July 12, 2023
Imagine that the US government could quickly authorize hundreds of billions of dollars of aid to developing countries, which would save hundreds of thousands of lives there, or possibly more. And that this would also save jobs here as the US and world economy slow, and that all of this would have zero cost to the US government.
Although most people don’t know about it, this actually happened in 2021, and it very much needs to happen again.
The World Food Programme has declared an “unprecedented” global food crisis in 2023, with some 345 million people suffering from acute food insecurity — “one step away from starvation,” as WFP Executive Director Cindy McCain has noted. This is a drastic increase in food insecurity since before the COVID-19 pandemic, and more than twice the number for 2020. And the current global downturn could push many over the brink.
The global economy is currently “at risk of a deeper downturn,” according to the World Bank’s projections last month. Among the main contributing factors, the Bank noted, are the rapid interest rate increases over the past year, led by the US Federal Reserve; the war in Ukraine; and continuing effects of the pandemic. The world’s poorest countries are among the hardest hit, with vastly increased debt service, shrinking budgets for vital social spending, debt crises, and even defaults.
In August of 2021, the IMF distributed more than $209 billion worth of Special Drawing Rights (SDRs) to its developing country members (not including China). This is an international reserve asset that the IMF uses that is convertible to hard currencies, including the dollar and euro. (China cannot convert SDRs, under IMF rules, because it has more than $3 trillion in international reserves.)
This $209 billion is a very large amount: it’s more than the total aid provided by high-income countries (mostly the United States and Europe) to the developing world in an entire year. And importantly for the recipient countries, it is different from other disbursements that come from the IMF in two fundamental ways: it comes without debt, and without conditions attached to it.
Right now it is the US Treasury Department, which represents Washington at the IMF, that is blocking this aid. Almost all other governments want the new issuance, as they did in 2020 and 2021.
But there is no cost to the US government, or to other governments. The total amount distributed in 2021 was $650 billion — about the maximum that the US Treasury can approve at the IMF without a vote of the US Congress. But it is only the $209 billion of this sum that goes to developing countries that matters; the rest is just an accounting entry that cannot be used by the recipients, since countries have to show some need in order to convert the SDRs to hard currency. There is therefore no waste or use of any resources, or currency, involved in the distribution of SDRs that do not go to developing countries; it is just a technicality that exists because IMF rules require that SDRs must be distributed to member countries in proportion to their quotas at the IMF.
There are potentially hundreds of thousands of lives, maybe more, that could be saved — depending on how badly the world economy fares over the next year.
The 2021 issuance of SDRs showed that they can make a big difference. Many countries converted the SDRs to hard currency and used the funds to respond to critical food and health needs.
But even for those who kept them as international reserves, these valuable assets can be a lifesaver — literally. The IMF guarantees that SDRs will always be convertible to hard currency, so they are solid international reserves; as good as, for example, US Treasury bonds.
And countries need to have reserves; if a country runs too low on these kinds of liquid international reserves, its borrowing costs will rise, and capital can even flee the country. An estimated $94 billion left developing countries in 2022. So, the hundreds of billions of dollars worth of SDRs that the IMF issued in 2021 helped stabilize many countries; these assets can help countries avoid balance of payments crises and other economic crises, even when they are not converted into hard currency.
The SDRs’ contribution to economic stabilization in the rest of the world can also save export-related jobs in the United States that depend on demand from other countries. And — particularly important at this time — this is something that the Biden administration can do for the US economy with a divided Congress that will not approve other measures to boost employment here as the US economy also slows.
The US Treasury Department, which is blocking this aid, has not offered any economic argument against the 2021 issuance of SDRs, or against the new issuance that members of Congress are proposing. At times they have raised the point that the majority of SDRs go to high-income countries. But, as noted above, this does not matter, since there is no cost or use of resources involved in this aspect of the allocation; the high-income countries cannot use the SDRs.
The Biden Treasury agreed to the 2021 allocation of SDRs after the US House of Representatives had passed legislation, twice, which Republicans blocked in the Senate. That legislation would have required Treasury to support, at the IMF, an allocation of $2.8 trillion — more than four times what was subsequently approved. All of this took place under pressure from hundreds of organizations who advocated for this help, including some representing tens of millions of Americans.
That organizing and pressure, from members of Congress as well, is still there. There is a good chance that reason and humanity will prevail again. The sooner it does, the more lives can be saved.