Here’s how to repay developing countries for colonialism – and tackle the climate crisis | Michael Franczak and Olúfẹ́mi O Táíwò
AActivists who demand global reparations for colonialism and slavery are often accused of asking for the politically impossible. Internationally, however, reparations are more plausible than one might think. Indeed, an international mechanism to transfer resources to the formerly colonized world in a politically feasible way already exists: the policy instrument of “special drawing rights” (SDRs) managed by the International Monetary Fund.
Calls to change the allocation of SDRs are not new, nor is the idea that SDRs could function as reparations for transatlantic slavery and colonialism. Professor Cynthia L Hewitt of Morehouse College championed exactly this strategy as early as 2004. What is new is the political possibility opened up by growing awareness of the global climate crisis, which requires solutions that are not only practical but historically correct. . The reallocation of SDRs, as Barbadian Prime Minister Mia Mottley suggested in her “scathing” speech at Cop26, is both.
Introduced in 1969, SDRs are essentially “IMF coupons” distributed to central banks or national treasuries around the world, who can either hold them or exchange them with other member countries for cash. “Adding SDRs to a country’s international reserves makes it more financially resilient,” says the IMF. “In times of crisis, a country can dip into its savings for urgent needs (for example, to pay for importing vaccines).”
Unfortunately, the general allocation of SDRs is unfair and inefficient. It is not a coincidence. At the 1944 Bretton Woods conference, 44 nations “negotiated” plans for the IMF and World Bank, but only two counted: the United States and the United Kingdom, with the latter ranking far behind. The allocation of quotas was decided by wartime politics, as Raymond Mikesell, the author of the “formula”, explained 50 years later. No European country expected to lose its empire; The presence of India as the only colony was the exception proving the rule.
Two decades later, dozens of new countries in Africa and Asia had achieved political independence from Britain, France and others. In the mid-1960s, Third World countries dominated the UN General Assembly, but the “economic decolonization” they sought was impossible without equal representation in global economic governance – the IMF created a whole new “African department” to manage the overflow. It is in this context that the SDRs were born.
“In 1965, when serious discussions about the creation of the SDR began, a group of experts…argued that SDRs should be allocated with a view to meeting the development needs of newly independent countries,” explains the historian Economics Barry Eichengreen. As the former colonial powers and the United States enjoyed a “golden age” of fossil fuel-fueled capitalism, inequality between rich and poor countries reached new heights. According to some, SDRs would allow poor countries to prioritize development that colonialism had denied, without risking massive capital flight or default. “But when the SDRs were issued in 1970, they were allocated in proportion to IMF member quotas.”
Last August, the IMF’s board of governors approved $650 billion in new SDRs, its largest allocation since 1945 and more than double its expansion in 2009 at the height of the global financial crisis. However, because SDRs are allocated by quota, low-income developing countries only received 1.4% of this massive sum. High-income developing countries like China did better, at 22%, but rich countries took the lion’s share – more than 60%. The United States gobbled up an obscene 17%. Additionally, U.S. law requires the U.S. Treasury to consult with Congress on any material changes to SDR allocations, giving U.S. lawmakers a functional unilateral veto over any new and significant SDR allocations.
Of course, the US will never touch its SDRs – the “exorbitant privilege” of the US dollar means the country can print all the money it needs. Other rich countries have equally low or zero utilization rates; reaching their SDRs would be an admission of failure. At the other end, the vast majority of small island developing states and low-income developing countries – countries that, let’s not forget, have never created a global financial meltdown – rely on their meager reserves for emergencies of all kinds.
The quota system is worse than a relic – it is a literal representation of how colonialism continues to exclude poor countries from global governance. For African countries still using the CFA franc currency instituted by the French empire, the link with colonialism goes far beyond the symbolic: while most countries in the world are authorized to use their SDRs without conditions, the use of SDRs by these former French colonies is assessed through IMF-backed “surveillance consultations” on a “case-by-case” basis. The size of the quotas also determines voting power on the IMF’s board of governors, giving the United States a 17% share of the vote. Since major IMF decisions require an 85% vote share, this gives the US a functional veto over the voting system on which SDR allocations are currently based. The IMF recognizes the need for change, but the US has blocked even marginal reforms, while hoarding SDRs it neither needs nor uses.
Yet it is entirely possible for the IMF and the international community to turn SDRs into an effective tool for climate reparations, rather than more money under the mattress for rich countries. Here are some ways that could happen.
The first is the IMF’s own proposal. As its Director General, Kristalina Georgieva, has rightly acknowledged, Africa contributes “almost nothing” to global warming but bears the consequences – and the costs – largely on its own. His idea, endorsed by G20 finance ministers at their October 2021 summit in Rome, is a new Resilience and Sustainability Trust (RST) within the IMF worth up to $50 billion. Through the RST, rich countries could turn their SDRs into climate finance for low- and middle-income countries vulnerable to climate shocks. But $50 billion – less than half of the new US allocation – isn’t just insufficient, it’s unlikely. As a mechanism and not a mandate, the RST cannot force rich countries to redistribute their SDRs. Even if the target is achieved, “design flaws” including eligibility requirements and conditionalities “would render the planned RST ineffective for most climate-vulnerable countries”, as noted by members of the a working group from Boston University.
The good news is that better alternatives already exist. In fact, most Multilateral Development Banks (MDBs) are prescribed holders, including new climate-focused banks like the UN Adaptation Fund and the Green Climate Fund that could be added with the consent of the United States. MDBs have climate knowledge and expertise that the IMF lacks, lagging behind in the climate game, and as prescribed holders, MDBs can use SDRs as part of their normal financial operations.
“Redirecting SDRs to multilateral development banks will expand [their] reach and power,” says the Center on Global Development. The African Development Bank and other multilateral development banks have asked for just that, but so far the IMF has rejected them. Another option is the creation of special environmental drawing rights within the IMF, which would help fund national investment plans aligned with a country’s climate goals.
The best option is the simplest and fairest: eliminate the system of allocation based on the “quota” of members and build a new one based on restorative principles, as Professor Hewitt argued years ago and as Prime Minister Mottley puts it today. Such an alternative ranking system would award the most SDRs to countries most disadvantaged by slavery and colonialism as well as climate vulnerability.
International funding for phasing out fossil fuels and adapting to climate impacts is trillion dollars short of what will be needed to avoid the worst climate impacts. More than a decade later, the Green Climate Fund (the largest dedicated climate fund in the world) has only managed to raise a tenth of a target that was an order of magnitude too small in the departure. SDR allocations can provide an alternative to the failing global climate finance system via an institution that is at least nominally publicly accountable, instead of relying on fantasies about private sector social accountability.
Not only are SDRs great dollar-for-dollar climate finance, but rich countries have little to lose beyond IMF “coupons” they don’t need and won’t spend. Abandoning the quota system outright may not happen (yet), but redistributing SDRs is a serious and workable way for rich countries to begin a process of reparations and avoid the worst versions. of the climate crisis at the same time.
Michael Franczak is a postdoctoral fellow at the University of Pennsylvania’s Perry World House and author of the forthcoming book Global Inequality and American Foreign Policy in the 1970s
Olúfẹ́mi O Táíwò is Assistant Professor of Philosophy at Georgetown University and author of the forthcoming book Reconsidering Reparations