IFI governance

Analysis

The IFIs in 2012: year in review

25 January 2013 | Review

2012 saw continued crisis in Europe, but also a turning point in the leadership selection of the World Bank. The choice of Dr Jim Yong Kim as new president, who brings a background in public health in developing countries, marked the first ever selection of a development practitioner to lead the institution. However, large bureaucracies are slow to change, as the International Monetary Fund (IMF) found out with its inability to extricate itself from the morass developing in the eurozone.

The Bank’s leadership selection process, despite being launched too late to signal a real desire for an open, merit-based and transparent selection, ended up being more promising than anticipated because of developing countries’ attempts to inject some competition into the process. But the tradition of the US nominee securing the presidency of the Bank was not in doubt since it relies on a quid pro quo with the Europeans assuming leadership of the IMF, as evidenced by former French finance minister Christine Lagarde’s 2011 appointment. Dr Kim beat Nigerian finance minister Ngozi Okonjo-Iweala and former UN under secretary-general for economic affairs José Antonio Ocampo to seal another round of this international ‘gentleman’s agreement’.

Many hoped that Dr Kim would completely reorient the Bank’s operations upon taking the helm in July, but some viewed his first six months more as a public relations exercise, including the Bank’s public campaigns on Twitter asking how it can contribute to “bending the arc of history” to “end poverty”. By year end Dr Kim seemed to have won over staff and shareholders to his stewardship without yet launching any new initiatives. Only in the final weeks of 2012 did he begin to shake things up at the Bank by reorganising management.

In January, the Bank board approved the new Program-for-Results lending instrument, but curtailed criticism by limiting its use to 5 per cent of total funding commitments per year for the first two years. The long anticipated review of the Bank’s social and environmental safeguards was finally launched in October. However, civil society groups criticised the Bank’s decision to push through a separate investment lending reform, which consolidates policies, before the safeguards review was launched. The safeguards review is expected to last for two years and advocates are pushing for issues such as indigenous rights, resettlement, disability and human rights to receive particular attention.

On environmental issues, feeding into UN’s Rio+20 ‘Earth Summit’ in June and as a precursor to the Mexico G20 summit, the Bank launched a report on ‘inclusive green growth‘. During the summit it pushed for natural capital accounting, but critics saw this as an attempt at privatisation of nature. The Bank also formally assumed its trusteeship of the UN Framework Convention on Climate Change (UNFCCC) Green Climate Fund and continued to champion the Climate Investment Funds. A review of its strategic framework on climate change identified “increasing demand” for the Bank “to join, help forge or lead new climate action coalitions”. However, its own Independent Evaluation Group’s assessment of the Bank’s track record on climate change adaptation concluded that it lacks “a reliable compass to guide future adaptation efforts”.

Furthermore, the Bank’s proposed energy strategy disappeared completely from the agenda in 2012. When Kim launched a new, but externally authored, Bank report on the latest climate science in November, he failed to rule out its involvement in fossil fuels, calling the Bank “the group of last resort in finding needed energy in countries that are desperately in search of it”. Controversy also remained around proposed coal power projects, such as in Kosovo. The Bank also continued to push other controversial energy options, such as large scale hydro.

The International Finance Corporation (IFC, the Bank’s arm that lends to the private sector), was also given new leadership in 2012. The October appointment of Chinese national and former investment banker Jin-yong Cai broke a string of European appointments and demonstrated the Bank’s attempts to keep new global powers like China engaged. Cai’s financial sector background is unlikely to end to the IFC’s increasingly controversial use of financial intermediaries, particularly private equity funds, as a means of channelling money.

On the policy front, internal opposition seems to have scuppered an attempt within the IFC for development outcomes to replace financial returns as the main metric on which staff incentives are based. Poverty reduction seemed further than ever from the IFC’s intentions as it funded scores of controversial projects, such as a massive iron ore mine in Guinea and mine in an indigenous area of the Philippines. Its investments in extractive industries garnered specific attention because of the police killings that ended large protests against IFC-investees Lonmin in South Africa and Yanacocha in Peru. The IFC also faced international criticism for its involvement in controversial coal projects, such as the Tata Mundra power plant in India.

The Bank Group’s involvement in ‘land grabsreceived increased attention, as the IFC’s accountability mechanism, the Compliance Advisor/Ombudsman, started investigating a complaint about activities in Uganda. Later in the year, NGO Oxfam launched a campaign for a moratorium of the Bank’s large scale land acquisition, but while the Bank accepted that its “practices need to ensure more transparent and inclusive participation in cases of land transfers”, it rejected the demand.

Campaigners finally cheered some success on jobs and labour. The Bank’s World Development Report on jobs marked a real departure from past Bank practice as it focussed on good jobs and the ways to promote them. This included research which undermined the IFC’s Doing Business Report message that labour deregulation is always beneficial. The resultant criticism of Doing Business grew to such intensity that Dr. Kim ordered an independent review of the report which will return its findings in 2013.

The IMF ended 2012 much as it began, lending more money to European countries, downgrading its expectations for their economic performance, and looking to the Middle East and North African region as the most significant opportunity for future growth and influence. By year-end, the mooted $1 billion loan for Egypt had grown to $4.8 billion while street protests challenged both constitutional changes and economic reforms contained to the proposed agreement.

The IMF’s role in the Troika of eurozone lenders, with the European Central Bank and European Commission, has continued to generate controversy. In March, the IMF signed a new agreement with Greece, worth an extra $36 billion. One long-time staff member resigned in disgust at the Fund’s “incompetence” and “failures”, accusing it of “European bias”. A mea culpa of sorts did follow as the October World Economic Outlook sought to explain why the IMF has consistently over-estimated the benefits of its medicine, triggering a debate about whether austerity and cuts imposed as conditions of lending have been counter-productive, something civil society has contended for decades. Applying its new enlightened attitude to Greece meant the Fund fell out with key Troika and European partners in December as it came to insist upon a degree of write-downs for Greece’s unsustainable debts.

While the challenges to the IMF’s role and legitimacy grew, the Fund determined that its record on lending and conditionality was overall rather good – notably excluding all of the controversial European lending which represent the bulk of its current loans. Furthermore, the October deadline for reforms to the quota determining countries’ representation in Fund governance, agreed with developing countries in 2010, passed without action leading to vehement developing country criticism and disappointment. More irritation followed the IMF’s long-awaited institutional view on capital flow management, which purported to end the bias to capital account liberalisation which critics have long blamed for exacerbating developing country crises. Instead of a U-turn, it was described as only a “baby-step”.

As the year ended, the IMF’s independent auditor, the Independent Evaluation Office, concluded that the Fund’s advice to countries with large reserves, notably China, betrayed what press commentators interpreted as outright “bias” in favour of US policy preferences for its developing country rival. A vigorous response from staff and management duly followed.