IFI governance

Analysis

The IFIs in 2011: year in review

23 March 2012 | Review

The deepening economic crisis in the eurozone continued to dominate headlines in 2011, with the IMF participating in controversial lending attached to austerity policies and conditionality requiring privatisation of public services, layoffs in the public sector and wage and pension cuts for vulnerable and poor people. The policies being pursued in Europe are strikingly similar to the structural adjustment programmes pushed in developing countries in the 1980s and 90s, which provided some of the impetus for launching the Bretton Woods Project in 1995.

At the beginning of the year, the IMF was accused by its own Independent Evaluation Office (IEO) of “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches”. The strong critique however did not prevent the IMF from lunging headlong into the European debt crisis.

In 2011 Portugal joined Greece and Ireland in turning to the IMF and European Union for a loan. However, as foreseen by analysts and campaigners, the austerity policies required in these and other countries worsened recessions, deepening fiscal deficits rather than shrinking them. By mid-year Greece was in need of a second loan, as it was unable to borrow in capital markets and its economy was entering a deep downward spiral. As the crisis mentality took hold, Spain and Italy came under the spotlight, with the latter eventually inviting the IMF to “monitor” its austerity plan. Elected governments were toppled and technocratic administrations took over in both Italy and Greece, while social movements across Europe organised general strikes and demonstrations with hundreds of thousands of people protesting against the austerity policies. Elsewhere in the world, IMF lending and advice continued to be tied to problematic demands for reduced spending. A promised internal review of IMF conditionality was delayed until 2012.

The sudden resignation of the IMF managing director Dominique Strauss-Khan after allegations of sexual assault emerged against him was a pivotal moment in the summer, when the IMF came under greater scrutiny than usual. European governments failed to fulfil their promises of an open, merit-based and transparent selection process for all senior leadership at the Fund, and rushed the French finance minister Christine Lagarde, into the position. Lagarde, the first ever female leader of an international financial institution, promised continuity in terms of IMF policy towards borrowing countries and austerity policies.

While Mexico’s central bank governor Agustín Carstens ran against Lagarde, the longstanding gentlemen’s agreement that ensures a European leader at the IMF and an American leader at the World Bank prevailed. Lagarde appointed Chinese national Zhu Min to an additional deputy managing director post as a concession to large emerging markets, but again there was no open competitive process for his selection. That was also the case for the appointment of two World Bank managing directors in 2010, leaving G20 commitments made in 2009 to open, merit-based processes for the selection of all senior International Financial Institution (IFI) positions looking moribund.

The Fund was also supposed to revamp its thinking on regulation of cross-border financial flows and other elements of the international monetary system in 2011. In the spring, IMF staff proposed a framework for capital account regulations that gave very limited space for developing countries to impose measures to protect their economies. The framework, which was renamed a “code of conduct”, was roundly rejected by a number of large developing countries, with Brazil particularly complaining of the IMF’s treatment of the issue. By the end of the year, the IMF started to look at both recipient countries like Brazil and source countries like the US and UK, but the conclusions still proved controversial and did not clarify how it plans to broker a compromise in 2012.

In 2011 the World Bank continued its drive to promote a greater role for itself across a host of topical issues. During the United Nations climate change conference held in Durban in December, the Bank was confirmed as trustee of the new Green Climate Fund (GCF), though only for the first three years. Moreover, as the market price of carbon plummeted, the Bank continued to prop up carbon markets and promote their use in controversial new areas, such as soil carbon.

However, the Bank’s board proved unable to agree a new energy strategy, after middle-income countries used a dispute over coal lending in the draft strategy to demonstrate their ability to block the document, even though their voting shares remain small. Meanwhile, NGOs continued to highlight the Bank’s continued preference for fossil fuel lending over renewables and energy efficiency projects, and potential Bank support for coal power in Kosovo caused controversy.

The increasing focus of Bank lending on infrastructure was highlighted in an assessment by its arms-length evaluation body, the Independent Evaluation Group, which found that infrastructure lending now comprises almost half of World Bank Group lending. The G20 made a big imprint on the work of the Bank in 2011 through its focus on scaling up infrastructure investment in developing countries. The G20 commissioned a private sector panel and the World Bank to produce reports which ended up promoting massive cross-border infrastructure projects. Critics complained of a lack of consultation and the secretive nature of the deliberations over the projects and ideas, especially the suggestion that the public sector needs to take more of the risks while handing potential profits to the private sector.

Continued high and volatile food prices were the subject of much Bank activity, as it continued to carve out a larger role in agricultural policy and lending. The Bank was criticised for ignoring the impact of speculation on food prices, while concerns remained over the market-based solutions it promotes. The Bank was also the subject of critique for its investment advice, with the Oakland Institute, accusing it of promoting “land grabs” in developing countries. A number of agricultural complaints were lodged against the Bank, particularly its International Finance Corporation (IFC) private sector activities, including in Peru and Papua New Guinea.

Despite Bank chief economist Justin Lin’s low key efforts to persuade the Bank to look more favourably on the role of the state in promoting industrial development, the Bank’s flagship Doing Business report continued to disappoint trade unions by basing its paying taxes indicator on the premise that lower taxes for business are always a good idea. A new policy on the use of offshore financial centres – tax havens – finally emerged from closed door internal discussions at the Bank’s private sector arm, the IFC. It was criticised for relying on a weak Organisation for Economic Co-operation and Development (OECD) process, and for allowing significant loopholes.

The IFC’s increased focus on the financial sector continued, with its first investment in a hedge fund, and a record amount of lending through financial intermediaries. Problems inherent in this model became increasingly apparent as the IFC’s complaints mechanism, the Compliance Advisor/Ombudsman (CAO), launched a probe into financial intermediary lending and agreed to investigate serious problems in India and Uganda.

Regarding the Bank’s internal reform, a new ‘scorecard’ was launched to guide management decisions, though it is not yet clear whether it will have an impact within the Bank. The new proposed Program-for-Results (PforR) lending instrument had an extended period of consultation and reworking after critics demanded a cap on lending and clarification of the treatment of programmes with potentially highly damaging impacts on the environment, local communities and indigenous peoples. Meanwhile, the IFC made a historic commitment to recognise the rights of indigenous peoples to free, prior and informed consent on projects that affect them when it finished the revision of its performance standards, though other areas, such as protection of human rights more broadly, were not included. The IFC’s new transparency policy, by contrast, was compared unfavourably with the Bank’s public sector version, as it had extensive loopholes allowing companies to block release of important information.