Global Policy Forum

Re-thinking the Role of the World Bank and the International Monetary Fund On the Occasion of Their 60th Birthday

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By Aldo Caliari

Hunger Notes
July 8, 2004

This year, on the occasion of the sixtieth anniversary of the founding of the Bretton Woods Institutions (BWIs) - the World Bank and the International Monetary Fund (IMF) - activists and campaigners from all over the world are planning mobilizations and protests. The largest protests were concentrated around the Spring meetings in April and targeted the institutions' continued engagement in policies and practices that have kept developing countries in a trap of slow and erratic growth, growing poverty and external dependence, and dramatic increases in income inequality at both the domestic and global levels.

The Center of Concern's Rethinking Bretton Woods project was born in 1994. It was the product of Center of Concern's continued reflection on the cases of several countries that were suffering the impacts of debt and structural adjustment. Its underlying assumption was that no poverty reduction could take place without the democratization of economic policy-making. Thus the project sought to achieve greater transparency, participation, and accountability of the BWIs, i.e.., to democratize them. Its backdrop was the heightened debate on the future of the institutions taking place on the occasion of the then-50th anniversary. Although the goals and assumptions of Rethinking Bretton Woods have varied very little, the 60th anniversary of the BWIs finds them immersed in a very different environment than ten years ago. This article attempts to lay out key elements of this new environment.

THE BUSH ADMINISTRATION: MELTZER AND UNILATERALISM

A crucial hallmark in these last 10 years has been the report of the Meltzer Commission. Appointed by a Republican-dominated Congress and with a mandate to review U.S. policy towards the international financial institutions, the Commission owes its popular name to its Chairman, Prof. Allan Meltzer. Among other things, the report called for dramatically downsizing the BWIs; restricting the World Bank's involvement to only the poorest countries and the IMF's involvement to a narrowly understood crisis prevention function; strengthening the BWIs power to enforce economic reform in borrowing countries; emphasizing their role as facilitators of the process of opening markets and facilitating private sector activity; and relying more on this private sector to finance development needs. The report embodied and provided new impetus to the views of conservative groups that traditionally lobby against U.S. engagement in multilateral institutions, and even against the very existence of such institutions. But it did more than that. As a Republican Administration that shared the ideologies and assumptions that permeated the report took over in 2001, the Meltzer Report became a blueprint for designing U.S. policy towards the institutions. Since the U.S. government is the BWIs most influential shareholder, they saw for the first time in their history a real threat to their survival. Since then, changes of dramatic proportions in the financial institutions (e.g. the release of the World Bank group's Private Sector Development Strategy in 2002) can be explained in terms of their struggle to survive in the face of U.S. pressure to change.

It is unclear to what extent the course set by the current Administration can be significantly reversed, even in the case of a change in the political party of the Administration in the upcoming elections.

THE GLOBAL JUSTICE MOVEMENT CRITICS

The global justice movement (oftentimes ill-called the "antiglobalization" movement) has registered an impressive growth in its organizing capacity, level of sophistication, and ability to have an impact on important intergovernmental gatherings. Its ability to convey messages to an oftentimes hostile and uninformed press has also improved. The misleading press reports on the WTO Seattle Ministerial, portraying it as a promising meeting that got derailed by a group of violent activists, have given way to the more accurate pictures of the last Ministerial in Cancun, which show the dividing lines between the haves and the have nots at the intergovernmental level. Most interesting, the fact that a number of former BWI staffers and widely respected mainstream economists have joined the critics has made their positions more appealing to a new audience. Not long ago, for example, Economics Nobel Laureate Joseph Stiglitz said that the credibility of the IMF has been so eroded that the institution might be beyond hope of reform and that we may need to begin "from scratch" to replace it.

FREE TRADE AGREEMENTS AND PRIVATE CAPITAL FLOWS

Paradoxically, the fact most threatening to the BWIs is probably one of their own making. The freer flows of trade and capital across borders that the BWIs were key instruments in bringing about threaten to make them irrelevant. They also represent an obstacle to meaningful reform in the right direction. It is part of the logic of the market relentlessly promoted by the BWIs since the advent of adjustment lending(footnote 1) that the organization of production and the economy should, to the greatest possible extent, be left to the free play of market forces. According to this theory, any kind of intervention is intrinsically wrong and doomed to distort the smooth working of the market. The very ideals that the BWIs originally embodied, however, although barely discernible in their current activities, contradict this paradigm. Longer-term lending at subsidized rates for development projects (World Bank) and fixing or stabilizing exchange rates and managing the flows of capital (IMF), presume a certain degree of intervention to correct for market failures.

It is true that the BWIs have played a useful role as instruments of industrial countries that, at the behest of transnational corporations, wanted to open and integrate new Southern markets into the global economy. But they also represent an obstacle to the ability of transnational corporations to profit from the expansion of the global market thereby achieved.

Moreover, the proliferation of trade and investment agreements means that new instruments to discipline Southern economies are available to industrial countries at a lower cost (after all, trade and investment agreements lock-in the structural reforms previously enforced by the BWIs, without the need periodically to renew a loan or grant with the respective conditionalities attached). In this context, the BWIs are increasingly forced to justify their existence in terms of what they can still do to help the interests of the largest corporations (e.g., provide technical assistance for the implementation of trade agreements, eliminate internal barriers to foreign investment, etc.). Those corporations, in turn, have added to their leverage to drive the policies of industrial countries.

In the new environment, the BWIs are increasingly minor actors that have to act in "partnerships" or joint ventures with the private sector (or, at least, with its acquiescence). The successive assaults by the private sector on the Sovereign Debt Restructuring Mechanism proposal clearly show the fate to be expected for any attempt by the BWIs to introduce any element of regulation over the private sector, however mild and imperfect it might be.

A NEW SOUTH?

One of the most inspiring developments of the last few years has been the way the governments of developing countries have grown more vocal in denouncing the injustices of the global economic system and more willing to cooperate and come together in order to enhance their bargaining position. The strong stance taken by developing countries at the last World Trade Organization Ministerial (Cancun), seemed to many a phenomenon confined to trade negotiations. Far from being an isolated phenomenon, however, Cancun was but one among many indications of the different political alliances being forged among Southern governments and whose projections do indeed reach also into the realm of international finance. By way of example, in the lead up to the approval of the IMF arrangement with Argentina last March, the Brazilian president worked the phones, calling the leaders of G-7 countries who had threatened not to approve the loan, in order to advocate in favor of its neighboring country. Around the same time, Brazil and Argentina signed an agreement on common principles for negotiating with the IMF. The agreement calls for the ability of the debtor country to grow to be prioritized above the right of creditors to be repaid.

The proportions of this event are better appreciated against the fact that Argentina and Brazil are two of the four countries where the IMF has nearly 70 percent of its outstanding loans. Another recent example was the communiqué issued by constituencies representing more than 120 IMF member countries calling for an open and transparent process in choosing the person who is going to succeed the recently resigned Horst Kohler as Managing Director of the IMF. The head of the institution has traditionally been chosen through backdoor deals between European countries and the US. Borrowing governments have also grown reluctant to swallow the promise that today's unpopular reforms will bring prosperity tomorrow. They have reasons for doubt after several econometric studies have shown the fragile grounds on which the "Washington Consensus" model (footnote 2) as built. At the same time, they are witnessing the higher external debt, social dislocation and destruction of their productive and social fabric left by the reforms.

CIVIL SOCIETY SKEPTICISM

After a wave of multi-stakeholder dialogue initiatives launched by the BWIs, with little or no result to show in terms of policy change, civil society organizations have also grown increasingly skeptical about whether the BWIs have any listening capacity whatsoever. The SAPRIN (Structural Adjustment Participatory Review Initiative), the World Commission of Dams, the consultation on the Information Disclosure Policy, are all examples of exercises where civil society groups gave the World Bank the benefit of the doubt when it reached out to them. After spending a great deal of time on the exercises they were left with only frustration, their recommendations ignored. The latest fiasco is the Extractive Industries Review, whose recommendations the Bank's management has rejected and the Bank's President has hinted will not gain his support.

THE GOVERNANCE QUESTION

Finally, for the first time since the foundation of the Bretton Woods Institutions, their governance is a matter of debate at the highest level. The Monterrey Conference (footnote 3) brought up the issue of inequity in the distribution of votes among BWI member countries and mandated an increase in the participation of developing countries in their governing structures. Traditional wisdom had always been that the BWIs are based on "one country- one-dollar" system, which makes sense because they are financial institutions and therefore "the one who pays, gets to rule." However, increased scrutiny and exposure of the governing structures and processes of the BWIs in the last few years have exposed the many fallacies and anachronisms inherent in how the system actually works.(footnote 4).

CONCLUSION

While the long-term struggle to democratize economic policy-making continues, civil society organizations need to factor in the elements and trends that can be appreciated in the environment now surrounding the World Bank and the IMF and capitalize on those able to offer some leverage for change. The Rethinking Bretton Woods project will continue to provide strategic analysis and advocacy towards the achievement of an international financial system that is truly supportive of development.

 

 

 

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