WB/IMF roles


G20 remains vague on social impact measures, still fails to tackle fundamental reform

3 October 2009

By Eurodad and the Bretton Woods Project

The G20 communiqué agreed at end September in Pittsburgh, despite expressing concern about the impacts of the financial crisis on developing countries, remained vague on some points, and still failed to address the needed radical overhaul of the international financial architecture.

G20 leaders made an excellent diagnosis. They “note with concern the adverse impact of the global crisis on low income countries’ capacity to protect critical core spending in areas such as health, education, safety nets, and infrastructure.” They correctly recognised that “we share a collective responsibility to mitigate the social impact of the crisis and to assure that all parts of the globe participate in the recovery.” And they said that “as we increase the flow of capital to developing countries, we also need to prevent its illicit outflow.”

But the cures for these ills fell far short of what is needed, with one or two specific commitments, plus some broad brush promises. While, the statement gives further details on the purposes and financial instruments that will deliver planned funding via the IMF and World Bank, it fails to make specific commitments on additional financial support for low-income countries. Martin Khor of the Geneva-based intergovernmental body of developing countries South Centre commented that the G20 “did not tackle key issues of immediate concern to developing countries, such as providing more liquid funds, or to help countries from falling into a foreign debt crisis caused by the financial downturn.”

The most concrete pledge was on agriculture. The G20 decided that the World Bank should work with others to develop a new trust fund to “help support innovative efforts to improve global nutrition and build sustainable agricultural systems”. Anticipating recipient country concern about a new sector specific funding vehicle, the communiqué continues that this facility “should be designed to ensure country ownership and rapid disbursement of funds, fully respecting the aid effectiveness principles agreed in Accra.” It should also “facilitate the participation of private foundations, businesses, and NGOs, [and] should complement the UN Comprehensive Framework for Agriculture.” G20 sadly leaders did not take up Eurodad’s proposal that anyone proposing a new vertical fund should propose abolishing two existing ones in the interests of non-proliferation.

Failing to deal with the financial sector

Ultimately one of the core problems causing the financial crisis was poor regulation of banks and other financial institutions. The G20 committed to “make sure our regulatory system for banks and other financial firms reins in the excesses that led to the crisis. Where reckless behavior and a lack of responsibility led to crisis, we will not allow a return to banking as usual.” Such warm words were accompanied by a list of areas for work such as competition policy, capital standards, and derivatives, with concrete dates set out for some of the refrom. However, the G20 clearly does not envision a radical restructuring of finance, for example by only “improv[ing] the over-the-counter derivatives market” rather than abolishing it altogether in favour of exchange-trading for all derivative contracts. Nothing was said about actually reducing the size of banks that are “too large to fail” instead of just creating plans for their failure. On securitisation, while the “sponsors or originators should retain a part of the risk of the underlying assets”, this suggestion was not agreedas a firm global rule that will need to be adopted across all locations, bringing the spectre of reguabout whether suggestions that financial firms issuing securitised financial instruments should hold onto ory arbitrage.

The one glimmer of hope was a request from the G20 that the IMF investigate “how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.” This is a coded reference to the proposed financial transaction tax which has been supported by the heads of state of France and Germany. The French foreign minister wrote are article saying that such a tax should also be used for development purposes.

On illicit capital outflows the G20 “will work with the World Bank’s Stolen Assets Recovery program to secure the return of stolen assets to developing countries, and support other efforts to stem illicit outflows. We ask the Financial Action Task Force to help detect and deter the proceeds of corruption by prioritizing work to strengthen standards on customer due diligence, beneficial ownership and transparency.”

Whilst the mention of the Bank’s StAR programme is welcome, NGOs are concerned that this programme is founded on a narrow and limited approach to illicit capital outflows. According to estimates from the Washington-based Global Financial Integrity, outflows from corruption are as little as 5 per cent, and just over one third are proceeds from criminal activities. The lion’s share of capital outflows is linked to tax evasion and avoidance by commercial activities. The communiqué fails to put forward specific and ambitious measures to combat tax evasion and avoidance, to enhance transparency of the activities of multinational corporations and to lay-out an ambitious plan to close down tax havens. Civil society groups were especially interested in new global rules on tax information exchange that would help developing countries. This G20 meeting in London instead endorsed the OECD’s insufficient and flawed approach, while the Pittsburgh meeting made no further progress.

Some new reports are also called for in the statement, most importantly one on looking into “how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.” This is a reference to the proposal of the French and German leaders for a financial transaction tax. The IMF is to prepare the report by the spring 2010 IFI meetings. NGOs in Europe welcomed this developed. The communiqué also references again a Charter of Sustainable Economic Activity, though there is no timetable for its completion. The G20 did support “Core Values for Sustainable Economic Activity, which will include those of propriety, integrity, and transparency”.

Dealing with jobs and unemployment

The G20 leaders, helpfully, also said they welcomed the recently adopted International Labour Organisation (ILO) resolution Recovering from the Crisis: A Global Jobs Pact and “commit our nations to adopt key elements of its general framework to advance the social dimension of globalisation.” They said that “international institutions should consider ILO standards and the goals of the jobs pact in their crisis and post-crisis analysis and policy-making activities”.

Although the recognition of ILO’s role in ensuring that economic recovery is based on creating decent jobs, forthcoming research from Solidar and Eurodad on how the IMF emergency loans impact the decent work agenda shows that there are still striking contradictions on the mandates that these two agencies have been given by the G20. This research finds that the macroeconomic frameworks set by the IMF in its emergency loans still constrain government’s ability to pursue the types of policies that would ensure creation of decent jobs for all. In some countries that took IMF loans a key part of the Fund programme is a retrenchment of public sector jobs.

Boosting the IFIs

The rest of the G20 package was an update on previous announcements or warm words about the possibility that some countries might take action in small groups. “On voluntary basis” is used twice and “ministers will explore” another two times. G20 voluntary commitments included “funding programmes such as the Scaling Up Renewable Energy Program and the Energy for the Poor Initiative, and to increasing and more closely harmonising our bilateral efforts.”

Another voluntary area was on the use of the more than $280 billion worth of special drawing rights (SDRs), the IMF-created reserve asset, that were distributed in early September. More than $180 billion worth of these went to rich countries and NGOs had demanded that they be re-transferred so that they would benefit those that needed them. These ideas were shot down by the IMF in September, so the G20 wants now to look at “mechanisms that could allow the mobilisation of existing [SDR] resources to support the IMF’s lending to the poorest countries.” That would transform conditionality-free SDRs into conditionality-laden loans from the IMF (see Update 67).

What about social protection?

The communiqué mentions that the World Bank should strengthen: “its focus on food security through enhancements in agricultural productivity and access to technology, and improving access to food;” and “its focus on human development and security in the poorest and most challenging environments;” by contributing “to financing the transition to a green economy through investment in clean energy, energy efficiency and climate resilience.”

However, civil society organisations in the South and the North are deeply concerned about the increasing role given to the World Bank as provider of global public goods, such as finance for climate change and food security. An analysis of the 2008 World Development Report by German NGOs shows that the Bank still encourages small farmers to become part of the global value chain of agricultural production in order to graduate from poverty. This is the very approach that promoted agricultural sector privatisation and liberalisation in the 1990s and that turned 70 per cent of the developing countries into net food importers, thus making them extremely vulnerable to the vagaries of the international commodities markets. It is thus very unclear that the Bank is well placed to promote the types of agricultural models that will enhance developing countries’ food sovereignty and food security for the world’s poor. Likewise, the Bank continues to fund fossil fuel projects which seriously calls into question the ability of the Bank to take up a role at all in climate change funding.

The communique also calls on the Bank to provide “support for private-sector led growth and infrastructure to enhance opportunities for the poorest, social and economic inclusion, and economic growth.” It also called for the phasing out of all fossil fuel subsidies, a measure which will be supported by environmental advocates. However, past attempts to do this, for example the IMF conditions in Indonesia in 1998, have generated widespread public anger. Much of the problem will be implementation of promised “targeted support for the poorest”.

The leaders in Pittsburgh also gave some work to their underlings, without any specific timelines or objectives. They asked “relevant ministers to explore … the benefits of a new crisis support facility in IDA to protect low-income countries from future crises.” This comes on top of the Bank’s unsuccessful efforts to boost IDA resources through so-called frontloading. Under the G20 London communiqué, low-income countries were to be allowed to draw down their IDA resources early, but this would have left a gap in their budgets in a few years time without some more resources.

Also to be explored is “the enhanced use of financial instruments in protecting the investment plans of middle income countries from interruption in times of crisis, including greater use of guarantees.” This is a reference to a potential increase in the World Bank’s treasury operations that give developing countries tools to hedge risks by using financial markets. Some have also posited that the World Bank should directly guarantee sovereign debt on its own balance sheet, an idea which will be resisted by some rich countries as too risky for the Bank.

IFI governance changes lack ambition

In a move that has generated significant media coverage, the G20 made a commitment “to a shift in International Monetary Fund quota share to dynamic emerging markets and developing countries of at least 5 per cent from over-represented countries to under-represented countries.” The details of how to accomplish this shift are to be worked out in time for the deadline set at the previous G20 meeting of January 2011. The communiqué did commit the Fund to “using the current quota formula as the basis to work from”, but this ignores that the current formula design, if implemented in full, would actually shift votes away from developing countries and towards rich countries. The G20 commitment leaves vague whether there will be some fiddling with the formula and implementing the quota shift to avoid supposedly ‘underrepresented’ countries such as Luxembourg, Spain, Japan, the United Kingdom, and the United States increasing their voting weights.

Though the IMF already had a shift of a few percentage points in voting rights in 2008 and is now promising another 5 per cent, at the World Bank there will be “an increase of at least 3 per cent of voting power for developing and transition countries.” This wholly unimpressive target has been lambasted by some NGOs, who have been supporting the idea that as an institution that is about development cooperation and partnership, borrowing countries should have at least half the voting rights. NGO Oxfam International has highlighted that the Bank’s goals on governance reform also continue to classify some high-income countries under the category ‘developing and transition countries’ for the purpose of discussing voting rights.

Reforming the international governance architecture

The other exciting development was the now much discussed decision of the G20 to appoint itself the guardian of the world economy. The communiqué proclaimed: “We designated the G20 to be the premier forum for our international economic cooperation”, essentially giving the G7/8 a further shove out of the economic policy making sphere. Pundits theorised that the G8 would turn into an extra-UN forum for discussing security and geopolitical strategy while economic issues will be handled with the emerging markets at the table at the G20.

This is of course an improvement over when the G7 made economic policy. However the power of the so called G1, the United States, still exerts a strong influence over the G20 agenda. The G20 has committed to two meetings next year at the leaders level, one in Canada in June next to the scheduled G8 meeting, and one in Korea in November. Canada is the 2010 G8 chair, whereas Korea is the G20 chair for the year. The communiqué then envisages that the G20 will become annual affairs starting in 2011 with a meeting France.