In the Preamble to the 2020 Spring Meeting Dispatch, we asked whether the global economic crisis triggered by the Covid-19 pandemic, now projected to be the worst recession since the Great Depression by the IMF, would bring about a reconsideration of long-standing Bank and Fund policies beyond the immediate response, and whether the 2020 IMF and World Bank Spring Meetings could open a window to a new multilateralism. The answer is ‘apparently not’. While the Spring Meetings only marked the first chapter in the evolving international response to the unfolding crisis, the failure of the supposed apex of the multilateral development finance system to set out an adequate and just response is a function of both its archaic, rule-by-the-powerful architecture and resistance to break away from a decades-long adherence to free market orthodoxy. As a result, the difficult discussions about how to resolve the global economic crisis accompanying Covid-19 remain largely unresolved.
As G20 emerges from behind the curtain, façade of international cooperation comes undone
Officially, the Spring Meetings are a forum where the governing bodies of the IMF and World Bank take key multilateral finance and development decisions, technically representing their 189 member states, but with decision-making weighted towards the largest economies and the Global North (see Inside the Institutions, IMF and World Bank decision-making and governance). Last week however, just as during the 2008 global financial crisis, it became abundantly clear that it was the G20, an unofficial group of major creditor countries that are unrepresentative of 90 per cent of UN member states, that would take key decisions on the response to the Covid-19 emergency. G20 countries dominate the boards of the IMF and World Bank and envisaged the role of the Bretton Woods Institutions (BWIs) as “financial firefighters” in the Covid-19 response. As a result, the international community’s attempts to support developing economies facing devastating health and economic crises have been mired in geopolitical manoeuvrings among G20 members and are reliant on philanthropy sustained by unequal economic relations, rather than international solidarity.
This dynamic was perhaps most clearly illustrated by the inability of the G20 to overcome US obstruction, rooted in concerns about growing Chinese influence, in order to reach an agreement on the urgent need to boost IMF resources through an expansion of Special Drawing Rights (SDRs), the international reserve currency held by the IMF (see Inside the Institutions, The IMF’s special drawing rights). In remarks made during an extraordinary G20 leaders’ summit in March, IMF Managing Director Kristalina Georgieva explicitly asked for the G20’s backing for a sizeable SDR allocation, a decision that should be the domain of the direction-setting body of the IMF, the International Monetary and Financial Committee (IMFC). In a footnote however, the G20 communiqué released on 15 April noted that no consensus had been reached on the SDR allocation issue, which was later confirmed by Georgieva responding directly to a question during the IMFC press conference (see Dispatch Spring 2020). The managing director added that the option is now being explored of wealthier countries voluntarily donating their existing, unused SDRs to developing countries. In his press statement on the meetings, US Treasury Secretary Steven Mnuchin confirmed the US does not support an SDR allocation. News agency Reuters reported last week that the US reluctance was over fears that SDRs would give new avenues of funding for Iran, Venezuela and China.
These high-level manoeuverings taking place in plain sight are indeed a clear indication that the international response to Covid-19 is at the mercy of China-US relations playing out in the G20, and by extension, the IMF and World Bank.
India was reportedly the only other country that expressed doubts over the allocation, a position which prominent Indian economist professor Jayati Ghosh considered “not just fraught with risks but also illogical…[carrying] terrible consequences for the entire developing world,” in Indian news outlet The Wire. In response to the decisions made during the Spring Meetings, China’s foreign ministry told Reuters that, “International financial institutions are important platforms for international cooperation, not political tools for a minority of countries to manipulate,” while UK newspaper The Guardian’s Larry Elliot described the 2020 Spring Meetings as the backdrop for a now accelerated “struggle for global hegemony between the US and China.”
The G20’s central role was also reconfirmed on debt relief, which centred around the question of whether the G20 would suspend debt payments from low-income countries (i.e. members of the World Bank’s International Development Association), as requested by IMF Managing Director Georgieva and World Bank President David Malpass in March. In the G20 communiqué, the group announced bilateral debt suspensions for 77 countries until the end of 2020, which is estimated to cover up to $12 billion, though they must first meet eligibility criteria. This will provide some much-needed breathing space for low-income countries to respond to the pandemic during the suspension period and represents a significant agreement that was likely difficult to negotiate amongst G20 members. However, it is still nowhere near the amount needed by developing countries to adequately address the Covid-19 crisis, and, as this is a debt suspension, not cancellation, it merely kicks the can down the road of a mounting unsustainable debt crisis (see Dispatch Spring 2020).
Geopolitical considerations also seemed to take centre stage with the negotiations around debt relief. The Group of Seven (G7), another informal group of countries comprised of the US, UK, EU, Germany, France, Italy, Japan and Canada, announced days before Spring Meetings it would support bilateral debt suspensions, but made their backing conditional on the G20 making the same commitment, ensuring resources ‘released’ were not used to pay back Chinese loans. In response, China continues to push for multilateral development banks, dominated by the US and EU, to “lead by example” and also take a hit by following suit and offering debt suspensions. These high-level manoeuverings taking place in plain sight are indeed a clear indication that the international response to Covid-19 is at the mercy of China-US relations playing out in the G20, and by extension, the IMF and World Bank.
Bretton Woods Institutions start building back to ‘business as usual’
While key decisions on debt relief and an SDR allocation are outside the realm of what most Bank and Fund officials can influence, early rumblings from the BWIs of the need to return to business as usual as soon as the peak of the crisis has passed demonstrates an inability to identify the root causes behind the current fragility and instability of the global economic system.
This already became evident in the first chapter of the IMF’s Fiscal Monitor, released last week, which declared that “a more ambitious, credible medium-term fiscal consolidation path is needed” for emerging and middle-income economies once the current economic situation improves. The document also highlighted the need to boost private sector investment and implement value-added taxes, explicitly putting “concerns that the value-added tax might be regressive” aside (see Briefing, The IMF, Gender Equality and VAT). As mapped by the website IMF Monitor, such policy advice is already taking concrete shape at country-level. In one of its first Covid-19 response emergency finance packages approved to Rwanda, for instance, the IMF prescribed that, “once the crisis abates, the fiscal adjustment path should be adjusted to preserve debt sustainability in the medium-term.” The IMF’s emergency top-up loan to Pakistan’s existing programme similarly stipulated adherence to fiscal consolidation reforms after the immediate economic shock abates (see Observer Spring 2020). Civil society calls to “never again” see IMF austerity-based policies and conditionality undermine the health, care and social protection systems the world now so relies on seem, at first glance, not to have made a dent in the Fund’s fiscal consolidation wall.
At the World Bank, the first sign of business-as-usual came early on, before the Spring Meetings, as it announced that more than half of its initial emergency financing to respond to Covid-19 would be channelled through its private sector financing arm, the International Finance Corporation, once again raising concerns about the Bank privileging private sector actors. A World Bank and IMF background note for a virtual meeting with African leaders on Friday called for, “deep and comprehensive structural reforms” directed at mobilising private investment in the region in the aftermath of the crisis, echoing Malpass’s earlier remarks for states to adopt deregulatory structural reforms. Even more striking was the absence of discussion around the BWIs’ climate action and ‘just transition’ to a zero-carbon economy within the Covid-19 recovery, as oil prices continue to plummet.
The pressure on the BWIs and other international finance institutions to swiftly mobilise significant emergency financing also raises critical questions about increasingly limited oversight and accountability of rapid financing, and who will end up paying for the economic fallout of this crisis in the end.
Rafts of commentators have stressed that Bank and Fund policies have exacerbated the economic impact of this crisis by leaving countries reliant on speculative foreign financing flows, volatile commodities and fossil fuels. Civil society has long pointed out that decades of IMF austerity policies has stripped health systems to the bone, while the World Bank’s private sector-first approach has constrained state capacity to respond to the pandemic. Despite this, early Fund and Bank responses signal hopes that the crisis will lead to systemic change could be premature (see Observer Spring 2020, Winter 2019; Background Minutes 2019).
Oxfam estimates half a billion people will be forced back into poverty in the aftermath of this crisis, with countries once again becoming trapped in cycles of debt and conditionality. Only a significant international response can avoid this catastrophic impact. Yet it looks likely that the BWIs as the supposed centre of the global financial safety net, may miss this critical moment to break with their flawed policy prescriptions in favour of a progressive economy that puts people and planet first.
Scale of the economic crisis deepens
Meanwhile, the global economy is rapidly deteriorating at unprecedented levels, with the World Economic Outlook released last week projecting a sharp contraction of 3 per cent through 2020. Economic shocks will be much greater in regions with a heavy reliance on commodity exports, trade and tourism (see Dispatch Springs 2020).
Aside from the immediate humanitarian impact of the virus, severe downturns in sub-Saharan Africa’s largest economies, Nigeria, Angola and South Africa, are expected to trigger the region’s first recession in 25 years according the World Bank’s Africa’s Pulse report. The Bank predicts a grave food security crisis in the region, which will lead to supply shortages and steep price increases for food at the household level (see Observer Spring 2020). Meanwhile, the international scramble for personal protective equipment (PPE) is creating shortages in low-income countries, and could potentially cause even higher mortality rates among health workers in already weak health systems with dire ramifications for decades to come.
The IMF has predicted the crisis will cause another “lost decade” of zero growth in Latin American and the Caribbean (LAC), the region with the highest inequality. Responding to debt suspension for low-income countries, former president of Colombia, Juan Manuel Santos, lamented that, “middle-income countries are sandwiched in the middle with nothing.” Financial shocks and recessions in developing economies in East Asia and the Pacific (EAP), including Pacific Island countries, are expected to push a further 11 million people into poverty.
It is perhaps not surprising to hear predictions of investors in rich countries swooping in to buy up soon-to-be stranded asset classes in developing countries, or that there may be grounds for claims under bilateral investment treaties against states for measures taken to protect public health during the crisis. The government of Peru has been warned that proposed emergency measures in response to Covid-19 to suspend the collection of toll fees on its road network could lead to claims from foreign investors in the International Centre for Settlement of Investment Disputes (ICSID), the World Bank arm for investor-state dispute arbitration. Concerns have been raised that contingent liabilities and other risks of public-private partnerships will begin to manifest during the crisis (see Observer Summer 2018). Instead of a fundamental re-balancing of the global economy, the aftermath of the crisis could see a solidification of dominant powers and commercial interests, aided by the IFIs.
Civil society calls for multilateral debt cancellation and conditionality-free grant-financing were met with silence at the Spring Meetings. While the IMF is providing some debt relief for a selected group of 25 countries under its Catastrophe Containment Relief Trust (CCRT), Mark Perera with Belgium-based CSO Eurodad warned that this “is still less than 1 per cent of total low-income countries external debt payments in 2020.” The World Bank failed to offer any debt relief on the loans it holds, citing concerns about maintaining its current credit rating. It did signal that development policy lending, a World Bank instrument that has been criticised for attaching policy conditions to loans and undermining development and climate outcomes, will be a substantial component of its financing response (see Briefing, The World Bank and Gender Equality: Development Policy Financing). Without debt cancellation, the flurry of IMF and World Bank loans now being taken out by countries to respond to the crisis will mean even greater debt burdens, BWI programmes, and damaging policy conditions further down the line.
Perhaps in anticipation of this bleak forecast, the IMF’s Fiscal Monitor dedicated a chapter to warning governments of a wave of protests triggered by needed economic policy reforms after the Covid-19 crisis peaks, fuelled by “long-standing grievances and perceptions of mistreatment.” Rather than considering whether its policy prescriptions are fundamentally flawed, IMF staff advised governments to develop far-reaching communications strategies publicly linking mitigation measures with policy reforms, and a “strategy for overcoming opposition from interest groups,” as “new rounds of protests could exhaust reform momentum.”
A different world is possible
Alternatively, calls for a solidarity-based multilateral system that addresses persistent power imbalances are growing. In its 2020 Spring Meetings communiqué, the Group of 24 developing countries highlighted “the need for an inclusive forum to examine the adequacy of the existing international financial and economic architecture and its ability to respond equitably and rapidly to global crises” (see Dispatch Springs 2020). The evident shortcomings of the 2020 Spring Meetings may have even pushed some of those closer to power toward re-examining the current system, with the World Bank executive director to Germany Jürgen Zattler coming to the conclusion on a CGD blog, “that we must check if our global political and economic architecture is suitable for dealing with [these] challenges.”
The CSO Financing for Development (FFD) Group has proposed that an International Economic Reconstruction and Systemic Reform Summit takes places under the auspices of the UN/FFD in 2021. If civil society wants such a Summit to be the start of a new international development finance architecture that places health, social protection, human life and the environment above profit and power, it must join forces and unite at all levels across the intersections of communities and social movements to demand change.