IFI governance

Analysis

Annual Meetings wrap-up: Bretton Woods Institutions continue sleepwalking, as economic uncertainty and social tensions intensify

23 October 2019

World Bank Group president David Malpass speaks at the Annual Meetings plenary on 18 October. Credit: World Bank.

Seventy-five years after their founding, the World Bank and IMF held their Annual Meetings amidst heightened fears of another global financial crisis, increasing social unrest and ever-increasing alarm over the impending climate catastrophe. The recently published World Economic Outlook (WEO) report noted that, “After slowing sharply in the last three quarters of 2018, the pace of global economic activity remains weak.” Potential catalysts of risk-off episodes, the WEO noted, “remain plentiful”, with increases in trade tensions, worsening debt dynamics, stress in some large emerging markets, a no-deal Brexit, and a sharper-than-expected slowdown in China being listed as conceivable triggers. The projected global growth forecast rests at 3 per cent for 2019 – its lowest level since 2008-2009, and a downgrade from April. Echoing the concerns raised in the WEO, the G24 Communique, issued on 19 October, described global growth as “subdued” – much like the meetings themselves – adding that, “policy efforts and multilateral cooperation in key areas are essential to avoid further economic slowdown and secure inclusive growth” (see Dispatch Annual Meetings 2019).

Further signs of macroeconomic instability were an inverted yield curve, distress calls in the Eurozone around another recession, rising external debt stock, a bloated unregulated banking sector, elevated levels of household debt, and an inequality crisis, a set of factors which are increasingly leading to speculative activities and financial instability and stagnating wages. The prospect of capital flight from emerging markets caused by interest rate changes in the developed world remains a cause of concern. Yet while the Bretton Woods Institutions (BWIs) have warned of another potential crisis, their ability to prepare, adapt and effectively respond remains in question. Indeed, at the IMF-hosted Per Jacobsson lecture on 19 October, the former Bank of England governor Mervyn King declared that after a decade of economic stagnation, the world was “sleepwalking” towards another financial crisis. Moreover, as nation states remain off-track to meet the Sustainable Development Goals (SDGs) amid the impeding climate crisis, concerns have been raised about the continued push to leverage the private sector in areas such as health, education, water and infrastructure under the guise of achieving the SDGs (see Observer Summer 2017).

The Annual Meetings also took place alongside a backdrop of social unrest which has been worsening globally as poor economic growth, rising inequality and austerity combine in a volatile mix, which resulted in violent clashes in Chile as the Annual Meetings closed. The violence in Chile was preceded by large-scale protests  in Ecuador over a controversial IMF loan programme (see Observer Autumn 2019). Within this troubling context the Latin American-based civil society organisation (CSO) Latindadd put forward a declaration to the IMF at Annual Meetings noting that, “The return of the IMF to Latin America has been marked by the implementation of familiar austerity policies, leading to devastating economic and social impacts that populations have to pay” and called on the Fund “to change its austerity policies” so that countries can “have access to financing with sovereignty in economic policies, where the State guarantees human and civil rights.”

Much as it was for the architects of Bretton Woods, restoring ‘faith in the wisdom and the power of Government’ needs to be the first order of business of the international communityUNCTAD 2019 Trade and Development report

While the subject of the IMF’s Fiscal Monitor, published on 12 September, was mitigating climate change, its focus rested largely on carbon pricing, rather than a critical assessment of how their conventional policies and practices could be altered to alleviate climate breakdown (see Observer Summer 2019). Moreover, an October report by the US office of international CSO Heinrich Böll argued that the turn to private finance by multilateral development banks (MDBs), “narrows the scope for a green developmental state”, thus reducing the prospect for a just transition to low-carbon economies, “where the burden of structural change does not disproportionately fall on the poor.” As the September Trade and Development 2019 report from the United Nations Conference on Trade and Development, which focused on finance for a global Green New Deal, noted, “Much as it was for the architects of Bretton Woods, restoring ‘faith in the wisdom and the power of Government’ needs to be the first order of business of the international community.”

A tale of two leaders: Contrasting styles of Malpass and Georgieva emerge amidst multilateral stalemate

As wryly illustrated by financial publication The Banker, the new leaders of the Bank and Fund have what could be diplomatically described as diametrically opposed leadership styles.

Newly appointed IMF managing director Kristalina Georgieva used her Annual Meetings opening press conference to set out her five key priorities: Build a stronger trading system; use monetary policy wisely; enable fiscal policy to play a more central role; find ways to boost productivity; and promote strong international cooperation. In her first CSO townhall, Georgieva made clear that she embraced a continued agenda around issues such as inequality, climate change and gender, promising to listen to and engage with civil society. For the first time, half of the official IMF seminars during Annual Meetings included civil society speakers, from organisations such as Oxfam and the European Trade Union Confederation. The proof of Georgieva’s promise, however, will be in the pudding, and there were murmurings of discontent around why questions posed at the townhall regarding crackdowns on civic space related to IMF programmes were not answered with more direct assurances (see Observer Autumn 2019).

Following the press conference, Georgieva did an interview on women, work and leadership, unveiling the IMF’s new working paper entitled, “Reducing and Redistributing Unpaid Work: Stronger Policies to Support Gender Equality”, which focused on the GDP gains of redistributing unpaid work across genders. While Georgieva emphasised that the Fund does recognise a broad range of appropriate policies and is ‘more mindful’ of whether policies expand or reduce inequalities, she illustrated this by highlighting the Fund’s social spending paper, which has been a bone of contention with civil society (see Observer Summer 2019).

While the Fund has undergone a leadership change, its broader governance structures remain untouched, as was evident with the lack of progress on the 15th Review of Quotas, which, despite being set to be published by Annual Meetings, was quashed by the US Treasury (see Observer Summer 2019). Unsurprisingly, the G24 demonstrated its discontent in its communiqué.

Meanwhile, Bank president David Malpass’s performance at the Bank’s CSO townhall meeting provided a stark illustration of the inherent dangers of the leadership selection processes at the Bank and Fund (see Observer Autumn 2019). Delivering ‘broad-based’ growth through creating a better enabling environment for the private sector seems to be Malpass’s chief development policy prescription, but whether this will eliminate extreme poverty in low-income countries remains extremely doubtful. At a time when the multilateral system is under tremendous strain, the world faces myriad crises, including an existential climate crisis, and there is near unanimous acknowledgment that the SDGs will not be met by a significant portion of countries, a return to the failed policies of the Washington Consensus, as articulated by the Bank’s president, risks undermining the Bank’s credibility as a multilateral actor.

Six months into the job, Malpass seems determined to bring a ‘small-government’ approach to running the Bank by implementing US-backed aspects of the capital increase for the International Bank for Reconstruction and Development (IBRD) – the Bank’s middle-income lending arm – which was approved last year: Namely, cutting down on lending to upper-middle income countries (including China) and reigning in the Bank’s expenditures. As he noted in the Annual Meetings plenary on 18 October, under his leadership the Bank is seeking to lend more to non-graduate IBRD borrowers, commenting that, “This will shift our lending substantially… We’ve adjusted our loan pricing, and other financial measures are underway to improve IBRD’s financial sustainability… without additional capital increases.” Malpass also noted the Bank’s expenditure review found a savings of over $4 billion between fiscal year (FY) 2019 and FY30, again due to changes under the IBRD capital increase package.

Malpass’s bare bones approach to leading the Bank was also evident in the Annual Meetings’ official events schedule, which was greatly reduced compared to under his predecessor, Jim Yong Kim, who departed in January (see Observer Spring 2019). In one of only a handful of public appearances during the Annual Meetings, Malpass took part in an event on women’s financial inclusion on 18 October, alongside US ‘first daughter’ Ivanka Trump, who helped secure his nomination earlier this year. However, in what was surely a missed opportunity, Malpass failed to share lessons learned from his time as Bear Stearns chief economist prior to the 2008 financial crisis, in terms of the dangers of expanding financialisation into riskier, ‘sub-prime’ markets (see Observer Winter 2017-2018).

As BWIs plot climate action policies, the way forward remains murky

Making an appearance on a panel entitled, “Can Central Banks fight climate change?” on 16 October, Georgieva was bullish on the IMF making climate more central to its mandate. “The IMF is gearing up very rapidly to integrate climate risks in our surveillance work,” she said, according to Bloomberg. “When we are working in countries that are either big emitters of carbon, and therefore need to transition, or are at high risk of carbon shocks, there is no way to address the fundamentals of their economies without looking at these climate risks.” The fact that this was more than mere rhetoric was evidenced in a Reuters piece on 19 October, where the head of the Fund’s markets division further clarified the scope of its ambition: “We are doing work on the pricing of climate risks and to what extent it is priced into stock and bond markets,” Tobias Adrian, financial counsellor and director of the IMF’s monetary and capital markets department, said. “We are going to look at stock markets country by country, then by sector.” However, the Fund’s attempts to better evaluate climate risks put it in unfamiliar territory. One particularly tricky proposition, as Georgieva herself alluded to, is the potential need to create a ‘green versus brown’ taxonomy of assets or activities. As the European Commission’s heavily politicised attempt to create such a taxonomy earlier this year showed (the effort is now delayed to the end of 2022), breaking away from ‘business as usual’ investments is easier said than done.

Meanwhile, the low water mark of an unconvincing performance from Malpass at the CSO townhall event on 16 October was when he largely evaded a question from SustainUS youth delegate Amanda Rodriguez, who asked the Bank’s president if its investments in fossil fuels were aligned with a 1.5°C future. Malpass helpfully clarified that he’s “not a scientist” (echoing a climate sceptic talking point), and pointed out that the Bank no longer funds coal, which “a lot of people are still doing.” In fairness to Malpass, confusion about how and when the Bank will agree a methodology for aligning with the Paris Agreement was palpable throughout the week: At a Civil Society Policy Forum event on the topic on 16 October, Bank officials noted that attempts to finalise the technical details of the Bank’s approach were still a work in progress. “Defining what ‘Paris alignment’ means is actually very complicated,” said Genevieve Connors, practice manager for strategy and operations at the World Bank, at the event, according to online news site Devex. “It’s very hard to come to a definitive list of what counts as in or out that applies to all countries, because all countries are on different transition pathways to get them to net-zero carbon by 2050.”

However, the Bank’s approach to Paris alignment – being developed in conjunction with other MDBs – risks missing the forest for the trees. According to the 2018 IPCC special report on 1.5°C, greenhouse gas emissions must fall 45 per cent by 2030 relative to 2010 levels, and reduce to net zero emissions by 2050. In response to this urgent need, civil society groups held a demonstration outside the World Bank and International Finance Corporation, the World Bank’s private-sector lending arm, on 18 October, calling for a “Fossil-free WBG”. As noted in a speech at the demonstration by Melinda Janki, the legal counsel for Fair Deal for Guyana, a civil society group challenging offshore oil development in Guyana where the Bank has provided technical assistance to prepare the legal groundwork for oil development: “The World Bank must stop funding fossil fuels now. The safe limit for greenhouse gas in the atmosphere is 350 parts per million; it’s now over 410. There is no carbon budget.”

Citizen engagement: The Bank faces a potentially growing implementation gap

Despite one of its twin goals being to end extreme poverty, the Bank’s efforts to engage the intended beneficiaries of this goal directly remains uneven, at best. Indeed, the lack of meaningful consultation of CSOs and communities in vital Bank processes was one of the themes of the Annual Meetings. At a workshop at the Open Society Foundation on 15 October, civil society reflected on the mixed record of Bank country offices in engaging national civil society groups in systematic country diagnostics (SCDs) and country partnership frameworks (CPFs) – which guide the Bank’s country lending and other activities over a five-year period – despite such consultations being mandatory under new regulations released in 2014. In the corridors of the Bank, Bank insiders admitted that there was an implementation gap in this area that urgently needs to be addressed. Relatedly, the lack of an adequate framework to ameliorate negative social or environmental impacts of ‘prior actions’ (i.e. legislative changes required prior to loan disbursement) that are included in the Bank’s development policy finance – and the lack of any consultation with citizens in the negotiation of these legal changes – remains an unresolved concern of civil society, particularly as this instrument now accounts for roughly 30 per cent of Bank lending. Related to the lack of accountability for the impact structural policies proposed by the  Bank and Fund, appetite by the Fund to consider the recommendations of the UN Independent Expert on the effect of foreign debt for human rights impact assessments remained conspicuous by its absence (see Observer Summer 2019).

Meanwhile, with the 19th replenishment process for the International Development Association (IDA) – the Bank’s concessional lending arm – nearing completion, civil society remains outside the process looking in (see Observer Autumn 2019), with an IDA Forum event on 17 October that was open to civil society not featuring a single IDA deputy. As the final policy commitments for IDA19 lurch towards conclusion, there were whispers that small changes were still being made to specific policy commitments, though how the final decision-making process works in what remains an extremely opaque process is anyone’s guess.

Questions also remain about the future of the Bank’s independent accountability mechanisms – the main way for affected communities to seek redress from Bank-financed projects. With the review of the Bank’s Inspection Panel’s toolkit  unresolved two years after its initiation, civil society is deeply concerned that its basic demands, which would bring the Inspection Panel in line with best practices of other MDBs and are therefore a bare minimum, will not be met, therefore substantially weakening the institution (see Observer Autumn 2019). CSO asks include the establishment of a dispute resolution function and the ability of the Panel to monitor Bank management’s implementation of Panel action plans.

A review of the IFC’s Compliance Advisor Ombudsman is also on the horizon. Following the US Supreme Court’s ruling on Jam vs IFC – which ruled IFC doesn’t have absolute immunity from prosecution in US courts (see Observer Spring 2019) – there is still an open question about how the IFC will deliver remedy for those whose livelihoods are damaged by IFC’s investments, a long-standing issue, which CAO currently has no mandate to address.

Civil society was pleased to see the Bank’s continued focus on fragility, conflict and violence (FCV) and noted the Bank’s commitment to improving it partnerships with other agencies and organisations. That said, civil society is deeply concerned about the implications of the continued weakness in the Bank’s approach to ensuring robust civil society engagement in the country diagnostic and country partnership framework discussions and the rise in retaliation against human rights defenders. Civil society fears that these challenges will be greatly exacerbated in FCV contexts and will negatively impact the Bank’s ability to conduct the required political economy analysis to inform SCDs and CPFs. The Annual Meetings gave civil society very little hope that concerns about the contradictions between the Bank’s Maximising Finance for Development approach and its eventual FCV strategy are being carefully considered.

Bretton Woods at 75 and the future of multilateralism conference

On the occasion of this year’s 75th anniversary of the World Bank and the IMF, on 21 October the Georgetown University Law Center for the Advancement of the Rule of Law in the Americas (CAROLA), the Bretton Woods Project (BWP) and the Bank Information Center (BIC) hosted a one-day conference entitled Bretton Woods at 75 and the future of multilateralism. The event, which was widely attended, provided civil society, academics from the diverse fields and former World Bank, World Trade Organisation and IMF officials an opportunity to explore the legacy of the BWIs, with a particular focus on whether they have adapted their policies to address key short-comings in their approaches since their establishment (see BWP briefing, Bretton Woods at 75). Within the context of the current crisis of multilateralism, the discussion also provided participants an opportunity to consider responses to the nationalist backlash and to begin to better articulate a vision of a multilateral system that goes beyond the current deeply flawed economic order, including whether to ‘fix’ or ‘nix’ the BWIs.

While the discussion was wide-ranging, key themes concerned the disconnect between policies supported by the Bank and Fund, particularly since the 1980s financial deregulation, and the stated aims of the Bretton Woods Conference to support full-employment and global financial stability by providing states significant autonomy and policy space. The erosion of policy space brought about by the increasing reliance on capital markets, deregulation and restrictions in the trade regime were seen as substantial barriers to bringing about the economic structural transformation required to address the climate emergency and other development challenges, which require strong state leadership to discipline capital. While former IMF, WTO and World Bank officials acknowledged that some mistakes were made, particularly in the initial implementation of structural adjustment programmes in the 1990s, they argued that the institutions had largely learned from those mistakes. This was challenged throughout the day, with many participants highlighting the continued damage of their polices, as currently seen for example in Tunisia, Argentina and Ecuador, and the inability of the institutions to robustly rebut claims that their policies bear a large degree of responsibility for the woeful performance of most developing countries since the 1980s, where some claim, the bulk of progress made in poverty reduction is due to China’s growth, which decidedly did not follow Bank and Fund policy prescriptions.

Watch the video here.