IMF challenged to match inequality rhetoric with action, and a campaign against the World Bank’s promotion of PPPs: Annual Meetings round up

The annual meetings of the Bretton Woods Institutions (the IMF and World Bank) are over for another year. The meetings in Washington DC were held against a background of strengthened but patchy global economic growth mixed with considerable crisis risks and renewed geopolitical fights over the World Bank’s demand for a capital increase. Meanwhile, civil society organisations (CSOs) questioned the development impact of the Bretton Woods Institutions, and launched a global campaign against public-private partnerships (PPPs).

IMF worries about debt (in China) and talks of taxing the rich more

The 2017 Annual Meetings were preceded by the publication of the IMF’s World Economic Outlook (WEO), in which the IMF signalled stronger than expected growth forecasts for the global economy in 2017 and 2018, but cautioned that this upswing might not last. Nor is the upswing universal: one quarter of the world is seeing negative or low growth. The IMF highlights the rising levels of debt in many nations, especially low-income countries, and rapid credit expansion in China, as key risks to the global recovery. However, the communiqué issued by the 24 members of the Fund’s ministerial policy committee, the International Monetary and Financial Committee (IMFC) – dominated by rich countries - signalled little policy deviation from a broadly neoliberal agenda, emphasising fiscal prudence and structural reforms for under-performing economies. Thinly veiled criticism of protectionist and isolationist tendencies from the USA were reflected in calls for multilateral solutions, particularly to achieve the Sustainable Development Goals – including combined efforts on global tax reform, and combating illicit financial flows. Whether this is merely lip service remains to be seen, particularly given the committee saying the IMF should only work on the SDGs when ‘relevant to [the Fund’s] mandate’.

In some respects, inequality was the buzzword of the week for the IMF. The Fiscal Monitor released by the IMF in early October, grapples head on with the question of how fiscal policies can support a redistributive agenda. It has surprised many with its call for more progressive taxation in richer countries, increased spending on education and health, and discussion of a universal basic income. Headline writers seized upon the IMF’s promotion of progressive taxation – a clear criticism of the Trump administration’s mooted tax reforms.

Nonetheless, while the Fund was busy patting itself on the back at the Annuals for its increasing focus on gender and economic inequality, CSOs raised a number of concerns, and voiced a strong note of caution. They urged the IMF to translate the rhetoric into a real change in policy direction at country level, where many IMF policies are already having negative impacts on gender and income inequality. For example, IMF tax reform prescriptions have often promoted regressive taxes such as VAT, and IMF conditionalities on labour market reform have, for example, been criticised for undermining workers’ rights. CSOs spoke directly with European Executive Directors to urge the Fund to revise its approach, and to consider how structural reforms might reduce inequality, rather than focusing purely on mitigating the adverse effects of any such reforms.

A geopolitical fight over increasing World Bank lending power 

As was clear at the end of the spring meetings, the World Bank’s call for a general capital increase – to boost its financial position and allow it to lend more in the future – sets it on course for a collision with the US. US Treasury Secretary Steven Mnuchin said “more capital is not the solution when existing capital is not allocated effectively,” picking a fight with emerging markets, and particularly with China, by calling for a shift of Bank lending away from these countries.

However, by pushing the Bank to exclude China and other emerging markets from the list of countries given access to World Bank credit, the US government will only fuel Chinese desire to strengthen new institutions, such as the Asian Infrastructure Investment Bank, which already represents half of the World Bank’s capital and has triple-A credit rating.

The Development Committee (the World Bank’s Ministerial-level steering group) – and World Bank president Kim – said they aim to reach a decision at the 2018 Spring Meetings, a timeline that looks forlornly optimistic, given that the US controls a large enough share of the vote at the Bank to veto any capital increase.

The World Bank’s ‘maximising finance for development’ approach

A major fight developed between the Bank’s ‘private finance first’ approach, and a major new CSO campaign calling on the Bank to stop promoting public private partnerships (PPPs). The Bank’s Development Committee considered a paper on “Maximising finance for development: leveraging the private sector for growth and sustainable development.” This sets out the rationale for the implementation of the controversial “Cascade” approach, now renamed “Maximising finance for development” (MFD). According to this approach, the Bank “first seeks to mobilise commercial finance” and “only where market solutions are not possible through sector reform and risk mitigation would official and public resources be applied.”

In practice, this ‘private finance first’ approach represents a significant change to the way the World Bank Group does business, and the Bank plans to shift incentives, guidance and training of staff, and monitoring of progress to fit this new paradigm. Nine countries have been selected to pilot the MFD approach: Cameroon, Cote d’Ivoire, Egypt, Indonesia, Iraq, Jordan, Kenya, Nepal, and Vietnam, with a focus on infrastructure sectors. Plans to scale up implementation both geographically and by sector are in progress, with Peru and Sri Lanka in the pipeline.

As Eurodad pointed out in a recent briefing on infrastructure financing, the MFD approach assumes that the private sector is always the natural supplier of capital. That's a mistaken and dangerous assumption to make in the case of infrastructure, which the Bank’s own research shows is overwhelmingly publicly financed – for good reasons. The MFD approach appears ideologically driven, which is why it leads to complicated ways of enticing private capital – for instance, through further encouraging the use of PPPs – rather than evaluating all financing options equally.

To combat this perceived ideological shift by the Bank, more than 150 CSOs and trade unions from 45 countries launched a global campaign manifesto to raise their concerns about the increased push for PPPs and the role of the WBG. The manifesto points out that PPPs often cost more in the long run than conventional public funding, expose governments to financial risk, can have a disproportionally negative impact on women and children, and undermine democracy, human and environmental rights. It calls on the WBG and other development banks to stop promoting PPPs over traditional public borrowing to finance social and economic infrastructure and services.

Debt sustainability: lack of transparency puts accurate monitoring at risk

Since the April meetings of the Bretton Woods Institutions, the IMF has established new lending arrangements with seven countries (Cameroon, Central African Republic, Chad, Gabon, Mongolia, Sierra Leone, and Togo). This, together with the G20 pointing to substantially higher sovereign debt levels than before the 2008/09 crisis, meant the need for better monitoring of the debt burdens of poorer countries was again a recurrent theme in DC. Immediately prior to the Annual Meetings, the IMF and World Bank agreed new reforms to the framework they use to monitor debt sustainability (the DSF), and though much work still needs to be done to improve the system, one welcome change is a greater focus on the hidden debts caused by PPPs. The lack of transparency in many PPPs, particularly surrounding government guarantees to infrastructure investors, means the IMF can’t properly assess risks or monitor the true state of government books.

The risks of major fiscal liabilities arising from PPPs was a key issue in two Eurodad panel discussions. One particularly worrying aspect is the danger of new debt crises emerging from the current push to promote private investment in the global south via initiatives such as the G20 Compact with Africa, which is doing much to promote PPPs.

The IMFC and the G24 voiced support in their communiqués for the Compact with Africa. This was accompanied by calls for continued attention to the impact of volatile capital flows, continued efforts to mobilise domestic resources, and better transparency on debt issues. The signs are that institutional actors may be aware of, but are reluctant to acknowledge explicitly, the dangers the compact poses to African economies. It was left to CSO participants to highlight the risks with increasing urgency - speaking on a Eurodad panel, Nancy Alexander of the Heinrich Boell Foundation referred to the compact as “the Washington Consensus on steroids”.

Building resilience to weather shocks: the message is ‘go it alone’

The reforms to the DSF will also allow the IMF to give greater consideration to how extreme weather events could increase vulnerability to over-indebtedness: an issue of particular focus at the Annuals, given the devastation recently wreaked in the Caribbean by Hurricanes Irma and Maria. Eurodad and other civil society partners called on European IMF Executive Directors to support an immediate moratorium on debt payments by affected islands, and for the revision of Fund rules to allow for debt relief in such circumstances. These recurring debt crises provide fuel for the campaign for proper solutions including a fair and independent sovereign debt workout mechanism.

Despite the IMF itself calling for international cooperation to protect poorer states from the effects of climate change, and the G24 group of developing countries’ call for ‘a strong global response’ to the hurricanes’ devastation, discussions on debt relief were side-lined in favour of a push for vulnerable states to take on the burden themselves, by buying risk insurance against weather shocks. The emphasis in the IMF debate on this issue continues to be on ensuring creditors get paid - in stark contrast to the better work done at the UN to promote fairer, more sustainable solutions.