2018 IMF and World Bank Spring Meetings: the Bank has more money, but promises little change

3 May by Bodo Ellmers , Gino Brunswijck , Maria Romero


World Bank Spring Meetings April 2014

The Spring Meetings of the IMF and World Bank took place amid warnings of a ‘borrowed boom’ as an uptick in global growth was matched by global debt levels reaching record highs. The World Bank Group shareholders stumped up for an increase in the Bank’s capital base, but without challenging the western-dominated nature of the institution, with the G7 countries plus the EU maintaining over half the voting share. In return for the cash, the Bank vowed to increase its ‘cascade’ approach. This puts private finance first, despite harsh criticism by major shareholders and CSOs of its business model, and a renewed call by a broad civil society coalition to abandon its promotion of public- private partnerships (PPPs).

A capital increase for the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

– but what for?

The main headline of this year’s Spring Meetings was an agreement on increasing the World Bank Group’s (WBG’s) lending capacity. It was agreed by the Development Committee, (the Bank’s Ministerial-level steering group) that the WBG’s middle-income country lending arm, the International Bank for Reconstruction and Development (IBRD), will receive a $60.1 billion capital increase, with $7.5 ‘paid in’ (the money is directly sent to the IBRD, the rest is ‘callable’ and available if needed). In addition, $5.5 billion will be paid in for the WBG’s private sector lending arm, the International Finance Corporation (IFC).

The result, however, is the continued dominance of high-income countries over the institution. Overall, the US plus the EU plus the other G7 countries (Canada, Japan and Australia) continue to control the IBRD, with 53 per cent of the vote, and the IFC, where their majority is even larger. Both the US, with 16% of the vote at the IBRD and EU member states with 26 per cent (collectively) retain a veto over major decisions which require a 85 per cent majority to change. The deal also includes a lending reform which increases borrowing costs for higher middle-income countries, including China. In exchange, China’s voting power goes from 4.5 to 5.7 per cent at the IBRD but only 2.8 per cent at the IFC.

The result, however, is the continued dominance of high-income countries over the institution

This time the financial package was negotiated together with a policy package, detailed in the document Sustainable Financing for Sustainable Development: World Bank Group Capital Package Proposal. The policy package has four key pillars: a) serving all clients; b) creating markets; c) leading on global issues; and d) improving the business model. While the Development Committee refers to this as “a transformative package”, in reality, there is little new in it. Instead the Bank continues with many of its existing reforms, but doubles down on its controversial ‘private finance first’ approach, known as the ‘Cascade’. This approach relegates public financing as the last option, only to be chosen where subsidies and guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). cannot persuade private financiers to invest. In the document, the Bank signals its intention to expand this approach to all areas, including “applying the Cascade approach that prioritises use of private sector solutions to address climate issues.

As a sop to US protestations that wages at the World Bank are too high, the Development Committee communiqué says: “Board-related and senior management budgets, including salaries, [will] be reviewed by the appropriate bodies, to identify possible additional cost-saving measures.” In addition, a wide range of “efficiency measures” at the institution are expected to result in cost savings (will the World Bank face its own “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
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CSOs protest against the PPP agenda

This week, executive directors of the World Bank were handed a letter signed by more than 80 civil society organisations and trade unions from around the world, urging a change in the Bank’s approach to PPPs. CSO concerns were also detailed during panel discussions. The World Bank, however, did nothing to allay CSO fears. A high-level side event, which featured a World Bank vice president, placed a strong focus on “managing PPPs better,” following a recent World Bank report that stated this area requires further improvement at the national level. While this is true, there was no evidence presented during this event to support the idea that the PPP model is the best option (instead of traditional public procurement) to deliver development projects. Coming after a European Court of Auditors report succinctly titled, Public Private Partnerships in the EU: Widespread shortcomings and limited benefits, the Bank’s continued promotion of PPPs, and its cascade approach that puts private finance on a pedestal, suggests the Bank may be determined to pursue these problematic models despite mounting evidence of major shortcomings.

Social protection emerges as key issue

As a follow-up to the Fund’s arms-length evaluation unit, the Independent Evaluation Office (IEO) report which was critical of the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
’s approach to social protection, the Fund committed to develop a new policy or ‘an institutional view’ on social protection. The IMF, in a welcome move, organised a consultation with civil society during the Spring Meetings in relation to this policy. Civil society called into question the IFI’s preference for targeted social spending and pointed to the significant shortcomings of the methods used. The IMF said they would assist countries to create fiscal space to enhance social spending. However, current IMF arrangements remain predominantly focused on fiscal consolidation which constrains the available budget for social spending.

A new debt-driven global upswing …

The global economic upturn since mid-2016 goes hand-in-hand with new risks to financial stability. The IMF has reported that global debt figures have hit record highs. This indicates that the recent upswing is once again debt-driven, and thus not necessarily sustainable in the long run. Both the IMF and World Bank warned about rising debt vulnerabilities, but limited their heads-up to public debt levels in low-income countries.

The rapid debt build-up in many richer countries and of private debts worldwide – and their tremendous systemic risks for the whole world economy – did not make it into the Communiques of IMF or World Bank. It seems that they did not want to undermine their agenda to leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. more private finance debt; plus the richer member states (which hold the majority of voting rights) want the IFIs to flag that poor countries’ policies are the most important global stability risk these days. The massive tax cuts of the US government was a recurrent topic in corridor talks, as it creates a hole in the US budget that needs to be filled by attracting loans and tapping into credit markets worldwide.

… while the old debt crises is unresolved

Debt sustainability in Greece was a second issue discussed behind closed doors. The IMF insists that substantial debt relief is necessary if Greece’s debt levels should ever become ‘sustainable’. A decision about debt relief needs to be made by August at the latest because this is when the third lending programme expires. Greece will then be cut off from official lending and needs to raise market funding. This obviously requires an escape from insolvency first. IMF Managing Director Christine Lagarde flagged after a meeting with the Greek Finance Minister that an ”early conclusion” is needed. This was a nice way of saying that a fundamental restructuring of the Greek debt stock Debt stock The total amount of debt should have been due in 2010, if the rules of the IMF lending framework had been followed. Meanwhile, the IMF continues to make good business in Greece. Since the beginning of the programme, the Greek people who have suffered under austerity measures have also paid about €4.5 billion in charges and interest to the IMF, funding - among other things - these Spring Meetings. And while the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
will most likely return the profits they made on Greece to Greece, there are no signs yet that the IMF will do so.

Financial crisis 10 years on – did the IFIs learn their lesson?

The policy response to global debt problems that was agreed at these Spring Meetings was meagre. Most progress seems to be in the area of debt transparency. Both the IMF and WBG have been mandated to scale up their work in this area. This would be useful, but neglects the fact that the international financial architecture cannot tackle debt problems adequately even when we know more about them. The G24 group of developing countries pointed at a better response, by calling in their Communique for improved frameworks for debt resolution. The IMF and World Bank were merely mandated to set up a “multi-pronged work programme … to address LIC debt vulnerabilities.” As the new debt LIC debt crisis is already around the corner, in the absence of a debt workout mechanism to fairly and rapidly resolve unsustainable and unpayable debts, we can expect the IFIs’ menu of solutions to be limited to the ‘too little – too late’ varieties that have historically followed major debt crises.
IFIs continue to turn a blind eye to the risk that high levels of both public, and especially private, debt in their richer member states pose to the world economy
That the IFIs continue to turn a blind eye to the risk that high levels of both public, and especially private, debt in their richer member states pose to the world economy indicates how their surveillance and policy responses are distorted by their ‘one dollar-one vote’ governance system. As we ‘celebrate’ the 10th anniversary of the transatlantic financial crisis - which eventually took the whole world economy down - the Bretton Woods Institutions will have to target more substantial reforms of the way they operate if they want to truly become part of the solution, not just part of the problem.

Source: http://www.eurodad.org/Spring-Meetings-2018



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