the belief that US government will never default her treasury bonds are seen as the safest financial instrument by investors globally). This rapid increase in the value of the US is apparently putting (according to an article on NYT two days ago) many sovereigns with emerging economies, especially in Eastern Europe and Asia, into a position of near-default.
The monetary policy based on pegged exchanged rates proved itself quite dangerous as a series of crisis in Asia and Russia has shown in the 1990s. The interesting thing with flexible rates regime is that it was designed and suggested by neo-liberals such as Mundell and Dornbursch in the 60s and 70s as a mechanism to protect national economic spaces from external shocks. This problematization, not surprisingly, was based on the norm of resilience. If only the value of a currency could adjust incrementally to the changes in its environment, such external shocks could be accommodated in the price system. As we know, flexible exchange rate policy has become almost a universal truth in institutions such as IMF especially after the currency crises of the 90s.
What is interesting, and this is how this security mechanism is linked to the Vulnerability fund, is that in the aftermath of the near failure of a relatively large hedge fund Long Term Capital Management in the US, it has become clear that the liberalization of the 80s also meant that now national economies were faced with a new problem: contagion. This perspective among many others was articulated by a group of economists and regulators, including Paul Volcker, Morris Goldstein (a high ranking IMF economists who had led its research division from late 80s into the mid-90s) in a report commissioned by the Council on Foreign Relations. After naming the series of international economic crises from early 80s to late 90s, the report had strongly pointed out that in a global world with free capital flows crises in emerging economies such as the Asian Tigers and Latin America was a source of vulnerability to the US economy and financial system. Not surprisingly, “say no to pegged currency regimes” was one of the main recommendations of the report among many others.
It is true that pegged regime was dangerous as due to the fragility of this security mechanism external shocks could easily lead to periodic rapid devaluations which would have catastrophic effects both on the domestic economy and in the foreign counter-parties interlinked with the currency of devaluation. However, now flexible regime seems to be creating its own problems as with this anomaly of excessive valuation of the US dollar. Rather than these small countries being a source of vulnerability to the US, now US seems to be a vulnerability to these countries. Obviously defaults in these countries would only act as positive feedback loops back on the US…
On an other note related to the question of vulnerability and financial crisis as a risk against the US, IMF in the aftermath of the Asian crisis have started a special unit, Financial Sector Assessment Program (FSAP), specifically designed to measure the resilience/vulnerability of financial systems of member countries (excluding the US) using what is called “stress testing”. As many of you must have heard by now, stress testing has become THE device used to assess the resilience of “systemically important” financial institutions in the US. So again, what we are observing today is a shift in the location at which questions around vulnerability should be sought. Of course a structural adjustment to be done in an “advanced capitalist” country such as the US will probably look quite different then as Stephen shows in his book how it was done in Russia…
Thanks for these comments Meg and Onur. I think that both make a lot of sense. Meg — I definitely agree that there is a kind of uncertainty about the “right” economic model, or a sense that the problem lies outside the control of these countries. I guess what is interesting to me is that at the beginning of the Latin American debt crisis people made the same assumption — these are short-term liquidity problems. It was only over time that people thought these might also be “structural” problems with the domestic organization of these economies.
In this light, I think that the shift Onur outlines is precisely right. Before the pathology and vulnerability arose from excessive regulation and rigidity. Now it seems to be emerging from excessive interconnectedness and sensitivity. It seems that this is a tension we have observed in domain after domain: how to secure a system without destroying it economically? How to prepare for catastrophic events without ruining the ability to deal with normal fluctuations? So part of what will be interesting to watch is the emergence of a new regulatory framework that does not go back to the old rigidities but tries other kinds of mechanisms — like surveillance, stress testing, and so on.
One final thought: I also found it quite curious that what this vulnerability fund IS is simply a fund for counter-cyclical spending in these countries. They don’t have the ability to fund stimulus packages, so we’ll finance them (on the good terms that the World Bank offers).