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

27 April 2016 by Eurodad

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 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.

’s executive board (these are mostly high-income countries). They note a wide range of problems, including that “financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. 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 World Bank
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.

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 BRICS The term BRICS (an acronym for Brazil, Russia, India, China and South Africa) was first used in 2001 by Jim O’Neill, then an economist at Goldman Sachs. The strong economic growth of these countries, combined with their important geopolitical position (these 5 countries bring together almost half the world’s population on 4 continents and almost a quarter of the world’s GDP) make the BRICS major players in international economic and financial activities. ’ 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 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). -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
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(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?

Source: Eurodad

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