The G8, the World Bank and the IMF: Debt, aid and trade implications

12 July 2005

At their 6 – 8 July summit in Gleneagles Scotland, G8 leaders tasked the World Bank and the IMF with much of the follow-up on their commitments on debt reduction, increased aid and fairer trade.

Debt: old conditions in new bottles

The summit agreement brings nothing new to that made by the G7 (the G8 minus Russia) finance ministers in June that $40 to $55 billion of debts owed to the World Bank, IMF and African Development Bank by 18 highly indebted poor countries would be written off.

Debt campaigners have said that this addresses only 10 per cent of the problem and falls short of the full debt cancellation needed by more than 60 countries. Lidy Nacpil, international coordinator of Jubilee South, said “the conditionalities attached to debt cancellation will exacerbate poverty rather than end it.”

the people have roared but the G8 has whispered

Arguments have already begun at the board on the details of Fund debt cancellation. In a leaked 22 June statement to the board, executive directors from Belgium, the Netherlands, Norway and Switzerland argued that “rather than giving full, irrevocable and unconditional debt relief”, the Fund should “amend the PRGF (Poverty Reduction and Growth Facility) instrument to allow the Fund to enter into a new kind of arrangement with countries that become eligible for debt cancellation. Under this new type of arrangement, countries would not receive new loans, but grants equal to the amount of the service of their remaining debt to the Fund.” Importantly, this would “enable the Fund to continue having active policy dialogues with poor countries”. African Executive Directors reacted strongly to the memorandum, stating categorically that “it does not seem appropriate that debt cancellation would reintroduce conditionality”.

Aid: Too little, too late?

The G8 communiqué asserts that commitments of the G8 and other donors “will lead to an increase in official development assistance to Africa of $25 billion a year by 2010” and to all developing countries by “around $50 billion a year by 2010”. Aid NGOs have pointed out that this amounts to only 0.36 per cent of gross national income and just half of the 35 year-old UN commitment of 0.7 per cent. UK chancellor Gordon Brown’s proposal for an International Financing Facility (IFF) was kicked into the long grass, with only a vague commitment to establish a working group to further examine the feasibility of the IFF along with other proposals including a tax on air travel.

In two papers released the week before the G8 summit, IMF economists Rajan and Subramanian did their best to let the stingy countries off the hook, concluding that there is “little evidence of a relationship between aid inflows into a country and its economic growth.” Contradicting previous Bank research, they found “no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.” Rajan and Subramanian explain these observations using classic ‘Dutch disease’ arguments: aid leads to exchange rate overvaluation which negatively affects a country’s competitiveness.

In an 11 July editorial, former World Bank chief economist Joseph Stiglitz gives the Fund research a failing grade. First, he says, because “the results do not appear to be very robust”, and secondly, because “historically aid was provided not to promote development, but to purchase friendship”. While the G8 communiqué does not go this far in its frankness, it does tacitly concede that the conditions attached to aid in the past may have negatively impacted its effectiveness: the communiqué states that developing countries “need to decide, plan and sequence their economic policies to fit with their own development strategies”.

Trade: “-1 out of 10”

With the possible exception of climate change campaigners, trade activists were most disappointed by the lack of progress, getting only a vague commitment to phase out northern export subsidies with no timetable. The Trade Justice Movement has said that, failing to make progress in Gleneagles, “the governments of the G8 must now urgently take steps at the WTO and in other trade negotiations as well as through the World Bank and IMF.”

In a now familiar sop to developing countries, leaders called for more resources to be given for trade capacity building, calling on the IFIs to “submit proposals to the annual meetings (of the Bank and Fund) for additional assistance to countries to develop their capacity to trade and ease adjustment in their countries.” Emphasis was also placed on infrastructure development. The communiqué called for a continuance of work to “build an international infrastructure consortium involving the African Union, the New Partnership for Africa’s Development (NEPAD), World Bank and African Development Bank”.

Kumi Naidoo, chair of the Global Call to Action Against Poverty, called the G8 outcomes “desperately disappointing” and vowed to “continue to pile on the pressure on all of our demands in the run-up to the Millennium Development Summit in September and the WTO meeting in December.”