The G24 is a grouping of some of the most important developing countries in the World Bank and IMF. The Communiqué addressed the global economy first and used the occassion of instability in the world markets as a chance to once again tell the IMF to spend more time looking at “advanced economies” and castigating the IMF for not evaluating the vulnerabilities of big rich countries as closely as it evaluates emerging markets. The G24 has long complained that the Fund is not even-handed, spending more time criticising the likes of Brazil and India than the US and EU members.
On other aspects of IMF reform – the G24 also again requested that the IMF propose an acceptable instrument for providing financial support to emerging market countries facing a crisis. So-called ‘contingency financing’ has been a long-term request of the G24. The previous IMF instrument, the Contingent Credit Line (CCL), was allowed to expire as no country had ever used it. Developing countries complained that it would not have provided enough financing fast enough to make a difference in the case of a financial crisis. They also disliked the conditions attached to its financing.
On IMF quota reform, which would change the voting rights of countries in the IMF, the G24 strongly opposed the proposals that have been put on the table by other countries, notably Canada and Australia. Alongside the usual demands for using GDP at purchasing power parity (PPP) to calculate the quotas the G24 made some concessions and new proposals. They have accepted and encourage the use of a compression factor in the quota formula which would reduce the disparities in voting power between the largest and smallest countries. They made a concession on the GDP calculation as well. Whereas previously they had demanded that GDP be solely measured using PPP, they now have accepted that the quota formula should blend the measure of GDP based on market exchange rates and on PPP. The G24 also called for more consideration of the use of double majority decision making – a proposal that has been supported by civil society and recently taken up by incoming IMF director Dominique Strauss-Kahn.
As usual the G7 statement focuses on the global economy and state of capital markets first. The G7 issued the strongest statement ever pressuring China to liberalise its exchange rate and let the yuan appreciate versus the dollar. The finance ministers “stress [China’s] need to allow an accelerated appreciation of its effective exchange rate.” The G7, and the US in particular, have led a push against China which included a decision on revising the IMF’s surveillance framework on exchange rates earlier this year. The IMF now has the power to demand in-depth discussions with one of its members if its exchange rate is ‘fundamentally misaligned’ and is posing a risk to global financial stability. European G7 members, after watching the euro appreciate against the dollar (and thus the yuan which is essentially fixed against the dollar), have also started increasing their pressure on China. The US Congress has also proposed legislation that would slap trade tariffs on China unless it lets the yuan appreciate.
On World Bank and IMF reform, the G7 again stated its commitment to reform the voting structures of the Fund, but given the divisions within the group, there was no commitment on level or pace of reform. The US and Japan generally favour quick quota adjustments that will focus on giving more votes to emerging markets, particularly those in Asia. The Europeans however have always sought much slower adjustments and focused on increasing the voice of low-income countries, not the emerging powerhouses. The statement repeated the usual phrases about quotas “better reflecting the realities of the world economy”. It did, as expected, posit that the World bank and IMF should participate in an effort to oversee so-called sovereign wealth fund, the method by which countries like China with large reserves are investing those resources in the private sector. The US in particular has sought a role for the IMF in setting best practices for the funds, focusing on transparency.
On the energy and climate side, the G7 governments advocated for a strong role for markets and private sector mechanisms to deal with the problems associated with climate change. The World Bank has been seeking a greater role in this field and has promised to be the market maker for global carbon trading schemes. The communiqué also stated: ” We noted the need for scaling up investments in cleaner and lower carbon technologies through existing mechanisms such as the Clean Energy and Investment Framework and agreed to explore the creation of a clean technology fund to support the deployment of clean energy technologies to developing countries.” This specifically avoided the use of the terminology like ‘renewable’ energy, pointing to continued G7 preference for the World Bank to continue investing in fossil-fuel projects.
The International Monetary and Finance Committee (IMFC) is the direction setting body of finance ministers for the IMF. The Italian finance minister Padoa-Schioppa was recently selected to head the committee after the resignation of UK chancellor Gordon Brown. The IMFC spent a lot of its time discussing the turmoil in global financial markets. The credit crisis and worries over instability in markets for asset-backed securities have worried governments and the private sector. It is particularly worrying for developing countries, because past credit crunches have been associated with difficulty for developing country governments to borrow funds from the private sector, and have exacerbated debt problems. Striking about the communiqué is the admission by the committee that new financial instruments, and new uses of securitisation have created problems for the global economy. This is a rare criticism by the IMFC of the role played by large banks and investment banks in creating instability. The committee is referring to new financial tools like asset-backed securities, and credit-default swaps, in which hedges funds are deeply involved.
In terms of policy at the IMF, the committee seems to have agreed with the pressures from the United States and Germany for the Fund to have a role in overlooking so-called sovereign wealth funds. These are investment mechanisms for countries with large international reserves to invest those reserves for higher returns. China has recently initiated a large sovereign wealth fund, though they have been used extensively by oil exporters and newly industrialised Asian countries such as Singapore and Korea. Specifically “the committee welcomes the work by the IMF to analyse issues for investors and recipients of such flows, including a dialogue on identifying best practices.” The vague wording indicates that some of the countries that have these funds are worried about how the Fund will get involved.
The communiqué also demonstrates clearly that the Fund members have made very little progress on reforming the IMF’s voting rights. The statement is very vague on details that should be considered in the discussion. On the sensitive topic of using PPP-weighted GDP for measuring the quota, the committee only says that it “should play a role”, but it hasn’t specified whether the PPP weights would be in the formula itself as part of a filter. But even this vague reference is a victory for developing countries over European members, who had clearly stated in the past that PPP-weighted GDP should play no role at all. Disappointing for low-income countries will be the retention of language on “at least a doubling of basic votes”. The poorest member countries of the IMF have recognised that a new quota formula along with a 10 per cent capital increase in the Fund, which also made its way into the statement, is likely to mean that only a trebling of basic votes would even keep their voting shares constant.
For low-income countries, the committee welcomes the work the executive board has taken on clarifying the Fund’s role. The Fund has recently altered its PRGF framework to modify how it deals with aid and the PRSP process. Specifically “the committee looks forward to a comprehensive operational framework” which will interpret the policy decisions for the IMF staff. This is a crucial detail, as a new framework will actually direct how the staff go about handling the contentious issues in aid spending and public participation in setting economic policy in low-income countries. This was also highlighted in civil society seminars with the Fund staff on the issue of aid spending and fiscal space in low-income countries. Civil society will be closely watching for the operational guidance when the IMF management reveals it.
Development committee communiqué
This year’s development committee communiqué is a veritable variety pack of current issues facing the Bank. It pays significant attention to the World Bank’s long-term strategic review (see Update 57) and several of the issues highlighted in Zoellick’s speech on globalisation on 10 October, namely middle-income countries, fragile states and Sub-Saharan Africa, and global public goods. Other key points in the communiqué include: the scaling up of aid and the modalities of IDA replenishment, clean energy and climate change, the implementation of the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI). Minor references are given to strategies on health and the financial sector, gender equality and women’s rights, governance and anti-corruption, the Doha round and aid for trade, Bank governance and Bank-Fund collaboration, and recent financial market turbulence. Finally the statement welcomes Zoellick and Strauss-Kahn as the new Bank and Fund heads, thanks former president Wolfowitz for his contribution to the Bank and bids farewell to the outgoing de Rato.
Key elements of contention identified by civil society related to private-sector led growth, including increased IFC involvement and other private sector contributions to IDA; the World Bank’s continued and increasing support for the oil industry whilst touting its clean energy and climate change strategy (see Hundreds say World Bank needs an oil change); and the failure of the institution to demonstrate any meaningful reform of its strategic direction or governance structures.
- On low-income countries: called for strengthened support for the “inclusion and empowerment of the poorest”, especially Sub-Saharan Africa, and for “active engagement in fragile and conflict-affected states” as key elements of the strategic framework. Emphasised that private-sector led growth needs to be more effectively integrated into poverty reduction strategies;
- On middle-income countries: the communiqué welcomed progress in implementing the framework for partnership with IBRD clients and the recent “simplification and reduction in IBRD pricing”, and urged the Bank to reduce the transaction costs of doing business, including by enhancing the use of country systems;
- On IDA 15 replenishment: welcomed the contributions of IBRD and IFC, and the “collaboration” between IFC and IDA on private sector development. It called on reticent donors to meet their 0.7 per cent target for ODA;
- On climate change: nothing new with regards to the need to increase support for access to clean energy for the poorest and in Sub-Saharan Africa and called on Bank management to “develop a strategic framework for Bank group engagement”, including support for adaptation and low-carbon growth, and to catalyse additional resources from public and private sources;
- On HIPC and MDRI: Indentified the challenge to the long-term debt sustainability of many HIPCs. Urged all creditors – including non-Paris club and commercial – to participate equitably in relation to the HIPC initiatve and the MDRI, and emphasised the importance of sound lending and borrowing decisions guided by the Bank-Fund Joint Debt Sustainability Framework.