The recent Washington meeting between the IMF and the World Bank left the two more divided than ever and the multilaterals unsure of their role, says Karina Robinson
“The rich are getting richer and the poor are getting poorer.’’ The words of World Bank president James Wolfensohn only two months ago provide a harsh condemnation of the Bretton Woods institutions.
If the world is showing increasing inequity in terms of the disposition of assets and income, what have the Bank, the IMF, and their spawn – the regional development banks – been doing for the past 55 years? Many of the protesters at the spring meetings in Washington would say “not much”.
But more reasoning non-governmental organisations argue that the World Bank has evolved towards a better role in the past eight years while the IMF remains little changed. “The World Bank is in the right ball park. The IMF hasn’t even arrived there yet,’’ says Kevin Watkins, senior policy adviser at UK charity Oxfam.
What we might call an alteration to the Washington consensus is taking hold. In a recent speech to the Inter-American Development Bank, Larry Summers, US treasury secretary, said: “Policymakers across the region are realising that issues that were once considered social questions are of increasingly direct macroeconomic importance.’’ For the region, read Washington and the G7 countries.
Along similar lines, the Asian Development Bank (ADB) said in one of its latest documents: “Growth will have to be inclusive and broad based, what we call pro-poor growth... as a trickle-down kind of approach will exacerbate fears of marginalisation and inequity that can only cause social and political instability” (see page 24).
Integrating poverty reduction with macro reforms depends not only on a change in the mindset of the multilateral banks, but also on enhanced co-ordination with the IMF – as well as its conversion to the need for change, or at least for some flexibility in its prescriptions. The Fund is far more influential than the banks.
When its delegations come to town, ministers stand to attention. When the World Bank teams come to town, officials at a much lower level meet with them. Changing the IMF is a Herculean task and beyond the scope of this article. But it is crucial to what the development banks aim to do: reduce poverty.
This is especially true as the Fund has managed to increase its role in combating poverty after the launch of the Highly Indebted Poor Countries (HIPC) initiative. Those wanting to receive relief must comply with the Fund’s structural adjustment programme – now called the poverty reduction and growth facility – a rather transparent public relations move.
At the very least, though, it could try singing from the same hymn sheet as the World Bank in some very specific instances where the organisations undermine each other. For example, the Fund does not treat aid flows as part of government revenues, even when these can account for about 5 per cent of GDP and may be long-term commitments.
This limits government expenditure and makes budget deficit forecasts unreal. Another problem between the Fund and the Bank is that the former is often looking for a deflationary fiscal stance, the latter for an expansionary policy.
This, says an observer, has lead to “a lot of arguing between them” in countries such as Ghana, Uganda and Tanzania. The Meltzer report (see page 22) would solve this problem by leaving crisis lending solely to the IMF. This would mean impoverished people would suffer even more disproportionately. In Asia, where the economic turnaround has led to back-slapping on the Fund’s part, the impact on the poor has still not been reversed.
And, despite an increased flow of funds from the private sector to developing economies, it is not enough to invalidate what the multilateral banks are involved in. In the 1990s, non-official flows have increased tenfold to $300bn a year, while official development assistance has dropped more than 30 per cent to $45bn. The Meltzer recommendation that the banks phase out lending to those with access to international capital markets does not take into account that private sector funds do not flow to the neediest.
Foreign direct investment in Brazil, for example, goes to areas that are seen as having potential, not to those impoverished ones where the multilateral banks are busy. As for the World Bank itself, there are two main strands to its change of policy. First, a shift in the lending profile to areas such as health, education and micro-credit.
Second, a more comprehensive view of development that involves working with governments, with the private sector, with communities – no longer “a project here and there’’. This evolution in World Bank thinking has been reflected in the regional development banks, albeit with long delays. The ADB, for instance, just instituted a “poverty strategy’’ in November 1999. In its latest press release, it notes that 40 per cent of the loans approved last year are focused directly on poverty reduction.
The non-government organisations (NGOs), though, point to the gap between rhetoric and practice. But if they criticise the Bank for non-practice, they slate the regional banks even more, saying they are overly bureaucratic, recruitment is based on nationality rather than merit, they are too intent on seeking an internal consensus for projects, and there is some corruption within them.
Realistically, a degree of all those characteristics is a given in any multilateral organisation. Other than dismantling the banks – which all but their harshest critics abstain from – the most that can be hoped for is a decrease in the levels of these practices. From all of the above, it seems apparent that the development banks and the IMF must step up their efforts with some reforms and take others on board.
Here are some suggestions from The Banker:
1. Increase the dialogue with NGOs. They are often close to the ground and can have constructive input into project design and implementation.
2. Step up the use and development of performance benchmarks to evaluate loan efficiency. Institute external bodies to do so rather than, for instance, the World Bank’s internal operation evaluations department. Misuse and misappropriation of funds is a valid criticism of a number of projects.
3. Institute an outside body to vet candidates for posts within the banks. Although some degree of selection based on nationality may be politically necessary, this could become less of a determinant.
4. Prioritise good governance, which affects the poor the most, in a more effective way by tying in improvements to legal systems, justice systems and financial systems to the agreement with the multilateral organisation involved, the sanction being a halt in disbursements.
5. Create boards that are independent of shareholder governments, rather like central bank boards or committees, where recipient governments would have influence. This would make loan decisions politically neutral, instead of, for example, products of US or Japanese foreign policy.
6. Give the loan recipients more of a say in individual projects. For example, the HIPC initiative means countries have “poverty-reduction strategy papers’’ saying what money from relief will be spent on and, in theory, giving them more input. But the nations involved say the IMF and the multilateral banks do not seem to have realised this.
7. Drop the excessively ambitious poverty goals. The World Bank, for instance, has missed every deadline it has set so far. There is scarce evidence its latest aim – to halve extreme poverty by 2015 – will be achieved.
8. Our “pie in the sky wish”: ensure Congress approves the US contribution to HIPC.
As Horst Köhler takes over the IMF after heading the European Bank for Reconstruction & Development, these are but some of the tasks he faces.
He and James Wolfensohn have their work cut out.
