IFI governance


Overhaul of international institutions

Is the G20 willing to deliver?

13 February 2009

With bleak economic news dominating the headlines, the IFIs are gaining prominence but also attracting renewed criticism. We cover the political response to the financial crisis, the IMF’s lending programmes (see Update 64), the World Bank’s boost in lending (see Update 64 on Bank lending and IFC lending) and reform of the international architecture (At Issue).

In the wake of a November summit (see Update 63) of the G20 leaders, a grouping of roughly the largest 20 economies in the world, an international work programme of financial reform is taking shape. But the ambition of the discussions will be dependant on both how vocal citizens become and the depth of the economic gloom.

The next G20 leaders’ summit is planned for 2 April in London. It will be preceeded by a specially planned G20 finance ministers meeting in mid-March in Sussex, UK. Britain is the 2009 host country for the G20, which is usually a process only involving finance ministries. The G20 finance ministers’ meeting is normally scheduled for November, but because of the extraordinary circumstances it is expected that several meetings of finance ministers will occur this year.

The meeting in London is increasingly being billed as the “London Summit” rather than a G20 summit, because some rich country governments are worried about the G20 supplanting the G7 as the forum for global economic decision-making.

The G20 working groups tasked with making proposals for financial and economic architecture reform have been announced, covering: accounting regulations and transparency; international cooperation on financial regulation; reforming the IMF; and reforming the World Bank and other multilateral development banks. Each working group is co-chaired by officials from a developing and a developed country. The full composition of the working groups has not been made public. The groups will issue their recommendations to the finance ministers at the March meeting. Inside information indicates that consensus on financial regulation is only likely on narrow changes.

The parallel process initiated by the United Nations General Assembly president Manuel D’Escoto (see Update 63 ) is also under way. The UN commission, chaired by former World Bank chief economist Joseph Stiglitz, also has four working groups – on regulation, multilateral issues, macro-economic issues and reforming the global financial architecture. It met at the beginning of January and issued its first recommendations. They noted the deficiencies in the actions taken so far by developed countries and the need to learn lessons from countries that have avoided instability. A second meeting is planned in early March in Geneva.

More money for the IMF?

The UN commission pointed out the “large asymmetries in global economic policies” and called it “imperative that developing countries be provided with funds to enable them to undertake … policies, to stimulate their economies, to provide social protection, and to ensure a flow of liquidity to their firms.” It was also careful to demand that the money “be provided without the usual conditionalities, especially those that force these countries to pursue pro-cyclical policies or to adopt the kinds of monetary and regulatory policies which contributed to the current crisis.”

The IMF has already agreed nearly $50 billion in loans but with heavy conditionality (see Update 64). That leaves the Fund with only $200 billion in available capital, plus another $100 billion that Japan agreed to lend it. IMF managing director Dominique Strauss-Kahn admitted that the IMF might need an injection of capital: “If in six months from now the crisis has worsened and many other of our members need our help, the demand may be above what we have.” The IMF deputy managing director, John Lipsky, indicated that the IMF wanted to raise its available resources up to $500 billion. The G20 is likely to announce an increase in IMF resources, though it is not yet clear where these will come from.

It’s the power, stupid

Everyone seems to agree – from African finance ministers and the UN financing for development process, to US president Barack Obama – that one element of any reform must be IMF governance.

A coalition of 15 mostly US-based academics wrote to the new US treasury secretary Timothy Geithner at the end of January calling the IMF governance reforms of 2008 (see Update 60) “inadequate particularly in light of the ongoing global economic and financial crisis.” They urged Geithner and Congress to “reopen the package starting in discussions with other governments in advance of the meeting of G20.”

But even broad agreement that global governance is problematic has not led to discussions on international reform being democratic or open. Civil society organisations in several statements and letters have condemned the G20 process for being exclusive and secretive. Biaggio Bossone, a former Italian IMF executive director, noted the legitimacy of the original Bretton Woods agreement. “It is fundamental that world leaders walk the same path that was traced in Bretton Woods precisely not to leave anyone out. They need to renew that same obligation to engage all.”

The British government has different objectives: shoring up support for liberalised economic models. After a call to return trust to the financial markets, a letter from the UK finance minister to other G20 finance ministers states: “Open, innovative financial markets are critical in driving forward economic growth. … Our second objective, therefore, must be to retain and build on the benefits that open financial markets bring to the world economy.”

However the US administration seems more keen on discussing exchange rate policy rather than legitimacy, as the US and China have been trading barbs over the value of the Chinese currency, the yuan. China has been incensed over perceived IMF meddling with the Chinese exchange rate (see Update 57), while the US has been frustrated that the IMF did not do more.

This does not bode well for the proposals from the UN Conference on Trade and Development (UNCTAD). Just before Christmas, UNCTAD issued a policy brief stating: “Multilateral or even global exchange rate arrangements are clearly necessary to achieve and maintain global monetary and financial stability.” The idea to return to globally managed exchange rates is unlikely to find backing in the West where interested parties prefer floating rates; nor in Asia, where governments do not trust the IMF to oversee such arrangements fairly.

Continental Europeans have been singing a different tune altogether, talking about stricter regulation and greater international oversight. At a January conference in Paris hosted by the French government, French president Nicolas Sarkozy and German chancellor Angela Merkel called for a “new capitalism,” with Sarkozy leading calls against “immoral capitalism”.

Merkel reiterated her idea for a UN economic council that would sit in parallel to the UN security council. It would presumably oversee international economic institutions such as the World Bank and IMF. However the German leader did not specify what sort of governance arrangements would be supported for such a council, leading to fear that, like the security council, it will be dominated by a few large rich countries. The UN’s existing body, the 54-seat Economic and Social Council (ECOSOC) with diversified regional representation, was described by Merkel as not viable.

Merkel has now called for a summit of European members of the G20 – including Germany, France, Italy, the European Commission and Turkey – to take place in Berlin at end-February. She also has invited Spain and the Netherlands to participate. This will be an important venue for European countries to consolidate their position in advance of the London summit, especially to develop their strategy to deal with a US administration that is likely to be uninterested in ceding sovereignty over economic issues to an international organisation

The president of the UN general assembly proposes that a fully inclusive UN conference on the financial crisis take place from 26-29 May in New York. He wants it to include plenary meetings of heads of state as well as ministerial working group meetings.

NGOs’ uphill battle

Civil society organisations have been trying to make their voices heard in these debates. The most noticeable intervention has come from the International Trades Union Congress (ITUC), a global labour umbrella organisation. . In January it organised an 85-member international trade union delegation to meet with the Bank and Fund. As a result, “commitments to strengthen social programmes for workers hit by the economic crisis and to increase action on core labour standards were made by World Bank president Robert Zoellick and IMF managing director Dominique Strauss-Kahn,” according to the ITUC.

At the World Social Forum, held in Belem, Brazil at the end of January, there were dozens of workshops and meetings about a response to the financial crisis. The social movements and NGO’s gathered at the event in the end authored a one-page call to action, saying “Let’s put finance in its place!” The statement makes nine specific demands, including a call for a reformed and democratised UN to be put at the heart of any process for reform of the financial system and the implementation of “a global mechanism of state and citizen control of banks and financial institutions.”

In the UK, a coalition of environment, social and development charities is joining with trade unions to launch a mass mobilisation on 28 March under the slogan “Put People First: Jobs, Justice and Climate”. Solidarity actions are being organised in other cities around the world.

John Hilary, director of UK NGO War on Want said: “The governments meeting here in London must realise that this is not just a banking crisis but an indictment of the entire economic model. We’re calling on them to commit to an open and democratic process for rewriting the global financial architecture so that people and the environment are served by finance, and not vice versa.”