Bretton Woods Institutions’ birthday party turns sour

This year’s annual meeting of the World Bank (WB) and the International Monetary Fund (IMF), on October 10-12, coincided with the 70th anniversary of both institutions. But it was not a happy party with global economic storm clouds looming, a growing Ebola pandemic and major internal problems at both institutions. The threat of a return to economic crisis and recession, now including Europe's largest economy Germany, also weighed heavily during discussions. 

The meetings themselves were largely a talking shop focusing on how to keep the institutions relevant in a fragile global economy and the emergence of new players in the development arena. A recurring theme was leveraging infrastructure finance as if it is a “magic bullet” to foster economic growth and achieve development objectives. The real story, however, was behind the scenes, with the Bank in a state of revolt after a painful internal restructuring process, while attempting to implement its controversial new strategy. At the same time the IMF’s failure to implement its governance reform, which was approved four years ago, finds emerging markets questioning its legitimacy. 

The implementation of the WBG strategy

One year after its endorsement, the new World Bank Group (WBG) strategy - centred around ending poverty and boosting shared prosperity - is in the process of being implemented. The Development Committee communiqué congratulated the WBG “for delivering increased lending, investment, mobilization of resources and advice… while undergoing a fundamental internal change process.” But it also noted that the committee “expect an important shift in the way the WBG operates to deliver more efficient support to client countries” as well as “better lending quality with increased development impact.”  

While the communiqué paints a rosy picture, recent decisions taken by the Bank have been controversial. Campaigners organised two demonstrations outside the institution: one on the Bank’s damaging impact on land use in developing countries; the second to raise concerns about the Bank’s ongoing review of its social and environmental safeguards, which many feel diverges from a promise made by Bank President Jim Kim that there would be no safeguard dilution. 

A house divided

These were not the only protests.  A group of employees called for a 15-minute strike and requested the institution to “walk the talk” after a push from Bank management to increase internal savings are rumoured to have resulted in massive staff cuts on one hand, and bonuses to senior officials amounting to $ 94,000 on the other. 

Internal discontent with Bank management reflected a previous Bank Group staff survey, revealing that almost 60 per cent of respondents did not feel that they have “a good understanding of the direction in which the WBG Senior Management is leading the institution.” Particularly worrying was that less than half of the respondents felt they “can report unethical behaviour without fear of reprisal.” No mention of this was made in the official communiqués or in Kim’s statements at the Bank’s concluding press conference.

The new panacea: leveraging private finance for infrastructure 

To counter a renewed global slowdown, the IMF advocated for an acceleration of public investments, particularly in infrastructure, in its flagship report World Economic Outlook, and through several of Managing Director Christine Lagarde’s statements. The IMF communiqué noted that “additional public and private infrastructure investment is also important for supporting a recovery and lifting growth potential.” The G24 communiqué went even further saying that they “recognize the important role of the public sector in creating a supportive environment for quality investment in infrastructure, including through sound sector policies and institutional and regulatory arrangement, and adequate project identification and preparation.”

The message across the street was much different. The World Bank launched its Global Infrastructure Facility (GIF) with the objective of mobilising private capital for infrastructure projects. This facility was welcomed by the Development Committee communiqué, which expressed hope “that the GIF will soon acquire the required scale and ambition.” Although the G24 also noted that there are other options available: “we welcome the increased attention to augmenting financing and capacity-building mechanisms to support quality investments in infrastructure, including the BRICS’ New Development Bank, the Asian Infrastructure Investment Bank, the Africa50 Fund, the Global Infrastructure Facility, and the recent G20 Global Infrastructure Initiative.” This statement demonstrates the increasing diversity of actors providing development finance in a changing geopolitical environment. 

Talks around infrastructure finance reinvigorated the push for public-private partnerships, something that is highly problematic from a civil society perspective. According to Dr Kim, “GIF was being designed to deliver complex public-private infrastructure projects,” which is in line with WB strategy and with G20 plans. However, there is growing evidence, through CSO research and a recent report by the World Bank’s Independent Evaluation Group (IEG), which shows that PPPs - expensive and high-risk financing mechanisms - have several problems. Even the IMF itself presented a more sceptical view, and suggested that “it is critical that countries maintain maximum standards of fiscal transparency when using public-private partnerships for infrastructure provision.”

A new strategy is still needed: The IFC investment in the financial sector 

The Bank’s private sector arm, the International Finance Corporation (IFC), continues to be under pressure to be fully accountable for the development impact of its investments. The IFC’s financial intermediary lending now comprises 62% of its portfolio, but evidence of highly problematic impacts on the ground is growing, such as the Honduran palm oil company Dinant - accused of several human right abuses and environmental damage - and the agriculture projects involving land grabbing by Hoang Anh Gia Lai’s (HAGL) activities in Cambodia and Laos, among others. 

CSO concerns were presented at several sessions, including one organised by the IFC on the Dinant case, in which a “Draft Enhanced Action Plan” was presented. CSOs remain concerned that the IFC cannot adequately ensure that sub-projects financed through third parties do no harm to people or the environment. In its Dinant audit, the CAO found that failures arose, in part, from staff incentives “to overlook, fail to articulate, or even conceal potential environmental, social and conflict risk”, and that staff felt pressured to “get money out the door.” CSOs have repeatedly demanded an inclusive review to develop a new group-level strategy for investments in the financial sector to rethink fundamentally the nature, purpose, modalities and limits of these investments.

The waxing and waning of the global economy

According to the World Economic Outlook launched by the IMF right before the meetings, “the growth forecast for the world economy has been revised downward” and global recovery is still uneven and weak. Delegates from emerging markets and developing countries heavily criticised the advanced economies’ lack of action, as spillovers threaten to harm the global economy. Pressure on advanced economies to introduce growth-promoting policies is increasing. There are also increasing complaints about the Global North's beggar-thy-neighbour policies, such as reduction of corporate tax rates or continuous use of subsidies. Ministers of Low Income Countries used the Annual Meetings to call for a more fundamental reform of the international tax system in order to get a fair share of global tax revenues, and for an equal seat at the negotiation table, which would be best provided by the UN.

Meanwhile, expectations that the IMF will ever come up with a sovereign debt restructuring regime that meets developing countries’ needs remain low, as major shareholders in the IMF Executive Board continue to block the necessary reforms. The IMF did come up with a proposal to strengthen collective action clauses in bond contracts, and to reform the pari passu clause whose recent legal interpretation by a US court has given new leverage to predatory vulture funds. But from developing countries' perspective, these reforms are too piecemeal and largely missing the point, and they have turned to the UN instead.  

IMF governance reform  

No progress was made in getting the stalled IMF governance reform back on track, due to non-ratification by the US Congress. As a result, the G24 noted that “this remains a significant impediment to the credibility and effectiveness of the IMF and unjustifiably delays forward-looking commitments.” At the same time, the International Monetary and Financial Committee (IMFC) “strongly urge(d) the US” to ratify the reform and reiterated its words from April saying that “if the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and stand ready with options for next steps.”