3 June 2002
The International Monetary Fund and the World Bank: challenges ahead
Committee on Economic Affairs and Development
Rapporteur: Mr Alfred Gusenbauer, Austria, Socialist Group
The Parliamentary Assembly of the Council of Europe regularly examines the activities of the International Monetary Fund and the World Bank – also known as the Bretton Woods institutions – not least because The Assembly’s member and observer parliaments from nearly 50 countries together contribute the lion’s share of the capital of these institutions.
The report argues that, even though the IMF and the World Bank were established nearly fifty years ago in a world economy very different from that of today, they still have important functions to fulfil, especially if they adapt their activities sufficiently to new realities and pursue needed internal reform.
The report in particular supports the new emphasis given to ‘pro-poor policies’, as manifested, for example, in the recently initiated joint programmes sorting under the titles Heavily Indebted Poor Countries (HIPC) and Poverty Reduction Strategy Papers (PRSP). An envisaged shift in assistance from loans only toward a greater role also for grants is equally welcomed.
The report goes on to call for a new Bretton Woods Conference, half a century after the first, whose task it would be to adapt the International Monetary Fund and the World Bank to the new international circumstances. It also wants voting rights within these bodies to reflect not only donor influence but also the wishes expressed by recipient countries. As a counterpart, the report concludes, demands on recipients should stiffen as regards movement towards democracy, ‘good governance’, the raising of labour standards and a more efficient protection of the environment.
I. Draft resolution
1. The Assembly recalls its Order No. 507 (1995), in which it states that “a large part of the funding of the Bretton Woods Institutions comes from the Council of Europe member states” and that the Assembly therefore “wishes to strengthen its co-operation with [these institutions] to monitor their activities … [through reports] at regular intervals”.
2. The Assembly believes that this mission takes on added importance at a time of growing instability in world financial markets and accelerating globalisation, which latter creates new opportunities for world economic development but also tends to widen the wealth gap between countries as well as within them.
3. In spite of a radically changed world economy since their foundation in 1954, the Assembly believes that both the World Bank and the International Monetary Fund still have essential functions to fulfill, provided they adapt their activities and pursue internal reform: the World Bank in particular in areas of longer term social utility for the poor; and the IMF in preventive action to assist individual countries in exchange for commitments to undertaking domestic reform, especially in cases where the stability of the international financial system is threatened.
4. The Assembly supports the new priority given by the World Bank and the IMF to sub-Saharan Africa, as expressed especially in their joint ‘Heavily Indebted Poor Countries’ (HIPC) and Poverty Reduction Strategy Papers (PRSP) programmes. It welcomes their emphasis on dialogue, long term development, civil society involvement, stringent evaluation of interim progress reached in reforms and aid to the poorest segments of the population.
5. The modified missions and inner functioning of the two institutions should be defined in a new Bretton Woods conference, which should include a wider set of both donor and recipient countries and representatives of civil society, in order better to reflect the realities of today’s world economy. Voting rights should mirror not only financial contributions but, increasingly, the needs and wishes of those with no say over the inequitable distribution of wealth that accompanies globalisation.
The World Bank
6. The Assembly welcomes the commitments made at the UN Conference “Financing for Development” held in Monterrrey, Mexico in March 2002. It sees these commitments as providing further support in favour of the World Bank’s more recent emphasis on ‘pro-poor’ policies; funding for basic social and economic services such as an improvement in the condition of women, public health, education and environment protection; a fairer distribution of wealth, the strengthening of institutions in developing countries and better access to industrialised countries for exports. It is this context recalls its Resolution 1269 (2002) on the role of the World Trade Organisation in the World Economy, in which it states that developing countries “must enjoy better, indeed often privileged, access to the markets of richer countries across the whole range of products and services”.
7. The Assembly in this regard supports a shift in funding from loans to grants, especially in education projects, and calls on Council of Europe member states to agree to the increase in World Bank resources that such a reorientation would require.
8. The Assembly also welcomes the efforts of the World Bank to bridge the ‘digital divide’ in Information and Communications Technologies (ICTs) between developed and developing countries, notably through the establishment of a so-called ‘Dot Force’ department. The Assembly stresses the major gains to be reaped by developing countries from investments in ICTs, including in agriculture, public health and social services.
9. The World Bank’s work to encourage the introduction of pension systems in developing countries should be promoted, considering the latter’s contribution to a more stable demographic development and to social security.
10. The Assembly salutes the World Bank’s recent decision to place much of its internal documentation on the Internet in order to assist public debate, including its so called Poverty Reduction Strategy Papers for individual countries, draft decisions on projects and evaluations of past projects.
11. The World Bank is encouraged to intensify its current efforts to incorporate requirements for democracy, ‘good governance’, core labour standards and environment protection into its projects and to make funding to recipient countries conditional on their accepting these dimensions.
The International Monetary Fund.
12. The Assembly recommends that the IMF refocus on its core mission of assisting countries in maintaining macro-economic stability, while ceding to the World Bank the main responsibility for longer-term development projects. This presupposes a greater emphasis on monitoring capital markets and financial flows; early prevention of financial crisis; and a degree of streamlining of reform requirements addressed to recipient countries in exchange for assistance, on the understanding that such streamlining is necessarily limited by the many unique characteristics of each country.
13. The Assembly welcomes the IMF’s recent assistance to Turkey and Argentina to help these countries overcome their financial difficulties. At the same time, its asks the IMF to examine why ‘early warnings’ on developments in these countries – of the type recommended in Assembly Resolution 1209 (2000) on democracy and economic development were not sounded in time to permit early preventive action. The Assembly does, however, see the IMF’s recent creation of an ‘International Markets Department’ as a step in the right direction for a better surveillance of countries and world regions.
II. Explanatory memorandum by the Rapporteur
II. ORIGINS OF THE IMF AND THE WORLD BANK
III. THE WORLD BANK
- The 2000 World Development Report of the Bank: Attacking poverty
- The 2001 World Development Report: Placing national institutions in the service of the people
IV. THE INTERNATIONAL MONETARY FUND
- Voting power distribution and accountability
- Long-term development financing in low-income countries
- The Fund: ‘gatekeeper’ for development assistance?
- The Fund’s conditionality
V. THE SPECIAL PROBLEMS OF SUB-SAHARAN AFRICA. THE HIPC AND PRSP PROJECTS
VI. THE MAIN ISSUES AT STAKE
- Raising financial standards
- The problem of ‘financial havens’
- Transparency and accountability
- Changing Roles and Responsibilities
- Alternative crisis avoidance strategies: strengthening crisis prevention and crisis management
- Universal Debt-Rollover Option with a Penalty (UDROP)
- Greater rewards for joining the 'good housekeeping club"
- Promoting a fair 'burden sharing' among private creditors, official debtors and official creditors when a crisis occurs
- Poverty reduction strategies
- The role of the IMF
- The heavily indebted poor countries (HIPC) plan
- The need to innovate: the example of the new “Sovereign Chapter 11” proposal for a more orderly resolution of payment problems
- The Spring 2002 Bretton Woods Conference
VII. CONCLUDING REMARKS
1. Following its Resolution 1057 (1995) on the “Activities of the Bretton Woods Institutions”, the Parliamentary Assembly – through its Committee on Economic Affairs and Development – has entered on a path of strengthening further its cooperation with the World Bank and the International Monetary Fund, and to serve as a parliamentary forum for monitoring their activities and policies, along the lines of its role vis-à-vis the OECD, the European Bank for Reconstruction and Development.
2. Members of Parliament of a wider Europe have a particularly strong interest in holding regular exchanges of views with these institutions on matters relating to the socio-economic sphere, such as their operations in Council of Europe members states; the need for sustained, socially just and environmentally sound development based on democracy and human rights in the world’s poorer countries; and the progress of economic reform in central and eastern Europe.
3. Indeed, the more recent financial crises in various emerging markets have shaken public confidence also in the Bretton Woods institutions, as these were called upon to provide urgent assistance. Their roles are indeed crucial: the Fund as a key crisis lender and manager and also increasingly as a monitor of compliance with international financial standards; and the World Bank as a promoter of poverty reduction and sustainable development.
4. In September 2000 in Prague, thousands of people – mostly foreigners and many of them seemingly ‘professional’ protesters – took to the streets to protest against ‘undemocratic and unaccountable’ Bretton Woods institutions and the inequitable effects of globalisation. The setting for that year’smeetings gave the demonstrations particular resonance, as the countries of central and eastern Europe and the former Soviet Union have been going through a dramatic process of transition, with varied outcomes. Many developing countries likewise have little to show after years of adjustment under Fund programmes. At the Bretton Woods meeting in September 2001 – shortened (and reduced in scope) to give demonstrators less time to vent any anger – the feared demonstrations were much more subdued than usual, no doubt owing to the state of shock after the terrorist attacks on New York and Washington D.C., on 11 September, 2001. The Rapporteur in this context wishes to express his, and the entire Economic Committee’s, grief for the victims of this terrible event and their families and commend the International Monetary Fund and the World Bank for their support on behalf of the civilised world in trying to overcome the economic effects of this trauma. These effects are, by the way, likely to be more severe for developing countries than for richer countries, since any world economic slowdown will hit the weak more than the strong.
5. The aim of this report is to portray and comment on the activities and concerns of the two institutions, and to provide insights into aspects of their operations that may be further improved in order to render them more responsive to the swift international changes underway. The Rapporteur is most grateful to Mr Horst Koehler, Managing Director of the International Monetary Fund, and Mr James Wolfensohn, President of the World Bank, and respective staffs, for sharing with him their thoughts on many of the issues raised in this report, for which he, however, alone takes responsibility, not least in his capacity as a free and independent parliamentarian and politician. He is also grateful to his colleagues on the Committee on Economic Affairs and Development for many valuable contributions in the course of its deliberations on various versions of the report.
II. ORIGINS OF THE IMF AND THE WORLD BANK
6. To understand the Bretton Woods institutions it is necessary to start with the vision of its founders. That vision was breathtakingly ambitious. Above all, it sought to ensure that the economic chaos and anarchy of the Great Depression would never be repeated. When the architects of the IMF and the World Bank met in the New Hampshire town of Bretton Woods, they set out to build institutions capable of underpinning a new economic order based on the twin principles of stability and shared prosperity.
7. These arrangements were set up also to reflect the radical change in the global balance of power following World War II. Europe was soon divided, seemingly permanently, and in the new bipolar world of US – Soviet rivalry, the “Iron Curtain” marked not only a sharp ideological divide but an equally clear divergence as regards economic theory and practice. The United States was the only major country that had in a way gone strengthened out of the war – holding as it did two thirds of the world’s gold reserves, half of the world’s manufacturing production and supplying one third of export goods. In the creation of this “new financial architecture”, the support of the US was certainly a condition sine qua non, also because it was the structure’s main architect. As a reflection of this, the voting rights on these organisations’ committees were in proportion to financial contributions. Since Washington was the largest single contributor, it effectively controlled the institutions.
8. At the time, the primary concern of the West was post-war recovery and reconstruction in Western Europe. Within this new geopolitical environment, the US recognised the existence of two potential and linked dangers: widespread social deterioration and decomposition, leading to political discontent in Western Europe and growing Soviet influence. These factors were clearly at play in the American decision to launch the Marshall Plan for the reconstruction of the “Free World”. The essence of controlling Soviet expansion lay in rebuilding sound economies and political structures.
9. Thus, the project of post-war reconstruction encompassed more than rebuilding war-torn states. The international capitalist system itself had been increasingly criticised for its role in the widespread economic collapses during the inter-war period that had, it was argued, contributed significantly to the rise of totalitarian regimes. The severity of the world-wide depression and the mass unemployment caused by it had led to attacks on the entire liberal-capitalist system and the success of assertive “national” policies, most disastrously in Germany.
10. At the end of the cataclysm of the Second World War there was therefore a consensus among the political leadership in the West that the currency chaos and ‘beggar-thy-neighbour’, mercantilist and protectionist, policies of the 1930s must be avoided through the establishment of international institutions capable of securing the kind of economic stability without which democratic revival would be impossible.
11. This historical overview is necessary to remind us that the Bretton Woods’ “twins” were part of a wider vision and altogether different from the situation these institutions face today. The IMF, the World Bank Group and, later, the GATT formed part of the commitment of the United States to the creation of a new-world order beneficial to the needs of the democratic market economy and the flourishing of democratic states.
12. Countries wishing to secure funds for reconstruction and development under this new economic regime were, and still are, obliged to conform to certain key US requirements, such as the free convertibility of currencies and open competition. The only area of the world that the US was unlikely to influence was that controlled by the Soviet Union. However, it was soon evident that while Soviet power was extremely imposing militarily, it had sustained tremendous damage during the war and could not possibly compete with the economic might of the United States and its allies..
13. The Bretton Woods agreement was the first successful, systematic attempt to produce a legal and institutional framework for the world’s free market economic system. It had a clear political mandate to promote free trade as a prerequisite for international stability, without therefore transgressing domestic interests and policy autonomy. However, from the very beginning there was an built-in tension between two competing ideas or interests: the Keynesian liberalism embedded within the Articles which accepted a degree of state intervention; and the orthodox liberalism of financial interests wishing to see the state withdraw from the substantial intervention seen during the war.
14. However, the preponderance of the US economy meant that from their beginnings the World Bank and the IMF were essentially financial institutions built on American values, prioritising financial rectitude and lending ideological support to the free flow of capital without substantial social commitment. The policy conflict caused immediate difficulties: for example, US bankers supported measures facilitating capital flows as opposed to the Keynesian concept of enforcing tighter controls to counter them. The US, as the largest single contributor to the Bretton Woods institutions, effectively controlled them. They were therefore from the beginning suspected in many quarters of being an arm of US foreign policy.
15. However, the IMF and the World Bank have been far from immutable or immobile. Throughout their history there have been organisational and ideological changes reflecting world developments. During the 1980s, they were the vehicles for then fashionable neo-liberal economic policies. At the end of the 1990s, following the serious social difficulties that erupted following the financial crisis in parts of Asia, in Russia or in Brazil, they began to adopt a more cautious and sometimes wary approach to the free market.
16. The re-examination that these institutions must undergo today are in keeping with this history of flexibility. Globalisation is a complex and uncertain series of forces to which various regional and international bodies must respond. It is therefore natural that the Bretton Woods’ institutions, along with all political and economic organisations, should be facing the challenges set by a new economic climate. Indeed, they will have to undergo re-evaluation and reform if they are to be able to respond effectively to these developments.
III. THE WORLD BANK
17. The earliest drafts for the World Bank foresaw as its main objective the financing of reconstruction and development of European areas destroyed during the Second World War. This was successfully completed decades ago. However, as de-colonisation gained momentum, the World Bank Group, at the request of in particular Latin American countries, moved towards a policy of “encouraging the development of productive facilities and resources in less developed countries”. Nevertheless, before the early 1970s, the external debt of most developing countries was relatively small and primarily of a government character. Most loans from the World Bank were on concessionary, or low interest, terms and extended for purposes of implementing development projects and permitting imports of capital goods.
18. However, in the late 1970s and in the aftermath of the OPEC boom and the flood of petrodollars, foreign borrowing by both the private and the public sector grew rapidly. Although the Bank continued to lend at a concessionary rate, this did not prevent a vast increase in debt service payments and the onset of a debt crisis for the developing world. Although much of the debt was with commercial banks, the World Bank was severely criticised for its alleged role in aiding and abetting the process.
19. Much World Bank lending was “tied aid”, meaning funds had to be spent on services provided by the West, and primarily the US. Thus, the World Bank subsidised service providers in the West. The most frequent criticism levelled at the Bank was indeed that it was biased in favour of projects with a high ‘foreign exchange component’, as distinct from those with a high ‘local content’. It is now recognised that an essential ingredient in any viable strategy of long-term development is that any loans should ideally be used for domestically productive development projects. To facilitate such activities, the International Development Association (IDA) was set up in 1960 as ‘soft-loan’ facility within the World Bank Group.
20. The Bank continued to change and in the 1980s it adapted its policies to the prevailing neo-liberalism known alternatively as “Reaganomics” or “Thatcherism”. Based on the unpopularity and dissatisfaction of the times with government intervention and central planning, the Bank claimed saw as the “success stories” in Southeast Asian countries, such as South Korea and Taiwan that resulting price distortions during the 1970s had slowed average GDP growth by about 2% and went on to emphasise the need to “roll back the state”. Encouraged by what it, the Bank became an influential part of the new orthodoxy of the 1980s, preaching and practising the virtue of market over state. Indeed, it scrutinised all projects to ensure that they could not be undertaken instead by the private sector.
21. The Bank also became a major advocate and enforcer of the policy of “structural adjustment”, that is, insisting on restrictive fiscal and monetary policies designed to prevent excessive domestic demand. This would, it was hoped, lower imports and reduce inflationary pressure. (Sentence out!) The focus was on improving the macro- economic policy environment by:
(a) an emphasis on mobilising domestic savings through appropriate fiscal and financial policies;
(b) improving public-sector efficiency by stressing price-determined allocation of public investments and improving the efficiency of public enterprises;
(c) improving the efficiency of public-sector investments by liberalising trade and domestic economic policies; and
(d) reforming institutional arrangements to support the adjustment process.
22. However, both the policies of structural adjustment and an uncritical belief in the virtues of the free market are now being reassessed. It is increasingly acknowledged that such policies of severe financial conditions on debtor countries have often inflicted an unduly harsh and unnecessary economic burden on communities that can ill afford it. Domestic consumption has suffered, hindering growth. In addition, there have been growing moral scruples about imposing spending cuts that lower social standards.
23. Such criticism seems to have been heeded. Under Mr Wolfensohn’s presidency, the Bank has undergone a remarkable transformation, including at the level of its public image. It now advocates a return to involvement by the state and emphasises the social aspects of its projects. In June 1999, at the Bretton Woods Committee’s Annual Meeting in Washington DC, Mr Wolfensohn said: “Since the realignment of the focus of the bank after the initial objectives of the Bretton Woods agreements … were met, the more recent and continuing focus has been on development and the issues of poverty and the issues of sustainable development.”
24. The speech marked a distinct departure from past policies, in that he spoke for the first time of the prerequisite of social safety nets and good governance, thus bringing the state back into the development equation. In doing so, he also mentioned the need for an adequate legal and justice system and so elevated the importance of accountability as well as transparency as necessary for sustainable development. Mr Wolfensohn cited the acute problems of South Korea, Thailand and Indonesia. This was not only pertinent but also ironic, given that the first two countries were once the starlets of the Bretton Woods neo-liberal orthodoxy programmes.
25. Perhaps most important, however, is the World Bank’s focus on the less developed countries and the poor. Mr Wolfensohn has emphasised the fact that those who suffer the most in a financial crisis are rarely the rich, or the middle class, but always the poor. He focused on their requirements and “the existence of a social safety net … Unless you have a social safety net, you have a real problem.” This ideological shift indicates that the Bank is not as impervious to alternative views as many of its critics have suggested.
26. The Rapporteur also discussed with the World Bank its efforts to bridge the so-called ‘digital divide’ between rich and poor countries. At a recent G8 meeting it was decided to entrust the World Bank with the setting up of a so-called “Dot Force”. The World Bank now lends around $2.5 billion per year towards this purpose and hopes that a “digital divide” chapter can be included in forthcoming WTO negotiations.
27. The rewards in terms of development are impressive. For every one dollar spent in this type of project, nine dollars come out in the form of increased income for developing countries. It may be for the farmers in the north of Peru to learn about the current coffee prices on the national coffee board in Lima in the country’s south. Or it may be the exchange of health data requested by a local hospital. Whatever, developing countries are showing increasing interest in this type of assistance.
28. The World Bank also encourages the introduction of pension systems in various countries, including developing ones, in order to enhance social security and against a background of overall lowering birth rates. It recommends a “multi-pillar” pension scheme with a significant private element and has a major research programme which tries to design and implement pension reforms in different countries, detect weaknesses in existing systems and work on improvements.
The 2000 World Development Report of the Bank: Attacking poverty
29. The World Bank’s 2000 ‘World Development Report’ (WDR) – Attacking Poverty’, published in September 2000, provided a powerful statement in favour of more equitable economic growth. Beyond the mass of empirical evidence it carried the simple message that mass poverty in the midst of global prosperity is “morally unacceptable, politically unsustainable and economically wasteful”. The challenge is to convert now its ‘pro-poor’ message into a concrete strategy for change at the national and global level.
30. The conclusion that emerged from the detailed empirical analysis marshalled by the Bank was that the war against poverty is, in a fundamental sense, a war against inequality. At the end of a decade that had seen the debate on poverty dominated by macro-economists stressing the primacy of economic growth, the World Bank was sending a clear message to governments that ‘distributional equity’ is as important to poverty reduction as macro-economic fundamentals.
31. Underlying the analysis presented in Attacking Poverty was a recognition that, without action to reduce inequalities within and between countries, the international development target of halving world poverty by 2015 will not be achieved. One in five of the world’s population lives on less than $1 a day, and one-in-two on less than $2 a day – approximately the same as in 1990.
32. The poverty reduction strategy set out in the report is based on three inter-related elements. These are:
33. Promoting opportunity. At national level the report calls for action to increase the asset base of the poor through increased investment in basic social and economic services. It also asks that service providers be held more accountable. At international level, the WDR calls for improved access to industrialised country markets, allied to measures designed to enable the poor to participate in local and global markets on more equitable terms. It estimates that the losses suffered by developing countries as a consequence of protectionism amount to $20bn per annum – or 40 per cent of aid flows.
34. Empowerment. The WDR recognises that the poor are often excluded from state institutions and public bodies that influence their chances in life. Alongside economic redistribution, it calls for the redistribution of political power, and for governments to increase awareness of the social benefits of ‘pro-poor’ public action.
35. Security. The WDR sets out an imaginative strategy for reducing the vulnerability of the poor through micro-insurance programmes, public works and disaster preparedness. The report also acknowledges that systemic risks in the global economy can have devastating implications for the poor, citing the East Asian financial crisis as an example.
36. Unquestionably, the most significant part of the report was its discussion of empowerment – significant because it marks a new departure. Empowerment embraces two objectives: making the state more responsive to the demands of poor people; and eliminating discrimination “on the basis of gender, ethnicity, race, religion, or social status”, all of which “can lead to social exclusion and lock people in long-term poverty traps”. The World Bank is in a way calling for the restructuring of the political and social order of its developing country members.
37. The report was absolutely right in analysing political and social realities. The fact of the matter is that the bulk of the world’s desperately poor are imprisoned in countries (or in regions of countries) that teeter on the brink of the dysfunctional. At worst, the political and social order has completely collapsed. That is an almost insurmountable obstacle to the elimination of mass poverty.
38. Yet in the final analysis, the term “empowerment” suggests the presence of a benefactor prepared to ‘dole out’ power to the deserving. In reality, however, no such benefactor exists. Consequently, the World Bank can only work through and with the elites that are as often the cause behind the ills it seeks to heal, as they are their cure. This is the point that the report largely evades – understandably so, since an explicit conclusion of this kind would be explosive.
The 2001 World Development Report : Placing national institutions in the service of the people.
39. The 2001 World Development Report – on which the Rapporteur received advanced information during his visit to Washington in July of that year – focuses on the importance of efficient institutions for economic development in developing countries. Weak institutions, the report published in September 2001 says, are characterised by confused legislation, corrupt systems of justice, unfair distribution of resources and swollen bureaucracies that meddle overly in economic activities. Complex regulations, often forming part of vague consumer protection legislation, indeed lead to more corruption, a waste of resources and lower productivity.
40. Institutions in many developing countries, indeed, prevent the populations from sharing in the dividends of the market economy. For instance, in order to register a new company in Mozambique, an applicant has to undertake 19 individual actions, stretching over 5 months and costing more than the average per capita annual income in that country. By contrast, in Australia the same process only requires two contacts with authorities, two months’ waiting and fees corresponding to only around 2% of average annual per capita income in Australia.
41. The report tries to identify the foundations for a successful institutional framework that can promote growth and reduce poverty.The report identifies three relevant aspects of institutional action. Institutions shape the flow of information, determine the various aspects of property rights (such as in contracts) and determine the degree of competition. Free media are essential. In countries with predominantly state-owned media citizens tend to have fewer political rights. Furthermore, such states are on the whole more corrupt and tend to give their citizens a low quality of life (such as in public health of education).
42. Finally, the 2001 World Development Report warns against unreflected copying by countries of models that perhaps were successful in other countries or at other times. Each country is in a way unique and needs to follow a unique path. Countries’ best bet, concludes the report, is to ensure greater transparency in the form of unhindered flow of information, to be prepared to try new ways on the basis of existing conditions and to ensure greater competition in all economic sectors.
43. In answer to the question whether the World Bank feels more optimistic about the general development situation in the world today compared with, say, a decade ago, bank officials were not so sure. They noted that much private investment to developing countries was withdrawn following the 1998 financial crisis in Asia and elsewhere and has not since returned fully. Furthermore, even a decade ago, some three-fourths of investment went to only a dozen or so countries. This concentration has if anything increased more recently.
44. One idea is for the World Bank to have grants increasingly replace loans. President Bush spoke out in favour of such a reform in July this year, while also callingfor a greater World Bank concentration on educational projects. The Rapporteur supports the idea. True, a concentration on grants would require an increase in the means placed at the disposal of the World Bank of between $ 500 million and $ 1 billion. This is so because loans are at least partly (around 70 %) paid back
eventually, whereas grants would not be paid back. However, since external debts weighs on donors and recipients alike, and since grants can be made conditional on actually undertaken reforms, there is much to say in their favour.
IV. THE INTERNATIONAL MONETARY FUND
45. As already mentioned, the IMF was designed to be the foundation of a system meant to foster prosperity through stable exchange rates and free trade. Yet when, in 1971, the fixed exchange rate system collapsed that the Fund had been set up to defend, the IMF seemed to have lost much of its original mission. However, in reaction to the first oil shock and the resulting widespread balance of payment problems, its duties were expanded. In subsequent years the Fund began to make longer-term loans in addition to its short-term credits.
46. This was not the only change. Originally envisaged as a major source of global liquidity through short-term loans for industrial countries facing balance-of-payment problems, the IMF’s influence diminished over the years. Today its quotas represent less than 2% of the value of world trade and no major industrial country has borrowed from it since the mid-seventies. Its clients are now located in the developing world, including the poorest countries, and in the transition economies.
47. In the midst of change, there have been strong elements of continuity. The IMF still provides balance of payment support with policy conditions attached. It is now a more active lender of last resort than in its heyday, as witnessed by its response to successive crises in Mexico, East Asia, Russia, Brazil, Turkey and Argentina. The Fund’s customers may have changed, but many of its activities have not. Nor has its organisational structure, inherited from the 44 countries that attended the first Bretton Woods conference, although the IMF’s membership now stand at over 180.
48. At present, the IMF is involved in negotiations with a number of countries with shaky finances. The reasons for each case vary, as, consequently, do the suggested IMF remedies. Argentina is the biggest challenge, not least considering its close economic ties to Brazil, which is also in financial difficulties. The IMF assisted Brazil with $41 billion in its 1998 crisis, while Argentina received $40 billion in assistance at the end of 2000. Turkey had received a total assistance of $ 31 billion (by February 2002) in exchange for a thorough reform of its banking sector and sounder budgetary policies, making it the IMF’s largest debtor1.
49. Argentina’s current difficulties stem from a combination of wasteful public spending (at both national and provincial level) and reduced exports resulting from an ill-conceived linkage of the peso to an ever-stronger US dollar. It is difficult to see how the IMF could have prevented either of these two factors, but it could presumably have been more vocal in drawing the world’s attention to their negative effects at an earlier stage.
50. In the early summer of 2002, Argentina sank further into economic morass following four years of a steadily worsening recession. Accusations are now levelled at the IMF for having supported the country for too long without any real reform undertaken in exchange. After its default in January 2002 on most of its $ 141 billion national debt, Argentina has become a financial pariah, with both the government and major Argentinean companies unable to borrow from abroad. The IMF’s response is now not to lend any more. It specifically wants Argentina to establish a budgetary framework, not only for the central government, but also for the provinces, which have also spent with abandon. The country is also expected to shape laws on bankruptcy and “economic subversion”,
in replacement of fully arbitrary legislation dating from the Peron era. Finally, Argentina is expected to put its monetary house in order – not only at national level but also at that of the provinces. In fact, Argentina has about a dozen different currencies, in the sense that provinces can in all independence issue bonds that are often void of any financial security.
51. To some, the IMF’s refusal to lend unless reform is undertaken is like the 18th century practice of bleeding sick people, thus weakening them further. Others insist that Argentina should not get another cent without a major overhaul of its government in order to rid it of corruption and inefficiency, with some going as far as to suggest that the government should temporarily be handed over to foreign experts.
52. The international community is in a conundrum over the Argentine crisis. The world has never seen anything like it. The suffering of the population is intense, with some people even setting themselves on fire as they are unable to withdraw their deposits from banks. Killings of police and official have become commonplace. Five presidents have succeeded each other since December 2001. The Rapporteur believes that, while the international community must continue to involve itself in the Argentinian crisis, it must in the last analysis be for the Argentineans to sort themselves out. Nobody from the outside can do it for them. Tragically, the Argentinian example shows how no country is immune to decline if it is poorly governed.
53. At the same time, the international community owes it to the ordinary Argentinean population to somehow support them, be it only with food. This, admittedly, looks like, and is, a paradox since we are talking about a country so rich in agricultural potential that it was once the world’s granary. Argentina at the beginning of the last century was one of the world’s richest and Europeans used to say in envy: “Rich as an Argentinean”. Excessive reliance on the government was followed by spreading, and in the end paralysing, corruption and inefficiency in the government itself.
54. Russia in May 2001 reformed its banking sector in line with IMF recommendations, to avoid the risk of a repetition of its 1998 financial crisis. Yugoslavia in 2001 was offered around $250 million in Special Drawing Rights, of which $52 million were paid out in June in a move probably related to the country’s transfer of Slobodan Milosevic to face international war crime charges in The Hague. Pakistan is being pressured by the IMF to cut its military expenditure in exchange for further IMF assistance. Even a country like the United Kingdom in 2001 was criticised by the IMF for what the latter considered to be excessive expenditure not in line with sounder long-term finances in the lead-up to general elections. All this shows the worldwide presence of the IMF, whether as a fire brigade extinguishing fires, or as a fire inspector trying to prevent future ones.
Voting power distribution and accountability
55. While developing countries provide the majority of IMF members, a given country’s quota continues to be determined by a formula which captures economic strength. For instance, the quota of the US is about $ 30 billion, while that of Indonesia is under $ 2 billion. Conversely, however, the survival of the old quota system has prevented any redistribution of political power. The G7 and EU countries enjoy 56 per cent of the votes in the Executive Board, despite their representing only 14 per cent of the world’s population and their being effectively exempted from Fund policy conditions. The United States alone accounts for 18 per cent of votes of the IMF’s Board – more than Latin America, South Asia and sub-Saharan Africa combined. Belgium, with a population of 11 million people, has more votes than India with a population of almost a billion people. It is difficult to accept that people in Africa, whose lives are arguably most affected by the Fund’s programmes, account for only around 2 per cent of IMF votes.
56. Voting power distribution at the Fund is a politically charged issue that goes to the very quick of the debate on IMF reform and accountability. It is not just a question of formal democracy. Increased interdependence among countries in the global economy implies that more countries need a voice and a say. The establishment of the ‘G-20’ reflects this new reality. The G20 group of countries, set up in 1999 to broaden the discussion on global financial affairs, includes large,
systemically significant countries such as Brazil, China, and India. The IMF would be well advised to follow suit with smaller, less strategically important developing countries that can also contribute to the discussion on global issues.
Long-term development financing in low-income countries
57. The Mexican debt crisis in 1982 signaled a new lease of life for the IMF in the developing world. As country after country teetered on the brink of bankruptcy, the IMF provided the loans that enabled them to repay creditors. It performed a similar function in sub-Saharan Africa. However, in that region the strategy of using short-term credits lent at market interest rates proved disastrous. Governments were unable to repay the loans, leading the Fund to create more concessional lending facilities foreseeing longer payback terms and lower interest rates: the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF).
58. The involvement of the IMF in providing concessional funds to low-income countries marked a new chapter in its history. In 1997, it was operating 33 ESAF programmes in some of the world’s poorest countries. Set up to provide short-term balance of payment and support, the Fund had been drawn into long-term development problems. This has given rise not only to an overlap with the World Bank’s mandate but also to questions about the very purpose of the IMF.
59. In the 1990’s the Fund’s involvement in development deepened further, with Mexico again serving as a catalyst. During the financial crisis of 1994-5, the IMF acted as a lender of last resort to the Mexican government, providing it with the funds needed to repay foreign creditors. Subsequent crises in East Asia, Russia, Brazil, Turkey and Argentina have seen this new role enlarged, placing a strain on the Fund’s resource base.
The Fund: ‘gatekeeper’ for development assistance?
60. In order to understand further the extent of the IMF’s true influence, which goes far beyond its funding capacity, it is necessary to look beyond the transfer of financial resources. The IMF derives its power from that vested in it by its major shareholders. This authority is reflected in the strength of the IMF’s so-called ‘loan conditionality’. Countries falling foul of these conditions risk exclusion from aid flows and debt relief. Other financial institutions will rarely support governments that fail to comply with IMF programmes. This gives the IMF a policy influence entirely disproportionate to the financial stake at hand. For example, while the Fund accounts for only 5% of aid to sub-Saharan Africa, countries in the region depend on its seal of approval in order to receive aid from other sources. In other words, the Fund is the gatekeeper for far more development assistance than it provides itself.
61. The management structure of the Fund has important implications as well. In practice, membership of the IMF is now divided into a debtor and a creditor community. Governments representing the citizens of developing countries over which IMF programmes hold sway, have no real say in setting loan conditions.
62. Moreover, in recent years, The IMF and the World Bank have often been ‘hijacked’ by their major shareholders for overtly political ends. When US financial institutions on Wall Street were threatened by the financial collapse of Mexico and the US Congress blocked a rescue plan, the Clinton administration turned to the IMF. More recently, some critics have pointed to the use of economic muscle by the Fund to pressure the Indonesian government into accepting an international peacekeeping force in East Timor. This has served to undermine the legitimacy of advice given by the IMF in some quarters.
63. Recent loan conditions for East Asia have included the liberalisation of car imports, the extension of foreign ownership in financial sectors and sweeping reforms in areas such as agricultural marketing. All too often, these conditions owe much to the strategic trade and financial interests of major shareholders, notably the US.
64. European governments for their part sometimes support loan conditions that they would presumably hesitate to implement at home, such as thoroughgoing liberalisation of agricultural trade and sweeping labour market reform. It is true, however, that also in the developing world attacks on the IMF may be off target, especially when used by governments as a smoke-screen to hide policy mistakes that led to economic crises.
65. The IMF staff like to portray themselves as providing “tough love”. As they frequently point out, governments visit them when their economies are chronically ill and they need strong medicine. The treatment may be painful, the side effects unpleasant, but there is, in a familiar refrain, “no gain without pain”. Governments in the industrialised countries share the Fund’s positive assessment of its therapies. They judge the economic standing of the world’s poorest countries, along with their right to receive aid and debt relief, almost entirely on the basis of their adherence to IMF medicine, seldom stopping to ask if it had been sensibly prescribed.
The Fund’s conditionality
66. From the very beginnings of the IMF, countries wishing to secure funds were obliged to conform to certain requirements, which more often than not reflected donor countries’ interests. Thus, in return for help in offsetting temporary imbalances in the economy, recipient countries had to accept the IMF prescription, which involved:
- the abolition or liberalisation of foreign exchange and import controls;
- the devaluation of an official exchange rate;
- a stringent domestic anti-inflation programme, controlling bank credit, government spending, wage increases and dismantling price controls;
- greater hospitality to foreign investment and a general opening up of the economy to international commerce;
67. The IMF encountered many of the same criticisms over its stabilisation programmes as the World Bank did in its programme of structural adjustments. Furthermore, the IMF has not been able to improve its image with the same success as Mr Wolfensohn achieved at the World Bank. Perhaps simply because “development aid” produces a more sympathetic audience than “financial aid”.
68. Indeed, under the 13 year leadership of Michel Camdessus, the IMF continued to be denounced as a neo-liberal institution, determined to foist painful policies, said to benefit only financiers, onto countries ill-equipped to withstand the consequences. Arthur Schlesinger, one time special assistant to President Kennedy said: “If the criteria of the IMF had governed the US in the nineteenth century, our own economic development would have taken a good deal longer. In preaching fiscal orthodoxy to developing nations, we are somewhat in the position of the prostitute who, having retired on her earnings, believes that public virtue requires the closing down of the red light district.”
69. Reforming the architecture of the Bretton Woods Agreement has again been given a fresh impetus due to the succession of crises that began with the European Exchange Rate Mechanism (ERM) crash in 1992 and carried on to include the crises in East Asia, Russia, Brazil and the Long Term Capital Management hedge fund crises. Much of the recent criticism has been directed almost exclusively at IMF rather than at the World Bank Group.
70. This is so mainly because the IMF is more involved in the management of these immediate crises than is the World Bank. Thus, although the World Bank certainly has a role in trying to remedy “crony capitalism” in various countries, the IMF has been the natural target of recent reproach. Whatever the debate about reforming the Bretton Woods system, in many respects, its goals remain the same as originally:
· to foster efficiency in the trade of goods and assets;
· to ensure the stability of the world economic system;
· to allow for an equitable, socially acceptable distribution of income and wealth.
71. These criteria are similar to the aim stated in Article One of the Bretton Woods Agreement:“To facilitate the expansion and balanced growth of international trade and to contribute to the promotion and maintenance of high levels of employment and real income…”
72. This means that, although these institutions must reassess their role, the focus must be on reforms that strengthen the architecture of the international financial system through the carrying out of their original mandate, not on reforms that risk weakening this role. After an era of deregulation the debate is shifting back, however reluctantly, to accepting the necessity of a degree of regulatory structure.
73. The enormous and fundamental changes in the world’s economic interactions – fashionably called “globalisation” – have revived the debate on the adequacy of international institutions. In addition to the general push for financial liberalisation at both domestic and global level, recent changes have, most notably, included a revolution in the technology of telecommunications and information systems. This new technology has underpinned and stimulated the integration of financial markets as well as capital mobility. The new mobility has increased private capital flows and the private sector has supplanted national governments and Bretton Woods institutions as the major source of international financial capital. This has caused unforeseen problems of current account imbalances in both advanced and developing countries.
74. For example, while the IMF and the Bank were once the greatest development investors, Foreign Direct Investment (FDI) is now increasingly in the hands of the private sector.It is now more apparent than ever that FDI involves more than the transfer of money or the establishment of a local factory. It carries with it new technology, managerial styles and business practices, in addition to new tastes and modes of living. However, the issue is not simply the amount of private FDI, but the stability of capital flows and the question of how much regulation is needed.
75. The phenomenon of globalisation has clearly confronted the IMF and the World Bank with new complexities and uncertainties that reflect those surrounding the future of public governance. Some now argue that globalisation is a set of unprecedented processes within the international political economy, requiring a corresponding transformation within national, regional and global institutions.
76. Traditional forms of public governance are now subject to serious questioning as a result of globalisation – as are the international arrangements for co-operation such as the Bretton Woods institutions, which have so far have dominated the international landscape. There is no doubt that such questioning contributes to the uncertainty and instability of globalisation itself. However, the IMF and World Bank can still be strengthened and reformed to good effect in the light of these changing realities, especially since the fundamental aim – the stabilisation of a liberal trading system- is largely the same as in the founding days. There is thus potential for yet another successful transformation.
V. THE SPECIAL PROBLEMS OF SUB-SAHARAN AFRICA. THE HIPC AND PRSP PROJECTS
77. The subject of Africa was raised repeatedly during the Rapporteur’s visit to IMF and the World Bank in July 2001. The heads of both institutions carried out a joint visit to several African countries in February 2001. They met with over twenty Heads of States as well as with leaders of civil society and drew as the main conclusion of their meetings that the Bretton Woods institutions and the developed world in general must expand their help to the continent.
78. As was pointed out the Rapporteur, almost half of all Africans live on less than $1 a day. One in seven African children dies before his or her fifth birthday. AIDS has reduced live expectancy sharply in many countries. Sub-Saharan Africa now accounts for only 2 % of world trade. At the same time development aid to Africa has fallen from $32 per head in 1990 to $19 in 1998. While OECD countries spend more than $300 billion a year on agricultural subsidies – roughly equivalent to the entire GDP of Sub-Saharan Africa – the African countries concerned find access for their agricultural and textile exports to OECD countries highly restricted. (The European Union pays more for agricultural subsidies within the CAP framework than it pays for development co-operation.) Africa must become more incorporated in the world economy since otherwise it will not reach the growth rates needed for a successful fight against poverty2.
79. The Africans told Mr Wolfensohn and Mr Koehler of their wishes: better access to the markets of industrialised countries, more direct investment, mobilisation of the domestic savings, greater access to information technologies and money to fight AIDS. They also asked for further reductions in their debt burden and greater understanding for the difficulties in introducing “good governance”.
80. The IMF and the World Bank for their part expect a more determined fight against corruption in Africa, better institutions and better policies. They are also becoming increasingly strict in their lending conditions. Thus, the IMF in 2001 suspended assistance to Kenya as that country refused to follow central policy recommendations.
81. The Africans were also told that they have to keep better peace among themselves since only peace can bring the stability necessary for development and growth. Serious investors shun regions in crisis. The IMF and the World Bank are ready to look into ways of further reducing the debts burden of African countries but have also made clear that this presupposes improvement in the investment climate. It is also important that Africa try to negotiate in unison (if not collectively as does, say, the EU) in such fora as the World Trade Organisation.
82. The African side replied that they were willing to fight more against corruption but also pointed to bribes offered by many companies from developed countries that rendered such a struggle more difficult. Furthermore, African countries that have succeeded in deepening democracy, such as Ghana and Uganda, now expect a “democracy dividend” as a reward for the reforms. This comes close to current IMF and WB thinking, which foresees a greater role for grants following improvements – rather than the current stronger reliance on loans that often have to be given before reforms are, or are not, implemented.
83. IMF and WB current thinking as regards Africa and the developing world in general comes against the background of recent criticism against past policies. One World Bank economist, William Easterly, argues, for example, in a recent book – “The Elusive Quest for Growth” – that traditional panaceas for growth, such as increasing business investment, improving education, limiting population growth, changing government policies and forgiving loans, have all largely failed to raise growth rates. His proposal is that the Bank instead focus on creating the proper incentives for poor countries to adopt free market policies, largely by halting loans to nations that do not manage their economies effectively, while increasing loans to those that do.
84. In a report published in March 2001 on “Assistance and Reform in Africa”, the World Bank seems in part to agree. The report states that aid is only efficient under two conditions: if the country in question is truly poor and if its government undertakes reform. The World Bank points to Ghana as an example. Ten years ago, Ghana had the worst financial reputation in all of Africa. Today, it has one of the best standings and the percentage of poor has fallen from 56 % to 34 %.
85. The IMF and the WB have initiated two programmes largely to help Africa: the Heavily Indebted Poor Countries (HIPC) and the Poverty Reduction Strategy Papers (PRSP) programme, which tries to ensure that aid goes where it is most needed by drawing on the experience of civil society groups as well as donors. In 2000, the HIPC initiative brought $34 billion in debt relief to 22 poor countries, 18 of them in Africa. The World Bank for its part has committed half a billion dollars to fighting AIDS, with additional funds foreseen.
86. The World Bank has drawn four main conclusions from its PRSP project: firstly that the recipient country itself should be responsible for preparing its own development strategy; secondly, that development must be seen in a long-term perspective, concentrating on strategies for participatory growth rather than ad hoc, short-term measures to reduce poverty; thirdly, that strategies must be results-oriented and quantifiable; finally, that there has to be a true partnership between donors and recipients, especially through the improvement by the recipient countries in co-ordinating aid policies. This presupposes a dialogue in the countries concerned. Thirty-five developing countries have so far committed themselves to formulating PRSP strategies and 5 have only produced them.
VI. THE MAIN ISSUES AT STAKE
87. Given that both “twins” are beginning to re-emphasise the need for social safety nets – and the position of individuals and nations lacking the abilityto protect themselves in times of economic turbulence – a reassessment of the balance of power between Keynesian interventionism and a more orthodox liberalism (also referred to as the “Washington consensus”) of letting the market decide must now take place. The essential issues are the following.
Raising financial standards
88. International accounting, disclosure and other financialstandards must be used in all financial areas, and therefore require some incentives to make signatories comply with them. The task lies in enforcing standards across the board, as otherwise one rogue member’s mischief can result in massive capital flight throughout larger parts of the system. This enforcing of standards and regulations should be attempted. For example, the IMF could incorporate compliance to international standards as a condition for their assistance loans and credit schemes.
89. Third, the evidence of the linkage between rapid liberalisation and social discomfort is now uncontested. Provision must be made to limit the social impact of financial crises and the disruptions caused by capital liberalisation. Again, this can be fostered by making lending conditional on such compliance.
The problem of ‘financial havens’
90. The international community has become increasingly concerned about offshore financial centres and the escalating problem of financial crime. The abuse of the international financial system were a theme in IMF discussions in Prague. They also provided a good opportunity to raise the issue of the negative impact that global tax competition can have on financing in developing countries.
91. Problems arise as markets have globalised, while tax structures have remained largely national. Tax competition between states, intensified by the increased mobility of capital and the proliferation of ‘offshore’ tax havens, now represents a serious obstacle to poverty reduction. Global tax competition limits the capacity of governments in both industrialised and developing countries to raise revenue through taxation, both of their own residents and on foreign capital. This undermines the ability of governments in poor countries to make vital investments in social services and economic infrastructure, upon which broad-based economic growth depends. A recent Oxfam study estimated that developing countries could be losing out on over $50 billion each year as a result of harmful tax competition – a sum roughly equivalent to yearly development cooperation assistance. Recouping even some of this revenue could make a significant contribution to the internationally agreed target of halving world poverty by 2015.
92. International efforts to crack down on harmful tax practices are currently being led by the Organisation for Economic Co-operation and Development (OECD). Still, the OECD initiative is often perceived by critics as primarily representing the interests of the governments of developed countries, and as lacking a poverty dimension. A global approach to this issue, reflecting human development concerns, is very much needed.
Transparency and accountability
93. There is a growing consensus that transparency and accountability can help prevent and resolve crises. Weak financial systems and opaque relationships between government and the private sector greatly enhance the risks in a more globalised world. The unwanted consequences of a lack of transparency, of lending on the basis of too many weakly underpinned public guarantees, and of the distortions associated with “crony capitalism” were all brought home in a dramaticway in the financial crises in Thailand, Indonesia and elsewhere.
94. While such occurrences had not prevented unprecedented growth gains in some of these countries in previous times, they surely contributed to the severity of the collapse when trouble came. That is why priorities such as increased transparency, effective bankruptcy and insolvency regimes and the fight against corruption should be a high priority in our approach to structural reform.
95. Parliamentarians should urge the IMF to press more actively for public funds in recipient countries not to go toward unproductive purposes such as showcase projects and excessive military spending – and instead have them directed towards policies that support growth and poverty reduction. To make progress in this area, there is a need to create more transparency in, and accountability for, government spending, including on the military.
96. The Parliamentary Assembly of the Council of Europe has devoted particular attention to the need for early warning as regards arising financial crises. The most notable expression – apart from several Enlarged Assembly reports on “OECD and the World Economy” – is perhaps Assembly Resolution 1209 (2000) on “Democracy and Economic Development”. In this text the “Assembly notes that the [financial] crises in question have hit countries where democracy is weak, incomplete or even absent, while the more fully developed democracies have on the whole withstood their international impact. This points to the importance of democracy for lasting economic development, including respect for human rights, the rule of law, social justice and solidarity, transparency and accountability in public affairs, an independent judiciary, a free press and a firm stance against “cronyism”, corruption and economic crime”.
97. The Assembly’s Resolution goes on to note that “international financial institutions gave insufficient advance warning to the world before the recent financial crises, and that even private credit rating and country risk agencies largely failed to do so – either because of faulty analysis or out of concern not to provoke the crises they feared. It is clear, however, that the damage to the countries concerned and the world would have been much less pronounced had early warnings been sounded”.
98. The Assembly, in conclusion, “calls on the international financial institutions, in particular the IMF and the World Bank, the EBRD and the Council of Europe Bank for Development to reinforce their ‘early attention’ role as regards any departure from democratic standards in individual countries, especially as it may affect the soundness of an economy and its financial system, or those of
neighbouring countries or the world economy”. Finally, the Assembly welcomes “the IMF’s recent proposals for country ratings on variables relevant to financial stability and for a code for governmental relations with the banking sector and investors”.
99. As if to underline the above, Mr Michel Camdessus, on leaving the post of Managing Director of the IMF after 13 years, talked in his farewell speech at an UNCTAD Conference in February 2000 about a “dangerous period of twilight” for the world economy. He warned that, unless countries undertook the “nitty-gritty” of reforms encouraged over the years by the IMF and others, there was a major risk of a “new financial crisis” of hitherto unknown magnitude. “Reforms must be implemented not just in a beautiful declaration on the occasion of the finance ministers of central banks’ meetings in Washington …We are in a dangerous period of twilight between when principles are agreed upon and when they are acted upon at the local level”. Mr Camdessus also proposed that the Group of 7 Summits be enlarged to include as many of 30 countries.
100. The Rapporteur needless to say had in his luggage to Washington Assembly Resolution 1209 (2000) and he is happy to report of more recent IMF action on the subject. Thus, a new International Markets Department will integrate the operations of earlier departments in trying to detect crises in the earliest stages in their development. The new department will study changes in the world economy occasioned by the operations of capital markets. The new system will focus on trying to identify vulnerabilities in country profiles. Models of past experiences will be used, the problem here being that the past rarely offers a guide to the future. Emphasis will be laid on gaining a good picture on the country’s macro-economic situation, the state and transparency of its financial system and the supervision to it is subjected by the country concerned. Much attention will be paid to fiscal sustainability and to the health of the corporate sector3. The IMF, in brief, will try to detect emerging crises at an early stage. It will ask the affected country to address the root causes of any difficulties it may have. At best, any liquidity crisis can be prevented from turning into a costly solvency crisis. And, as has been indicated, the IMF will try to ensure a legal framework to guide the restructuring of the overall economy, including ‘standstill provisions’ that give a country breathing space to address its problems while negotiating with creditors for a rescheduling of their debt.
101. The IMF through its International Markets Department wants to become a “Center of Excellence” on the subject of capital markets. It will increase its “surveillance” of them at local and global level, paving the way for IMF member countries to gain access to international capital markets. The reform is in reaction not only to the relative lack of preparedness for the Mexican financial crisis in 1994, those in Asia and Russia in 1998, that in Turkey in 2001 and that in Argentina in 2002.
102. Internal transparency can also bolster the legitimacy of both Bretton Woods institutions. For instance, the IMF has been severely criticised for using the “confidentiality” label excessively as a pretext for maintaining secrecy. This was alleged, for example, when Michel Camdessus offered to lend Mexico $17.8 billion in 1995 without even discussing it with his own executive board. The IMF must clarify and open up its own decision-making process. It could broaden consultation to national government ministers and parliamentarians during the programme planning phase and also make such consultations available for public scrutiny before discussion in the Executive Board.
103. Moreover, it is now widely recognised that environmental, social and labour issues must be incorporated in some agreed way into international rules. It has become accepted that these issues have a material impact on a firm’s financial position. There is a need for incentives for private and national authorities to comply with international norms and, hence, for a monitoring of compliance through ‘transparency reports’.
104. There is also consensus that there is an urgent need for reporting and publication requirements for the activities of hedge funds and major asset holders. These have mushroomed over recent years and play an influential, yet unclear role in world finance. The latest example is Enron, the US energy-trading company, whose collapse in late 2001 illustrated that the industrialised world had better put its own house in order before preaching transparency and corporate standards to others.
Changing Roles and Responsibilities
105. With the past quarter century, economic and financial liberalisation across the world has fully transformed financial markets. Government regulations have been reduced and emphasis placed instead on making markets function better by adopting rules-based frameworks to assist financial policies and markets. This has led to greater efficiency in the use of capital, but it has also, on occasion, caused abrupt capital outflows from countries in difficulty. The task for especially the IMF now consists in enhancing the transparency of the financial system and increasing the latter’s resilience against market turbulence.
106. It is now generally accepted that an international lender of last resort does not, and cannot, realistically exist. The IMF cannot be such a last resort lender because it does not have the resources necessary to provide the vast liquid assets necessary to stop any financial panic. Moreover, the IMF’s main funder, the US, is unlikely to contribute much more and the US Congress is already critical of the extent of US support for existing arrangements. The same holds for the countries of the Council of Europe area, most of which face tight budgetary restraints, whether inside or outside the EMU’s Stability and Growth Pact.
107 Furthermore, sufficient resources are unlikely to emerge from other sources, unless countries can agree to further solidarity payments in favour of poorer countries – a less likely scenario within the foreseeable future. Therefore, the IMF will have to focus on planning contingency credit lines it can disburse quickly in an emergency.
108 Since the IMF will not be able to provide huge sums of money should trouble break out, it should concentrate on its role of overseeing how individual debtor countries negotiate with their creditors. In addition, there is a role to be played by regional, devolved bodies which could increase their profile in encouraging development financing and crisis management. Such an extension of regional banking and development facilities – for example Asian or Middle East development banks – could provide a more positive climate for a country in difficulty and allow region-specific development plans.
109 Some more radical critics argue that if the IMF cannot deploy enough resources to be the ‘lender of last resort’, it should not be called upon to lend at all. Their rationale is that a weak capacity merely creates an illusion of protection, which makes the world more dangerous. However, it is clear that a body like the IMF is still very much needed. Some argue for an expanded role for the IMF, for example by setting criteria for good governance in advance – before any country qualifies for access to funds.
110. Arguments for an extended role for the IMF have been seriously undermined over the years as the IMF is still seen as a partisan advocate and enforcer of a particular kind of economic development – that of unbridled liberalism. Furthermore, suspicions, founded or not, that the IMF is deeply committed to US foreign policy aims may have undermined the credibility necessary for such an extended role. Perhaps no international institutions may be able to escape from such suspicions. Yet, credibility as a non-partisan body is a vital component of any new financial architecture.
111. In this regard, it is worth revisiting the discussion about the future of the United Nations (UN). It should be recalled that the Bretton Woods procedures first took place within the ambit of the UN. The UN and its various bodies, such as UNCTAD, the UNDP and the ILO could be reinvigorated as forums for economic security discussions. The UN has always been seen as being more legitimate than many other international bodies because it is based, at least in theory, on the ‘one member one vote’ principle and thus does not, again in theory, override the voices of the less developed economies.
112. It has become fashionable to talk about the concept of ownership, using the term to mean ‘national responsibility for economic policies and performance’. Michel Camdessus has argued that part of the perception that the IMF has failed has been part of the result of a more subtle failure to persuade governments to assume responsibility for their economic policies.” We neglected”, he said, “the dimension of ‘ownership’, which is indispensable for a policy to be sustainable”. He also felt that countries only approached the IMF once a crisis had hit, not before it hit. It is significant that his successor Mr Köhler lays emphasis on precisely these aspects in his efforts at reform of the IMF.
113. If such a notion of “ownership” were to gain ground, assistance would be focused more exclusively on countries with truly reform-minded governments. Reform in this sense embraces transparency, accountability, and other features of good governance. Such selectivity could lead to a leaner strategy for the IMF and to the end of any claim that the IMF is mainly a tool of US foreign policy. For example, since 1989 it is evident that the IMF has been used increasingly by the US to help in the reform of post-communist countries, notably Russia. Similarly, it has come to be seen as the means by which richer countries can deal with emerging-market crises. The questions of legitimacy raised by such a development needs to be addressed. Corresponding questions of devolving economic responsibility and policy-making could also be raised in this context.
114. “Ownership” also implies improving standards of financial disclosure. Here rich countries should lead by way of example. They can discourage their own financial institutions from behaving recklessly in emerging markets by, for example, revising the Basle Capital Accords. It is easier and quicker to encourage creditors’ behaviour than to place all the responsibility for improving banking supervision on emerging markets alone.
115. Another area that deserves more attention that it has received so far is that of international bankruptcy. Within states provisions exist for allowing the write-off of debts when an enterprise has clearly failed and where ‘throwing good money after bad’ would have little effect on the crisis at hand. The introduction of such a principle on the international stage is long overdue.
Alternative crisis avoidance strategies: strengthening crisis prevention and crisis management
116. Listing the problems is easier than finding a solution. Should there be a more or less global set of rules? Should exchange rate policies be looser or tighter? A policy-maker trying to design the ideal financial system may have three objectives:
- preserving at least the essentials of national sovereignty;
- maintaining financial markets that are somehow kept within a common framework of rules, supervised as to its overall functioning and equipped with resources to cushion any crisis; and
- deriving the maximum benefits for growth and development from global capital markets.
117. Unfortunately, as the then US Treasury Secretary Larry Summers argued, these three goals are difficult to reconcile. They form the ‘impossible trinity’ that underlies the relative instability of today’s global architecture.
118. The “impossible trinity” renders most radical reform blueprints utopian. The best hope in the short-term, therefore, may lie in improving the trade-off between these objectives. Transparency can be improved. Global standards can be developed across a broader range of institutions and products. Incentives can be devised to make market participants stick to the rules. Such improvements will reduce the risk of financial crises even in a world of sovereign states.
Universal Debt-Rollover Option with a Penalty (‘UDROP’)
119. This scheme was put forward by Willem Buiter, then a member of the Bank of England monetary policy team. He argued that all foreign currency debt should have attached to it an option, exercisable at the discretion of the borrower, to roll the liability over (3-5 years, for example) at a penalty rate. The option is supplied at a price determined by the market, therefore acting as a tax on foreign-currency borrowing. Borrowers who are expected never to exercise the option will be charged a nominal fee but if a crisis occurs, the option can be exercised and the borrower will gain breathing space until more orderly conditions return.
120. The ‘UDROP’ is only intended to assure liquidity for fundamentally solvent borrowers at times of disorder in financial markets. The scheme is ineffective if the debtor country is insolvent. The scheme would be mandatory in order to avoid adverse selection, whereby borrowers try to signal reliability by not invoking the option. The IMF would refuse to help countries that did not have them and members would agree to make non-UDROP contracts unenforceable in their courts.
Greater rewards for joining the ‘good housekeeping club’
121. Emerging market economies have a key responsibility to keep their house in order. International financial institutions can encourage them to do so by enlarging the rewards for ‘good housekeeping’. The term covers a range of economic policies and institutional reforms, such as the avoidance of large budget deficits, prudent debt management, or a strong and well-regulated banking and financial system that complies with international standards for good public disclosure of economic and financial data.
122. Suffice it to say that many of these elements were not there in the run-up to the recent financial crises, in which large government deficits and heavy reliance on short-term government borrowing were at the heart of the problem. In the Asian crisis, countries with imprudent debt management, a weak domestic banking systems and premature and poorly supervised financial liberalisation took a heavy toll when the external environment soured.
123. Henceforth the IMF should lend on more favourable terms to countries that take effective steps to reduce their vulnerability to crises. To increase the private market pay-off of good crisis prevention, the IMF should make public a ‘standards report’ in which it assesses periodically each member country’s compliance with international financial standards. It should also publish its regular assessments of each country’s economic policies and prospects (its article IV reports). Some initial, partial and tentative steps in this general direction have already been taken, but more should be done to strengthen the rewards for joining the ‘good housekeeping club’.
Promoting a fair ‘burden sharing’ among private creditors, official debtors and official creditors when a crisis occurs
124. If debt difficulties are resolved with large official bailouts (paid by national authorities or by the international financial institutions and, ultimately, by taxpayers) this can lead to distorted expectations. Market participants come to routinely expect such bailouts and private creditors will have little incentive to monitor the financial condition of borrowers.
125. All too often large rescue packages will allow private creditors (particularly large commercial banks) to escape from bad lending decisions at relatively little cost. These problems generally fall under the heading of ‘moral hazard’.
126. Despite serious underlying weaknesses in the economic fundamentals, investors were prepared to purchase large amounts of high- yielding government securities, presumably on the expectation that, should conditions worsen, geopolitical and security concerns would prompt G7 governments and the IMF to bail them out. There is indeed a ‘moral hazard’ problem associated with large IMF-led financial rescues, but this can be reduced significantly by altering the IMF’s intervention policies.
127. The recent financial crises of different countries illustrate how increased private capital flows to developing countries can quickly translate into unsustainable debt. Under current arrangements, IMF loans have been used to ‘bail-out’ private creditors, while the pain of adjustment has fallen almost entirely on the debtor countries. One of the major challenges facing the international community consists in establishing a more orderly and equitable set of arrangements for dealing with the problem of unsustainable debt owed by developing countries to private creditors.
128. During the last two years, the IMF and G7 governments have clearly stated that burden-sharing between the private and official sectors in times of financial crisis will have to increase. Yet progress on establishing rules of the game to govern private sector involvement has been slow. The IMF has been examining what role it could play in an international regime and has been testing new approaches in its treatment of countries with debt problems – such as Ecuador. One proposal is that when a country that is facing a crisis seeks IMF assistance, it should be expected to declare a ‘standstill’ on debt servicing while negotiating with the Fund and private creditors. The IMF would provide financial support during the negotiations, and could also verify the sustainability of the debtor country’s debt profile, once restructured.
129. In addition, the G7 countries remain divided over whether such arrangements should operate on an ad hoc basis or whether clear multilateral rules should be established. Meanwhile, the private sector is opposed to ‘standstill’ arrangements altogether. This stalemate cannot be allowed to continue, as protracted debt crises can have devastating economic and social costs, particularly in poor countries. If the Fund is serious about its objective of reducing poverty and reaching sustainable and equitable growth – which no doubt it is - it cannot afford to tarry further in addressing this issue.
Poverty reduction strategies
130. the centre of the new consensus on development is a commitment to a comprehensive approach to poverty reduction. In place of the old approach, which ranked economic fundamentals first and social policies second (if at all), the new framework sees economic policy as an integral element within a wider human development strategy that includes stabilisation policies, macro-economic reform and redistributive public spending policies. This is the idea behind the comprehensive development framework (CDF) developed by World Bank President James Wolfensohn. It is also reflected in the new “Poverty Reduction and Growth Facility” (PRGF), which G7 countries have promoted within the context of their ‘heavily indebted poor country initiative’.
131 Indeed, while progress on debt relief captured media attention at the IMF/World Bank Annual meetings in September 1999, agreements reached on the nature of IMF and World Bank programming were more fundamental. The two institutions agreed to negotiate their programmes in low-income countries through the previously referred to government-owned and government-driven Poverty Reduction Strategy Papers (PRSP), developed in consultation with civil society and other stakeholders. These agreements have the potential to place poverty reduction, in the ‘front and centre’ of IMF and World Bank programming in these countries, with civil society having a major role to play.
132 These ideas are being turned into practice through a range of innovations, among which the following are particularly significant:
133 Medium-term financial frameworks enable governments to develop budget priorities over the longer term. They are being used to establish the financing requirements for achieving human development goals in areas such as basic education and health care, enabling government to project annual budgets forward over time.
134 Budget transparency and public expenditure reviews: far more attention than previously is being paid to the development of transferring budgets forward and to monitoring expenditure against national priorities. This method has been used for instance in Tanzania, in order to improve the efficiency of public expenditure and planning in education and other key social policy areas.
135 Sector wide approaches (SWAPs): Instead of financing individual projects, donors pool their resources to support strategies across whole sectors, on the basis of partnerships with governments. SWAPs help to identify the long-term financing requirements for achieving specified human development goals.
The role of the IMF
136 The Prague annual meeting in September 2000 gave Mr Horst Köhler, the new Managing Director of the Fund, the opportunity to set out a more clearly defined role for the IMF. Mr Köhler has taken stock of the widespread criticism of the Fund's response to various crisis, congressional opposition to the Fund's role in the poorest countries, and the debate surrounding the IMF's new poverty reduction focus. Yet some of the key questions remain, such as how the Fund and the Bank are to work together; which lending facilities the Fund should retain and how they are to work; and how the Fund should navigate the inevitable trade-offs between its growth and poverty reduction objectives.
137. Mr Kohler has indicated he wants to reform the IMF in various ways. He wants it to refocus on its chore mission, namely maintaining macro-economic stability, and to reduce its work on longer-term structural and development work. This, in his mind, calls for greater emphasis on capital markets and financial flows; a greater effort to prevent crises rather than simply managing them; and streamlining of the conditions that the Fund attaches to its many loans. As regards this latter point, Mr Kohler wants to bring down the number of “conditions” for assistance from the current average 12 or more to only a handful. He also wants a more co-operative relationship with borrowers in order to ensure that they feel that they truly “own” can identify with reforms agreed on with the Bank. Fund programmes will be developed in close co-operation with the World Bank and other development agencies.
138. The IMF has also committed itself to ensuring that budgets are more ‘pro-poor’, with spending directed at poverty reduction. This is an important shift from the past, where under IMF adjustment programmes many countries experienced large falls in social sector spending and a more costly recovery process, with poor people paying for health and education. By way of example, in one IMF survey 16 countries in Africa saw education spending fall, with growing numbers of children being forced out of school. Another key change is that the IMF has agreed to undertake social impact assessments of major reforms prior to their implementation.
139. The Rapporteur alsobelieves that IMF programmes should be integrated more into national and international strategies for achieving the 'Human Development' goals for 2015 established at the World Summit for Social Development in Copenhagen in 1995. More emphasis should be placed on creating the macro-economic conditions for poverty reduction. IMF programmes in poor countries should be reformed to support accelerated economic growth, improved income distribution and increased investment in basic social services.
140. Moreover, performance criteria in IMF loan conditions should include benchmarks for protecting priority social spending budgets. These benchmarks should be established with reference to national plans in health and education and to wider poverty reduction strategies. In responding to financial crises, the IMF should give priority to human development and economic recovery.
141. Another lesson from recent financial crises is that co-operation requires a different set of institutional relationships. The international community's response to the financial crisis in East Asia was to ‘send in’ the IMF to restore macro-economic stability first and to ask questions about poverty later. In future, the World Bank and relevant UN agencies should be involved at the outset in shaping macro-economic goals, and in setting up structures for monitoring impacts on poverty.
The heavily indebted poor countries (HIPC) plan
142. ‘Deeper, broader and faster’: such was the promise given by the leaders of the Group of Seven leading industrial countries when they met in Cologne in 1999. It was another way of acknowledging that debt relief for many of the world's poorest countries had been ‘too little, too late, and too slow’. Under pressure from non-governmental organisations, and confronted by the realities of poverty, the G7 summit admitted the weaknesses of the 1996 initiative drawn up by the World Bank and the International Monetary Fund.
143. The Bank and the Fund have therefore changed the terms of the heavily indebted poor countries (HIPC) plan. Under the new terms, the definition of debt sustainability - debt servicing as a percentage of export earnings became less stringent. There is a stronger link between debt relief and poverty reduction .
144. Welcome though these changes are, they do not go far enough. As critics argue, the headline figures are often misleading. Figures from the enhanced HIPC debt relief applied to 12 countries shows that some of the worlds poorest countries will continue to transfer more to their creditors than they are able to invest in basic services. In five of these countries - Zambia, Tanzania, Senegal, Mauritania and Cameroon - debt repayments will exceed the combined health and education budgets – even after the proposed debt relief. In the case of Zambia, one of the countries worst affected by the AIDS epidemic, around 40 per cent of government revenue will go to debt servicing.
145. Getting the terms right is difficult. Conditionality remains a vital factor. But there is surely something seriously wrong when a country that is undergoing reform and which committed to a credible poverty reduction programme spends more on debt service than on health and education.
The need to innovate: the example of the new “Sovereign Chapter 11” proposal for a more orderly resolution of payment problems
146. The changes brought on by globalisation have gone to the heart of the workings of organisations such as the IMF and the World Bank Group. The original mandate of the Bretton Woods’ Agreement was to find the best way of helping to alleviate poverty and stimulate development. These bodies should be innovative in the face of the present complexities, in order to give substance to that same, remaining goal.
147. In April 2002, Mrs Anne Krueger, Deputy Managing Director of the IMF, launched a proposal for the orderly resolution of payment problems by debtor countries. Unofficially termed the “Sovereign Chapter 11” plan after similar provisions in US domestic bankruptcy legislation, the idea is that countries in payment crises would be able to call a halt to debt payments while negotiating a restructuring of loans with private sector lenders under the jurisdiction of a new international judicial panel. At first, the IMF had in mind that itself could be in charge of such a panel, but Mrs Krueger has since held out that it could also be an independent expert panel, thus allaying private sector fears that loans would be adjudicated by the IMF alone.
148. Several major European countries have stated their support in principle for the plan. The United States for its part has shown itself cooler to the idea, proposing instead that borrowing countries should add provisions to their bonds allowing a majority of creditors to propose a collective deal.
149. Proponents of the “Sovereign Chapter 11” plan argue that it would permit the international community to avoid messy and chaotic defaults hurting the international financial system as a whole. Sceptics, however, maintain that foreign debt has been the determining factor in only one of the many financial crises in recent years, whether it be in Argentina, Mexico, Korea, Russia or Brazil.
150. The Rapporteur views Mrs Krueger’s proposal favourably, even as he recognises that its implementation will not be easy, since its inclusion in the IMF’s statute would require 85% of country shareholder votes, that is, necessitate the consent also of the United States.
The Spring 2002 Bretton Woods Conference
151. The Spring 2002 meeting of the Bretton Woods institutions was held in April 2002 against the background of easing concern over the world economic situation following the 11 September shock. For the purposes of this report, let us concentrate on the various themes we have raised. Thus, the G7 International Monetary and Finance Committee took up the subject of the procedure to be followed in the event of insolvency of sovereign debtors. An action plan was decided to give further body to a proposal raised a few weeks before by Anne Krueger, Deputy Managing Director of the IMF, for an orderly negotiation procedure between the debtor country and the international community, whether represented by the IMF or some independent expert panel. This is something which the Rapporteur welcomes, since everything must be done to prevent international financial chaos in the event of a major default by a country.
152. Furthermore, it is heartening that the meeting raised the progress made in tracking terrorist funds and encouraged the establishment and implementation of the necessary international standards in this area. The meeting also pointed to the importance of intelligence in halting international payments for terrorist purposes.
153. Finally, coming as it did on the heels of the March 2002 UN Conference “Financing for Development”, the meeting also called for a deepening of development cooperation along the lines of the Monterrey commitments. This seems to the Rapporteur to be fully in line with the emphasis he encountered during his visit to the IMF and the World Bank in Washington to give greater weight to the struggle against poverty and its underlying causes in the developing world.
154. The Spring Meeting launched an Education For All (EFA) project, which among other things foresees worldwide access to basic education by 2015 at the latest. The greatest efforts would be undertaken in those poorer countries where, according to the World Bank, 125 million children between 5 and 11 do not receive any school education at all. The effort in launching the EFA was clearly to carry the ‘spirit of Monterrey’ further. Countries that show good governance and which create the necessary institutional framework for education are to receive more official development assistance by the industrialised countries as a reward.
155. The so-called Development Committee of the World Bank also engaged in a discussion about the effectiveness of past development cooperation efforts, especially in connection with the previously mentioned HIPC initiative foreseeing a reduction in the debt burden for poor countries. The meeting did not, however; manage to find any final agreement on the desirable proportion between loans and grants to developing countries.
VII. CONCLUDING REMARKS
156. Towards the end of the 1990s it became evident that unfettered markets, particularly of capital flows, are not necessarily a positive feature of the world economy. The combined strategy of deflationary domestic economics - sold as 'structural adjustment plans' along the motto ”short term pain bringing long-term gain” - was proving more and more unacceptable from the political and social point of view. A more sophisticated view of globalisation has brought about a general re-evaluation of the international political economy, international relations and governance. The role of the Bretton Woods institutions must be re-examined in the light of these new realities.
157. Since these institutions have been constantly evolving since their beginning, any reform or redistribution of responsibility need not be that dramatic or disruptive a break with continuity. Like all mature and enduring institutions, the Bretton Woods 'twins' need to move on and adapt their expertise, experience and founding principles to new realties.
158. Indeed, changing ideological environments have, as described above, always been reflected in the workings of these institutions. The Bretton Woods blueprint evolved organically in response to changing circumstances. Its central institutions took on new tasks. When the fixed exchange rate system broke down, the IMF simply began to monitor the new system of floating rates and shifted the bulk of its activity to developing countries. After the collapse of communism, the Fund became the chief architect and financier of the transition from communism to capitalism. Since Mexico's crash in 1994, it has shifted gear again, providing more money more quickly to countries in the turmoil of financial crises.
159. The remit and activities of the IMF and World Bank need adjusting. Neither has or is likely to be granted the resources necessary to perform any vastly expanded role. Nevertheless, for all the criticism directed, particularly against the IMF, changes are underway which indicate that the Bretton Woods twins are capable of reform and indeed reforming.
160. More fundamentally, the Bretton Woods doctrine of promoting macro- economic stability and liberal, market-based, economies as a prerequisite for sustained economic growth, is now generally accepted. This is a return to the original post-war vision which was set aside at the beginning of the 1980s.
161. Globalisation has, paradoxically, caused a two-way flow of economic power: devolution and concentration. The Bretton Woods institutions can reflect this reality by becoming one of several institutions to share responsibility for international stability and prosperity. By devolving much responsibility back down to the national level while re-energising alternative institutions such as the UN, the EU and various regional banks and bodies, global efficiency can be encouraged.
162. At the same time, the IMF and the World Bank must themselves also undergo internal reform in order to improve transparency, accountability and legitimacy in the eyes of the people they serve. As a result they would be better able to perform their primary and enduring task of encouraging sustainable development and eliminating poverty in an interdependent world.
163. The Rapporteur’s Washington discussions also focused on globalisation and the protests against it. Indeed, the autumn 2001 Bretton Woods summit was shortened considerably out of fear of violent protest on the streets of Washington by opponents of globalisation.
164. Many people today view globalisation as a process which benefits capital at the expense of labour; which benefits the private sector while to the detriment of the public sector; which imposes austerity on developing countries while largely protecting western shareholders; and which preaches open markets for rich countries exports while restricting exports from poor countries. Whereas the original Bretton Woods was drawn up by rich countries alone, a new Bretton Woods would give greater representation to the developing world and pay greater attention to its needs. It could also try to include representatives of certain non-governmental organisations and private sector leaders.
165. As for the composition of the anti-globalisation movement, there is first the radical, violent and often nihilistic group, which uses media coverage of such summits as an opportunity to engage in violence and destruction. However, there is also a deeply felt and non-violent sentiment that globalisation is a means for rich countries to exploit poor countries and that globalisation inevitably leads to a greater disparity between rich and poor. Finally, there is an increasingly vocal environmental movement, which holds that globalisation is rapidly destroying our environment, including our climate. To these latter two movements, the World Bank and the IMF will have to respond, both by explaining and justifying policies pursued and by, if need be, modifying them.
166. It is therefore all the more welcome that the World Bank decided, in September 2001, to make more of its internal documentation available to the public on the Internet. Thus, draft strategies presented by developing countries for reducing poverty within the so-called Poverty Reduction Strategy Papers will be put on the Internet. The same holds for various evaluation reports on projects and documents submitted for decision by the World Bank.
167. Another claim by opponents of globalisation is for the introduction of a so-called ‘Tobin tax’. Such a tax would consist of a small fee for every international currency transaction, with the purpose of slowing down capital flight or speculative currency movements. The main problem here is the effect such a tax will have on the supply of liquidities to various capital markets. Furthermore, who should collect the tax in question and who should receive the funds collected? Nevertheless, the notion of a ‘Tobin tax’ or some variation of it is so important as to merit further discussion, in the Economic Committee and elsewhere.
168. The World Bank is formulating a new environmental strategy to help its clients address environmental sustainability while boosting their economies. The proposals result from long consultations with its members, as well as with its detractors, academics, development agencies and company representatives. The Bank feels that, although it has made progress in integrating environmental concerns into its programmes, it has begun to lose ground in recent years. A draft report on the subject states that “our achievements overall have fallen short of our own high expectations and those of others… We were overoptimistic in setting environmental objectives, designing complex interventions and targeting tight deadlines without giving sufficient attention to the practicalities of implementation and to competing pressures in our client countries”. Furthermore, the Bank found that environmental issues have not been sufficiently “mainstreamed” into its lending conditions.
169. One difficulty is, however, to persuade recipient countries of the need for environmental protection in projects. They often consider concerns for the environment as “intrusive and likely to impede development”, in the words of another report. Finally, the Bank’s environmental staff is not always listened to by other World Bank departments when it comes to shaping projects. This notwithstanding, the World Bank has created a Prototype Carbon Fund whose purpose is to reduce carbon dioxide emissions resulting from various projects.
170. The time may indeed have come for another Bretton Woods conference. After all, the original Bretton Woods agreement was concluded over 50 years ago in a completely different world. The World Bank and the IMF have been indispensable to world development since then, but it is time to review their functioning in a world where the economic agenda is now determined by movements of private rather than public capital. It is a world characterised by rapid technological evolution and with an emphasis on intellectual property rather than the exports of raw materials or manufactures. This new world is one where poverty and disease are still rampant among much of the world’s population, and where wealth differentials seem to be increasing rather than narrowing. The Parliamentary Assembly of the Council of Europe owes it to its 43 member states, and to the developing world, to closely follow the two institutions we have discussed face up to the global challenges ahead.
Reporting committee: Committee on Economic Affairs and Development.
Reference to committee: Resolution 1128 (1997); Order No. 507 (1995)
Draft resolution unanimously adopted by the committee on 22 April 2002.
Members of the committee: Mrs Zapfl-Helbling (Chairperson), Mrs Stepova (Vice-chairperson), Mr Kirilov, Mr Blaauw (Vice-chairmen), Mr Adam,Mr Agius, Mr Agramunt, Mrs Akgönenç, Mr I. Aliyev (Alternate: Mr Abbasov), Ms Anderson (Alternate: Baroness Hooper), Mr Arnau (Alternate: Mr Yanez-Barnuevo), Mr Aylward, Mr Berceanu (Alternate: Mr Baciu) , Mr Billing, Mr Braun, Mr Brunhart, Mr Budin, Mr Budisa, Mrs Burbiené, Mrs Calner, Mr Cerrahoglu, Mr Cosarciuc, Mr Crema, Mr Djupedal, Mr Elo, Mr Eyskens, Mr Felici, Mr Galoyan, Mr Grachev (Alternate: Ms Yarygina), Mr Gülek, Mr Gusenbauer, Mr Haupert, Mrs Hoffmann, Mr Hrebenciuc, Mr Jung (Alternate: Mrs Durrieu), Mr Kacin, Mrs Kestelijn-Sierens, Mr Kosakivsky, Mr Leers, Mr Liapis, Mr Lotz, Mr Makhachev, Mr Mateju, Mr Mikkelsen, Mr Mitterrand, Mr Naumov (Alternate: Mr Tulaev), Mr Palis, Mrs Patarkalishvili, Mr Pavlidis, Mr Pereira Coelho, Mrs Pericleous-Papadopoulos, Mrs Pintat Rossell, Mr Pleshakov, Mr Podgorski, Mr Popa, Mr Popescu, Mr Popovski, Mr Prokes, Mr Puche, Mrs Ragnarsdottir, Mr Ramponi (Alternate: Mr Rigoni), Mr Reimann, Mr Rivolta, Lord Russell-Johnston (Alternate: Mr Banks), Mr Schmitz (Alternate: Mr Buwitt), Mrs Schoettel-Delacher, Mr Schreiner, Mr Seyidov, Ms Smith (Alternate: Mr Marshall), Mr Stefanov, Mr Suslov, Mr Texeira de Melo, Mr Valleix, Mr Voog, Mr Walter, Mr Wielowieyski, Mr Wikinski
N.B. The names of those members present at the meeting are printed in italics.
Head of Secretariat: Mr Torbiörn
Secretaries to the committee: M. Bertozzi, Ms Ramanauskaite and Ms Kopaçi-Di Michele
1 Turkey’s difficulties in 2001 came unexpected to the IMF, which argued that no outsider could really have foreseen the tensions between leading politicians in the country leading to a fall in market confidence in the country’s currency and banking sector. In addition, the IMF argues that it haddifficulties gaining aninsight into the conditions of Turkey’s banks, since even the Turkish government seemed to be lacking such an insight. The IMF recognises that its observance of Turkey and its markets was perhaps not close enough.
2 In a statement before the Economic and Social Council of the United Nations in Geneva in July 2001, Mr Wolfensohn said that better access to developed markets held the key to the growth of developing countries. He asked that the next WTO Round be made into a ‘Development Round’ that would take into full account the interests of developing nations”. He also called on the industrialised countries to realise their promise to devote 0.7 % of their GDPs to development co-operation, up from the present average of only 0.22 %.
3 In the spring of 2001, the Institute of International Finance (IIF), an association of leading international banks and financial companies, issued a report on “The reinforcement of the global financial architecture”. In this report, the IIF calls for a closer involvement of the private sector in crisis prevention and crisis management. This is particularly important in emerging markets, where the IFF wants to see a “robust partnership” between private investors, the IMF and national authorities. Four areas are seen as being of particular importance: investor relations, financial sectors, data standards and governance. Emerging markets have a vital interest in improving standards in these sectors, since otherwise international investment will pass them by.