The Spring Meetings of the IMF and World Bank took place amid warnings of a ‘borrowed boom’ as an uptick in global growth was matched by global debt levels reaching record highs. The World Bank Group shareholders stumped up for an increase in the Bank’s capital base, but without challenging the western-dominated nature of the institution, with the G7 countries plus the EU maintaining over half the voting share. In return for the cash, the Bank vowed to increase its ‘cascade’ approach. This puts private finance first, despite harsh criticism by major shareholders and CSOs of its business model, and a renewed call by a broad civil society coalition to abandon its promotion of public- private partnerships (PPPs).
A capital increase for the World Bank – but what for?
The main headline of this year’s Spring Meetings was an agreement on increasing the World Bank Group’s (WBG’s) lending capacity. It was agreed by the Development Committee, (the Bank’s Ministerial-level steering group) that the WBG’s middle-income country lending arm, the International Bank for Reconstruction and Development (IBRD), will receive a $60.1 billion capital increase, with $7.5 ‘paid in’ (the money is directly sent to the IBRD, the rest is ‘callable’ and available if needed). In addition, $5.5 billion will be paid in for the WBG’s private sector lending arm, the International Finance Corporation (IFC).
The result, however, is the continued dominance of high-income countries over the institution. Overall, the US plus the EU plus the other G7 countries (Canada, Japan and Australia) continue to control the IBRD, with 53 per cent of the vote, and the IFC, where their majority is even larger. Both the US, with 16% of the vote at the IBRD and EU member states with 26 per cent (collectively) retain a veto over major decisions which require a 85 per cent majority to change. The deal also includes a lending reform which increases borrowing costs for higher middle-income countries, including China. In exchange, China’s voting power goes from 4.5 to 5.7 per cent at the IBRD but only 2.8 per cent at the IFC.
This time the financial package was negotiated together with a policy package, detailed in the document Sustainable Financing for Sustainable Development: World Bank Group Capital Package Proposal. The policy package has four key pillars: a) serving all clients; b) creating markets; c) leading on global issues; and d) improving the business model. While the Development Committee refers to this as “a transformative package”, in reality, there is little new in it. Instead the Bank continues with many of its existing reforms, but doubles down on its controversial ‘private finance first’ approach, known as the ‘Cascade’. This approach relegates public financing as the last option, only to be chosen where subsidies and guarantees cannot persuade private financiers to invest. In the document, the Bank signals its intention to expand this approach to all areas, including “applying the Cascade approach that prioritises use of private sector solutions to address climate issues.”
As a sop to US protestations that wages at the World Bank are too high, the Development Committee communiqué says: “Board-related and senior management budgets, including salaries, [will] be reviewed by the appropriate bodies, to identify possible additional cost-saving measures.” In addition, a wide range of “efficiency measures” at the institution are expected to result in cost savings (will the World Bank face its own “structural adjustment”?)
CSOs protest against the PPP agenda
This week, executive directors of the World Bank were handed a letter signed by more than 80 civil society organisations and trade unions from around the world, urging a change in the Bank’s approach to PPPs. CSO concerns were also detailed during panel discussions. The World Bank, however, did nothing to allay CSO fears. A high-level side event, which featured a World Bank vice president, placed a strong focus on “managing PPPs better,” following a recent World Bank report that stated this area requires further improvement at the national level. While this is true, there was no evidence presented during this event to support the idea that the PPP model is the best option (instead of traditional public procurement) to deliver development projects. Coming after a European Court of Auditors report succinctly titled, Public Private Partnerships in the EU: Widespread shortcomings and limited benefits, the Bank’s continued promotion of PPPs, and its cascade approach that puts private finance on a pedestal, suggests the Bank may be determined to pursue these problematic models despite mounting evidence of major shortcomings.
Social protection emerges as key issue
As a follow-up to the Fund's arms-length evaluation unit, the Independent Evaluation Office (IEO) report which was critical of the IMF’s approach to social protection, the Fund committed to develop a new policy or ‘an institutional view’ on social protection. The IMF, in a welcome move, organised a consultation with civil society during the Spring Meetings in relation to this policy. Civil society called into question the IFI’s preference for targeted social spending and pointed to the significant shortcomings of the methods used. The IMF said they would assist countries to create fiscal space to enhance social spending. However, current IMF arrangements remain predominantly focused on fiscal consolidation which constrains the available budget for social spending.
A new debt-driven global upswing …
The global economic upturn since mid-2016 goes hand-in-hand with new risks to financial stability. The IMF has reported that global debt figures have hit record highs. This indicates that the recent upswing is once again debt-driven, and thus not necessarily sustainable in the long run. Both the IMF and World Bank warned about rising debt vulnerabilities, but limited their heads-up to public debt levels in low-income countries.
The rapid debt build-up in many richer countries and of private debts worldwide – and their tremendous systemic risks for the whole world economy – did not make it into the Communiques of IMF or World Bank. It seems that they did not want to undermine their agenda to leverage more private finance debt; plus the richer member states (which hold the majority of voting rights) want the IFIs to flag that poor countries’ policies are the most important global stability risk these days. The massive tax cuts of the US government was a recurrent topic in corridor talks, as it creates a hole in the US budget that needs to be filled by attracting loans and tapping into credit markets worldwide.
… while the old debt crises is unresolved
Debt sustainability in Greece was a second issue discussed behind closed doors. The IMF insists that substantial debt relief is necessary if Greece’s debt levels should ever become ‘sustainable’. A decision about debt relief needs to be made by August at the latest because this is when the third lending programme expires. Greece will then be cut off from official lending and needs to raise market funding. This obviously requires an escape from insolvency first. IMF Managing Director Christine Lagarde flagged after a meeting with the Greek Finance Minister that an ”early conclusion” is needed. This was a nice way of saying that a fundamental restructuring of the Greek debt stock should have been due in 2010, if the rules of the IMF lending framework had been followed. Meanwhile, the IMF continues to make good business in Greece. Since the beginning of the programme, the Greek people who have suffered under austerity measures have also paid about €4.5 billion in charges and interest to the IMF, funding - among other things - these Spring Meetings. And while the ECB will most likely return the profits they made on Greece to Greece, there are no signs yet that the IMF will do so.
Financial crisis 10 years on – did the IFIs learn their lesson?
The policy response to global debt problems that was agreed at these Spring Meetings was meagre. Most progress seems to be in the area of debt transparency. Both the IMF and WBG have been mandated to scale up their work in this area. This would be useful, but neglects the fact that the international financial architecture cannot tackle debt problems adequately even when we know more about them. The G24 group of developing countries pointed at a better response, by calling in their Communique for improved frameworks for debt resolution. The IMF and World Bank were merely mandated to set up a “multi-pronged work programme … to address LIC debt vulnerabilities.” As the new debt LIC debt crisis is already around the corner, in the absence of a debt workout mechanism to fairly and rapidly resolve unsustainable and unpayable debts, we can expect the IFIs’ menu of solutions to be limited to the ‘too little – too late’ varieties that have historically followed major debt crises.
That the IFIs continue to turn a blind eye to the risk that high levels of both public, and especially private, debt in their richer member states pose to the world economy indicates how their surveillance and policy responses are distorted by their ‘one dollar-one vote’ governance system. As we ‘celebrate’ the 10th anniversary of the transatlantic financial crisis - which eventually took the whole world economy down - the Bretton Woods Institutions will have to target more substantial reforms of the way they operate if they want to truly become part of the solution, not just part of the problem.