Info Service on Finance and Development (Oct13/02)
G24 endorses WB-IMF status quo, but calls for some specific measures
Washington, D.C., 18 October (Bhumika Muchhala) – The Group of 24 (G24) developing country finance officials at the International Monetary Fund (IMF) and World Bank reinforced previous positions in their 10 October communiqué, such as negative spillovers of rich country monetary policies and the failure of timely IMF governance reforms.
The G24 also endorsed the World Bank Group’s strategy for private sector-led projects and financing, stressing “the particular importance of mobilizing large-scale infrastructure financing.”
The scaling up of financial resources for low-income countries through gold sales was supported, while a specific call was made for “the IMF and World Bank to demonstrate flexibility in the design and conditionality of their programs in Arab countries in transition.” The dedicated paragraph on the Middle East and North Africa region was new to this October’s communiqué.
The G24 group is composed of African, Asian and Latin American country clusters. There are 9 African countries, 5 Asian countries and 8 Latin American countries. The current Chair of the G24 is Fernando Aportela (Deputy Minister of Finance and Public Credit of Mexico), the First Vice-Chair is Karim Wissa (Alternate Executive Director of the World Bank, Egypt), and the Second Vice-Chair is Mohammad Safadi (Minister of Finance of Lebanon).
US monetary policy imperils emerging markets and developing countries
The G24 expressed concern over the higher volatility in global financial markets following the Federal Reserves indications of ‘tapering off’ the multi-year long quantitative easing, or printing of US dollars that investors have funneled into higher-yield bonds, currencies, equities and commodities in emerging markets.
(After the Federal Reserve’s first announcements in the summer, there were sudden exits of money out of developing countries such as India, Indonesia, Brazil and Turkey. This caused rapid currency depreciations and created risks of financial crisis.
For example, in recent weeks, India had seen its rupee fall from 56 to 68 rupees to the dollar and Indonesia’s rupiah depreciated from 9,500 to 11,000 to the dollar. This has led to economic slowdown, inflation spikes and costly increases in import payments, among other challenges, in developing countries.)
The G24 stressed that, “Given the renewed financial turbulence, it is important that EMEs affected by global financial instability have the flexibility to adopt policies to preserve resilience.” This echoes previous statements by the G24 that refer to the ongoing debates over capital account regulations. In December 2012, the Fund released a milestone “Institutional View” paper that established limited support for capital controls on capital inflows. (See article: “IMF: Small door for capital controls, but maintains primacy of financial liberalization” at http://www.twn.my/title2/finance/2012/finance121201.htm).
The IMF paper acknowledged the successful use of capital controls by several emerging market economies such as Brazil, Korea and Indonesia in the fall-out of the 2007-8 global financial crisis, where surges of capital inflows to these countries have resulted from global investors seeking higher returns in the context of record-low interest rates in the rich economies.
However, the IMF’s institutional view paper makes no mention on capital controls on capital outflows that could be implemented by source countries, such as the US. The G24 statement also makes no direct reference to capital controls, and certainly not on source country controls.
As for the quantitative easing policies of the US, the G24 has asserted that the US should be “mindful of negative spillovers and to clearly communicate their exit strategies.” The G24 Chair said the IMF should analyze the impact of the Federal Reserve’s withdrawal, or taper, of quantitative easing on their economies. At a press conference with reporters, IMF managing director Christine Lagarde also urged for better policy coordination among IMF member countries due to the world economy being “not simply connected,” but “hyperconnected.”
Global imbalances and flailing growth trajectories
The G24 again emphasized the need for developed countries that have trade surpluses, or in other words, “policy space to take more concerted action” to scale up their contribution to global demand (namely, by boosting their domestic consumption and national imports). In response to the ongoing slump in demand and consumption across developed countries and the repercussions on developing country output, exports and revenue, the G24 called on the Fund to do more to “support countries in warding off global tail risks and minimizing output losses.”
Despite the G24’s acknowledgement that emerging markets and developing countries have enormous growth potential, and will continue to be the driving force of the global economy, they noted that global growth projections for 2013 and 2014 are marginally lower than in April due to slower growth in the context of protracted difficulties and uncertainties in both Europe and the US.
In particular, concern was expressed on high unemployment rates and poverty levels in emerging economies. Officials committed to “take a broad range of actions to promote more and better jobs” through investments in skills and education with objectives to encourage “skills portability, facilitate labor mobility and enhance employability.” However, no details were provided as to what fiscal policy tools or adjustments could be employed to achieve these social investment objectives.
The G24 supported the Fund’s explicit growth agenda in their concessional loan programs, particularly in small states, while calling attention to the importance of “productivity growth and an increased rate of structural transformation” as well as job-inclusive growth, across the range of emerging markets to low-income countries.
(However, a critical lack of policy coherence lingers on between the continuing emphasis on austerity measures in the IMF’s policy advice through both loans and Article IV surveillance reports, and the policy choice to boost public investments for job creation, productivity growth and skills and education. A key report released earlier this year, “The Age of Austerity – A Review of Public Expenditures and Adjustment Measures in 181 Countries,” analyzes policy advice in 181 IMF surveillance reports, and reveals how 119 countries will be reducing public expenditures in 2013, increasing to 131 countries in 2014 and the trend will continue at least until 2016.)
Corporate Strategy of World Bank Group Endorsed
The G24 endorsed the World Bank Group’s corporate strategy and its “goals of contributing to ending extreme poverty and promoting shared prosperity in a sustainable manner.” The strategy’s emphasis on “supporting clients in delivering customized development solutions, backed by finance, knowledge and convening services” was welcomed in the context of the importance of poverty reduction and inclusive growth. However, the World Bank’s strategy revolves around the pivot of a private sector-led development paradigm and private investments backed by guarantees and additional financing from multilateral institutions and the country governments.
Several African countries emphasized the double constraint they faced, where economic growth and macroeconomic stability in addition to looming social challenges create little room for maneuver in fiscal space to put in place vital economic infrastructure. These countries asked the question of how public-private partnerships for infrastructure will be both financially and technically supported by multilateral institutions. An African finance official noted that one of the key deficiencies in Africa is the lack of a project preparation facility, and that building this facility with the Bank and other multilateral institutions is increasingly important.
Civil society critique of World Bank’s Strategy
In a paper titled, “A Common Vision for the World Bank Group,” a new strategy underpinned by five key goals is established as a foundation for the multilateral institution as a whole. The five goals are: (1) Serve the poor and vulnerable people everywhere in a sustainable manner; (2) Recognize the diversity of clients; (3) Work as one World Bank Group; (4) Focus development solutions; and, (5) Exercise dynamic selectivity. The goal to end extreme poverty worldwide by 2030 is now part of the World Bank Group’s new vision, adopted at its April 2013 spring meetings in Washington, D.C. The World Bank also adds the promotion of “shared prosperity” and “inclusive growth” as overarching thematic goal.
However, civil society advocates who have studied the World Bank’s new strategy argue that the overriding emphasis on private sector-led economic growth and infrastructure investments through public-private partnerships is deeply worrying on several counts. Case studies over the years show that private sector investments do not prioritize development outcomes, equity of and access and prices for the poor, or environmental and social risks. A recent study by the European Debt and Development Network of development finance institutions in Europe shows that almost 75% of public aid money from North to South goes to firms and companies domiciled in developed countries when it is allocated to the private sector.
The high risks in debt sustainability posed by public-private partnerships are also a central concern. In the event of project failure, the costs are paid by the state. However, this ‘contingent liability’ is usually not factored into the public budget and official assessments of debt sustainability, as they are usually counted as ‘off-budget’ items. Thus, the question of whose interests will be served by the World Bank’s new strategy—that of big business or the developing world—looms large.
The Bank’s focus on inequality is framed within a language of “shared prosperity” aimed at raising the incomes of the bottom 40% of a country’s population. The Bank claims that its new “Shared Prosperity Indicator,” to be launched later this year, will help countries reduce domestic inequality over the time while still capturing economic growth. Critics claim that such a framing implicitly accepts increasing inequality as a by-product of economic growth.
The Bank also calls for “green growth” that reconciles “rapid growth with environmental sustainability.” However, the prevailing concern of many critics that such “green growth” will result in financial transfers to primarily developed country environmental companies, rather than to provide developing country renewable and clean energy initiatives with much-needed financial resources and intellectual property rights flexibilities, is not at all addressed.
The World Bank report explicitly states its focus on a private sector-led development paradigm, “A key element of our work is to promote the private sector as a critical driver of jobs, goods, and services to improve the lives of the poor through inclusive and sustainable growth.” The state is relegated to the task of “creating an enabling environment” for the private sector, by a now well-known set of measures such as improving competitiveness, promoting a favorable investment climate and encouraging innovation.
Neglected deadline for IMF governance reform drags on
The G24 ministers’ 10 October communiqué also expressed “deep regret” that the agreed October 2012 deadline to implement the 2010 quota and governance reform was missed and that there was no agreement on a new quota formula by the review deadline of January 2013.
(IMF quotas, which represent member countries’ voting power based on their monetary contributions, are the fundamental building block of the Fund. The US has the highest percentage of quotas, at about 17%, and continues to hold veto power in the Executive Board, while European countries hold over 30% voting power. The G8 countries alone thus hold an imbalanced majority of voting power in the IMF’s Board, failing to reflect structural shifts in political geography since the post-World War II years during which the IMF and World Bank were founded).
The G24 once again asserted that quota reform is “critical to the Fund’s legitimacy, credibility and effectiveness,” and urged “countries to fulfill their commitment of implementing the 2010 governance reform expeditiously.” They added that, “the fundamental goal of quota and governance reform must be to enhance the voice and representation of emerging market and developing countries, including the poor, as well as vulnerable, fragile and small low- and middle-income countries.” However, greater quotas for emerging markets “must not come at the expense” of other developing countries. The representation of the poorest members of the Fund must be protected through the quota formula.
The longstanding call for a third chair for sub-Saharan African countries was reiterated. Currently, over 40 African countries have only 2 chairs in the IMF’s Board. A third chair has been requested by developing countries on the Board for several years now. Still, there is a complete lack of action by developed countries, demonstrating not only the absence of political will but also the intransigence and disrespect of developed countries on the democratic deficit of the IMF’s governance structure. Unsurprisingly, the IMF’s legitimacy crisis continues unabated.
Debt and lending accepted without questions
The G24 supported the use of gold sales profits to bolster the lending coffers of the Poverty Reduction and Growth Trust (PRGT), and reiterated their commitment to ensuring the PRGT’s long-term sustainability. Implementation of the joint Debt Sustainability Framework of the World Bank and IMF and ways to enhance low-income countries’ debt management capacity by increasing flexibility on debt limits was encouraged. However, no mention was made of the heightening debt problems of low-income countries over the last few years.
The IMF is urged to complete as soon as possible the ongoing debt management review to enable poor countries to secure adequate financing for their investment programs while also preserving debt sustainability. Updates to the Guidelines for Public Debt Management and concrete proposals on issues and gaps identified in examples of sovereign debt restructuring was also encouraged.
The G24 ministers lent their support to the Fund’s tax equity focus, and to the importance of preserving the tax revenue base and addressing the adverse effects of tax avoidance and evasion in developing countries, including through transfer pricing and tax havens.
(However, the Fund continues to advise member states to boost public revenue through regressive tax measures, such as raising value-added taxes or sales tax rates, as well as by removing tax exemptions on basic goods. While such measures do contribute to the tax revenue base, lower-income segments in society are disproportionately impacted and income inequality exacerbated when the cost of basic goods and services are increased. Progressive tax measures based on income, assets and property, including taxation of large and powerful multinationals and taxes on financial transactions, are not emphasized with equal weight).
Flexibility called for in Middle East and North Africa
A specific paragraph on the Middle East and North Africa region was new to this October’s communiqué. The G24 makes special mention of the tumultuous political events in the region and called for “the IMF and the World Bank to demonstrate flexibility in the design and conditionality of their programs in Arab countries in transition, given the political and social constraints facing policymakers.” The Fund’s ongoing loan negotiations with Egypt, which have been agreed to on two separate occasions but remains unsigned due to deep local opposition over the controversial fuel and food subsidy eliminations and consumption tax hikes, is implicitly referred to in this paragraph.
(Civil society and academic studies of the Egyptian loan program reveal that it is based directly on the 2010 Article IV surveillance report drafted by the IMF for Egypt, before the uprisings began. While inefficient and wasteful fuel and food subsidies for big companies was supported by the people, actual impacts were felt by low-income and middle-class households who saw their electricity tariffs and food costs increase sharply. Furthermore, popular campaigns on sovereign debt and equitable development in Egypt have raised alarms on the illegitimacy of Egypt’s debt, amassed by the former Hosni Mubarak regime.)
The G24 also called for “additional resources to neighboring countries facing the influx of Syrian refugees.” However it is unclear as to whether these resources would be in the form of grant aid through development agencies nationally or loans from financial institutions such as the World Bank and IMF that would create increased debt. Arab civil society networks this week issued a statement demanding the cessation of lending and a scale up of grants to countries dealing with the refugee crisis.