As the IMF and World Bank met for their second virtual Spring Meetings since the outbreak of the Covid-19 pandemic, a key theme under discussion was the uneven pace of recovery, as outlined in the IMF’s latest World Economic Outlook (WEO) report, titled Managing Divergent Recoveries, which projected stronger global growth than its October predecessor of 6 per cent in 2021 and 4.4 per cent in 2022 but noted, “daunting challenges related to divergences in the speed of recovery both across and within countries and the potential for persistent economic damage from the crisis.” The report added, “the divergent recovery paths are likely to create significantly wider gaps in living standards between developing countries and others, compared to pre-pandemic expectations. Cumulative per capita income losses over 2020–22, compared to pre-pandemic projections, are equivalent to 20 per cent of 2019 per capita GDP in emerging markets and developing economies (excluding China), while in advanced economies the losses are expected to be relatively smaller, at 11 percent.” In this context, the IMF and World Bank – and their wealthy shareholders – once again failed to take the decisive action required to ensure a just and inclusive recovery.
Promising statements, upbeat music, and familiar policies
Evidence discussed during the Spring Meetings once again showed that despite much rhetoric to the contrary, at the country level, the World Bank and IMF seem to continue to hope that previously failed policies, such as fiscal consolidation (in the medium term) and reliance on market-based solutions will finally work. The World Bank and IMF also seemed intent on exploring the power of positive thinking and hopeful presentation through sleekly produced pre-recorded ‘flagship events’ during the Spring Meetings. With upbeat music, inspirational statements from youth representatives and discussions devoid of any critical participants, those less familiar with the issues and challenges at hand could have been forgiven for thinking that all is well, bar some relatively minor adjustments to the Bank and Fund’s response. For those following events a bit more closely, the dissonance between the official events and the stark reality developing countries are facing was jarring.
Despite the focus on divergent economic paths generated by the global imbalances – exacerbated by the very policies proposed by the Bank and Fund for decades (see Observer Winter 2017-2018) – one of the central concerns of civil society at the Spring Meetings was the degree of divergence between progressive policy announcements by the IMF and the reality on the ground. Examples of statements that received substantial news coverage included the Fund’s support for a ‘solidarity tax’ on high earners and businesses that have prospered during the pandemic and a global minimum corporate tax rate. Indian economist Prabhat Patnaik using recent Oxfam research brought attention to the tension between pronouncements and reality in a 3 April article in Indian news outlet NewsClick, noting the contradiction between IMF statements in support of developed countries’ fiscal stimulus efforts and the need for action in the Global South. Oxfam’s latest research tracking IMF Covid-19 financing revealed that the IMF continues to promote austerity measures, despite the Fund claiming in October that its fiscal consolidation prescriptions focus primarily on boosting revenues through progressive tax measures. Oxfam found that in the loan programmes approved for 16 countries since September 2020, IMF staff explicitly recommended fiscal consolidation for all countries, reducing spending and wage bill reductions for seven countries and regressive tax reforms for four countries, implicating the IMF in promoting austerity in the Global South. Patnaik concluded, “This insistence on austerity on the part of IMF shows two things: first, that it clearly discriminates between countries…It may be willing to avoid austerity measures for the rich countries but never for the underdeveloped ones. Second…Its occasional “sensible” pronouncements…encourage progressive economists to entertain the belief that IMF may be changing, and becoming more humane. But these pronouncements, often in the form of research papers by its staff published in its journal, are just a facade behind which it keeps doing what it has always done.”
Money freed-up under the DSSI may effectively be used to repay private and multi-lateral debts and not to fund the response to the COVID-19 crisis.Tiri Mutazu, Afrodad
Two new working papers from Boston University’s Global Development Policy Center, based on an analysis of IMF loans from 2001-2018, support this claim. The first paper by Ray, Gallagher and Kring stresses that “IMF-required austerity is commonplace and did not diminish in intensity after the 2008/2009 financial crisis”, while the second by Stubbs, Kentikelenis, Ray, Gallagher notes that, “IMF-required austerity is significantly associated with rising inequality, by increasing the income share to the top ten percent at the expense of the bottom 80 percent. Unsurprisingly, the impact can also be seen in significantly rising poverty levels in countries facing tighter austerity requirements.”
Likewise, despite much focus by the World Bank on the scale and efficiency of its Covid-19 response, a new report by European network Eurodad cast additional doubts on the degree to which the support provided under its “green, resilient, and inclusive development (GRID)” approach is meeting the needs of the most vulnerable and fostering job creation in domestic small and medium enterprises. The report provides yet more evidence of the shortcomings of the World Bank’s Maximizing Finance for Development approach within the context of the pandemic recovery and response (see Observer Spring 2020). Concerns about the World Bank’s support for a financialised private sector-led approach to development go beyond the immediate Covid response however, with Professor Daniela Gabor stressing the model also deprives states of the policy space to undertake policies essential for a green recovery (see Observer Winter 2020).
SDRs allocation: A small step forward for the fiscally constrained
On a more positive note, progress was made during the Spring Meetings on one of the key issues of debate since the outbreak of the pandemic in March 2020, a new allocation of Special Drawing Rights, the international reserve currency maintained by the IMF (see Background, Special Drawing Rights). The change in US administration has opened the way for a new issuance of SDRs, which the UN Conference on Trade and Development (UNCTAD) and Eurodad, among others, have deemed essential to provide desperately needed finance and liquidity to debt-distressed and fiscally-constrained countries. The G20 communiqué issued on 7 April called on the IMF, “to make a comprehensive proposal for a new Special Drawing Rights (SDR) general allocation of USD 650 billion to meet the long-term global need to supplement reserve assets,” falling well short of the demands of civil society organisations for an allocation of $3 billion (see Dispatch, Spring 2021), as well as the financing needs of emerging economies. The positive development notwithstanding, the episode once again highlights the dysfunctional nature of the international financial architecture’s ‘non-system’ of international reserves (see At Issue, March 2021), with decisions about desperately needed financing dictated by the whims of the US and a few other developed states.
In another step intended to provide much-needed support to low-income countries, the World Bank and IMF Development Committee welcomed proposals to bringing forward the 20th round of the replenishment of the International Development Association’s (IDA, the World Bank’s low-income lending arm) resources (see Observer Spring 2021). While a substantial increase in IDA resources would be required to meet pressing international demands, as the Center for Global Development noted, the likelihood of the desired 30 per cent increase in resources from the Bank’s wealthy donor countries is extremely unlikely. In an apparent effort to resist calls for the World Bank to offer debt relief, the G20 communiqué noted that discussions about IDA20 should find ways to maximise donor contributions while “preserving [IDA’s] AAA rating”. While a focus on additional IDA resources is potentially positive, pending articulation of its policy framework and operational details, it does nothing to alleviate concerns about the plight of middle-income countries (MICs) ineligible for IDA grants and concessional lending. As the negotiations proceed, those concerned about the unsustainable debt levels of many MICs will hope that the World Bank heeds calls to develop ways to provide grant and concessional finance to countries that are currently not eligible for IDA finance.
Meanwhile, IMF Managing Director Kristalina Georgieva was forced by the Argentine government to address the issue of its surcharges. Professor Kevin Gallagher deemed surcharges “unfit for purpose” in a March Financial Times article, stressing that, “the countries that need the most from the IMF will have to pay over $4bn in extra surcharges on top of interest payments and fees from the beginning of the crisis through the end of 2022.” Georgieva noted that the Fund is undergoing a periodic review of the charges.
DSSI: Kicking the debt can further down the road
The G20 also announced the “final extension to December 2021” of its much criticised Debt Service Suspension Initiative (DSSI) (see Dispatch Spring 2021, Observer Winter 2020). While the debt suspension initiative does provide some potential breathing room for countries not fearful of the wrath of financial markets, it does nothing to deal with long-term debt sustainability issues. As an October Eurodad report stressed, “DSSI-eligible countries are already scheduled to repay USD 115 billion of debt in 2022-2024, just when their suspended 2020 payments are due, and middle income countries, many of whom are currently at the epicentre of the pandemic, are left out of this initiative and its extension.” UNCTAD noted in March that, “So far, the G20’s DSSI has negotiated a standstill worth an estimated $12 billion between May 2020 and June 2021. This compares to DSSI-eligible countries’ burden of serving external debt obligations to the tune of around $80 billion in 2019 alone.”
Additionally, as highlighted by Jubilee Debt Campaign’s (JDC) reaction to the extension’s announcement, the DSSI and related Common Framework continue to lack a robust mechanism to compel private creditor participation. JDC underscored that efforts of “asking nicely” have obviously failed and called on the G20 to “urgently introduce legislation in key jurisdictions, including the UK, to ensure private sector participation in the Common Framework.” As the African Forum and Network on Debt Development (AFRODAD) stressed in a 9 April interview, the African Development Bank calculates that “Africa’s top five creditors since 2015 are [private] bondholders (27 percent of external debt by the end of 2019), China (13 percent), the World Bank-International Development Association (12 percent), AfDB (seven percent) and other multilateral lenders (seven percent).” Afrodad noted that, particularly given the creditor composition above, the lack of participation of private and multilateral lenders implies that “money freed-up under the DSSI may effectively be used to repay private and multi-lateral debts and not to fund the response to the COVID-19 crisis.”
Despite such concerns, progress seems unlikely. In a 9 April letter to the G20, the Institute of International Finance, a trade body representing some of the world’s most powerful private financial institutions, noted that private creditors will remain largely unaffected given the lack of “an appropriate forum for creditor coordination.” Worryingly, and reaffirming the strength of the evolving Wall Street Consensus, the letter notes, “Current conditions have created tremendous opportunity to develop new sources of capital for emerging and developing economies, supported by innovative public-private sector partnerships including blended and credit-enhanced financing for sustainable infrastructure and other ESG-linked use of proceeds or sustainability-linked debt raising transactions.”
Unfortunately, if the IMF’s Managing Director’s muddled response during an IMF Spring Meeting seminar to a proposal for a debt resolution mechanism along the lines of the long-standing G24 call (see Dispatch Spring 2021) is anything to go by, one should hardly hold one’s breath for an equitable, coordinated and well-designed solution. Private creditors look set to continue to profit handsomely from the lack of a coordinated and compulsory approach for some time to come.
Covid-19 vaccines: The search for an antidote to intellectual property rights protection continues
While the World Bank and the IMF noted throughout the Spring Meetings that the pace and nature of recovery from the pandemic depends substantially on vaccination efforts, with the IMF projecting that, “faster progress on ending the health crisis will raise global income cumulatively by $9 trillion over 2020–25, with benefits for all countries, including around $4 trillion for advanced economies,” neither institution took the opportunity of the meetings to join developing states, the World Health Organization and UNAIDS in calling on their shareholders from the Global North to rethink their blockage of the intellectual property waiver at the World Trade Organization in order to address one of the key obstacles to the urgently-required expansion of Covid-19 vaccines in the Global South (see Dispatch Spring 2021; Observer Spring 2021). It appears that, despite the evidence, including opaque and biased pricing arrangements, gigantic profit margins and refusal of the private sector to participate in the DSSI, and the very limited numbers of voluntary vaccine licensing agreements, the Bank and the Fund continue to believe in the private sector’s willingness to voluntarily ‘do the right thing’. They apparently disagree with the G77’s November 2020 statement that “generic drugs have played a key role in ensuring access to medicines in the developing world” and “all parties [should] urgently remove all obstacles that limit the capacity of countries to use, to the full extent, the TRIPS flexibilities.”
The Bank and Fund’s response to climate crisis remains limp
Despite tackling climate change being one of the key themes of the Spring Meetings’ official events, the Bretton Woods Institutions are yet to transform their operations to match the scale of the crisis. World Bank President David Malpass spent much of the Spring Meetings promoting the World Bank’s new Climate Change Action Plan for 2021-2025 (CCAP), although it will not be finalised until May. The CCAP’s most concrete details feature reheated announcements: the Bank committed to align its finance with the Paris Agreement by 1 July 2023, putting a timeline on implementing a process it first began at COP24 in Katowice, Poland, in 2018 (see Observer Spring 2019). The Bank also reiterated a commitment that an average of 35 per cent of its investments would be ‘climate-related’ over the period of the CCAP – which was first announced in December 2020 – and indicated it would seek to help countries transition out of coal, as well as developing new diagnostics to guide countries’ climate action efforts.
Civil society felt this initial offering was left wanting, a sentiment evidently shared by some of the Bank’s shareholders. Indeed, COP26 President Alok Sharma of the UK punctured the otherwise criticism-free atmosphere during an official event on ‘Key Green Transitions: How Systems Are Changing for People and Planet’ on 8 April, stating, “I urge the World Bank to go further, and step up support for countries to transition away from fossil fuels, and create a clear plan to phase out the Bank’s support to them.” Sharma’s plea echoed an open letter from over 150 civil society organisations and individuals on the eve of the Spring Meetings, which called for the World Bank to adopt a ‘whole of institution’ commitment to end its support for fossil fuels, and increase support for a just energy transition in borrower countries.
The quality and nature of the Bank’s climate finance has also been called into question. There are lingering concerns about the transparency of how the Bank accounts for this finance at the project level (see Observer Spring 2021), the fact that the majority of its climate finance is provided as loans (a concern in the context of the ongoing debt crisis), and indeed that the Bank’s approach to climate action is firmly embedded in the wider project of Maximizing Finance for Development. As noted by Professor Daniela Gabor and colleagues in an April blog post in Developing Economics, “The World Bank’s new Climate Action Plan…suggests that global finance can deliver where the fiscally-constrained state cannot, as long as concessional lending and scarce fiscal resources are directed to mobilise private finance for development by de-risking development assets. Such plans retain Washington Consensus logic at its core, but go further in terms of actively promoting global private finance as the solution to financing gaps and development risks – the so-called Wall Street Consensus.”
Meanwhile, the IMF’s efforts to operationalise its approach to climate change continue to be a work in progress, as the Fund grapples with how to gauge the impact of climate change on macro-stability. At a Civil Society Policy Forum event on 30 March, Johannes Wiegand from the Fund admitted that, despite emerging areas of work on the adaptation of climate vulnerable countries and mitigation needs of big emitters, the Fund’s efforts to assess the macro-relevance of the low-carbon transition to the Fund’s member countries remains “an area where we have a lot of work to do” (see Dispatch Springs 2021). This was reiterated by a briefing published by Boston University’s GDP Center in March, which showed transition risks had only been mentioned in three IMF Article IV reports to date. Civil society will be watching closely to see whether the IMF includes addressing climate risk as a point of emphasis in its Comprehensive Surveillance Review, which is due to be approved by the Fund’s executive board later this Spring, and will provide the framework under which staff guidance for 2021-2030 is developed.