1. Introduction
1. Governments in Europe and around the world are struggling
to alleviate the effects of one of the worst financial and economic
crises for decades, with its severe negative impact on growth, trade,
investment and employment across the globe and untold social and
human consequences. Among other things, the crisis has focused renewed
and more urgent attention on the role and relevance of the world’s
economic and financial institutions and their governance, which
were already under close scrutiny, not least in order to assess
how far their mandates allow them effectively to help overcome the
crisis and the role they should play in avoiding such turmoil in
the future. The crisis has thus intensified efforts to re-design
the international financial architecture, currently under the leadership
of the Group of 20 major industrial and emerging countries that
met in Washington D.C. on 15 November 2008 and in London on 2 April
2009 and will meet again before the end of 2009 to review progress.
The fact that the G-20, a body more representative of the global
economy than the G-7 or G-8, is spearheading these efforts marks
in itself a major change in the international financial architecture
and ensures that its deliberations will carry weight. Its membership
includes the key emerging economies and represents some 90% of world
GNP, 80% of world trade and two-thirds of the world’s population.
2. These international efforts have been likened to a “Bretton
Woods II” exercise, in reference to the seminal United Nations Monetary
and Financial Conference that brought together 44 governments in
Bretton Woods, New Hampshire, U.S.A., in June 1944 in order to agree
a strategy and institutions to promote post-war economic growth
and reconstruction and international monetary stability on the basis
of a fixed exchange-rate system. Today, more than sixty years after
their inception at that conference, the International Bank for Reconstruction
and Development (IBRD), now part of the World Bank Group, and the
International Monetary Fund (IMF) retain their mandate of promoting
international development and safeguarding financial stability. Although
these objectives have found renewed relevance, and indeed urgency,
in the present crisis, the world in which these institutions operate
has radically changed, It is not surprising that their roles, which
have stirred some controversy in the past, are as much debated today.
Their goals, governance and operating principles have come under
intense scrutiny.
3. How are these and other global economic institutions such
as the World Trade Organization (WTO), the International Labour
Organization (ILO), the Organisation for Economic Co-operation and
Development (OECD), and the Bank for International Settlements (BIS)
trying to evolve in order to meet the challenges of the financial
and economic crisis and a rapidly changing world economy? What should
be the role of human rights and conditionality in their policies?
The Bretton Woods institutions have featured heavily in the media during
the last few years; they have appointed new leaders and are in the
midst of far-reaching structural reforms. This would seem an appropriate
moment to offer a parliamentary assessment of the evolving framework
of global financial and economic governance and its prospects for
the future.
4. This report will attempt to do so, beginning with a brief
survey of the factors that led to the original design and objectives
of these institutions (especially the IMF and the World Bank), and
to their development thereafter. It will examine the chief dilemmas
and criticisms that they have faced, and the nature of their response.
The report will pay some attention to the work of the World Trade
Organization – a body which, although envisaged at the time of Bretton
Woods and partially realised as the General Agreement on Tariffs and
Trade (GATT), was not formally established until 1995, but whose
credibility and purpose as regulator of the multilateral trading
system is today perceived to have reached a decisive crossroads.
5. The report draws in part on the Rapporteur’s fact-finding
visit to Washington (1-3 July 2008) where he met, together with
the Sub-Committee on International Economic Relations, representatives
of the Bretton Woods institutions, the Brookings Institution, the
Cato Institute and the US State Department. The Rapporteur has also
benefited from debates held during his participation in the Parliamentary
Conference on the WTO (11-12 September 2008)
,
the WTO Public Forum “Trading into
the Future” (24-25 September 2008), and hearings organised by the
Parliamentary Assembly Committee on Economic Affairs and Development.
2. The spirit
of Bretton Woods
6. Though it is one of the most famous places in economic
history, the village of Bretton Woods in New Hampshire (USA) consists
only of a railway stop and a hotel – which, by July 1944, had been
disused for two years. But the delegates representing 44 countries,
who arrived in special trains dubbed ‘Towers of Babel on wheels’,
were delighted by the solitude and clearly found it inspirational.
For in three weeks of the UN Monetary and Financial Conference,
the architecture of a new global financial order had been built.
Many of the same disputes over representation and national self-interest
that apply today were raging also then. However, there were common,
overriding goals; to achieve them, the institutions that emerged
from Bretton Woods were, quite deliberately, unprecedented in both
scope and scale.
Reconstruction and Development
7. The International Bank for Reconstruction and Development
(IBRD) – now part of the World Bank Group
- was intended
to stimulate recovery and sustain growth, as Article 1 of its Agreement
states, in the ‘territories of members by facilitating the investment
of capital for productive purposes’.
The Bank was ‘to promote the long-range
balanced growth of international trade and…international investment…thereby assisting
in raising the productivity, the standard of living and condition
of labour in their territories’. In practice, this was expected
to involve lending primarily to governments for substantial projects
with long-term effects. The priorities were infrastructure schemes
in sectors such as transport, sanitation and electricity, and social programmes,
particularly in health and education. With the Bank acting as a
resource for contributing members, its management structure would
resemble that of a club, governed by a representative board, where voting
power was allocated to each country according to the level of its
subscriptions.
Financial Stability
8. During the 1930s, the world’s economies had endured
a series of interconnected problems: in particular, a shortage of
gold, exchange rate instabilities, the rapid flow of ‘hot money’
capital, and an inability to address balance of payments problems.
This contributed to a spiral of currency battles and ‘beggar my
neighbour’ policies, underpinning the Great Depression and the rise
of fascism. So at Bretton Woods the International Monetary Fund
(IMF) was established as a supervisory institution, charged with
promoting financial co-operation and encouraging trade, by aligning
monetary policy and maintaining currency stability.
9. IMF members would join an exchange-rate regime, with their
currencies pegged against the US dollar and therefore, at the time,
against the price of gold. While some scope for currency adjustment
was envisaged, it would only be possible with IMF permission. The
IMF would have the power to provide short-term loans to member governments
with balance of payments problems, so offering, as its Articles
of Agreement state, ‘the opportunity to correct maladjustments…
without resorting to measures destructive of international or national prosperity’.
In return, members would agree to implement reforms so as to prevent
a recurrence of their difficulties, and the completion of loan payments
would be tied to compliance.
10. As with the World Bank, the IMF was to be structured like
a club. Each member would deposit a ‘quota subscription’, and this
would determine how much that member could, if necessary, borrow.
In addition, the level of quota would determine a member’s voting
rights, so that control lay with the greatest contributors. Although
the Bank and IMF were to be separate institutions, they were linked
by the requirement that any member of the Bank should also be a
member of the IMF.
Ambitions, tensions and limitations
11. On the one hand, the objective of Bretton Woods was
to build a rules-based system to guarantee a functioning framework
for international co-operation. A real effort was made to establish
what Lord Keynes described in his farewell speech to delegates as
‘a common measure, a common standard, a common rule applicable to
each and not irksome to any’. But, given the far-reaching and unprecedented
powers proposed, the effect of Bretton Woods upon national sovereignty
was controversial from the start.
12. For one thing, the system was dominated by the great powers
of the day, in particular the United States, then emerging as the
leading economic force. Indeed, some have always seen Bretton Woods
as a formula for US dominance, pushed through in a time of war.
But it should be noted that, while the US delegation was naturally
in a strong position, they were also constrained by the fear of
rejection by their own Congress. Some in the US feared that the
IMF would go bankrupt, with the country losing its investment. This
reinforced the delegation’s insistence on the supremacy of the IMF
Board and on the link between voting power and quota size, despite
a demand by smaller countries that each member should start off
with 100 votes.
13. In fact, every delegation jockeyed for advantage. The British,
for instance, lobbied hard to have the institutions based in London
and were among those claiming access to IMF funds as a matter of
right, while the French threatened to withdraw from the IMF agreement
if their quota were not increased, worried that the newly-formed
Benelux agreement might deprive them of the fifth-largest share
and a seat on the Executive Board. Amazingly, each issue was resolved
and perhaps only in a time of international emergency could this have
been achieved so quickly. But the problems encountered vividly show
why it has since been so difficult for the Bank and the IMF to reform
their own structures.
14. Despite all that was agreed, one piece of the Bretton Woods
vision was left aside. The International Trade Organisation was
intended to champion free trade, to monitor a rules-based system
and resolve disputes, so as to prevent states from resorting to
protectionism. But given its sensitivity, and with no trade delegates
present at Bretton Woods, this idea was deferred. Later on, negotiations
took place in Geneva, with 23 countries represented, forming the
basis of the General Agreement on Tariffs and Trade (GATT), and leading
to a ‘Protocol of Provisional Application’, signed in October 1947.
15. Meanwhile, plans for an ITO were seemingly far advanced, with
its draft terms agreed in March 1948. The draft ITO Charter was
ambitious. It extended beyond world trade disciplines, to include
rules on employment, commodity agreements, restrictive business
practices, international investment, and services. But it was repeatedly
rejected by the US Congress and, at the end of 1948, discarded.
Even so, in the trading climate established by Bretton Woods, there
was obviously a need for an ‘umpire’ in trade disputes, and an advocate
for deregulation. So, increasingly, countries turned to the only
international trade forum, the GATT, to handle such issues.
2.1. Bretton Woods in
practice
16. In the immediate post-war years, there were striking
changes. The winding-up of the colonial empires and the onset of
the cold war brought the US to an undeniable position of leadership,
while the western economies most ravaged by the war recovered faster
than expected, particularly with the launch of the Marshall Plan,
initially administered through the Organisation of European Economic
Co-operation (reformed, in 1961, into the Organisation for Economic
Co-operation and Development or OECD, a body of global scope, with
its current membership centred on the advanced industrial economies).
So the Bretton Woods institutions shifted focus.
17. As had been envisaged, the World Bank’s first customers were
in Europe but by 1948 there were plans to finance a hydropower scheme
in Chile. In 1950, funding was offered to Ethiopia and Uruguay,
and the year after to Nicaragua and the Democratic Republic of Congo.
While reconstruction remained a part of the Bank’s work in response
to wars and natural disasters, its remit widened to include more
social sector lending, development, debt relief and governance.
In time, poverty reduction was explicitly seen as the Bank’s ‘overarching
goal’. Its motto is “working for a world free of poverty”.
18. To support this, the Bank created or helped set up a number
of specialized internal or affiliated agencies: the International
Finance Corporation (IFC) was set up in 1956 to promote sustainable
private-sector investment, and in 1960 the International Development
Association (IDA) began to offer preferential loans and grants to
the poorest countries. At the time, developing countries tended
to have difficulty raising money and therefore carried low debt
levels while the Western world had plenty of spare capital. Bank
membership therefore grew rapidly: in 1954, Burma was its 57th member,
while in 1964, Kenya was its 102nd, and in 1974 Western Samoa became
the 124th; IFC and IDA membership also grew rapidly
.
19. Meanwhile, the Bretton Woods exchange-rate system steadily
unravelled. After the war, the dollar became the international reserve
currency. However, the US went from being in surplus to running
trade deficits, and while at first other countries wanted dollars
to meet their trade obligations, it became clear that if the US
attempted to correct its deficit, it would cause a liquidity crisis.
If, however, it allowed deficits to continue, others would lose
confidence in dollars and convert them into gold (as the gold standard
allowed). US deficits did continue, partly because of the Vietnam
war, and dollar confidence eroded. In 1971, with the dollar increasingly
being transferred into gold, the US abandoned the gold standard.
20. This diminished the clarity of the IMF’s purpose, with other
states being more or less forced to float their currencies. Moreover,
the growth of trade was reducing its role as a source of short-term
credit, and in the mid-1970s Britain was the last developed country
to draw on it. So its focus turned to the developing world’s debt problems,
though its requirements for country reform remained as rigorous
as before.
21. By the late 1970s, borrowing had grown so rapidly all over
the world that economic turmoil triggered a series of debt crises.
Although much of this debt was with the private sector, the World
Bank was blamed by many for encouraging this. Not only had too much
credit been offered, said critics, but much of the Bank’s assistance
had been ‘tied’ to services from the West, which might not be appropriate
and were often perceived as detrimental to local economies. With
social and environmental issues coming to the fore, an increasingly vocal
civil society claimed that the Bank had failed to observe its own
policy rules in several important projects.
22. In country after country, the IMF engaged in debt-crisis management.
Like the Bank, the IMF became known as apostles of the free market
– bearing down on inflation, insisting on rapid liberalisation,
agricultural and labour market reform, while demanding lower public
spending. This approach, known as the ‘Washington Consensus’, culminated
in the notorious phrase, ‘structural adjustment’, seen by many as
a euphemism for external control. The developed world stood accused
of insisting on policies abroad that it would not implement at home.
23. Developing countries, especially in Africa, could not always
achieve such targets, nor afford to repay the short-term credits
they were offered; easier terms had to be negotiated. All in all,
there was a perception that the Bretton Woods prescription had lost
its relevance, that the roles of both institutions were confused
and that their credibility was compromised.
24. In the 1990s, the Bank released the Wapenhans Report and began
a series of reforms, including the creation of a panel to investigate
claims against it. Though criticism continued, there was a marked
shift of policy toward the real needs of recipients. The ‘Heavily
Indebted Poor Countries Strategy’, launched by the Bank and IMF,
began a process of managed debt relief, while ‘Poverty Reduction
Strategy Papers’ were designed to help countries build their own
solutions. In 1999, both bodies made country-generated strategies the
basis of all concessional lending and debt relief. Increasingly,
the Bank championed social programmes, such as literacy and vaccination
campaigns, and launched ‘Education For All’.
25. This approach culminated in the launch of the Millennium Project,
where the Bank and IMF joined forces with the UN to lead the most
ambitious anti-poverty agenda ever attempted, with 15 specific goals,
the Millennium Development Goals (MDG), to be reached by 2015. To
meet the targets, both institutions have offered their resources,
skills and expertise in tracking and reporting. At the time, the
Bank’s President summed up what seemed a highly successful transformation:
“Since the realignment of the focus of the
Bank after the initial objectives of Bretton Woods… were met, the
more recent and continuing focus has been on development and the
issues of poverty and the issues of sustainable development.’
2.2. Legitimate and
relevant? The Bretton Woods institutions today
26. More than halfway through its implementation period,
the progress of the Millennium Project is patchy. While most of
the targets set are unlikely to be attained, and not all countries
have reached the aid commitments made at Monterrey
,
it is fair to say that progress has been made, and the Project itself
has helped to focus activity and resources. Moreover, the boom in
world trade and a concerted programme of debt relief that preceded
the present crisis helped to cut structural poverty in many areas
even if the 2008 hike in energy and food prices had the opposite
effect on some countries and the present recession will hit the developing
world very hard. Indeed, its probable impact on growth, trade and
aid make it likely that the MDG timetable will suffer a serious
set-back. This puts the Bretton Woods institutions under further
pressure to step up their support for the Millennium Project or
face further criticism.
An austerity package for the
IMF
27. With the present crisis the IMF has rediscovered
its role as a financial fireman. But previously, many emerging economies
had benefited from strong growth in trade and high commodity prices
and had large foreign currency reserves to rely on. The IMF’s major
clients (such as Brazil and Argentina) had been paying off their
debts to the Organisation early. In a world of globalised capital
markets to cover the financing needs of more and more countries,
there were fewer demands on the loan capacity of the IMF. Since
its operating budget is traditionally financed from profits on its
loans, the Fund had a budget crisis of its own. At the end of August
2008, the IMF had a lending capacity of $250 billion, not all of
it rapidly usable. Its resources were being stretched because of
the current and foreseeable demands on them arising from the financial
and economic crisis. One of the main issues facing the IMF was how
to strengthen its financial capacity and provide funds quickly for
crisis management and prevention. To this end, a new Short-Term
Liquidity Facility (SLF) was set up in October 2008 to help countries
with strong economic fundamentals and domestic policies to face
short-term liquidity shortages. The SLF was superseded in March
2009 by the Flexible Credit Line (FCL) with the same objective.
Mexico and Poland are the first countries to benefit from such precautionary
lending. Indeed the whole IMF lending framework has been revamped.
In addition, at their meeting in London on 2 April, the G20 leaders
agreed that the IMF’s resources should be increased by $500 billion
to $750 billion, and that it would be allowed to issue $250 in new
Special Drawing Rights (SDRs)
to
increase global liquidity. Pledges so far (at 7 May 2009) have been
made by Japan, the European Union and the United States each for
$100 billion, Canada and Switzerland for $10 billion each, and by
Norway for $4.5 billion, amounting to a total of $324.5 billion,
leaving $175.5 billion still to be raised to reach the additional
$500 billion required. The G20 countries that have not yet pledged
should be encouraged to do so.
28. In the past, the Fund’s leadership had appeared reticent to
push changes through. Regarding the selection process for choosing
the managing director, some questioned whether Europe should retain
its informal right to the post. The 2007 leadership race showed
an array of first-rate candidates from all over the world and the
gap between the diversity of talent potentially available and the
limited choice that was actually on offer, thus emphasising the
anachronistic approach to the Fund’s governance. Yet an excellent
European candidate was finally selected. It is now time for European
countries to open up the selection process to a wider range of deserving
candidates.
29. The present Managing Director, Dominique Strauss-Kahn, (who
took office on 1 November 2007) seems to understand all this and
to have been aware, right from the start, that the nature of the
race could unfairly tarnish perceptions of him. Accordingly, he
displayed a degree of enthusiasm not seen at the IMF for some time,
travelling to meet shareholder governments, pledging to serve a
full term and campaigning as if he were in genuine contest for the
job. Since taking office, he has been equally vigorous and maintained
a high media profile. Meanwhile, having told the IMF board that
the Fund’s ‘very existence’ is at stake, he has moved to reform
its management structures and redefine its role in the world, stressing
the need for both legitimacy and relevance.
Relevance
30. The IMF reform process could consolidate its comparative
advantage in strengthening the links between real and financial
sector developments, and between national economies and the global
economy. The Fund’s continued top priority is to help members address
their economic and financial vulnerabilities. Responding to liquidity
shortages in several countries affected by the financial crisis,
the IMF has arranged loans for Armenia, Belarus, Georgia, Iceland,
Hungary, Latvia, Mexico, Pakistan, Poland, Romania, Serbia and Ukraine,
thus complementing emergency interventions by central banks (coordinated
by the Bank for International Settlements). Moreover, IMF policy
advice remains essential in helping countries to improve regulatory
and supervisory systems that failed to prevent the escalation of
financial risk. Developing countries can learn from the risk management
and regulatory failures of major economies, by building systems
that shield them from the risks of non-transparent instruments and
excesses in lending.
31. The IMF provides an in-depth fresh look into the state of
financial markets and its work to stabilise financial systems in
its Global Financial Stability Report published
twice annually, in spring and autumn. To provide practical assistance
and identify vulnerabilities in individual countries and internationally,
the IMF has stepped up its development of new analytical tools,
such as the Risk Measures Project, Financial Stability Models, and
a series of ‘stress tests’, while the preparation and delivery of
country assessments and updates under the joint IMF/World Bank Financial
Sector Assessment Program has been accelerated. Whilst calls had been
heard for the IMF to assume a major role in a global early-warning
mechanism, the IMF regretted that its members paid little attention
to its warnings before the sub-prime crisis exploded. We also know
that a similar early caution by the OECD was largely ignored. So
the decision of the G20 leaders at their London Summit on 2 April
2009 that the IMF, in collaboration with the Financial Stability
Board (successor to the Financial Stability Forum – see section
VII below), should “provide early warning of macroeconomic and financial
risks and the actions needed to redress them”, is to be welcomed.
32. Anxious to remain active in the poorest countries, the Fund
is developing its role in ‘multilateral surveillance’, examining
how financial turmoil can leak from one country to another, and
acting as an economic umpire. This also means getting involved in
currency disputes amongst its largest members. With the enthusiastic
backing of the US, the Fund has been given more scope to scrutinize
and to report on exchange-rate policies that it feels are harmful
to others. A country such as China, in the Fund’s view, now has
sufficient economic muscle and should not simply set an exchange
rate to suit its own political purposes. This discussion is welcome
and timely. It is noteworthy that the G20 leaders, at their London
Summit on 2 April 2009, agreed that “We will conduct all our economic
policies co-operatively and responsibly with regard to the impact
on other countries and will refrain from competitive devaluation
of our currencies and promote a stable and well-functioning international
monetary system. We will support, now and in the future, to candid,
even-handed, and independent IMF surveillance of our economies and
financial sectors, of the impact of our policies on others, and
of risks facing the global economy.”
Legitimacy
33. The role of umpire is hard to play. Developed countries
have a long history of ignoring unwelcome advice from the Fund,
and there is little reason to think that booming developing countries
will behave differently. China has been infuriated by the new emphasis
on objective currency analysis, seeing it as a US-inspired action
against it. Pleasing both sides in such a dispute has proved difficult.
The IMF would need a stronger advisory role, or even some form of
quasi-judicial powers, perhaps along the lines of the WTO, to play
a determining role in the area of currency disputes.
34. Further to an earlier interim grant of extra votes to China,
Mexico, Turkey and South Korea in the IMF (made in 2006), a broader
redistribution of power was agreed in April 2008 as part of quota
and voting structure reform. The reform aimed to make quotas more
responsive to members’ evolving weight in the world economy and
increase the voice of low-income countries in the IMF’s decision-making.
Alongside a single more transparent formula
for allocating quotas, the reform
increases nominal quotas for 54 countries (by 12 to 106%) and the
voting power of 135 countries, as well as trebling votes of the
smallest members of the IMF (many of which are low-income countries).
The largest emerging countries – China
, South
Korea, India, Brazil and Mexico – will benefit most from this reform
in terms of voting share. An Alternate Executive Director was added
for the two Executive Directors representing Africa at the Executive
Board. Further rebalancing of quotas and votes should henceforth
take place every five years. The G20 leaders endorsed these reforms
at their London Summit on 2 April 2009. Given the discontent amongst
the fastest-growing members, change is urgently needed. In September
2008 IMF Managing Director Mr Dominique Strauss-Kahn announced the appointment
of a committee of eminent persons chaired by Mr Trevor Manuel, South
African Minister of Finance, to assess the adequacy of the Fund’s
management and decision-making framework. This committee’s assessment
was made available on 24 March 2009. According to Mr Strauss-Kahn,
“The committee proposes a package of measures to enhance the Fund's
legitimacy and effectiveness, including the formation of a high-level
ministerial council to foster political engagement in strategic
and critical decisions, acceleration of the quota and voice reform
begun last year, a broader mandate for surveillance, clearer lines of
responsibility and accountability between various decision-making
entities in the Fund, and the introduction of an open, transparent
and independent of nationality selection process for the Managing
Director.”
35. Parliamentary oversight also contributes to institutional
legitimacy. The Parliamentary Network on the World Bank (PNoWB)
allows parliamentarians to better understand how this institution
functions and to make proposals for its work. As the IMF has no
such equivalent for dialogue with parliamentarians, it should be encouraged
to seek more interaction with national parliaments in a manner that
it deems compatible with its mandate. This should include regular
scrutiny of the activities of the Bretton Woods institutions by
the Assembly in accordance with the terms of reference of the Parliamentary
Assembly Committee on Economic Affairs and Development.
36. At an IMF annual meeting in 2007, the Group of 24 developing
countries argued that the regulatory focus should be turned back
upon wealthy members, declaring that it was failings here that lay
behind current global instability. This call was taken up by the
Deputy Governor of the Bank of China in October 2008.
There
has also been a hostile reaction from many to a call by the US for
the Fund to address the growth of sovereign wealth funds. Together
with the OECD, the IMF has nevertheless developed a voluntary code
of conduct to encourage good practice and transparency.
37. Winning approval for reform requires the Fund to put its own
operations in order. It has therefore undertaken an austerity package
worthy of one of its own prescriptions, suspending refurbishment
work at its headquarters, decreasing expenses and reducing staff
by around 15%, or some 400 members. It has also considered suggestions
that it might charge for its technical assistance, particularly
in the case of rich countries, and could sell some of its substantial
gold reserves, as suggested by a panel of experts in 2007, to create
an endowment designed to ensure the long-term funding of expenses.
38. The overhaul of the management and decision-making structure,
lending capacity and framework, surveillance policy and other ongoing
reforms will transform the IMF, but also require support of members, particularly
those whose relative influence is declining. While retaining their
support, the Managing Director must do enough to give the Fund authority
and legitimacy amongst developing countries, and to give fair weight to
the fastest-growing economies. It is a difficult balancing act,
but there is widespread agreement that a good start has been made.
The decisions made by the G20 leaders at the London Summit of 2
April 2009 have certainly resulted in a strengthened global role
for the IMF. The Council of Europe member states should endorse
the Fund’s efforts to achieve such meaningful reforms and pledge
their support for this process of radical and unprecedented change.
The World Bank’s challenges:
more than trouble at the top?
39. The appointment of Paul Wolfowitz as President of
the World Bank in 2005, after serving as Under Secretary of Defense
in the US Government, highlighted the dominant role played by the
United States in the Bank. The lack of internal accountability and
transparency under his Presidency is often invoked by the Bank’s critics.
Following a sustained revolt by staff and shareholders, Mr Wolfowitz
resigned in May 2007, and although hopes for a speedy reform of
the selection process were dashed, with the US nominating his successor
Robert Zoellick, it seems that substantive management change is
now possible. In a statement for the consideration of the Board,
the Bank’s Independent Evaluation Group has set out what it considers
the key areas of institutional reform needed, with a focus on better
management controls, more transparent governance, and the improvement
of internal checks and balances. A crucial element of this is the
selection of the Bank’s President using open and objective criteria.
The Rapporteur supports the principles
outlined in the statement, and welcomes the agreement to the principle
of a merit-based selection process for the Presidency reached at
the Bank’s October 2008 annual meetings, with nomination open to
all 185 member states.
40. Such reform had already resulted in the appointment in June
2008 of a Chinese scholar, Justin Yifu Lin, as Senior Vice President
and chief economist, a top job in the institution. In February 2009,
following the Bank’s October 2008 Annual Meeting, the World Bank’s
Board of Governors also approved a first phase of reforms to increase
the influence of developing countries within the World Bank Group,
including adding a third seat for Sub-Saharan Africa to allow developing
countries a majority of seats on the Executive Board, and expanding the
voting and capital shares of developing countries to 44% of total.
These reforms are now subject to a vote by the 185 member states.
It should be noted that nearly two thirds of Bank staff and 42 %
of all Bank managers are from developing countries, and that 7 of
President Zoellick’s 9 senior appointments have been from developing
countries.
41. Several groups are working on proposals for World Bank reform.
One of these groups is the commission headed by former Mexican President
Ernesto Zedillo. The ‘Zedillo Commission’ is an independent, high-level commission
of 12 members from current or recent senior international positions,
from both developed and developing countries. The commission was
created by World Bank President Zoellick; and is tasked with making
recommendations on how the institution is governed so that it can
better fulfill its mission of overcoming global poverty. Former
World Bank Chief Economist Joseph Stiglitz chairs a ‘Commission
of Experts on Reforms of the International Monetary and Financial
System’ appointed by the UN General Assembly President, Miguel D’Escoto’.
42. Although press reporting was dominated by the drama of Mr
Wolfowitz’s departure, it is worth remembering that his appointment
had been partly due to concerns by the US – then the Bank’s largest
donor, but owing around $300 million in outstanding pledges – about
its direction. Before the financial and economic crisis, and like
the IMF, the Bank was faced with fundamental questions in an increasingly
prosperous and interconnected world:
- What was the purpose of its institutional lending? Poverty
levels had fallen, particularly in Asia, and many governments had
been able to borrow on capital markets; yet they were the Bank’s
most lucrative customers and tended to achieve the best results:
could the Bank cope without them?
- With an ever-increasing multitude of other donors, what
was the Bank’s role in international aid? Should it complement better
various forms of donation, such as presidential plans, millennium
accounts and philanthropic global funds? Increasingly, some emerging
economies, hungry for influence and resources, were offering aid
even as they also borrowed money from the Bank.
- When the Bank faces competitors in every sphere, what
sort of policy balance should it strike? For some, it was still
too tough, too insensitive to local and environmental needs. For
others, its desire to avoid confrontation reduced its effectiveness:
for instance, was consensus the right way to tackle corruption? Both
viewpoints questioned whether the Bank was the best means for donors
to get results.
The Bank’s best customers
43. Historically, the Bank has done its most productive
business with the group of some 86 middle-income countries (MICs),
such as Brazil and the Philippines. These countries, accounting
for just under half of the world’s population and home to one-third
of people across the globe living on less than $2 per day, with
GDP per head from $1,000 to $6,000 per year, have tended to perform
more strongly in poverty reduction and have been better at keeping
up repayments. It is not surprising that this group has tended to
account for almost two-thirds of the Bank’s lending, and half of
its administrative budget.
44. Before the present crisis, such countries had used their growing
wealth to pay off old loans. In fact, over the period 1995-2006,
they repaid an annual average of $3.8 billion more than they had
borrowed and by 2005 the contribution of World Bank finance to the
national investment of MICs had more than halved from the level a
decade earlier, to just 0.6%.
45. The Bank’s Independent Evaluation Group (IEG)
reported
in 2007 that the trend to lower business was, in many ways, a sign
of success. In general, middle-income countries were growing faster
than any others in the world: indeed, five countries had moved out
of this group since the mid-1990s, while several – most notably
China – had joined it. Crucially for the Bank, many of them had
improved their national balance-sheets to the point where they could
easily raise money in the financial markets. The result was that,
in the period 2001-2006, 31% of Bank lending to MICs went to countries
that had investment-grade credit ratings, while 62% went to countries
with a rating below investment grade, and only 7% to countries which
had no credit rating and therefore little access to private capital.
46. The fundamental question as to whether, with less and less
need in MICs, the Bank could still be useful in these countries,
has of course been answered by the financial and economic crisis.
In reply, the IBRD is set to almost triple its lending from about
$13.5 billion in 2008 to an estimated $33-35 billion per year for
the period 2009-2011.
47. Over the years, the Bank has claimed that the best thing it
lends is its expertise. Recently, it has found that many countries
would rather do without such advice, unless the other terms are
extremely attractive. So how can its skills be made more attractive?
Some commentators have suggested separating World Bank loans from
the advice of its staff and allowing countries to choose either
or both. As Nancy Birdsall, who leads the Center for Global Development,
puts it
“lending and grant-making at
the country level should not be the end-all and be-all. It should
be the vehicle for advice and constant rebuilding of the bank's
knowledge”. Nurturing its own skills base might
allow the Bank to establish a more clearly focused and differentiated
range of investment and development tools, like a private consultancy.
48. The Bank may not be ready to embrace such a drastic solution
at this stage, not least because of its financial implications.
According to the 2007 IEG evaluation of a range of projects and
the views of borrowers
, the Bank should make the most of its
expertise by better internal co-operation and a coherent use of
best practice, as well as by producing plans that are collaborative
and specific to local needs, rather than general statements of principle.
Overall, while the majority of programmes achieve their objectives,
they often do not address underlying policy reforms, and incentives
and procedures encouraging regional co-operation are lacking. Nevertheless,
the report noted that most country strategies had focused on sectors
and themes important for countries’ development needs, including
promoting growth. Moreover, your Rapporteur finds the Bank’s role
in coordinating the actions of ODA donors and its involvement in
the preparation and implementation of country strategies for poverty
reduction highly useful. Moreover, whatever its shortcomings, it
does have some influence in shaping governance and good practice
in major projects, even when it has a relatively small financial
stake. Financial markets are reassured by its presence, and it can
be helpful in gaining the confidence of local authorities and dealing
with local bureaucracies.
2.3. Local operations
– key challenges
49. If the World Bank’s function as a bank is to yield
value, it will increasingly have to improve the perceived effectiveness
of its lending. Responsible lending policies are an essential foundation.
In an assessment published in 2005, the IEG was critical of the
Bank’s project selection mechanism, as well as its ability to monitor
results and measure performance. Ensuring that financially-efficient
and ethically-responsible processes are in place, and convincing
people that they are so, is vital and can be made easier by closer
local co-operation and by more transparent governance. In addition,
there are three key areas where performance could be improved: corruption,
inequality and the environment.
50. Tackling corruption is
no easy task, as the Council of Europe can affirm, and the problem
is compounded when wealth is growing quickly. In the poorest countries,
Bank policies and decisions – for better or worse – can alter the
fate of a national economy. Here, the Bank cannot help having a political role and voice. But in
a booming middle-income country, the Bank’s best chance of influence
may be through advocacy and example, and by the steady osmosis of
its principles into local political debate. If there’s too much
pressure, the borrower can raise money elsewhere.
51. Many feel that the Bank should be stricter. When Paul Wolfowitz
began suspending loans relating to projects or governments where
corruption was suspected, he provoked a storm of controversy, not
least from within the Bank itself. These suspensions may have been
abruptly introduced and disruptive to years of work, but there were
serious grounds to make them. When so much of the Bank’s work relates
to nurturing local efforts that it does not directly control, it
may sometimes need to publicly uphold its own standards by saying no.
Although the borrower might be able to replace the Bank’s capital,
denunciation by such a prestigious institution has a strong deterrent
effect. Moreover, in an age when information is easily available,
the Bank’s own reputation is at risk.
52. Some commentators suggest that the most practical approach
is to hold recipients more clearly accountable for the outcomes
generated and, if needed, be ready to stop further funding. But
the effect of the last anti-corruption drive was so damaging that
the Bank’s management have to be cautious. Earlier attempts to increase
the power of the Bank’s internal investigations unit aroused such
anger that a new team had to be appointed to investigate them! However
unfairly, previous policy changes were seen as a covert form of support
for US foreign policy, with formal protests by Kenya’s opposition
leader about its perceived bias.
53. In this context, mention should be made of the Volcker commission,
which reviewed the Bank’s anti- corruption efforts in 2007, and
the steps taken by the World Bank following this review. In January
2008, the Bank announced that it would implement the recommendations
of the Volcker Report to strengthen its Department of Institutional
Integrity (INT), which investigates fraud and corruption. The recommendations include
creation of an independent advisory board composed of international
anti-corruption experts to protect the independence and strengthen
the accountability of the INT; the creation of a preventive services
consulting unit to help Bank staff guard against fraud and corruption
in Bank projects; and raising the rank of the head of the INT to
Vice President. The first INT Vice President was appointed in May
2008, and the Independent Advisory Board was announced in September
2008.
54. Inequality is an even
more difficult issue for the Bank to address. Globalization has
contributed to astonishing wealth gaps between countries: the average
income in Switzerland is now more than 400 times greater than that
in Ethiopia and it is safe to say that, at a macro level, every
project supported by the Bank should aim to mitigate this. Another
critical trend, which perhaps needs to be more effectively addressed,
is the widening disparity within countries. This is glaringly apparent
in the middle-income group where more than half of borrowers became
more unequal in the period 1993-2004
.
Yet even this is not straightforward: the Bank’s avowed mission
is to address poverty, and confronting relative deprivation can
be seen as an attack on relative advantage. The Bank must avoid
adopting any stance that might be seen as ideological, especially
if viewed as hostile to the sections of society it works with.
55. The 2007 IEG report describes the difficulty of tackling inequality
within a state.
In China,
for instance, local beneficiaries are responsible for loan repayment;
problems arise in Russia, Turkey and Ukraine, where governments
lack a regional approach despite a widening inequality gap. It is
still open to question how the Bank can develop effective instruments
to address this. However, persistent inequalities in rapidly developing countries
offer reasons for continuing to support local projects, even as
countries seem to have become wealthy overall. Despite many specific
constraints on work relating to race, religious and gender inequality, social
programmes are showing results. Education remains the top priority,
along with health services and a shift in employment from the agricultural
sector.
56. Environmental issues are
important to the Bank which is one of the world’s largest backers
of biodiversity projects and currently provides around $11 billion
to projects with clear environmental objectives. In India (Karnataka
state), for instance, it has helped farmers to make dams, collect
rain and protect soil from monsoons. These efforts have raised crop
yields by 24% and household incomes by two-thirds, while boosting the
local ecosystem. But while the Bank seeks to ensure that all projects
it supports are environmentally sound, the issues involved are complex,
often technical and require careful local judgments. If poverty
reduction and environmental protection may in the long term be synonymous,
short term needs often diverge. Environmental protection may amount
to telling poor countries what they can and cannot do. Sometimes
it may increase inequality: in Congo, the Bank’s support for ‘avoided
deforestation’ via local payments has been criticized for provoking
wealth disparities among local tribes. Two projects recently in
the headlines show some of the dilemmas involved:
- There has been a widespread
welcome for the Clean Technology Fund under the Climate Investment Funds,
administered by the Bank, implemented by the Multilateral Development
Banks (African Development Bank, Asian Development Bank, European
Bank for Reconstruction and Development, Inter-American Development
Bank and the World Bank Group) and funded by Australia, France, Germany,
Japan, Spain, Sweden, the UK and the US. At the same time, many
see a paradox in the Bank's proposal for a large coal-fired power-station
in Botswana. The Center for Global Development has estimated that
a solar power installation would be more rational and clean, and
they urge the Bank to immediately implement an explicit carbon accounting
charge for all their energy projects (despite the fact that developing
countries have voiced discomfort with this approach). This seems
reasonable but should Botswana not have the right to give work to
its miners and use its own coal?
- Controversy has grown over the social effects of the Nam
Theun 2 dam in Laos, where efforts to ease the environmental impact
are lagging. According to the pressure group International Rivers,
which has opposed the dam from the start, the $16 million social
budget is inadequate to compensate more than 120,000 villagers downstream
for loss of fisheries, "let alone to provide livelihood alternatives
and flood and erosion protection”. However, Laos is one of Asia’s
poorest countries, and the dam is key to becoming a "battery" for
the region. The Bank, a key backer, has admitted the social and
environmental challenges but feels that the project has provided
significantly better housing, schools, healthcare and roads to the
affected people.
57. These examples may make one wonder about the role of
human rights in lending policy.
It is important to point out that neither of the Bretton Woods institutions
are rights-based bodies; in fact, the Bank’s Articles state that,
in all its decisions, "only economic considerations shall be relevant."
Some believe that this is an unacceptable restriction. The Bank
maintains that its ‘economic and social approach to development
advances a comprehensive, interconnected vision of human rights
that is too often overlooked’.
Because its lending decisions are
based on the quality of the project, and its effectiveness in reducing
poverty, the Bank feels that it has been able to escape the vagaries
of short-term political or ideological considerations which can
be very costly and often have little to do with relieving poverty.
It can, in other words, be objective. The Bank denies that it views
civil and political rights as unimportant to development and suggests
that it can ‘make its greatest contribution to development - and
simply is able to help more people - by continuing to focus on the
important work of economic and social development’.
58. Labour standards are
a good example of the type of rights-related issue that the Bank
seeks to address. Its labour policies aim to reflect the key elements
of social development articulated in the 1999 Copenhagen Declaration
on Social Development, and have become an integral part of its poverty-reduction
strategies. While it believes that the private sector must generally
be the engine of employment creation, the Bank affirms the need
to protect fundamental employment rights. Hence its guidelines for
low-income countries require the consideration of core labour standards
in formulating any Country Assistance Strategy and in subsequent performance
measurement.
59. To underscore this, the Bank supports a range of labour-related
initiatives, such as the Communities and Small-scale Mining (CASM)
initiative launched in 2001 - a multi-donor programme that aims
to improve the circumstances of those working in small-scale mines.
It has also integrated labour standards into its concessional lending
practices: the IFC’s operations policy addresses all four core ILO
labour standards (forced labour, child labour, non-discrimination,
and freedom of association and collective bargaining) and requires
a comprehensive approach to labour and working conditions, as part
of any funding agreement. The Bank participates in specific social
development schemes, such as training for garment factory supervisors
in partnership with ‘Better Factories Cambodia,’ the ILO's local
programme.
60. Finally, it is worth looking at the degree to which the Bank
and the IMF encourage reform in borrower countries. While the notion
of
‘structural adjustment’ still
features in some of the debate, the Bretton Woods Institutions are
today emphasising national ownership of reforms, including alignment
with existing national development strategies. Nevertheless, a report
by the IMF’s Independent Evaluation Office, released in January
2008, criticised the continuing overuse of ‘structural conditionality’.
Having reviewed the Fund’s lending operations between 1995 and 2004,
they found an average of 17 structural conditions per agreement. While
the report did not discuss the nature of the conditions in detail,
it noted that their effectiveness was relatively low, with around
54% compliance achieved, and less than 33% compliance for what it
called reforms of ‘high structural depth’.
This illustrates the importance of
national ownership of reform and the investments, loans and conditions
in support of these reforms.
61. Clearly, it is legitimate for a public body to attach conditions
to a loan, but they need to be reasonable, appropriate and realistic.
One of the World Bank’s key mechanisms for achieving this is its
‘Good Practice Principles’ (GPP) for the application of conditionality
(Ownership, Harmonization, Customization, Criticality, and Transparency
and Predictability) which have been widely embraced by aid providers.
This seems to have yielded results, as the Bank has sharply reduced
the number of disbursement conditions since the late 1990s. In fiscal
years 2007 and 2008 disbursement conditions had declined to about
9-10 per operation (from a level of 31-35 per operation in 1995).
A report by Eurodad
claims
that the real picture is different because of the practice of bundling
several ‘conditionalities’ together, but the World Bank reports
that the relatively rare use of bundling would not substantially
alter the number of conditions. According to Bank analysis, sensitive
reforms (defined by the Bank
as
privatization, price liberalization, subsidy reforms, utility price
adjustments, trade reform, and user fees) have been used in less
than one-third of operations during Financial Years 2007 and 2008.
62. It is hard for a layman to judge the merits of such arguments
but it is clear how hard a job it is for a public institution to
strike a balance between the interests of its investors and the
needs of its borrowers, while retaining the confidence of civil
society. By contrast, private creditors do not care how their money
is used, as long as it is repaid. This may mean that poorer countries,
who cannot raise capital elsewhere, are more subject to conditions.
It is worth bearing in mind that without involvement by the Bretton
Woods institutions, issues such as the environment and inequality
would receive less attention than they do now. This in itself justifies
their continued lending and continued efforts to do it more consensually.
63. In the worsening global economic situation that prevails in
2009, however, there are even more immediate reasons that justify
continued, indeed increased, lending and grants by the Bretton Woods institutions.
The world’s developing economies are particularly vulnerable to
economic shocks. As capital markets have dried up, trade has shrunk
and commodity prices have fallen, many of today’s middle-income countries
and certainly the low-income ones find that they have a renewed
need for the Bank’s help. That is why the World Bank has appealed
to donor countries to commit 0.7% of their economic stimulus packages
to a Vulnerability Fund for assisting countries that lack resources
for such fiscal plans. Donors could channel such resources through
the UN, the World Bank or other development banks, thereby using
existing, well functioning development mechanisms to deliver funds
quickly, transparently, and safely. The World Bank has identified three
main priorities for vulnerability fund investments: safety nets,
infrastructure
and the financing of small and medium-sized enterprises and microfinance
institutions. Not only that, but the IBRD has announced new commitments
of up to $100 billion over the next three years, with lending in
2009 increased to $35 billion compared to $13.5 billion in 2008.
In December 2008 the Bank approved a $500 million loan for structural reform
in Ukraine, and has agreed to help India with $3 billion in additional
investment. Ironically, as for the IMF, it is adversity that has
renewed confidence in the Bank’s role. This goes not only for loans
but also for concessionary aid disbursed by the Bank’s aid agency,
the IDA.
64. Among other things, Mr Zoellick’s efforts to restore confidence
among staff and shareholders since he was appointed President of
the Bank resulted in a major increase in contributions for the IDA
during the funding replenishment round finalised in December 2007
for the period ending 30 June 2011 (IDA 15). With so many other
routes for donation and shortfalls in previous pledges, notably
by the US, the IDA had been in serious need of stronger funding
and this latest negotiating round had been seen as a test of the
Bank’s credibility. The negotiations concluded with $25.1 billion
committed - an increase of 42% over the previous round. Behind this vote
of confidence, it was notable that Germany, one of the countries
most concerned about the former President’s approach, gave more
than $2 billion, while Britain pledged $4.3 billion, becoming the
largest single donor. Among the 45 contributors were debut appearances
by several middle-income countries, such as China, Egypt and Latvia.
The donor contributions of $25.1 billion enabled the Bank to replenish
IDA 15 with $42 billion in total. Under the leadership of Mr. Zoellick
the World Bank has improved its crisis response capacity, and the
Bank has established a new facility to rapidly provide $2 billion
worth of aid to the poorest countries from the $42 billion IDA 15
fund. Priorities will be safety nets, infrastructure, education
and health. As part of the World Bank’s new way of doing business,
approval processes are being speeded up. The Bank launched a $1.2
billion Global Food Response Program (GFRP) in May 2008 to speed
assistance to the neediest countries, and loans were processed on
average in under two months.
65. To encourage contributions, Mr Zoellick had engineered a $3.5
billion transfer – partly from the IFC (which had retained earnings
of $11.7 billion in 2007 and $13.2 billion in 2008) and partly from
its loan operations to middle-income countries – to the IDA, which
now has capital worth about a third of its lending. So the Bank
has ‘put our money where our mouth is’ and also reduced its own
charges and fees. It has been suggested that there should also be
a re-evaluation of customers, with some countries (such as Vietnam
and similar) currently benefiting from IDA aid being able to accept
loans on a more commercial basis.
66. As for the IFC’s response to the crisis, it has increased
its support for the private sector in developing countries through
the launch or expansion of initiatives designed to help microfinance
institutions experiencing difficulties, including a $500 million
Microfinance facility; through doubling its Global Trade Finance
Program to $3 billion over three years and mobilizing funds from
other resources, including a $1 billion pledge from Japan; to help
recapitalise banks in developing and middle-income countries, including
Central and Eastern Europe, through a $3 billion Recapitalisation
Fund created in December 2008; to prop up privately funded infrastructure projects
in financial difficulty; and to step up its advisory services in
the field of finance.
67. According to Mr Zoellick, Central and Eastern European countries
need $120 billion to recapitalise banks in difficulty following
the recall of liquidity by Western banks. The World Bank is therefore
working with the European Bank for Reconstruction and Development
(EBRD) and the European Investment Bank (EIB), as well as the IMF
and the EU and its member states to help restructure and recapitalise.
As part of a joint package with the EBRD and the EIB, the World
Bank Group will provide support of about €7.5 billion to help the
Eastern Europe banking sector and to fund lending to businesses
hit by the global economic crisis.
68. A further World Bank objective, unrelated to the crisis, is
to ‘unify’ the rapidly expanding universe of development aid. With
more than 280 donors, international efforts are incredibly fragmented.
This takes the heaviest toll on countries with the least bureaucratic
resources: Tanzania, for instance, received 542 donor visits in
2005, while Vietnam had 791, and India has decided to restrict the
number of aid partners it works with. The Bank can act as a common
platform from which others can operate: it does so in Afghanistan,
where reconstruction of rural roads and bridges is supported by
a multilateral fund that it administers. The Bank is doubtless less
troublesome to work with than many donors, less prone to split aid
into tiny projects, or to bypass a government's own budgetary systems.
69. There are also problems that stem from a lack of overall planning.
One is the issue of ‘donor orphans’, whereby aid is focussed on
favoured countries with colonial connections, or where there is
commercial advantage to be gained - to the detriment of those who
have least to offer and are therefore often in the greatest need.
Another is that of ‘sector orphans’: for while there are many sources
of income for eye-catching causes, such as Aids and Malaria, that
have traction in the media, there is a danger of overlooking important
areas such as hospital refrigeration or sewerage.
70. Recent success will only increase the Bank’s need for transparency,
and objective measurement of the results of its work. This is often
difficult: for instance, the Bank supported the construction or
repair of more than 22,000 classrooms in the 12 months to June 2007,
but has little means to know how much children are learning there.
Systematically, the Bank is seeking to improve its own indicators
for measuring progress and should not allow its recent traumas,
or its current success, to slow the drive for closer self-scrutiny
of results.
2.4. What future for
the Bretton Woods approach?
71. The Bank faces questions about who its customers
should be. By the middle of 2007, the Bank's cumulative lending
to China was nearly US$42.2 billion in 284 projects. With 70 of
these under implementation, China's portfolio is one of the largest
in the Bank
.
As China becomes a World Bank donor itself and competes with the
Bank as a provider of aid in many developing countries, can this
be right? This report has already suggested several reasons why
such an unprecedented situation may have merit – but it will be
increasingly difficult to defend among the tax-payers of the developed
world, especially when China is using much of its aid money to compete
with those countries for influence and natural resources. Moreover,
continued assistance can even hold back some developing economies,
reinforcing dependency, discouraging the emergence of local accountability,
and preventing them from doing things for themselves.
72. Such questions have been debated at the Asian Development
Bank (ADB) whose largest borrower and third largest provider of
funds is China (in 2007, it even undercut the ADB in lending money
to improve the water supply in Manila, this Bank’s own base). An
internal report has suggested that the ADB should curtail lending and
focus on being an adviser and coordinator for the region. While
the report advocated continued infrastructure funding, pointing
out that Asia needs to spend up to 4.7 trillion dollars in this
sector over the next decade, this sum is scarcely more than Asian
governments have recently held in their own reserves.
73. Unsurprisingly, the ADB has found resistance to its ideas
amongst the regions poorest countries, such as Cambodia - and certainly,
there are still countries in all parts of the developing world that
more or less rely on aid. But many of the richer developing countries
also have doubts: for them, institutions such as the ADB and the
World Bank still have a role in enabling long-term financing, particularly
in vast and complex projects such as infrastructure. Although these
governments have in recent years been able to use the markets to
raise some of that money, they usually try wisely to diversify their
borrowing. Another reason for caution is that financial markets
more or less expect their borrowers to be IMF/World Bank members.
74. There is a similar story in Latin America, where the Bank,
like the IMF, has over the years made much of its money. Now, only
a few countries in the region are poor enough to qualify for its
aid; most are borrowers, and in 2006 the Bank earned $1.7 billion
in interest and fees there - more than a third of its total. As
elsewhere, though, the trend had been declining: before the financial
crisis the Bank and its regional counterparts had been finding it
hard to compete with private capital, and some critics had been
saying that the Bank should stop trying. For different reasons,
some voices in the region also want to see the Bank out of the way.
In 2006 Venezuela proposed a massive new investment Bank, free from
the constraints of Bretton Woods, to which it offered to donate
up to half of its foreign-exchange reserves, reckoned at $30 billion.
Venezuela, and then Ecuador, indicated that they would withdraw
from both the Bank and the IMF. It was suggested that African countries,
too, would be asked to join.
75. Yet, there has been a lukewarm reaction to the ‘Banco del
Sur’. Latin America has been amongst the IMF’s biggest customers
in the past and, arguably, the scene of some its biggest successes.
But it is also a good example of one of its biggest problems: while
governments adopt, and even privately welcome, rationalization measures,
they also like to blame the IMF when these measures are unpopular
- a syndrome that those who represent the European Union will recognise!
76. But pulling out of the Bretton Woods institutions would carry
many risks. Firstly, leaving the IMF would cause a technical default
on a country’s bonds and raise the cost of future borrowing; pulling
out of the World Bank would void the bilateral investment treaties
that have been signed with other countries, and which use the Bank’s
investment-dispute mechanisms. Probably only an oil-rich state like
Venezuela would contemplate this (and that before the financial
crisis and the collapse of the oil price), and even Bolivia, perhaps
Venezuela’s closest ally, said from the start that joining the new
bank would not mean pulling out of the IMF. Brazil is particularly
sceptical and has worked to limit the bank's scope. Brazil is reportedly
concerned that such a bank may give soft, politically-motivated
loans that are never repaid. It is also worried about the regional
balance of power and its own business interests: Brazil already
has its own development bank, running successfully alongside the
World Bank projects, and with far greater levels of lending. Thus,
in December 2007, seven countries signed up to the ‘Banco del Sur’,
though there was no final agreement on its scope. At this point,
it seems likely to end up as a fairly modest operation, focussing
on cross-border infrastructure; so far, no one has pulled out of
the IMF or the Bank.
77. So there are a host of reasons why countries have been cautious
about radical changes to the world’s economic order - some to do
with economics, other to do with politics. As we are experiencing
once again, the system can be extremely fragile, and the financial
stability that some Latin American countries had begun to enjoy
in recent years is now being severely tested by the global crisis.
Once again, it is the Bretton Woods institutions that are expected
to come to the rescue.
3. The WTO: how to
reap a low-hanging fruit?
78. Though formally ‘provisional’, the General Agreement
on Tariffs and Trade (GATT) succeeded in steering eight rounds of
trade liberalisation between 1947 and 1994. At first, the focus
was on tariff reduction, but by the 1960s, the Kennedy Round achieved
an anti-dumping agreement and measures to promote development. The
Tokyo Round, in the 1970s, saw an average one-third cut in the customs
duties of major economies and made the first attempts at removing
non-tariff barriers. The results of this, though, were mixed, with
many initiatives being left as ‘codes’ agreed by some members, rather
than as binding agreements, and there was a notable failure to come
to grips with agricultural trade. The GATT’s achievements to this
point were real: tariff reductions helped trade to grow faster than
production, with average rates of around 8% during the 1950s and
1960s; but thereafter, states began to devise new forms of protection
and subsidy. Moreover, the GATT did not apply to trade in services
and could not restrain a trend toward bilateral market-sharing agreements.
79. So a concerted effort was made to reinforce the GATT’s principles.
This resulted in the Uruguay Round (1982-1995) and the creation
of the World Trade Organization (WTO) in 1995. The round yielded
the biggest-ever reform of world trade. All sectors had been up
for review, with an extension into services and intellectual property
and reforms in the sensitive sectors of agriculture and textiles.
It also contained the blueprint for the WTO, including a dispute
settlement system and the Trade Policy Review Mechanism, thus providing
the formal arbiter that countries had been seeking. As the Uruguay
Round was concluded, the WTO was formally launched.
80. Then, there was a period of ‘trade fatigue’. The Uruguay Round
had been so ambitious, and so many countries had joined during its
negotiation, that some time was needed to digest the results. Work
on the Doha Development Round, which began in 2001 in the wake of
the September 11 events, has not been so successful. The US and
the EU have been in endless dispute with each other, and much of
the rest of the world, over agriculture; but there are many areas
of concern within emerging economies too, notably over the lowering of
their own tariffs. In summer 2007, as a deal over agriculture seemed
more possible, Brazil led a chorus of disquiet over the prospect
of cheap manufactured imports, in particular from China. Ironically,
China itself was about to lose the first appeal lodged against it
as a WTO member
.
81. The next major attempt to strike a trade deal a year later,
in July 2008, also failed amidst rising protectionist positions,
mistrust and disagreements on farm subsidies and a safeguard mechanism
for sensitive goods. Another opportunity to remove distortions in
global trade, competition and entrepreneurship was missed, hurting
developing countries most.
Partly
because they were not represented in earlier trade rounds, tariffs
are much higher on goods primarily produced by developing countries
than on those produced by wealthy countries
.
82. The Doha Round has been declared dead so often – and for so
many different reasons – that some wonder whether it can have any
life left in it. Although following the collapse of the Ministerial
negotiations in July 2008 there have been several calls for the
revival of the talks as a way to boost global growth, the protectionist
argument tends to be persuasive in recessionary times. Today, the
central question for the WTO is: how far, and how fast, can national
interests be pushed in the cause of free trade?
83. According to the Center for Global Development, removing global
trade barriers would lift 500 million people out of poverty, with
about half of that effect from the opening of agricultural markets.
The developing world would benefit significantly as, on average,
a one percent increase in a country's ratio of trade to output eventually
boosts its income by one-half percent, which translates into a one
percent reduction in poverty. U.S. Department of Agriculture studies
show that eliminating rich countries’ agricultural supports would
result in a 24% gain in the value of poor countries’ farm exports,
which account for a quarter of their total exports and represent
industries that employ roughly half their population.
84. All sides agree that the stakes are high. In services – long
excluded from trade talks, but now the fastest-growing sector of
the world economy – the OECD has estimated gains of up to $500 million.
It also sees global welfare gains of around $100 billion, if there
were full tariff liberalisation for industrial and agricultural
goods – and as much again if there were agreement on trade facilitation
(the removal of procedural barriers). Developing countries would
reap up to two-thirds of the benefit. Yet, amazingly, World Bank
studies show that more than half of the burden on developing countries’
exports come from restrictions imposed by other developing countries.
This is partly because developing countries still tend to have high
tariff levels, and partly because many developing countries mostly
trade with other developing countries. So there is no good substitute
for a global opening of markets.
85. Without a Doha agreement, there is a danger that existing
distortions will become entrenched and the rules-based multilateral
system would be weakened, while countries increasingly proceed via
bilateral and regional agreements, reminiscent of the pre-war years.
Already such deals proliferate. The US, for instance, has a range
of bilateral deals, particularly in Latin America, while in Asia
there is talk of an “APEC only” Free Trade Agreement (FTAAP). This
would leave the WTO acting increasingly as a centre of disputes,
with global trade proceeding by litigation, rather than legislation.
It is no wonder that the OECD sees the Doha round as a low-cost
insurance policy against the revival of protectionism and trade
wars, and urges that the key players grasp what it describes as
the ‘low hanging fruit’ of the world’s trading architecture.
86. So what are the prospects? Those in charge of the process
are refusing to give up. Reaching a deal would require an immense
effort of political will, and perhaps careful brinkmanship, to secure
terms that all sides can accept. Observers such as the OECD believe
that the basis for an agreement exists, with largely converging
views on a range of important issues. But no trade round has ever
been so complex, and some wonder whether key states would actually
approve what their negotiators can come up with.
87. Having tried to force a conclusion several times, the WTO
seems to be running out of negotiating room: the economic downturn
will surely make concessions harder to accept, while ever more necessary
as a stimulus to growth, and so far multilateral trade talks have
not appeared to be among the top priorities of the new US Administration.
Nevertheless, at their London Summit on 2 April 2009, the G20 leaders,
besides calling for a rejection of protectionism, said that they
remained “committed to reaching an ambitious and balanced conclusion
to the Doha Development Round, which is urgently needed. This could
boost the global economy by at least $150 billion per annum. To
achieve this we are committed to building on the progress already
made, including with regard to modalities. We will give renewed
focus and political attention to this critical issue in the coming
period and will use our continuing work and all international meetings
that are relevant to drive progress.”
88. In the meantime, the global community should stay focused
on helping weaker countries to overcome obstacles that prevent them
from taking advantage of new trading opportunities. This is why
the World Bank works with the WTO and development partners on “aid
for trade”, mobilizing resources to help poor countries build up
their trade capacity and capture the potential benefits of globalization.
An even more urgent problem is the effect of the credit crunch on
trade. Financing international trade must be an immediate priority
on the agendas of the World Bank, the IMF and the WTO. Hence the
importance of the G20 leaders’ promise on 2 April 2009 to “ensure
availability of at least $250 billion over the next two years to
support trade finance through our export credit and investment agencies
and through the MDBs” and to “ask our regulators to make use of
available flexibility in capital requirements for trade finance.”
89. To the Rapporteur, such a multilateral approach represents
both a worthy restatement, and development, of the Bretton Woods
ideals
.
The Assembly has expressed its support for these objectives and called
upon the key players to redouble their efforts to secure a successful
outcome to the Doha Round. We should be mindful of the fact that
the opposite could set back the efforts of the global community
to work out other large-scale multilateral agreements, such as on
coping with global warming and globalisation.
90. On WTO reform, we should note a call by the WTO Director-General,
Pascal Lamy, to change the rules for future talks, and the opinion
of former Director-General Supachai Panitchpakdi, that some of the
WTO’s workings are ‘dysfunctional’. The complexity of the multidimensional
game is such that a continued stalemate is a likely result of marathon
talks: WTO rules that every member has a veto power and that “nothing
is agreed until everything is agreed” have reached their limits.
Forging a consensus on every single issue is problematic. It is
time for the WTO’s 153 members to accept that smaller-scale agreements
should be allowed in individual trade sectors among those willing
to advance and thus pave the way for the final deal. Further ideas
are to have groups of countries negotiate in blocs, and to have
proposals drafted by neutral experts rather than countries.
91. Although it is governments that negotiate at the WTO on behalf
of their countries, the role of parliaments should not be underestimated.
Whilst the WTO has no parliamentary assembly of its own, national
parliaments are called to validate bilateral and multilateral trade
agreements brokered by governments, including in the framework of
the WTO, and to vote laws that need to be compatible with their
countries’ international trade commitments. The European Parliament
, the PACE and the Inter-Parliamentary
Union have for some time advocated in favour of giving the WTO a
parliamentary dimension which has so far taken the form of parliamentary
conferences on the WTO.
92. One such conference (held in Geneva on 11-12 September 2008)
adopted a statement underscoring that “it is crucial for parliaments
to exercise ever more vigorously and effectively their constitutional
functions of oversight and scrutiny of government action in the
area of international trade. […and] play a far greater role in overseeing
WTO activities and promoting the fairness of the trade liberalization
process”.
93. It is to be hoped that a full WTO Ministerial Conference can
be organised as soon as possible in order to discuss the strategic
direction of the Organisation in the light of the global financial
and economic crisis, to review prospects for the Doha Round, to
highlight the need to combat protectionism and to discuss internal reform
issues.
4. The ILO: furthering
core labour standards
94. As globalisation has changed the nature of relations
between states by removing national borders in many sectors, some
thorny questions about working migrants, labour standards and social
justice have come to the fore. The International Labour Organization
(ILO), born in 1919 together with the League of Nations and since
1946 the first UN specialized agency, provides a world-wide institutional
framework for shaping solutions to improved development and human
condition through employment and decent work. Its past achievements include
such hallmarks of modern society as the eight-hour working day,
maternity protection, suppression of forced labour, child-labour
laws, policies on workplace safety, recommendations of equal pay
for men and women, and the core rights to freedom of association,
collective bargaining and strike. The Declaration on Fundamental
Principles and Rights at Work, adopted in 1999, reaffirms the multilateral
commitment to respect the rights of workers and employers (to freedom
of association and collective bargaining) and commits states to
eliminating forced labour, child labour and discrimination at work.
95. As the ILO admits, child labour is a most pressing social,
economic and human rights issue, with some 218 million children
estimated to be working worldwide
, often at
the expense of adequate education and healthcare. Attempts to eliminate
the worst forms of child labour (including slavery, sexual exploitation,
illicit activities and practices harmful to health, safety and morals)
have led to the adoption of a key ILO convention in 1999 and, in
a broader sense, the international community is committed, with
the Millennium Development Goals, to ensure that by 2015 all children
complete a primary education course. The challenge, however, remains
effective implementation, especially in developing countries. Several
specialized UN agencies, the World Bank, regional development banks
and civil society organizations are key ILO partners in this direction.
96. With the world’s population growing by about 84 million every
year (of which 97% live in developing countries), some 100 million
persons seek to join the global work market each year against the
backdrop of over 1 billion unemployed or underemployed. Not least
because of the financial and economic crisis, but also for a host
of social and political reasons, the promise of globalization to
deliver economic gains through ‘more and better jobs’ has yet to
be realised. In this connection, ILO Director-General Mr Juan Somavia
stressed in a statement on 20 October 2008 that world leaders should
not just focus on financial institutions when they talk about rescue
plans, but, most importantly, on individuals, especially the most
vulnerable. He underlined the need for “prompt and coordinated government
action to avert a social crisis that could be severe, long-standing and
global”.
The
crisis would significantly increase unemployment,
so
measures should be taken to extend social protection and unemployment
benefits, facilitate training, strengthen placement services, and
provide emergency employment schemes. The crisis had already undermined
pension funds invested in the stock market, so pension systems should
be given sufficient liquidity to avoid having to sell assets in
a collapsed market in order to pay pensions.
97. In its Resolution 1651 (2009) of 29 January 2009 on the consequences
of the global financial crisis, the Parliamentary Assembly gave
its support to Mr Somavia’s statement and deplored the fact that
“the G20 action plan [adopted on 15 November 2008] makes no reference
to protecting the social and economic rights of citizens in a period
of crisis.” Hence there is cause for satisfaction that the G20 leaders,
at their London Summit on 2 April 2009, said “We recognise the human
dimension to the crisis. We commit to support those affected by
the crisis by creating employment opportunities and through income
support measures. We will build a fair and family-friendly labour
market for both women and men. We therefore welcome the reports
of the London Jobs Conference and the Rome Social Summit and the
key principles they proposed. We will support employment by stimulating
growth, investing in education and training, and through active
labour market policies, focusing on the most vulnerable. We call
upon the ILO, working with other relevant organisations, to assess
the actions taken and those required for the future.”
98. Poor working conditions, forced and precarious work, and unfair
treatment of migrant workers (some 81 million worldwide) remain
huge global concerns. However, whilst the developed countries feel
they have a moral obligation to help the developing world to implement
core labour standards, thus anchoring basic human rights and ensuring
fairer competition, developing countries all too often perceive
this as neo-protectionism on the part of industrialized countries.
It is therefore vital to seek greater mutual understanding in this
area via global economic institutions (notably the ILO, the World
Bank and the WTO) and to translate concerns into affirmative policy
tools that can bring about a ‘win-win’ deal for all.
5. The OECD as a pathfinder
99. Based on its undoubted economic expertise, the OECD,
which groups 30 of the world’s most advanced industrial countries
and is in a process of expansion that will also bring in emerging
economies, has defined a Strategic response to the financial and
economic crisis.
The OECD Strategy covers two main
areas. The Strategy emphasises the need to align regulations and
incentives in the financial sector to ensure tighter oversight and
risk management. The OECD also urges governments to review and upgrade
their national policies and improve international co-ordination
in order to restore the conditions for economic growth.
100. In the OECD’s view, nearly all its member countries can enact
growth-enhancing structural policies that could potentially enhance
short term, as well as long-term growth. These include reforming
anti-competitive product market regulation and reducing tax burdens
for low-income workers, as well as launching major infrastructure
projects and compulsory training programmes for the unemployed.
101. Beyond such actions, however, the OECD stresses the need to
re-think how the world economy operates. The goal must be a global
economy that is not only stronger and more stable but also more
ethical, environmentally friendly and more equitable. Measures needed
to strengthen the economy and increase prosperity include improving
regulation, strengthening corporate governance, promoting trade,
investment and competition, and developing policies for sustainable
growth. At the same time, attention must be paid to the environmental
dimension by tackling climate change.
102. To improve ethical standards in the economy, there is a need
to promote transparency and integrity, fight corruption and money-laundering
and combat tax evasion. To promote a fairer economy, the benefits
of prosperity should be shared by boosting employment and social
inclusion, fostering development, and providing adequate education
and healthcare.
103. The OECD is working in conjunction with other international
economic and financial institutions to enhance co-ordination of
the global response to the crisis. For example, its experts met
with those of the IMF and the World Bank on 4 February 2009 for
a seminar on the response to the crisis and exit strategies.
The participants emphasised the urgent
need to restore market confidence in the financial sector and stimulate
the real economy, to exercise vigilance against trade and investment
protectionism, to support human capital formation and avoid policies
that would undermine recent reforms or reduce the labour supply,
and to mobilise international fora and multilateral institutions
in order to coordinate the policy response and design the new regulatory
architecture.
104. For their part, the G20 leaders at their London Summit on
2 April 2009 noted, in the context of the fight for tax transparency
and their promise “to take action against non-cooperative jurisdictions,
including tax havens”, that “the OECD has today published a list
of countries assessed by the [OECD] Global Forum against the international
standard for exchange of tax information”. Following the G20 meeting,
the OECD provided a detailed report on progress by financial centres
around the world towards implementation of the internationally agreed
standard on exchange of information for tax purposes.
Subsequently, the four countries
that had not yet committed to the internationally agreed tax standard,
Costa Rica, Malaysia, Philippines and Uruguay, announced their intention
to do so. Nevertheless, the list has been criticised in some quarters
for appearing to whitewash the United Kingdom (Jersey, Guernsey,
etc.), for example, and for its lack of clarity with regard to Hong
Kong and Macao, among other tax havens.
105. Although many still perceive the OECD as a purely economic
organisation, data provider, think-tank and policy forum, economic
matters there are not treated in isolation. In the context of globalisation,
the OECD has strengthened its responsiveness to concerns about the
environment, health, education, innovation, governance and social
changes, considering them as part and parcel of progress and prosperity
in society. Trends are monitored, policy experiences exchanged and
expertise shared with more than 100 countries – beyond the membership
circle of 30 states. Yet the criteria for membership are not quite
clear and should, in future, be clarified. Together with various
partner organisations (including the Bretton Woods institutions,
the Council of Europe, the ILO and many other UN bodies), the OECD
has a careful eye on the planet and far-reaching ideas for balanced
development.
106. Looking ahead, OECD’s capacity to detect emerging policy issues,
systemic risks and long-term development challenges positions the
organisation as a leading player in modernising multilateral policy making
and achieving policy coherence. Knowing how difficult it is to devise
and implement structural reforms, members of the Parliamentary Assembly
Committee on Economic Affairs and Development particularly appreciate
OECD’s insights on the ‘political economy of reform’, advice on
structural reform issues, ongoing work on ‘measuring the progress
in societies’ and guidance, together with the IMF, on voluntary
best practices for sovereign wealth funds.
107. The report and debate on the OECD held annually by the Parliamentary
Assembly, enlarged to include parliamentary delegations from the
non-European OECD member states, is a unique opportunity for a parliamentary
forum to exercise democratic oversight with regard to the OECD’s
wide-ranging activities, to the benefit of all the participants
involved. This practice should be continued.
6. The Bank for International
Settlements as a global co-ordinator
108. In existence since 1930, the Bank for International
Settlements (BIS) is the world’s oldest financial institution promoting
international (and domestic) financial stability, sound banking
and co-operation among central banks. It has 55 members - central
banks (including from 32 Council of Europe states plus the European Central
Bank) which seek to keep their monetary policies in line with market
reality, intervene with massive financial resources in emergency
situations and exert regulatory powers conducive to greater transparency and
predictability in financial markets.
109. The Basel Committee on Banking Supervision (BIS) is an authoritative
source of banking policy advice and is best known for its standards
for capital adequacy (Basel I accord of 1988 – now superseded by
the Basel II agreement of 2004), the Core Principles for Effective
Banking Supervision, and the Concordat on cross-border banking supervision.
However, there remain substantial differences between the US, the
EU and the UN concerning the degree of capital adequacy and reserve
controls that is needed in global banking. The UN agencies were
particularly critical of arrangements that they saw as merely technical
and insufficient to defuse fundamental risks. Some critics also
point to insufficient BIS capacity to enforce its regulations more
widely in order to remove distortions and asymmetries in competition
on the global financial market. Moreover, there is a growing body
of opinion that the BIS, acting as a sort of financial safety net,
should address some specific concerns such as the growth of offshore
financial centres, highly leveraged institutions, deposit insurance, money
laundering and accounting schemes.
110. At their London Summit on 2 April 2009, the G20 leaders agreed
“that all systemically important financial institutions, markets,
and instruments should be subject to an appropriate degree of regulation
and oversight” and that in particular, “we will amend our regulatory
systems to ensure authorities are able to identify and take account
of macro-prudential risks across the financial system including
in the case of regulated banks, shadow banks, and private pools
of capital to limit the build up of systemic risk. We call on the
FSB [see below] to work with the BIS and international standard
setters to develop macro-prudential tools and provide a report by autumn
2009.”
7. The Financial Stability
Forum (FSF), renamed Financial Stability Board (FSB)
111. The financial and economic crisis has brought to
the forefront of the policy response debate a hitherto relatively
little know institution, the Financial Stability Forum (FSF), transformed
by the G20 leaders at their London Summit on 2 April 2009 into the
Financial Stability Board (FSB). Based with the Bank for International Settlements
(BIS) in Basel and sharing its secretariat resources, the FSF has
met as often as needed, bringing together senior representatives
of national financial authorities (e.g. central banks, supervisory
authorities and finance ministries) from the G7 countries, Australia,
Hong Kong, the Netherlands, Singapore and Switzerland, international
financial institutions, international regulatory and supervisory
groupings, committees of central bank experts and the European Central
Bank. The FSB will now include, in addition to the FSF members,
all the other G20 countries, Spain and the European Commission.
112. The FSF was first convened in April 1999, at the initiative
of G7 Finance Ministers and Central Bank Governors, in order to
promote international financial stability, improve the functioning
of financial markets and reduce the tendency for financial shocks
to propagate from country to country, thus destabilizing the world economy.
113. The FSF's mandate is to assess vulnerabilities affecting the
international financial system; to identify and oversee action needed
to address these; and to improve co-ordination and information exchange
among the various authorities responsible for financial stability.
114. The FSF seeks to give momentum to a broad-based multilateral
agenda for strengthening financial systems and the stability of
international financial markets. The necessary changes are enacted
by the relevant national and international financial authorities.
115. Since 2001, the FSF has also held regional meetings with non-member
financial authorities in Latin-America, Asia-Pacific, and Central
and Eastern Europe.
116. In April 2008, the FSF submitted to G7 Finance Ministers and
Central Bank Governors a comprehensive set of recommendations for
addressing the weaknesses that produced the financial crisis and
for strengthening the financial system. This Report
on Enhancing Market and Institutional Resilience drew
on extensive work by national authorities and the main international
supervisory, regulatory, and central bank bodies.
117. The guiding principle underlying this work was “to recreate
a financial system that operates with less leverage, is immune to
the set of misaligned incentives at the root of this crisis, where
prudential and regulatory oversight is strengthened, and where transparency
allows better identification and management of risks.”
118. The actions recommended by the FSF and endorsed by the G7
were to be implemented by end-2008. These included “further measures
to strengthen standards and oversight of bank capital and liquidity,
risk management standards in financial institutions, valuation practices
and accounting standards.”
119. The FSF announced in October 2008 in its follow-up report
that it would “continue to oversee and coordinate implementation
of the recommendations in a manner that preserves the advantages
of integrated global financial markets and a level playing field
across countries”. In addition, the FSF would “monitor and address
the international interaction and consistency of emergency arrangements
and responses being put in place to address the current financial
crisis”, “work to mitigate sources of pro-cyclicality in the financial
system”, ”reassess the scope of financial regulation, with a special
emphasis on institutions, instruments and markets that are currently
unregulated”, and “work to better integrate macroeconomic oversight
and prudential supervision, to help translate more effectively
systemic concerns into concrete supervisory and regulatory responses”.
120. Building on the current work of the FSF, the G20 leaders have
given its successor, the FSB, a wide-ranging role in strengthening
the financial system, including its supervision and regulation,
as well as responsibility for monitoring progress together with
the IMF.
8. The challenge of
global financial and economic co-ordination
121. At this time of financial and economic crisis in
a globalised world, the need for more intensive global financial
and economic co-ordination has never been greater. So far it may
be said that governments have taken the lead in coming together
to discuss what should be done, notably under the impulsion of the
leaders of France and the United Kingdom. Several of the institutions
mentioned in this report are involved, and both they and the world
financial and economic system should emerge strengthened from the
current complex and multifarious discussions and decisions that
remain to be implemented.
122. A first step was taken by the leaders of the Group of 20 industrialised
and developing countries at their summit in Washington, D.C. on
15 November 2008. In their Declaration, the leaders determined “to
enhance our co-operation and work together to restore global growth
and achieve needed reforms in the world’s financial systems”. They
analysed the root causes of the crisis and detailed action taken
and to be taken to stabilise financial markets and support economic
growth. As far as the international financial and economic institutions are
concerned, the G20 stressed “the International Monetary Fund’s (IMF)
important role in crisis response”, welcomed its “new short-term
liquidity facility”, and urged “the ongoing review of its instruments
and facilities to ensure flexibility.” They encouraged “the World
Bank and other multilateral development banks (MDBs) to use their
full capacity in support of their development agenda” and welcomed
“the recent introduction of new facilities by the World Bank in
the areas of infrastructure and trade finance.” They also pledged
to “ensure that the IMF, World Bank and other MDBs have sufficient
resources to continue playing their role in overcoming the crisis.”
123. On the reform of the international financial institutions,
the G20 leaders said: “We are committed to advancing the reform
of the Bretton Woods Institutions so that they can more adequately
reflect changing economic weights in the world economy in order
to increase their legitimacy and effectiveness. In this respect, emerging
and developing economies, including the poorest countries, should
have greater voice and representation. The Financial Stability Forum
(FSF) must expand urgently to a broader membership of emerging economies,
and other major standard setting bodies should promptly review their
membership. The IMF, in collaboration with the expanded FSF and
other bodies, should work to better identify vulnerabilities, anticipate
potential stresses, and act swiftly to play a key role in crisis
response.” More detailed proposals were set out in the Action Plan
to Implement Principles for Reform.
124. The second major step forward has been the G20 leaders’ London
Summit on 2 April 2009, whose decisions have been referred to at
various points in this report. Comment on its results have been
generally positive tinged with caution. On the one hand, the promise
of tripled resources for the IMF (to $750 billion) to allow it to
rescue countries in difficulty, a $250 billion increase in that
institution’s Special Drawing Rights to boost world liquidity, another
$250 billion to guarantee the financing of international trade,
the undertaking to eschew protectionist measures, the targeting
of tax havens, and the determination to strengthen regulation of the
financial system via such institutions as the new Financial Stability
Board, are all welcomed. But on the other hand there is some disquiet
as to where much of the new funding is going to come from, the fundamental difference
over how much economic stimulus is needed to boost the global economy
out of recession is unresolved, and there is still a certain lack
of clarity as to how the banking system is to be restored to health.
125. While it must be recognised that only governments and central
banks control the real resources for the stimulus packages and rescue
operations needed to counter the recession, they have done so by
and large within the coordinated framework of the G 20 and the European
Union, which should continue to set guidelines and targets. Such
global and regional co-operation is vital to overcome a financial
and economic crisis that has gripped the globalised economy.
9. Concluding remarks
126. When work began on this report, the outlook for the
international economic institutions was not particularly good. The
global economy was booming and credit was generally available on
better terms than those provided by the IMF or the World Bank to
countries wishing to borrow. In these circumstances, the Bretton
Woods institutions were struggling to reinvent themselves. They
were deluged by criticism about their irrelevance and their inability
to reform. Paradoxically, the crisis that has decimated the global
financial and economic system, with untold consequences on the social
and human level, has been a life-saver for these institutions. The
IMF and the World Bank have emerged hugely strengthened from the
crisis, not only in the significantly increased resources available
to them, but also as a result of the reforms that have been put
in train by their leadership. However, this paradox is easily explained.
These institutions were created following the Second World War precisely
for the purpose of ensuring a sound financial system and promoting
economic growth and development. They must now come back to their
fundamental purpose in changed circumstances.
127. As far as the World Trade Organization is concerned, it has
suffered from disappointment about the continuing failure to conclude
the Doha Round of trade negotiations, and unlike the two aforementioned institutions,
the crisis is not necessarily conducive to a revival of its fortunes
since global recession is more likely to elicit protectionist than
liberal reactions. But this is precisely why the governments and
the parliaments of the Council of Europe member states must do everything
in their power to ensure a successful conclusion to the Doha Round.
128. Obviously, intergovernmental organisations are only as strong
as the governments that run them allow them to be. The Parliamentary
Assembly should not only continue to act as a forum for debate on
the important work of these institutions, but it should call on
parliaments that vote for the national budgetary contributions necessary
for their funding to exercise close vigilance over every aspect
of their activities.