Rethinking Bretton Woods | Thu, Apr 25, 2002
Welcome announcements contained in the Development Committee communique are the commitment to the Millennium Development Goals, and a recognition of education as one of the most powerful instruments for reducing poverty and consequent endorsement of the action plan presented by the Bank as a basis for reaching international consensus to help make primary education a reality for all children by 2015.
The Committee also stated that the new partnership for development recognizes that country-owned and driven development strategies embodying sound policies and good governance have to be the starting point., which is to be welcome, although whether the Bank is getting right the meaning of sound policies and good governance at the operational level remains a debatable question.
Regarding CDF/ PRSP the Development Committee communique states that they are increasingly providing a common foundation for implementing the new partnership at the country level. While recognizing that scope for improvement exists, we shared the positive assessment of implementation to date, particularly in enhancing ownership. This seems too positive in the light of an increasing number of studies that find that macroeconomic policy prescriptions under the PRSP framework, setting aside some improvements on the area of social sector spending, look startlingly similar to those that used to be embedded in structural adjustment programs and that are so heavily criticized for their negative impacts on the poor. The same comment could be made about the IMFC statement that The substantial progress under PRGF-supported programs in implementing the PRSP approach will be further enhanced by better identifying the sources of sustained growth, strengthening public expenditure management, and using poverty and social impact analysis more systematically. Additional concerns about this statement is that studies have also shed light on the way that PRGF arrangements, rather than supporting PRSPs, many times precede them, therefore driving them and setting the boundaries within which participation and discussion of macroeconomic policies at the national level can take place. The call to make systematic use of poverty and social impact analysis, though welcome, is not new and one cannot help but wonder why it has not been done yet.
Both, the Development Committee and the IMFC addressed debt sustainability analyses. The IMFC said that while it was encouraged by the progress with the implementation of the HIPC Initiative, in a number of cases, debt sustainability remains an issue and called on the IMF and World Bank to review the situation. It will be important to ensure both that the reviews are carried out and that they are done in accordance with the Monterrey consensus commitment to ensure that debt sustainability analyses take into account the impact of debt relief on progress towards the achievement of the Millennium Development Goals.
The Committee reiterated the call, which seems to have become lately a permanent feature of IMF and World Bank statements, for industrialized countries to enlarge market access for developing countries and phase out trade-distorting subsidies. However, there is no evidence that the Fund and Bank are ready to slow trade-related conditionalities in borrowing countries until the playing field is leveled, or to allow developing countries to protect productive sectors that have been wiped out because of previous trade liberalization that forgot to take into account those imbalances of the trade system. Moreover, the IMFC continues to stress the vital importance of more open trade . . . for sustained, broad-based economic growth in the developing countries in particular. This is at odds with increasing evidence, some of them recepted in a report on trade launched by Oxfam few days ago, which challenges on statistical grounds the analytical basis for such an assumption that has driven IMF and World Bank conditionality for twenty years.
Maybe the most worrisome point regarding the IMFC statement is the total neglect of Fund's responsibility in the Argentinean crisis. After the East Asian crises and the crises that followed, some degree of soul-searching seemed to have begun within the IMF. However, by reading the statement coming out from the IMFC meeting, the first meeting after the social explosion in Argentina that was featured by the media around the world last December, the impression one gets is that IMF conditionalities played no role in generating and exacerbating the recession and following crisis. Furthermore, the IMFC urged the Argentinean authorities in cooperation with the Fund, to move quickly to reach agreement on a sustainable economic program that could receive the support of the international financial institutions and provide the basis for the reestablishment of stability and growth. This seems not to take into account that Argentina has followed sustainable economic programs backed by the IMF so closely for the last 10 years that it had become some sort of IMF poster-child, as reflected in several statements by IMF officials. Even when a recession was well underway, in September 2000, and after the De La Rua government had implemented yet one more wave of adjustment measures advised by the IMF, an IMF economist in mission in the country said that Argentina did everything right, but the markets did not respond.
In fact, the Argentinean crises put in evidence a series of structural failures of the international financial system that the IMF apparently is not ready to address. First, the role that uncontrolled financial and capital account liberalization has played in the origin of the crises, and the IMF approach to capital controls and taxes, is not on the agenda, in spite of the Monterrey consensus recognition that measures that mitigate the impact of excessive volatility of short-term capital flows are important and must be considered. Second, the IMFC also encourages the Fund to press ahead with the range of recent initiatives designed to enhance the effectiveness of surveillance and crisis prevention. These include the Financial Sector Assessment Program (FSAP) and policies on transparency . . . Further work on standards and codes is a crucial item in the forward agenda to strengthen their relevance and contribution to Fund surveillance. As some economists have pointed out, standards and codes have sometimes important implementation costs, while their effectiveness in preventing crises in the countries that implement them is still open to question. An inherent imbalance in the Fund's surveillance, namely, that only its borrowing country members are really obliged to follow it, is not factored into the analysis. Indeed, the economies with the highest impact on the international financial system are the largest ones, precisely those over which the Fund has no leverage because they are not borrowing members. Finally, currently there is no mechanism that allows countries to restructure unsustainable debts in a timely manner and in a comprehensive way. This is an issue that the Fund is increasingly beginning to address and the IMFC actually encouraged the Fund to continue to examine the legal, institutional, and procedural aspects of two approaches, which could be complementary and self-reinforcing: a statutory approach, which would enable a sovereign debtor and a super-majority of its creditors to reach an agreement binding all creditors; and an approach, based on contract, which would incorporate comprehensive restructuring clauses in debt instruments. However, a key problem with the current system is that, unlike under domestic bankruptcy laws, international sovereign debtors do not get to have their claims heard by a neutral party, but usually the solutions to debt problems are designed by the creditors themselves which, not surprisingly, has led to solutions that are biased in favor of the creditors. Therefore, the need for neutral decision-making that takes power away from the creditors in the design of the solutions has been a permanent demand of civil society groups, especially during the Financing for Development process. Judging from that perspective, the statutory proposal by the Fund would not be satisfactory as it leaves significant decision-making power with the Fund. The contractual proposal, which seems to enjoy more sympathy with the US Administration, would make a restructuring arrangement contingent upon approval by a super-majority of creditors (for example,75 %). While this is better than the need for approval by all creditors, it still falls far short from the independent fair decision-making that civil society proposals have been asking for.
In other activities around the meetings, civil society groups released reports. A coalition of U.S. Civil Society Organizations released a report aimed at influencing negotiations around IDA 13: Responsible Reform of the World Bank: The Role of the United States in Improving the Development Effectiveness of World Bank Operations.
The SAPRIN coalition launched full version of its report The policy roots of economic crisis and poverty: A Multi-Country participatory assessment of Structural Adjustment While the World Bank had launched this initiative together with SAPRIN in 1996, as the findings of the process started to come out, the Bank started to distance itself from the exercise, to the point that the Bank's President was not present during the release of the draft report in July last year, despite having been invited. As media reported on the release of the final report findings, he called the SAPRIN representatives present in Washington to a meeting where he promised he will study closely the report and set a new meeting with them within the next two months. Finally, the UK-based World Development Movement released an updated version of the States of Unrest report it had issued last year. This last report documents 77 episodes of civil unrest directed against the policies of the International Monetary Fund (IMF) and World Bank that took place in 2001 throughout 23 countries.