Rethinking Bretton Woods | Wed, Oct 21, 2015
RBW Project Director Aldo Caliari reports on the World Bank –IMF Annual Meetings 2015, held in the city of Lima, Peru, October 9 through 11.
Last October 9-11 the World Bank and IMF Governors met in Lima, Peru, for their Annual Meetings. For those who do not follow the meetings closely, the World Bank and IMF Governors meet every year but only once every three years in a location outside Washington DC. The last time the meetings were held in a Latin American country was in 1967 (Rio de Janeiro, Brazil).
This year’s venue was most surely not the scenario that the leadership of the institutions had in mind when the decision to hold these Annual meetings in Peru was taken more than three years ago. At that time, Peru, South America and developing countries, in general, were enjoying the benefit of an already 9-year long commodity prices boom. It still remained the case that advanced economies were weighed down by the aftershocks of the global financial crisis whereas developing ones, especially the lowest-income countries, were growing at a faster rate.
The meetings this year found the world economy confronting deep uncertainty, amidst deceleration of China and a still-postponed, but looming, US Fed decision to begin tightening interest rates, which follows after withdrawal of its program of monetary easing. Developing countries are, in this scenario, doing less well than the advanced ones. They have been hit by the impacts of the Fed’s decision and saw capital fly in a way not seen since even before the global financial crisis (according to the Institute of International Finance, the net capital outflows projected for this year are not seen since 1988). Commodity prices, after peaking in 2012, have been falling steadily for 3 years (between 2011 and 2015 agricultural prices fell by 29 per cent and metal prices by a 41 per cent).[i]
The particular backdrop made the message that the authorities of both the World Bank and IMF tried to convey, a “Peruvian miracle” in which the recipes of the said institutions would have played a major role, even less credible. At an alternative forum organized by a wide range of Peruvian civil society organizations under the fitting theme “Belying the Peruvian miracle” and attended by nearly 3000 people, assertions about such “miracle” were put under the microscope from a variety of perspectives.
A running theme throughout the discussions was that growth figures that had been overly positive in the last few years were largely due to “extractivism,” or the pursuit of high growth via extraction and exports of natural resources. As Peruvian economist German Alarco summed up, “There is no Peruvian miracle. What Peru had was a lot of good luck.” Not only did the alternative forum expose the falsity in calling success something largely dependent on the juncture of a high point in the price cycle of commodities. The analyses therein furthermore illustrated the perversity in doing so in support of a model that failed to harness the favorable juncture to reduce inequality and poverty, or improve fiscal revenue, diversification and real wages.
Speaking of a miracle may even sound like an insensitive joke in a country tragically dotted by numerous violent and regionally-focalized conflicts over natural resources that the “extractivism” is fueling. A report issued on the eve of the Annual meetings confronted several of these contradictions. Peru, the report stated, is the second best-ranked country in Latin America in the World Bank-issued Doing Business report. Precisely, efforts to implement these reforms “had a severe toll on people, workers, and the environment, resulting in rising social conflicts.”[ii] In 2014, estimates are that Peru experienced 200 social conflicts on average every month, largely due to mining-related issues.[iii]
Another report analyzed the presence of the International Finance Corporation – the World Bank’s arm that finances the private sector-- which has invested to date USD 3.1 billion in the country. Looking at the 71 projects approved between 1997 and 2015, the report found that they overwhelmingly favor the financial sector[iv] – including financial intermediaries that an evaluation recently found cannot guarantee compliance with minimal environmental and social safeguards. The projects also contributed to concentrating and strengthening the economic power of large company groups. The report explores in detail emblematic cases like the Yanacocha mine, the Camisea gas pipeline and hydropower central of Cheves, whose negative environmental and social impacts have been the matter of ample reporting and numerous complaints nationally and internationally.
The extraction does not end, unfortunately, with just the natural resources. Some of the experts at the alternative platform showed that illicit financial flows leaving the region are estimated in USD 105 billion a year.[v] In Mexico, illicit financial flows amount to half what the government collects in taxes, and almost four times what it spends in social security.[vi]
The alternative forum produced a declaration that a small delegation of the representatives delivered to the authorities of the World Bank and the IMF. Unfortunately, with a political symbolism that was not lost on the members of the civil society delegation, nobody from the leadership of both institutions, but only the country representatives for Peru, were present for the reception of the document. Neither did it help the political symbolism that the delegation was received standing, under an informal tent in a backyard removed from the main building where the official meetings were taking place, as if to shorten the duration and further reduce the significance (and potential press interest) in the act.
The officials hastened to underscore the commitment of both institutions to the dialogue with civil society, and the venues in which that was happening, such as the ongoing Civil Society Policy Forum. But concerns have been growing about the suitability of the CSO Forum – which the World Bank and IMF organize every Annual and Spring meeting – to fulfill that function. The said concerns crystalized in a letter submitted to the leadership of the Bank and IMF by several organizations in early October.[vii] “The [CSO] Forum provides legitimacy to the Bank and Fund; however, the changes which have recently been imposed with insufficient consultation or consideration have diminished the Forum’s independence and compromised its role enabling meaningful CSO engagement with the Bank and Fund,” the letter argued.
World Bank: A one-stop shop to finance the SDGs?
It was predictable that in the year of the key Summit that adopted the agenda that will replace the Millennium Development Goals, papers in front of the Board of Governors gathering in Lima would focus on the contribution of the Bank and IMF to the post-2015 development agenda. These papers see the institutions firmly joining the race in which all international organizations currently are engaged for carving a role for themselves in the new agenda.
The paper[viii] bills the organization as fit for purpose of delivering the 2030 agenda by having the comparative advantages of ground presence in almost every country, ability to offer solutions to multi-faceted challenges, a range of operations that spans the public and private and a platform for coordinated action on global and regional initiatives.
Conspicuously missing given the relevance of the environmental and social aspects in the new agenda, is any discussion of the ongoing dilution of environmental and social safeguards in operations by the World Bank group. This is particular true given the above findings for the IFC. The new approach the World Bank is taking to financing infrastructure is epitomized with the Global Infrastructure Facility, presented as a platform of the Bank with other development finance institutions, bilateral donors and institutional investors. To date, it is unclear whether projects brought to life through such facility will be subject to the same safeguards -even the diluted new ones—as typical World Bank-financed projects.
Related to this positioning is the struggle regarding who will have a mandate to produce monitoring reports on the new agenda. The Communique of Development Committee expressed “The Global Monitoring Report has proven its value in tracking progress in achieving the MDGs and we are confident it will play a similar role for the SDGs.”
The alleged advantage in bridging public and private investments is also subject to questioning by civil society. In a letter addressed to the World Bank Presidency in March of this year, Amnesty International said “references to the need to catalyse and leverage private and non-traditional finance are concerning in the absence of accompanying commitments on accountability both for the corporate sector and the MDBs themselves.”[ix] In this regard, Amnesty mentioned the recent evaluations of the World Bank’s track record on involuntary resettlements which found “a systematic failure by World Bank staff to assess, track and alleviate the suffering experienced by millions of people who were forced from their homes, impacting on a range of rights including housing and livelihoods further pushing them into poverty to make way for World Bank-financed projects over the past two decades.”[x]
In particular, the use of Public Private Partnerships (PPPs) as a tool for financing development was the matter of debates both at the CSO Policy Forum and the alternative platform. Case studies featured at different events confirmed a trend from countries in the region in line with the Group of 20 calls for improving the investment climate and creating pipelines of “bankable” infrastructure projects.
The reforms go almost without exception in the worrisome direction of emphasizing limitations to human rights guarantees and environmental safeguards for projects. In the increasing social conflicts ensuing in the wake of such projects, the prevailing response by states has been criminalization of communities that resist the taking of their territories and restriction of freedoms that might permit human rights defenders to pursue complaints, including guarantees on the access to required information.
In the month preceding the Lima meetings, the World Bank proceeded to submit to the Group of 20 a set of Guidelines (among other things for disclosure, for contract clauses and for prioritization of PPPs). Civil society groups voiced concern that the said guidelines may end up setting the standard for countries and for other banks. However, at a side-event a bank representative promised that these documents are not final and the Bank will be open them up for consultation.
The undesirable fiscal impacts of PPPs were also in evidence at a side event in the Civil Society Policy Forum, where an IMF official shared research showing quite graphically that while PPPs open fiscal space in the short term, they tend to significantly reduce it in the longer term. Civil society concerns have to do with the imbalance in incentives, as governments may find easier to “buy now and pay later” for projects that in the end under the lower threshold for scrutiny emerging when projects do not mean an immediate expense.
IMF: In no hurry to respond to global economic challenges
The International Monetary and Financial Committee (IMFC) – the IMF’s main policy–making body– expressed concerns with the situation of the global economy. But one would not gauge the dramatism of the situation from the laconic mention received by three issues that are key to preventing the materialization of risks and eventually offering a coordinated multilateral response should they materialize: sovereign debt, the international monetary system and the governance of the IMF.
The IMF Global Stability Report warned about the high levels of corporate debt in developing countries. The debt of nonfinancial firms quadrupled between 2004 and 2014, with highest leverage associated to foreign currency exposure.[xi] This raises the prospect of rising defaults as the Fed begins tightening rates. As UNCTAD recently explained, sovereign debt crises have often followed the pattern of a corporate debt crash that ends up socialized through government bailouts.[xii]
In spite of the looming dangers of recrudescing sovereign debt crises the IMFC cursorily addresses the subject, essentially to refer to the ongoing work which consists of promoting adoption of contractual changes to sovereign bonds. Several experts have said this will not address the problems in the existing debt stock (and some say will not address problems even when properly introduced in the full outstanding debt stock). In contrast the Group of 24’s acknowledged as a positive step “the recent passage by the U.N. General Assembly of the resolution on the Basic Principles on Sovereign Debt Restructuring Processes.” Regrettably, such principles were adopted in spite, not thanks to, IMF engagement in their development.
The IMFC also “looked forward” to the forthcoming stocktaking of the international monetary system, which will “include a review of the adequacy of the global financial safety net” – this is, the lendable resources the IMF has at its disposal to offer to countries going through crises. It is unclear whether this review will be as deep as the one carried out in 2011, and reopen discussions such as the sustainability of a system where the currency of one country (the United States) is the main reserve and trading currency.
At the moment, the only potential reform of Special Drawing Rights (SDRs) in the horizon being discussed is centered on whether to include the renminbi in its currency basket. The Quinquennial Review that should have taken place in the middle of this year led to the rare step of postponing a decision until later in the year.[xiii] Many see this as giving time to China to deepen steps towards liberalization of the currency and, therefore, its “free usability” – one of the criteria for inclusion in the basket. More recently, however, there was speculation that such decision may not even come before the end of the year.[xiv] The fact that the most far-reaching reform to the SDR that can be envisioned at the moment is addition of one more domestic currency to the basket shows the limited scope of the debate on reform. There’s no denying that inclusion of the renminbi in the basket is a belated fair step and one with great importance for China as a matter of national prestige and economic influence. But it is a far cry from the sort of reforms needed in the SDR to respond to the systemic monetary challenges the international community faces.[xv]
As part of the debate in 2011-2012, the IMF also produced an institutional view on capital flow management measures on which the IMF received substantial praise (including from this author) for what was seen as a relaxation of its negative stance on capital controls. But the IMF’s stance throughout the negotiations in the Third Financing for Development Conference this year exposed just how utterly insufficient that institutional view is to offer enough protection to the countries’ policy space to introduce such measures.
Finally, regarding governance of the IMF, the IMFC reiterated its disappointment with the delay in implementing the reforms to voting shares agreed in 2010 –due to failure of US Congress to ratify them. But in terms of paths to a solution it merely repeated its call to the Executive Board made last Spring to “pursue an interim solution that will meaningfully converge quota shares as soon as and to the extent possible to the levels agreed under the 14th Review.” Deadlines for work on the 15th review of quotas, and a new quota formula, look set to be missed again as it is highly unlikely they can be completed by the end of the year (although the IMFC this time did not bother to even set a new deadline).
For the moment, those hoping for miracles to come out of the Lima meetings will have to wait for another time.
[i] ECLAC 2015. Economic Survey of Latin America and the Caribbean, p. 15.
[ii] Oakland Institute 2015. ( available at http://www.oaklandinstitute.org/peru-poster-child-world-bank-latin-america)
[iii] Oakland Institute 2015. ( available at http://www.oaklandinstitute.org/peru-poster-child-world-bank-latin-america)
[iv] Yanez Quiroz, Luis 2015. Opportunities and missteps: Lessons from the IFC investment policy in Peru. Oxfam and Cooperaccion (available at https://peru.oxfam.org/que-hacemos-industrias-extractivas/oportunidades-y-extravios-politica-de-inversiones-de-la-ifc )
[v] Villamar, Alejandro 2015. Como Mexico no hay dos. (available at http://www.rmalc.org/revista-alternativas-97-como-mexico-no-hay-dos-sobre-flujos-financieros-ilicitos/ )
[vii] Protecting the voices of civil society at the World Bank and IMF meetings, Letter to the President of the World Bank and the Managing Director of the IMF by civil society organizations.
[viii] World Bank 2015. The World Bank Group Support for the 2030 Agenda for Sustainable Development. Development Committee Discussion Note.
[ix] Amnesty International 2015. Letter addressed to the World Bank President’s Special Envoy on the post-2015 development agenda, June 2015.
[xi] International Monetary Fund 2015. Global Financial Stability Report, p. 84-89.
[xii] UNCTAD 2015. Trade and Development Report, p. 119.
[xiii] IMF 2015. IMF Executive Board Approves Extension of Current SDR Currency Basket Until September 30, 2016. Press Release No. 15/384. August 19.
[xiv] Donnan, Shawn 2015. China’s renminbi creeps closer to global reserve status, in Financial Times. September 28.
[xv] See Caliari, Aldo 2015. Facing Global Economic Governance Gaps – The International Monetary and Sovereign Debt Restructuring Regimes, in Rebalancing Global Economic Governance: Opportunities for China and the G20 beyond 2015. China Center for International Economic Exchanges, Shanghai Institute for International Studies and United Nations Development Program.
|Read Letter - Protecting the voices of civil society at the World Bank and IMF meetings.pdf||54.96 KB|