Why won’t the Bretton Woods institutions take crisis risks seriously?

The International Monetary Fund (IMF) and World Bank spring meetings have faded in significance since the G20 became the main forum for discussion between major economic powers. As happened last year, little was agreed when the governors of the two Bretton Woods Institutions met in Washington last week. 

The gloomy context of a faltering world economy was at the forefront of the communiqué issued by the International Monetary and Financial Committee ( IMFC) – a group of finance ministers and central bankers from the 24 countries and constituencies that have seats on the IMF’s executive board (these are mostly high-income countries). They note a wide range of problems, including that “financial market volatility and risk aversion have risen” and that “lower commodity prices have adversely affected exporters”. They conclude that “downside risks to the global economic outlook have increased since October, raising the possibility of a more generalized slowdown and a sudden pull-back of capital flows”.  

In fact, the problems facing developing countries are potentially far bigger than ‘downside risks’ – with ‘crisis risks’ being a better description. As Eurodad has noted, last year already saw a major turnaround in capital flows to developing countries. Analysts estimated a net negative flow, showing why the Bretton Woods Institutions’ emphasis on encouraging these flows – particularly to finance infrastructure (which in the past has been overwhelmingly financed through public investment) – has been a highly risky strategy. The IMF has taken the important step of reopening the discussion on how to manage capital flows but there is no indication so far how much their position will change as a result. 

For example, incentivising private finance for infrastructure was a focus of the first Global Infrastructure Forum (one of the concrete commitments included in the Addis Ababa Action Agenda), hosted by the World Bank Group in the sidelines of the spring meetings. 

This event brought together the leaders – all men – of all the Multilateral Development Banks, including the newly established Asian Infrastructure Investment Bank (AIIB) and BRICS’ New Development Bank. The Chairman’s statement endorses controversial tools, including “de-risking and risk allocation mechanisms”. These are already being promoted by the World Bank-led Global Infrastructure Facility, the G20-led Global Infrastructure Hub and a private sector-led Public Private Partnership (PPP) Certification programme, among others. This happens even though the Bank keeps claiming that they don’t push PPPs

At the same time, the statement highlights the need to develop “tools for assessing (…) fiscal implications of public investment versus public private partnerships (PPPs); risks of implementation of projects as PPPs or as a public option; and approached for improving transparency on infrastructure contracts and projects.” 

For these tools to have any value, they will have to truly address the perverse incentives that Eurodad has identified as driving the PPP option: accounting practices that allow the true costs to governments to be hidden, storing up major fiscal problems for the future, and a woeful lack of transparency that encourages bad decision-making, and hampers oversight by parliaments and others.

Collapse in commodity prices heralds bigger risks still

However, perhaps the biggest crisis risks come from the collapse in oil and other commodity prices, which is having a devastating impact on countries that are dependent on them. The governments of these countries have witnessed collapsing revenues, and some have already had to turn outwards for help. For example, Nigeria negotiating a major loan from China, after discussions with the World Bank did not go beyond exploratory talks

The canary in the coalmine may be Angola, which until recently had one of the highest rates of economic growth in the world, but has now turned to the IMF for help – the last resort of a country in deep trouble. In response, however, the IMFC communiqué supports the implementation of ‘structural reforms’ in those countries to reinforce their economic diversification. It refers to the ongoing review of the debt-sustainability framework for low-income countries. However, as usual it shies away from the obvious conclusion: that the international system has no way of dealing effectively or fairly with such debt crises, without the fair and independent debt workout mechanism that Eurodad has been calling for.  

These continued failures to take the major risks facing developing countries seriously stem in part from the skewed governance of the Bretton Woods institutions. Of the 25 seats on the World Bank’s executive board, 18 are held by high-income countries, despite the fact that the Bank has no programmes in these countries, and finances its operations largely from the money it gets from low- and middle-income countries when they repay its loans. 

The Bank is currently in the middle of a review of its governance, focusing on creating a new formula to apportion the voting shares of the institution. Any hope that this might lead to a more democratic institution with a more dominant voice from those countries actually affected by its decisions seems to have been crushed. Instead, the paper endorsed by the Bank’s governors last week agreed to focus on using Gross Domestic Product (GDP) as “the measure of economic weight”, which is one of the two main factors that will determine how many votes countries get at the institutions. This will give more votes to some emerging market economies, but will also favour high-income countries. 

In its communiqué, the G24 – a group of countries coordinating developing countries’ positions on development finance issues – calls on the shareholding review to increase the voting power of developing countries and to notably protect the voting power of the smallest poor countries. 

The paper explicitly rules out “the inclusion of a population variable”, which would have favoured developing countries. Instead it focuses on a second factor, which is contributions made to the Bank through the replenishment of the International Development Association (IDA), the Bank’s subsidised lending arm. Unsurprisingly, the countries that give to IDA – and that will therefore get more voting shares as a result of making this one of the two key factors – are largely the high-income countries that currently dominate the Bank. 

The governance reform is supposed to conclude at the Bank’s annual meetings this autumn, but the tortuous process for approving the IMF’s governance reforms (agreed in 2010, but only approved last year), show that this may be wishful thinking. Until then the key question will be: how long can an institution that is supposed to serve developing countries continue to deny these countries a significant voice in the institution?