TWN Info Service on Finance and Development (Apr07/01)

27 April 2007

WOLFOWITZ SCANDAL DOMINATES BANK AND FUND SPRING MEETINGS

Once again, institutional controversy has eclipsed substantive focus at the biannual meetings of the Word Bank and International Monetary Fund (IMF) governors, with the scandal surrounding World Bank president Paul Wolfowitz overshadowing official agenda items and other issues on the table at the Spring Meetings in Washington DC from 14 – 15 April.

With Wolfowitz embroiled in a storm over his role in the secondment package of his partner and fellow Bank employee, Shaha Riza, much less attention was given to the substantive issues affecting developing countries at the Bretton Woods institutions (BWIs), including crucial questions concerning the governance of the two organisations, of which leadership selection and management oversight is one.

Although there were several items of policy and operational interest to developing countries on the official agenda in Washington, much of the discussions were marginalised by the focus on Wolfowitz and speculation about his future at the Bank. Some areas of interest to developing countries were also not discussed at length or given low priority on the official agenda, once again reflecting the disproportionate influence of developed country priorities at these institutions.

Please find below an article summarising some of the key discussions relevant to developing countries at the Spring Meetings. An abridged version of this article was published in the SUNS #6101, Wednesday 18 April 2007.

With best wishes
Martin Khor

Wolfowitz Scandal Dominates Bank and Fund Spring Meetings

By Celine Tan

Once again, institutional controversy has eclipsed substantive focus at the biannual meetings of the Word Bank and International Monetary Fund (IMF) governors, with the scandal surrounding World Bank president Paul Wolfowitz overshadowing official agenda items and other issues on the table at the Spring Meetings in Washington DC this weekend.

With Wolfowitz embroiled in a storm over his role in the secondment package of his partner and fellow Bank employee, Shaha Riza, much less attention was given to the substantive issues affecting developing countries at the Bretton Woods institutions (BWIs), including crucial questions concerning the governance of the two organisations, of which leadership selection and management oversight is one.

Although there were several items of policy and operational interest to developing countries on the official agenda in Washington, much of the discussions were marginalised by the focus on Wolfowitz and speculation about his future at the Bank. Some areas of interest to developing countries were also not discussed at length or given low priority on the official agenda, once again reflecting the disproportionate influence of developed country priorities at these institutions.

No traction on IMF quota reform

In spite of the fact that the Wolfowitz saga continues to furnish evidence of the anachronistic nature of the decision-making processes of the World Bank and the IMF, there has been little spotlight on how the scandal reflects, in large part, the systemic problem of political power relations within these two institutions in which non-borrowing member states have much more influence over institutional governance and operational policy than borrowing member states.

Developing countries had placed importance on the question of voice and representation at the Bank and Fund, notably the ongoing review of quotas and voice at the IMF in pursuant to the ministerial decision taken at the Annual Meetings in Singapore last September, but this issue was not given prominence in the official agenda at these meetings. In spite of the top priority placed on the issue at the meeting of the Group of 24 developing countries within the IMF and on their official communiqué and emphasis placed on it by the African ministers’ meeting, the topic was not discussed at length at the meeting of the IMF governors in the International Monetary and Financial Committee (IMFC) and only appears in paragraph 11 of the official IMFC communiqué.

The IMFC communiqué noted that a ‘broad consensus was reached in the Executive Board on  the legal framework of an amendment of the Articles of Agreement regarding basic votes’ and welcomed ‘the initial informal Board discussions on a new quota formula’ while stressing the imperative of a new formula which was ‘simple and transparent’ and captures ‘members’ relative positions in the world economy’, including higher shares for ‘dynamic economies … whose weight and role in the global economy have increased’.

According to sources, the lack of more focus on the issue on the official agenda could be because of the lack of consensus among the member governments on the reform process, notably significant disagreements between the developed and developing countries on the reform process.

Developing countries have expressed concerns with the two-track review process and have called for greater commitment to initiate substantive and not just cosmetic measures to address the under-representation of developing countries at institution Some low-income countries have expressed discomfort with the way the process had proceeded, particularly the focus on maintaining the voting power of smaller members in the package of reforms rather than increasing the overall voice of such countries at the institution.

The G24’s communiqué last Friday had called for more ‘meaningful action to address under-representation’ of developing countries leading their communiqué. Ministers had called for the voting power of developing countries to be ‘significantly increased’ to reflect the significant role played by developing countries in the world economy today.

According to their communiqué, the governance structure of the Bank and Fund must take into account the fact that developing countries now account for over half of global GDP measured in purchasing power parity, hold most of the world’s international reserves, represent 80% of the world’s population, constitute more than three-quarters of the world’s population and represent the sole borrowers from the BWIs.

While calling for the new quota formula to ‘reflect the relative economic size of countries in the world economy’, including the ‘need to increase the voting share of those countries whose weight and role in the world economy had increased most’, the G24 ministers had emphasised that this package of reforms ‘should not come at the expense of other developing countries’. Developing countries have also expressed reservations with the inclusion of trade and financial openness in calculating the variables for the new quota formula. The IMFC has set a deadline of the Annual Meetings by this year or the latest by the Spring Meetings of 2008 for an agreement on the quota formula.

Welcoming the agreement to amend the IMF Articles of Agreement to protect the overall share of basic votes in the second round of ad-hoc quota increases under the two-track reform process, the G24 also noted that such revision ‘may still not preclude the erosion of the relative voting power of low-income countries’ and stressed that ‘any package of reforms should include a substantial increase in basic votes and prevent erosion in its share thereafter’. The G24 also underlined ‘the need to implement measures to effectively enhance the participation of chairs with the largest constituencies in the decision-making and management structure of the BWIs’.

The issue of voice and representation of these large constituencies has been a critical issue in the process of reform, notably the 54 sub-Saharan African members who between them share only two Executive Directors and hold less than five percent although they represent the majority of IMF clients today. Speaking at a public seminar on Saturday, a representative from one of the two African Executive Director’s office had argued that the current process had already ‘started off on the wrong foot’ because the discussions had been ring-fenced around a set of limited reforms aimed at preserving the status quo of voting power of low-income members rather than increase their voice and representation significantly.

Surveillance reform should not impose new obligations

Developing countries also expressed reservations about the IMF’s proposed revision of its 1977 Decision on Surveillance over Exchange Rate Policies as a means of strengthening global financial stability, and the IMF’s role in regulating the international financial architecture in the context of the asymmetrical nature of Fund governance. This is in light of the IMF’s continued emphasis on exchange rate flexibility and the implications of such a policy on member states’ domestic policy autonomy in this area.

The IMFC had called upon the Executive Board ‘to continue to give priority to further work on all aspects of this reform’, notably the updating the aforementioned surveillance decision, in order ‘to improve the quality of surveillance, its focus, candor, and evenhandedness’.

However, the G24 ministers had earlier expressed doubt that the revision of the current IMF policy on surveillance is necessary for more focused and effective surveillance, linking the lack of IMF effectiveness in maintaining global financial stability to systemic problems of governance and the IMF’s lack of influence over non-borrowing country members. According, the communiqué had noted that ‘if the IMF has not been more effective in its surveillance (as the case of persistent global imbalances suggest), it is mainly because systemically important economies have not felt the need to follow the Fund’s policy advice’.

The G24 cautioned against revising IMF surveillance policy towards ‘a compliance-based relationship’ between member states and the institution and expressed concerns that ‘expanding the principles for the guidance of members in the Decision would blur the distinction between surveillance over exchange rate policies and over domestic policies’. As a result of such concerns, the official IMFC communiqué states that further work on Fund surveillance should not involve new obligations and be based on ‘dialogue and persuasion’ and ‘pay due regard to country circumstances’.

The G24 also expressed preference for the multilateral consultations in complementing existing IMF surveillance, including the recent consultations on global imbalances. The issue of global imbalances have also featured high on the official agenda of the meetings and the IMFC reviewed the results of the recently concluded consultations on this issue. The recent consultations involved five countries which the IMF identified as ‘directly party to the existing imbalances through their current account deficits or surpluses, or because they represent a very large share of global output and could contribute to sustaining world growth as demand and savings patterns adjust’.

These five country participants – China, the Euro area, Japan, Saudi Arabia and the United States – released a statement, along with IMF staff stating that ‘the consultation process has proved a useful initiative, bringing together representatives of relevant economies to discuss how best to make progress in addressing this critical challenge’ and noted that the implementation of their policy plans ‘would in combination constitute a significant further step toward sustaining solid economic growth and resolving imbalances’, adding that participants agreed ‘to meet again when developments warrant’.

Declining aid flows and the new IDA round

The Wolfowitz scandal had also overshadowed substantive discussion of recent developments at the World Bank, particularly its operations in low-income countries and in the context of the overall aid architecture. The Development Committee, the Bank counterpart to the IMFC, however did place emphasis on maintaining adequate levels of official resource flows for development, both in the context of the Bank’s Africa Action Plan and the current negotiations for the 15th replenishment of the International Development Association (IDA), the concessional lending arm of the World Bank.

Ministers expressed concern that total official development assistance (ODA) had declined in 2006 and called upon donor governments to make good on commitments to achieving the objective of assigning 0.7 percent of their GDP as aid as well as to fulfil pledges made in 2005 of doubling aid to Africa by 2010. In particular the Development Committee noted that although aid had grown in real terms over the last few decades, much of this increase has been a result of debt relief and called for financial flows to be scaled up to provide fresh financing to reach the Millennium Development Goals (MDGs).

This issue is particularly pressing in the context of the current replenishment process at the International Development Association (IDA), the World Bank’s concessional lending facility reliant on donor financing. A key concern emerging from the Bank as an institution as well as developing country members has been the sustained financing of the IDA in light of debt relief provided through the recent operations of the Multilateral Debt Relief Initiative (MDRI) and the Heavily Indebted Poor Countries Initiative (HIPC).

Speaking at a civil society meeting, Philippe Le Houérou, the Bank’s Vice President for Concessional Finance and Global Partnerships, said that debt relief will have a big impact on the ability of the IDA to provide resources for development if sufficient funds are not mobilised to meet the amount of debt forgiven under the MDRI and HIPC initiatives, including resources pledged for projects in advance.

Echoing these concerns, the Development Committee had called for a ‘dollar for dollar replenishment of lost credit flows’ due to the MDRI and HIPC in the IDA replenishment process as well as efforts to reduce aid fragmentation and the earmarking of aid leading to ‘higher transaction costs for recipients and reduced aid effectiveness’. There was also a focus on maintaining debt sustainability and capacity building in debt management strategies for country beneficiaries of debt relief operations.

Other issues discussed at the Development Committee were the gender action plan of the World Bank, the problems faced by fragile states, the imperative of a successful conclusion of the Doha Round of multilateral trade negotiations at the World Trade Organisation (WTO), the Africa Action Plan, the Bank’s proposed anti-corruption and governance framework and the Bank’s new clean energy framework.

Despite a focus on Africa in deliberations this year and the questions thrown up by the Wolfowitz scandal, the issue of Bank governance was not prioritised on the official agenda of the Development Committee. The ministers had noted that enhancing the voice of developing and transition countries is ‘is key to strengthening the credibility

and legitimacy of the institution’ and noted a Bank staff paper on the ‘Options Paper on Voice and Representation’ and called upon the Bank ‘to continue carrying out technical work to assist such consultations’, including a report by the next meeting.

In a small reference to the Wolfowitz controversy, the governors of the Bank noted ‘great concern’ with the ‘current situation’ but referred the matter back to the Executive Board for investigation and consideration with the expectation that ‘the Bank adhere to a high standard of internal governance’ in order ‘to ensure that the Bank can effectively carry out its mandate and maintain its credibility and reputation as well as the motivation of its staff’.