The IFIs in 2008: year in review

13 August 2009 | Review

2008 was the year of crisis:  developing countries, already reeling from the impacts of food and commodity price crises, faced the spectre of a global financial and economic crisis, caused by policy choices made by rich countries. The World Bank and International Monetary Fund (IMF), two of the key institutions who have promoted the ‘Washington Consensus’ model of economic deregulation and liberalisation that many blame for causing the crisis, tried to wriggle out of responsibility and present themselves as saviours of the hour.

Early in the year, the Bank launched a ‘rapid financing facility’ in an effort to try to position itself as the leading agency responding to the food crisis, though it was forced to accept that it would have to work closely with better placed UN agencies such as the FAO.

The IMF used the opportunity to try to revamp its image and fortunes. The IMF had started the year down in the dumps, with an impending income crisis forcing it to cut 10 per cent of its staff. Some claimed that it was no longer relevant. The beginning of the credit crunch in 2007 and ballooning global imbalances had shown that the IMF was ineffective in bringing macro-financial linkages into its core analysis and in pushing needed policy changes in systemically important countries with persistent current account deficits such as the United States and United Kingdom.

The August eruption of a full-blown financial crisis, which created a widespread Wall Street meltdown in September, changed everything. Despite being partially to blame for the crisis, through its weak surveillance and policy advice on financial liberalisation that increased contagion effects, the Fund positioned itself as the key agency to be ready to mop up the mess. A battle ensued at the IMF between managing director Dominique Strauss-Kahn, who wanted the Fund to be promoting Keynesian fiscal stimulus, and more conservative staff members who were ready to respond with more traditional structural adjustment and austerity policies.

The tectonic shift of the year, prompted by the crisis, was the shift of global economic decision-making from the G8, a rich country club, to the G20, a broader group that includes emerging markets such as the so-called BRICs (Brazil, Russia, India, and China). The G20, previously only meeting at finance ministerial level, had been a little heard of forum for negotiating financial issues including IFI reform. With its elevation to a leader-level summit, the G20 became the focus of international financial and economic crisis response.  It faced criticism for its lack of accountability, the poor participation of low-income countries, and for turning to the Bank and Fund as the institutions to deal with the crisis.

The Bank’s social sector programmes have faced renewed and significant criticism throughout the year. Despite starting the year with a record IDA replenishment, meaning the Bank had more money than ever to lend to low-income countries, there were still strong complaints about the conditionality applied to Bank loans. A continued focus on private sector approaches to basic human rights such as health and education have brought critiques from many corners. And while the Bank successfully pitched itself to the media as the solution to the food crisis, it couldn’t escape blame from developing countries, NGOs and researchers for the role it played in creating food fragility through previous controversial policies such as privatisation, trade liberalisation and cash crop export promotion.

The Bank continued its push to position itself as the ‘environment bank’ but faced mounting criticism of its greenhouse gas emissions and carbon intensive development model.  Its attempt to become the de facto conduit for rich countries to channel carbon financing to the south was stymied because it threatened to undermine the UN process that will agree a global climate deal in Copenhagen in 2009.

There is growing recognition that one of the key issues in international climate change dialogue is climate finance and its governance, with the Bank and donors facing severe criticism for the initial attempts to exclude recipient countries from the governance of climate finance trust funds.

The UK led in the development of climate finance pilots through the World Bank in 2008. This created controversy for two reasons. First, it represented a challenge to the predominance of the UN, and thereby threatened to undermine UN climate negotiations.  Second, the models these pilots develop for future international climate architecture were questioned.  Key issues were the recognition of the polluter pays principle, the need for ownership by developing countries and the inclusion of transformational technology packages for reducing greenhouse gas emissions.

The Bank pushed hard on the development of projects to reduce emissions from deforestation and forest degradation (REDD) in developing countries. However it faced criticism over issues of tenure in forest areas, and some charged that its approach could benefit large corporations that undertake projects such as tree plantations more than local communities. This has raised a number of human rights issues, in particular the rights of indigenous peoples. The resignation of the World Bank general counsel, Ana Palacio raised hopes that progress could finally be made on human rights issues within the Bank in the future.

To date there has been little, if any recognition within the Bank that it holds rights obligations. A trust fund initiative by the Nordic countries to fund rights and rule of law projects in developing countries was started.  However, little has been made known publicly about this fund, which may be due to internal resistance among some Bank donor countries to its creation, and it does not yet appear to be disbursing funds.

The Bank’s knowledge role came under increasing scrutiny.  An IEG report found widespread failings in its training and capacity building programmes, while the IMF was forced to revamp its technical assistance activities because of its income crisis. The Bank was forced to admit that its methods for calculating poverty, and hence its claims about progress made in recent years, were flawed. It recalibrated its poverty line at $1.25 per day, meaning over 400 million more people ‘became’ poor by its new calculations, which experts continued to question.  The IFC’s flagship Doing Business report was slammed by the IEG, trade unions and others for continuing to give higher marks for countries with poorer worker protection and social standards.

The Bank began gearing up for major increases in lending in response to the financial crisis with infrastructure likely to be the biggest gainer.  Stark reminders of the controversial nature of Bank involvement in infrastructure were provided by damning reports by the Bank’s own Inspection Panel on its involvement in the Bujugali dam in Uganda and the West Africa Gas Pipeline.

World Bank governance reform began with a distinct lack of ambition, though the G24 and civil society united around the concept of achieving ‘parity’ of voice and vote as a first step towards deeper reform, and promises were made to end the longstanding convention that the Bank president must be a US national.

After years of negotiations, 2008 also saw the completion of the IMF’s long-promised governance reform. While all countries put on a good face after the acrimonious discussions were completed, no one was happy with the result, as it shifted little more than 1.6 percentage points of voting power in the direction of developing countries. While the quota formula was simplified, implementation only went half-way. Reform of the board was left off the agenda, and much needed reform of transparency standards were pushed into 2009.

The UK continued its close relationship with the Bank, approving record IDA subscriptions without ensuring significant reforms. There was a welcome increase in UK oversight with the appointment of separate Executive Directors for the Bank and Fund. Meanwhile the UK parliament’s International Development Committee rebuked the UK government for handing over a 50 per cent increase in World Bank funding without sufficient analysis of whether this represented value for money.