IFI governance

Analysis

The IFIs in 2010: year in review

15 May 2011 | Review

2010 was a year of uncertainty for the global economy. While many countries, particularly emerging markets, emerged from recession, public finances deteriorated across the globe as governments struggled to recover from the recent crisis. The troubles of the Eurozone dominated the headlines, but this only reflected the continued fragility of many countries still reeling from the biggest depression since the 1930s. The ongoing impacts of the recession remained high, particularly on the poor and vulnerable. At the same time, the capacity for coordinated international action, of the kind that had pulled the global economy back from the brink, dwindled, as governments focussed on national priorities or merely stuck their heads in the sand.

One of the most eye-catching developments was the return of the IMF lending to rich countries, but with heavy doses of conditionality attached. While tiny Iceland took out a loan in 2009, in 2010 Euro-members Greece and Ireland both turned to the IMF and European Union for loans, marking the first time a country using a globally-accepted reserve currency has needed IMF assistance since Britain in the 1970s. However, IMF loans to the euro area, like those to Latvia and Romania, carried debilitating demands for cuts in pensions, public services, public sector salaries, and forced privatisation of public enterprises and services, all the while insuring that private sector banks were repaid in full. IMF advice and conditionality was similarly contractionary for low-income countries, as the IMF expected them to reduce public spending as a percentage of GDP despite the uncertain global economic outlook.

While IMF thinking on fiscal matters seemed to have reverted to business as usual, on global structural issues, such as capital controls and the international monetary system, it began a very slow revamp. 2010 was supposed to see the completion of a wholesale mandate review at the Fund, but political consensus to shift the IMF position was hard to reach. The IMF’s own research showed that capital controls should be a part of the toolkit for macroeconomic management. Meanwhile, emerging market countries, particularly Brazil and South Korea, had already blazed ahead to begin controlling capital inflows, and IMF staff recognised that the current monetary system, based on the dollar as the world’s reserve currency, was less than ideal. But by the end of the year there was little movement in official policy, with only grudging acceptance of temporary and ad hoc capital controls as a last resort and no progress on monetary reform. France, which chairs the G20 in 2011, promised to pick up the baton of reform, but expectations were low for any fundamental change that would benefit developing countries.

Only incremental reforms were agreed to the governance of the Bank and Fund, despite IFI spinners claiming major changes. The World Bank shifted voting share, primarily to middle-income countries, but still left high-income countries with over 60 per cent of the vote. Bank claims that developing countries now have 47 per cent of the vote were revealed as misleading spin, based on miscategorising 16 high-income countries as if they were still developing. Further progress towards the G20’s promise of equality of voting share between developed and developing countries will have to wait for the next round of reforms in 2015.  At the IMF, the changes were also marginal. Shifts to middle-income countries, which saw China emerge as the third largest shareholder, still left high-income economies with over 55 per cent of the vote.  European countries finally bowed to pressure from other shareholders to rationalise their board presence. However, the promised cut of two European seats could still leave seven European faces on the 24-strong board. A promised review of the contentious quota formula that favours rich countries was delayed to 2013. Meanwhile, in September the Bank appointed Egyptian investment minister Mahmoud Mohieldin as its new managing director without an open, transparent process for his selection, despite 2009 promises that such processes would apply to senior management at the IFIs.

However, campaigners celebrated a significant victory, after many decades of effort, when the Bank put into place one of the most open disclosure policies of any international institution. It is too early to judge if implementation will be rigorous enough.

Meanwhile, the World Bank’s role in climate finance has continued to be contentious. The UN’s high level advisory group on climate change financing identified the multilateral development banks, including the Bank, as a source of finance due to their alleged abilities to leverage private finance. At the Cancún UN climate negotiations, despite protests from civil society groups, the Bank was granted a trustee role for the new Green Climate Fund, but already began lobbying to expand its influence beyond this limited part. Meanwhile, resistance to the Bank’s role swelled in countries like the Philippines from both government and civil society groups.

The Bank’s energy lending caused uproar after a $3.25 billion loan mainly for a coal plant in South Africa. After vigorous campaigning by South African and international civil society groups, several board members abstained on the vote, adding a political dimension to ongoing energy strategy consultations. This fuelled debate within the Bank board, staff and civil society groups about the use of the institution’s limited public resources and its contribution to the causes of climate change at a time when it is positioning itself to play a central role in climate finance.

Donors gave a measure of backing to the 16th replenishment of IDA, the Bank’s low-income country lending arm, by keeping their contributions flat in real terms. However, a record $49 billion top-up was secured through significant contributions from the Bank’s own resources and increasing repayments from middle-income countries. Behind the scenes, major internal reform of the Bank’s procedures continued, largely devoid of external scrutiny. A new ‘results-based’ instrument was promised to speed up lending procedures, though critics feared it could lead to the bypassing of important social and environmental safeguards. Investment lending – the majority of the Bank’s portfolio – was revamped with a new risk-based framework, though the Bank’s focus on financial returns dominated with only one category devoted to social and environmental risks.

Both Haiti, reeling from a massive earthquake, and Pakistan, suffering unprecedented flooding, had large debts to the IFIs and existing IMF programmes. While donors agreed to write-off Haiti’s IMF and World Bank debt, the IFIs immediately issued more loans, ensuring that after reconstruction the small island would still be chained by debts to the international community. Pakistan received less generous terms with no debt write-offs, and continued fighting the IMF over tax policy conditionalities in its programme. The only silver lining was that the debt crises in Greece and Ireland, closer to the core economic powerhouses in Europe, might finally make rich countries consider an independent, fair process for dealing with sovereign debt restructuring.

The World Bank Group’s role in agriculture was increasingly highlighted in 2010 with the IFC’s role in supporting ‘land grabs’ coming to light and the Independent Evaluation Group (IEG) raising concerns about the Bank’s capacity on the issue. Similarly, IEG and internal evaluations of the Bank’s treatment of gender issues confirmed the accuracy of the criticisms of civil society, regarding the Bank’s lack of integration of gender and women’s rights issues and its institutional unwillingness to address them.

Bank President Robert Zoellick tried to rebrand the Bank’s knowledge role, arguing that development economics should be demystified and that the Bank shouldn’t claim to have all the answers. This was not carried through into the Bank’s strategy, which sought to position the Bank for ‘global thought leadership.’

The dramatic shift in the lending portfolio of the International Finance Corporation (IFC), the Bank’s private sector lending arm, continued apace with financial sector investments reaching over half of its portfolio. Most of this is money the IFC channels through arms-length financial intermediaries such as banks and private equity funds, instead of direct lending to projects.

Meanwhile the review of the IFC’s performance standards got underway, amid continued evidence of social environmental and human rights problems at Bank-sponsored projects, including cyanide spills in Ghana and encroachment on tribal lands in India.

In 2010, the Bretton Woods Project (‘the Project’) finished a five-year strategic planning process which reinforced our focus on supporting civil society work on the World Bank and IMF, and their vital links to global financial issues, including climate finance, not only in the UK but also at the European and international levels. We have also continued our efforts to highlight and amplify the voices of critics of the World Bank and IMF across a broad range of issues, detailed below.