IFI governance


Global economic governance roundtable

Istanbul, October 4, 2009

4 October 2009 | Minutes

Adolf Kloke-Lesch; Deputy Director General, German development ministry and Michael Hofman, German W0rld Bank Executive Director made the following points:

  • Increasing the capital of the World Bank and other MDBs as the same time is unusual and will put pressure on budgets.
  • MDBs should be the trustees of climate funds and central in the design of climate strategies at the country level. Part of the quid pro quo for a capital increase for the World Bank will be an increased role in climate.
  • Pittsburgh G20 agreed at least a 3% shift of voting shares at the Bank to developing countries; Brazil is still pushing for 6%.

Jomo Kwame Sundaram, UN Assistant Secretary General for Economic Development made the following points:

  • Two main causes of the crisis were global imbalances and problems in the financial system.
  • Structural imbalances have occurred before; the collapse of the Bretton Woods system was due to the US deficit that had been built up.
  • Since then there has been a ‘non-system’. Asian countries have accumulated huge reserves as a form of self protection. This is very harmful for the international system and costly for those countries.
  • Only 4 major international institutions warned of the problems in the financial system in advance: UNCTAD; UNDESA; the BIS and G24.
  • Market participants and key players saw it as being in their interest to perpetuate the fiction that the financial system was stable. The result has been disastrous, particularly for the innocent countries.
  • The crisis response has been very uneven; the Anglo-Saxon economies who did most to create the bubble have produced a fairly robust response; others have been more reluctant.
  • There has been a failure of international cooperation, even though all stand to benefit from more cooperation.
  • Part of the reason for this has been a poor response from the IFIs. IMF head, Dominique Strauss Kahn has provided much more credibility and leadership and has spoken out in favour of a fiscal response BUT the IMF has also been responsible for multiplying the effects of the crisis through the harsh conditions on its lending, which have further reduced fiscal space, on top of 30 years of structural adjustment policies which had already eroded fiscal space and capacity.
  • But we shouldn’t exagerrate the IFI’s role – they’re constrained by (a) policy decisions of powerful countries and (b) the fact that these countries have made key decisions in other forums- such as the G7 and G20, which have no institutional support, making it hard for them to deliver.
  • The G20 has helped in some ways, but the danger is that it will prevent a Global Economic COordination Council from emerging. This would create leadership for the entire multilateral system. Chancellor Merkel has supported this.
  • UN could learn from the IFIs and use a constituency system to facilitate representation.
  • Learning the lessons from the Bretton Woods conference is a good place to start when preparing the ground for another. Roosevelt chose to ensure that it was a UN conference, even though the UN had not at the time been formally created. The original intent for the WOrld Bank was for borrowers to have an equal stake – this was part of the reason for the Europeans being over-represented.

Issues raised in discussion included:

  • It is time for a financial transaction tax to both raise funds and help regulate the financial system
  • Removing the US veto at the IFIs is a critical issue.
  • Developing countries have resisted making the WOrld Bank the conduit for climate finance – raising this at these annual meetings risks undermining the UN climate process.
  • At a time of change it would be a big mistake to opt for a static institution like the G20 – we need a global economic council with a dynamic membership that can change as the world changes. Otherwise we risk repeating the mistakes of the security council and the G8.
  • EU could show its support for the consituency system by reducing the number of chairs it has on the IFI board, or adopting common EU chairs.
  • What institutions do is also important – need for a global reserve system and currency to help prevent future imbalances.

German officials’ response:

  • Will have to see if the financial transaction tax will be part of the new government’s programme.
  • Mustn’t forget that the World Bank requires money from tax payers – no taxation without representation.
  • No institutions are perfect, but we have to work with what we’ve got – can’t envisage new institutions being created for climate finance.
  • G7 and G8 have delivered some things on development.
  • UN could gain credibility through adopting the constituency system.
  • Seats on the Bank’s board should recognise the contribution to development, for example of the Nordic countries who give more than 0.7% of GNI as aid.
  • The ‘veto’ is seldom used. The size of the US economy means they will always get more than 15% of the vote.
  • Country classification is also an important issue in World Bank voting shares – as countries graduate from developing country status, can we really imagine them giving up shares in order to preserve equality of shares?