The IFIs in 2009: year in review

24 February 2010 | Review

If 2008 was the year the financial crisis began, 2009 was the year its impacts were really felt in most developing countries. The beginning of the year saw near panic about the potential depths of the global recession and a glimmer of hope that the economic policies of rich countries which had touched off the crisis and contributed to its spread would be rethought. The Bretton Woods Project, with many partners around the globe, viewed it as an opportune time for a Bretton Woods II – a new international economic settlement to fundamentally restructure the way the global economy was run and directed.

In the end the G20 group of countries stepped into the breach with grand rhetoric, but few of the fundamental reforms that would merit the moniker Bretton Woods II. The London Summit of the G20 in April was a key moment, as some of ideas for progressive change were taken up and some of the old institutions such as the G7 were demoted in importance. However the real winner was the IMF, which came away from the summit revitalised, with more money, more power, and far bigger role. When developing countries, most of whom were excluded from the G20, moved to put the UN, instead of the IFIs, at the centre of global economic governance, their efforts were shot down by rich countries who sought to marginalise the UN and its inclusive conference on the crisis. However, the UN commission of experts, chaired by Nobel laureate Joseph Stiglitz produced an influential report, calling for fundamental changes, such as the establishment of a global reserve currency.

Despite the role the policies of the World Bank and IMF had played in creating the conditions for the crisis, rich world political leaders turned back to these institutions, particularly the IMF, to lead the way out. Under the leadership of Dominique Strauss-Kahn, IMF lending underwent rapid reform. It introduced conditionality-free loan facilities for a few countries, upped the amount of money it would lend, eliminated one type of conditionality, and rebranded all of its facilities for low-income countries. However it was far from sufficient to turn the IMF into an institution trusted by its members, particularly developing country governments, as borne out by a report from its Independent Evaluation Office at the end of 2009.

The longstanding debate over how to create a development-friendly international monetary system to replace the global reserve system based on the dollar was sparked into life. An unprecedented allocation of special drawing rights (SDRs), promoted by the G20 and finally agreed by the IMF in the autumn, was a step forward. However, the IMF and its largest shareholders refused to give sufficient SDRs to developing countries and balked at talk of deeper reform of the international monetary system.

Finally, while the IMF advised counter-cyclical fiscal and monetary policies for its richest members, it has continued to court controversy over strict macroeconomic policy conditionality for developing countries, and has been blamed for worsening recessions and deepening social crises in some of the Eastern European countries worst hit by the financial crisis. In a further sign of thaws in the IFI’s approach to macroeconomics, the World Bank Group’s International Finance Corporation (IFC) announced in April that it would change some of its controversial indicators which have penalised countries for adopting social protection and employment protection policies in its flagship Doing Business report, following years of critique by trade unions and others.  However, the release of the 2009 report showed very little change in the resulting ranking system.

Meanwhile, the long-anticipated global climate talks in Copenhagen failed to produce a deal on cutting greenhouse gas emissions, and the Copenhagen Accord – negotiated between a small number of countries – agreed only limited short-term financing to help developing countries. The World Bank, supported by many rich countries, continued to lobby heavily throughout the year for a central role in the emerging climate finance architecture, while developing countries and many civil society organisations pushed for the UN to play the leading role. African delegations staged a one day walk out of preparatory talks in the lead up to Copenhagen to protest at the glacial pace of progress. In the end little was settled at Copenhagen but the Bank’s Climate Investment Funds (CIFs), while attracting relatively small amounts of donor funding, leveraged significantly more, including from the private sector. The UK continued to play a major role both as a significant donor to the CIFs and advocate for a strong role for the Bank in climate finance.  However, in response to civil society calls for the UK to push the Bank harder to clean up its act, the government agreed to push the Bank to achieve 60 per cent clean energy investments by 2012.

The Bank announced a major review of its energy policy, which will continue throughout 2010, and be a focus for continued controversy over the Bank’s energy lending.  Early in the year the Bank signalled its intention to continue to support fossil fuels, allowing the Clean Technology Fund to finance coal-fired power plants, leading the US Congress to vote against funding it this year. Signals that the Bank’s energy portfolio may be beginning to shift were mixed, with increased lending to renewable energy and energy efficiency undercut by controversy over its methodology for categorising projects, and the fact that a number of major large dams and fossil fuel projects are in the pipeline. The Bank also announced its intention to estimate the greenhouse gas emissions for its projects, though progress in developing a methodology for doing so was slow.

The Bank also announced a review of its environment strategy for 2010, while the IEG called its efforts to mainstream environment across other sectors “weak”.  Evidence of the Bank’s troubles in this area was provided in July, when the IFC withdrew funding from Brazilian cattle farming company, Bertin. Though 80 per cent of deforested land in the Brazilian Amazon is used for cattle farming, the IFC did not mention any environmental reasons for their withdrawal. Meanwhile the Inspection Panel rapped the Bank over the knuckles in Ghana for forced evictions and environmental hazards.

Hopes for far-reaching World Bank governance reform to democratise the institution were once again dashed, as, following agreement by the G20, the Board of governors agreed to negotiate a shift of voting power to developing countries of at least 3% which will mean that rich countries will maintain their significant voting majority for years to come. An expert panel led by former Mexican president Ernesto Zedillo called for sweeping reform, but his report arrived after decisions had already been made.

IMF governance reform progressed at a glacial pace. Despite G20 promises to the contrary, a new member of the senior management team was appointed without an open merit-based selection process, and some of the still-not-strong-enough proposals put forward by IMF staff during the transparency review were shot down by an unreformed and unrepentant IMF board. Voting rights reform has been promised for January 2011, but a subsequent G20 pledge to shift just 5 per cent of the votes left no doubt that the changes would not be sufficient.

Real progress was made in the long campaign for World Bank transparency. At the end of the year the Bank agreed a new disclosure policy based on a recognition of the principle of maximum access to information, with limited exceptions. If implementation is effective this should mean a significant increase in the amount of information citizens, civil society, parliaments and others gain access, with proper procedures to handle information requests and an independent appeals mechanism.  However, significant shortcomings remain, including the exclusion of almost all information on the Bank’s decision-making processes and the continuation of closed Board meetings. Progress was also made on IMF transparency, where most documents will now be disclosed, though the Fund’s new disclosure policy lagged a long way behind the Bank.  Significant loopholes remain, including the ability of governments to block publication of all documents relating to their country.

2009 was a record year for World Bank lending, with commitments almost trebling, though actual disbursements lagged a long way behind, and remained static for the poorest countries. The main increases were promised to middle-income countries through a trebling of IBRD lending, prompting the Bank to seek contributions from member governments for a significant increase in its capital base.  Negotiations had not completed by year end, but the Bank signalled its intention to push ahead aggressively.

The Bank’s work in the health sector came under sustained criticism throughout the year, with stinging NGO critiques backed up by highly critical IEG evaluations of both its past lending and its overall strategy.  Despite this, the Bank announced its intention to push on with a major expansion of its health sector funding. The Bank also continued to come under fire for its bureaucratic management of the Education For All – Fast Track Initiative.

The Bank also plans to scale up its activities in agriculture, launching a multi-billion dollar donor agriculture trust fund in response to calls from the G8 group of rich countries. However its approach to agriculture remained controversial, and in the autumn, the Bank dramatically halted lending to new palm oil projects pending a review of its strategy. This followed a stinging critique from the Compliance Advisor Ombudsman over the Bank’s failure to implement its ‘performance standards’ at the IFC.

The UK government continued its ‘critical friend’ relationship with the Bank, replacing its three year strategy with an annual plan, and releasing a new policy White Paper focussed on five key priorities for Bank reform, including environment, gender and governance.

Finally, the normally shadowy activities of the International Center for the Settlement of Investment Disputes (ICSID), part of the World Bank Group were thrust into the limelight with an explosion of cases and increasingly vocal criticism from South American countries, some of whom called for its closure.