TWN Info on Finance and Development (Oct06/07)
4 October 2006
NGO representatives have criticized the negligible results of the annual meetings of the International Monetary Fund and the World-Bank, held in Singapore from 19 - 20 September 2006, which they said were grossly inadequate to deal with the massive problems of financial instability, debt, poverty and economic imbalances plaguing the world today.
They also attacked the lack of democracy and participation, manifested by the treatment meted out to NGOs at the annual meetings in Singapore, as well as the lack of basic changes in the decision-making structures of the two institutions, despite the positive "spin" that the IMF secretariat had tried to put on the decision adopted by the IMF Board to raise the quota shares of four countries.
The NGOs presented their views at a press conference at the venue of the annual meetings. The NGOs were also launching the 2006 report of Social Watch, which is the product of year-long investigations by over 300 civil society groups across more than 60 countries.
Below is a report summarising the points raised by NGOs during the aforementioned meeting, including a synthesis of the findings of the Social Watch report 2006. The report was published in the SUNS#6103 Thursday 21 September 2006.
With best wishes,
NGOs criticize outcome
of IMF-World Bank meeting
They also attacked the lack of democracy and participation, manifested by the scandalous treatment meted out to NGOs at the present meetings in Singapore, as well as the lack of basic changes in the decision-making structures of the two institutions, despite the positive "spin" that the IMF secretariat had tried to put on the decision adopted by the IMF Board to raise the quota shares of four countries.
The NGOs were presenting their views at a press conference at the venue of the World Bank-IMF meetings. The NGOs were also launching the 2006 report of Social Watch, which is the product of year-long investigations by over 300 civil society groups across more than 60 countries. The meeting was attended by representatives of the media, NGOs and some delegations.
Roberto Bissio, coordinator of Social Watch, criticized the IMF and World Bank for their failure to ensure the security and participation of NGO representatives at the meetings. That the Singapore authorities could unilaterally determine which NGOs could enter the country to take part in the meetings, and that they subjected so many individuals to detention, interrogation and some to deportation, was scandalous.
Bissio said the attempts through recent years of the two institutions to engage with civil society had now been severely damaged not only by the shabby treatment by the Singapore authorities that hosted the meetings, but also by the failure of the leadership of the World Bank and the IMF to ensure the security of NGO participants from detention and deportation, and that they could participate either in events at the venue of the IMF-World Bank meetings, or at their own NGO events.
The attempts in recent years by the two institutions to engage civil society had been severely damaged, perhaps beyond repair, as NGOs had been outraged and totally disillusioned by their Singapore experience.
At a "town hall meeting" of NGOs with the IMF managing director and the World Bank President prior to the start of the annual meetings, Bissio had told the two agencies' leaders that the treatment of NGOs was totally unacceptable and he challenged them to hold the meetings at another venue in view of the Singapore authorities' refusal to meet their obligations as host.
Third World Network director Martin Khor said that there were vital roles for a multilateral system on finance and development, but that the Fund and the Bank were not fulfilling those required roles, and instead had contributed to the present serious problems.
As a result of the seriously flawed global financial system, finance was not serving the real economy in terms of channeling savings for productive investment that will lead to job creation and the satisfaction of basic needs, but has instead become an instrument for those who want to profit from speculation.
As a result, there is little correlation between finance capital and the real economy, leading to disruption in the international financial system and manifesting in crises and instability in developing countries.
The IMF had been created to ensure global financial stability and it had originally overseen a system that regulated international capital flows and that had fixed exchange rates. However, it abandoned this framework in the early 1970s, and instead contributed to an acceleration of financial liberalization that enabled volatile flows of funds and financial crises around the world.
According to Khor, the IMF should return to its original task of ensuring financial and currency stability, and discontinue its provision of advice and conditionalities relating to development and structural issues, which was not in its original mandate, which it was not equipped to undertake and in which it had made disastrous mistakes that proved costly for many developing countries.
Due to the skewed distribution of equity and votes that overwhelmingly favoured the developed countries, the two institutions were able to impose policy conditionalities in a rapidly increasing number of areas. As most of the policies were inappropriate for development, many developing countries suffered economic stagnation or recession.
After more than two decades of bad experiences and draconian conditionalities, most developing countries dread having to borrow from the IMF and an increasing number are pre-paying their loans so as to free themselves from dependence and conditionality.
As a result of this declining business and of the poor record, the IMF is going through a legitimacy and financial crisis, and this prompted the Secretariat to initiate the so-called reform of quotas in the hope this would draw back the developing countries into the Fund.
However, said Khor, the decision made at this meeting had not resulted in any basic change as only four countries had seen their quota increase and even then by only a minuscule amount, while other developing countries had seen their quota shares actually declining.
Even if the proposed second phase of reforms were implemented, it was unlikely that the developed countries which now hold the overwhelming share of votes would agree to surrender their dominant control, and the developing countries would only make marginal progress, while some might actually lose out.
An inability to come to an agreement might even stretch the negotiations to many more years. Meanwhile, there were so many issues relating to finance and development that require attention and action, which are unlikely to be resolved.
This view was shared by former financial trader, Sony Kapoor who is now policy advisor to Christian Aid. Kapoor highlighted the fact that instability in the international financial system was caused largely by the fact that decisions on capital markets are no longer made based on economic fundamentals but on market sentiment and that the incentives of participating in the financial system has been driven largely by the need for short-term profit at the expense of longer term development objectives.
Finance, instead of existing as a facilitator of the real economy, has evolved to serve its own interests as it had become more profitable to make money through financial transactions than to take part in the real economy. This is detrimental to developing countries which do not control the instruments of international finance, he said.
Kapoor said the current discussion on the quotas had distorted the picture of the real problem, which was the lack of decision-making power of developing countries and the lack of an adequate global financial architecture.
The global architecture issue had been narrowed down to the role of the Fund and the Bank, and the question of the governance of these two institutions had been narrowed to the quota shares of countries. This had again been narrowed down to whether countries' present shares reflected their shares of economic power or GDP, rather than on other criteria such as the effects that the financial system had on a country, in which case the poorer countries would have greater shares.
He said that the current exercise in quota reform would most likely have little effects on governance of the IFIs or the financial system, and little significance to the lives of ordinary people in developing countries.
The panelists concurred that the main problem with the lack of resources for international development is that the poor has ended up subsidizing the rich in an asymmetrical system of financial transfers, compounded by the unfair trade rules. This is exacerbated by the continuing lack of representation of these countries in the trade and financial institutions which control these trade and financial regimes.
The panelists also referred to several chapters of the Social Watch report, which is the product of year-long investigations by over 300 civil society groups in more than 60 countries. Social Watch's main activity is to monitor progress (or the lack thereof) of the implementation of development goals agreed to in the various recent United Nations summits.
The annual Social Watch report challenges common indicators of human development used in other (official) reports and provides an alternative framework for analysing country progress in various areas of development.
The 2006 Social Watch report highlights the fact that financial flows from developing countries to developed countries outweigh financial flows from developed countries to developing countries due to the asymmetrical nature of the international financial architecture as well as the imbalanced trading system.
The report also found that instead of offsetting the negative flows of funds, the IMF and World Bank are contributing to this trend as developing countries in recent years have been paying more to these institutions than the funds they are obtaining from them.
These negative net transfers of funds from the Bank and the Fund have meant that the two institutions are no longer contributing development finance but instead are detracting from it. (See details below).
The report found that over the past 20 to 30 years, southern countries have seen 'money flowing out in the form of debt interest payments, unfair trade relations and massive profits siphoned out of their economies by foreign corporations' and called for a redesigning of the current international financial architecture and trading system which has facilitated such unfair rules of economic engagement.
According to the report, 'since 1984, net transfers to developing countries (the result of inflows and outflows in the form of debt service) have been negative in all but three years'. For example, in 2003, low-income countries received grants of about US$ 27 billion but, at the same time, paid out US$35 billion in debt service. Sub-Saharan Africa has seen its debt stock rise by US$220 billion in spite of paying off US$296 billion of the US$ 320 billion it has borrowed since 1970.
This situation is exacerbated by unfair trade practices and trade rules which work against developing countries. Trade restrictions in rich countries cost developing countries around US$100 billion a year with Sub-Saharan African countries losing US$2 billion a year from protectionist policies in the north.
Meanwhile, more than 60 percent of international trade are made up of intra-firm trade between subsidiaries of multinational enterprises and these chains exploit the globalized nature of the world economy by channeling money through practices such as mis-invoicing and transfer pricing and taking advantage of tax havens and low-tax jurisdictions.
The report found that between US$ 200 billion and US$350 billion are transferred out of developing countries using such mechanisms, compounded by the fact that around US$11.5 trillion of the private wealth of the world's wealthiest citizens are currently held in tax havens, largely undeclared and untaxed, in their countries of residence.
The conclusions of the Social Watch report contradict commonly held perceptions that rich, Northern countries are paying for development in the South and instead, demonstrate the real resource drain from the south to the north.
This is captured in the metaphor of an impossible architectural waterfall where 'water that seems to be falling actually flows up, against all rules of logic', the report argues. According to the report, for every US$1 that goes into developing countries, US$10 comes out as capital flight and it is estimated that developing countries lose more than US$500 billion each year 'in illegal outflows which are not reported to the authorities and on which no tax gets paid'.
This asymmetrical situation has been detrimental to the ability of developing countries to generate sufficient resources to satisfy the basic needs of their citizens as well as exacerbating the income inequalities between and within countries.
Excluding China and India from the mix, the report finds that poverty has actually increased in the past decade and currently, more than a billion people worldwide live on less than US$1 a day and 2.6 billion people live on US$2 a day or less.
These figures are starker when individual country cases are considered with many countries demonstrating high levels of persistent poverty, in spite of increased aid flows. For example, in Bangladesh, Uganda and Zambia, poverty stagnation has been very high at 36, 85 and 64 percent respectively, calculated over two periods between 1990-1994 and 1999-2000.
The report found the Bank and Fund highly complicit in the leakage of finances from developing countries to developed countries. Since 1991, net transfers (disbursements minus repayments minus interest payments) to developing countries from the International Bank for Reconstruction and Development (IBRD), the arm of the Bank which lends to middle-income countries, has been negative and since 2002, net disbursements have also been negative.
Accordingly, 'taken as a whole, IBRD is not making any contribution to development finance other than providing finance to service its outstanding claims', argues one of their report authors, Yilmaz Akyuz.
At the same time, the IMF's Poverty Reduction and Growth Facility (PRGF) which lends to low-income countries is the only instrument the Fund uses to disburse development assistance to developing countries and the amount of financing from the facility is limited, representing US$9,900 billion or ten percent of total outstanding IMF credits.
The Fund is similarly experiencing a net negative transfer of resources from developing countries as middle-income countries have pre-paid their debt to the IMF, a situation which has left the institution in a state of crisis and in need of reforms, such as those relating to governance of the institution, to reclaim its legitimacy.
(The Social Watch report entitled 'Impossible Architecture: Why the Financial Structure is Not Working for the Poor and How to Redesign it for Equity and Development' can be found at: http://www.socialwatch.org/en/informeImpreso/tablaDeContenidos2006.htm)