Challenges rise fast, reforms proceed slowly as political blockades remain an issue – Spring Meetings round-up
Finance ministers from around the world gathered in Washington DC last week for the IMF and World Bank spring meetings. Held amid an economic downturn and emerging risks of a new round of debt crises, the key task was to discuss how the two organisations can be made more effective to address these challenges, which threaten to affect people’s lives and derail progress toward development goals.
A gloomy scene for development
A dramatic scene was set by the IMF’s flagship publication, the World Economic Outlook, which underlined rising inequality, while revising projections for the global economy down. Economic growth is now expected to slow to 3.3 per cent in 2019, a reduction of 0.4 per cent as compared to their overoptimistic projections from last year. When economic growth fails to meet expectations, the capacity to sustain debt payments is naturally lower than expected. Consequently, it will be difficult to achieve many development objectives, especially given the unequal distribution of benefits that continues to side-line many of the poorest countries in Africa and Latin America. Following the report’s launch, Eurodad stressed that sluggish growth at times of ultra-high debt levels in all regions implies a heightened risk of debt crisis.
A question of bad governance: World Bank leadership
A few days before the meetings, David Malpass was installed as new World Bank President following an untransparent and uncompetitive process, where he was the sole candidate. In an open letter, more than 100 civil society organisations (CSOs) demanded changes to the process, which further undermined the World Bank’s legitimacy and indicated that the Bank remains firmly under control of the US’s White House and Treasury. Eurodad repeated this objection in Washington. Speaking at a side-event co-organized by Eurodad and the Bretton Woods Project, José Antonio Ocampo - who ran for World Bank President in 2012 - said it was worrying that emerging economies could not agree on a joint alternative to the US-nominee. On his first day Malpass sought to allay fears that he would bring “Trump’s political agenda with him to the Bank” by pulling out of climate financing among others. He did not engage in a dialogue with CSOs, leaving former acting president Kristalina Georgieva to open the Civil Society Policy Forum.
Bad governance at the IMF: Quota and Voice Reform
The IMF’s overdue quota reform was another item on the governance agenda. The current system determines a country’s voting rights mainly on their economic strengths, but reforms have not kept track with development. Consequently, countries like China are massively underrepresented while old economic powers (including Europe) are overrepresented. What’s more, the US’s quota implies it is the only IMF member state with a de facto veto over all decisions. Any reform, however, would require approval by the US and European countries, who also do not want reforms which reduce their influence. CSOs have long called for a fundamental democratisation of the system, which moves away from the plutocratic approach in which rich countries dominate decision-making at the IMF. Similarly, the G24’s communique – which brings together major developing countries and emerging economies – regretted the lack of progress on the 15th review of quotas.
Any reform should not just redistribute quotas and voting rights, but also increase quotas. This is a prerequisite to scaling up the IMF’s lending capacity and its function as central pillar of the global financial safety net. Without this, member states will continue to build regional alternatives to an IMF that they do not trust to solve their problems when the next round of crises hits.
Ready to tackle the next round of crises?
Tackling the next wave of debt crises was a big topic at the public policy debates. During a panel with IMF Vice Managing Director David Lipton (co-organised by Eurodad and regional partners), civil society experts discussed how to fill the gap in the international financial architecture for effective institutions to prevent and resolve of debt crises. Meanwhile, other public events assessed debt crises in different regions, including:
- An event by Jubilee USA, AFRODAD and LATINDADD, which presented shocking debt figures for Africa and Latin America
- Immediate debt relief for Somalia. For procedural reasons, the country still has not received relief it was promised in 1996 (!) by the Heavily Indebted Poor Country Initiative.
- Debt crises in small islands states, which was high on the agenda at the Spring Meetings and “DebtCon3”, a gathering of leading debt experts which ran in parallel to the meetings.
The IMF and World Bank are slowly scaling up their work on debt issues through their new “multi-pronged approach”, a timid and incremental set of reforms that aim to improve debt transparency and creditor coordination in debt restructuring. Member states expressed their support for the approach at the Bank’s ministerial-level steering group in their ‘Development Committee Communique’ but AFRODAD’s Fanwell Bokosi made it clear that we cannot afford to lose more decades to debt crises. Delaying reforms while people are dying from the consequences of debt crises is unacceptable.
In debates with IMF staff and Executive Directors, CSOs criticised the IMF’s crisis response and the use of IMF loans to bailout irresponsible creditors, which implies that these do not contribute their fair share to crises solutions. Additionally, IMF programme design is such that ordinary citizens shoulder the burden through fiscal austerity and structural adjustment conditions.
Eurodad’s 2018 report “Unhealthy Conditions” provided evidence of unjust and inappropriate practices in IMF-supported programmes, and was used widely in policy dialogues in Washington. Side events at the CSPF also discussed how these conditions harm health and education services, negatively impacting living conditions. The IMF is currently reviewing its conditionality policy and the Board is expected to make a decision soon. It is a key opportunity to change harmful practices.
A ‘private-finance first’ approach to development means a risky approach
Meanwhile, the World Bank continues to implement its ‘private-finance first’ approach. Maximizing Finance for Development (MFD) has been repeatedly questioned by Eurodad and CSO partners as it relegates public financing as a last resort, only to be chosen where policy reforms, subsidies and guarantees cannot persuade private financiers to invest. Eurodad observes this development with particular concern. A briefing on the World Bank's flawed conditions launched last week demonstrates how conditions are used to promote ideological policy approaches, which undermine ownership of reforms in borrower countries. This concern has also been raised many times in relation to World Bank’s Doing Business Report.
Worryingly, the World Bank market creation efforts are also directed to low-income countries, fragile and conflict states, through its International Development Association (IDA)-Private Sector Window, where the cost of private finance can be even higher as private investors are not naturally drawn to investing there. Plans to support low-income countries need to put the most vulnerable people at its core, and this will not necessarily occur through market creation.
Several panels also raised the inherent contradiction between the World Bank’s commitment to sustainable development and climate change mitigation, and its support of public-private partnerships (PPPs) and climate-damaging investments. European Executive Directors were reminded of the fundamental challenges of using PPPs as a tool to ensure gender equality, while Oxfam’s report on World Bank supported education PPPs exposed the negative impact of PPPs on access to education. The need for greater policy coherence remains one of the key challenges World Bank is facing in this regard. Only through clear fiscal, environmental, social and human rights impact assessments for banks supported projects can this be achieved.
Reforms urgently needed – but who will implement them?
The somewhat gloomy outlook for the global economy, and financial stability in particular, indicates that a functional and operational international financial architecture is badly needed. The actual needs of member states are moving further and further away from what IMF and World Bank have to offer, both in terms of lending volumes and policy solutions. The impact of Malpass’s unilateral enthronement still remains to be seen, but it is likely that alternative institutions will emerge elsewhere. Outdated governance models at both organisations still reflect the world as of 1944 and as reforms remain blocked the debates continue this week at the UN Financing for Development in New York.