Presentation to SCFAID on WB and IMF - April 26, 2007

On April 26th, NSI President, Roy Culpeper, and KAIROS Canada's Global Economic Justice Coordinator, presented their views on the issues raised by the Government’s annual report on the Bretton Woods Organizations (the International Monetary Fund and the World Bank) before members of the Standing Committee on Foreign Affairs and International Development (SFAIT).  The meeting was called by the Standing Committee in response to a request by the Halifax Initiative Coalition. 

Link | PDF for the full minutes from the hearing

House of Commons
Standing Committee on Foreign Affairs and International Development
Notes for Remarks by Roy Culpeper, President, The North-South Institute (pdf)
April 26, 2007

I would like to thank the Committee for inviting The North-South Institute to offer its views on the issues raised by the Government’s annual report on the Bretton Woods Organizations—the International Monetary Fund and the World Bank.

We live in a world facing a number of complex problems, some of them present emergencies, others crises in the making. These include the HIV/AIDS pandemic and other health emergencies afflicting the world’s poorest people and countries; the spectre of devastation from climate change; local conflicts and the threat of regional wars or worse; huge and escalating payments imbalances between the United States, Asian countries, and Europe, threatening the financial stability of the international economy; and enormous and growing disparities between rich and poor which are a consequence of inequitable globalization.

It is not possible to resolve any of these problems through bilateral aid, diplomacy, or military intervention. They are too large and complex even for the United States, the world’s richest and most powerful country. Problems of such global magnitude demand multilateral solutions. In other words, today’s most pressing problems demand that multilateral organizations such as the United Nations and the Bretton Woods institutions play key roles in their resolution. They do so by mobilizing resources from those around the world endowed with the greatest ability to help, and allocating them to those facing the most pressing needs.

There is, of course, a catch. In order to be effective and efficient, the multilateral organizations have to be constantly monitored, evaluated and made accountable for their activities, policies and results. For that to happen, member countries must exercise constant vigilance and due diligence, through their representatives at the organizations, and the officials who support them in capitals.

But accountability of the multilateral organizations only starts with our officials—for example, with the report from the Department of Finance on the IMF and World Bank. It certainly does not end there. Indeed, it is essential that these reports be used as a platform for wider discussions not only on the effectiveness of the institutions, but on their very purpose and legitimacy. Parliamentarians and civil society in member countries must be engaged in these discussions to ask not just whether the multilaterals are doing things right, but more fundamentally whether they are doing the right thing. Typically, officials do not ask such questions.

Let me give two examples. The report points to the fact that many fewer countries are now borrowing from the IMF, undermining the financial viability of the Fund. Most of its remaining borrowers are the poorest countries, which need long-term development assistance—not the kind of short-term balance of payments support for which the IMF was created. Yet the IMF does not consider itself to be a development agency. The report alludes to the search by officials for financial solutions to the IMF’s problems. But the officials are not posing the more fundamental questions: should the IMF continue to exist at all? If so, should its mission and mandate be drastically altered?

My second example relates to the turmoil currently engulfing Paul Wolfowitz’s presidency at the World Bank. The issue I want to raise is that of the selection process for the World Bank president and for his counterpart in the IMF (the Managing Director). Although the report states that Canada favours an open, transparent and merit-based selection process, when push comes to shove traditions die hard—in this case, the tradition that the United States hand-picks the World Bank president and other countries rubber-stamp the American candidate. Paul Wolfowitz, nominated two years ago by President George W. Bush, was a very controversial choice, hardly the best person for the job. If Mr. Wolfowitz steps down, as many believe he should, the next president must be chosen through an open, transparent and merit-based process, but it will take a considerable amount of pressure to make this happen. And that pressure must come from parliamentarians and civil society in member countries. Officials in Washington, Ottawa and other capitals are unlikely to make this change happen without such external pressure.

Finally, I would like to add that Canada has an opportunity to make a different sort of contribution at the IMF and World Bank than it is able to in UN agencies and other multilateral organizations. The Boards of the IMF and World Bank comprise 24 Executive Directors, most of whom represent a grouping or “constituency” of a dozen member countries. Canada’s Executive Director represents Ireland and most of the Commonwealth Caribbean states as well as Canada itself. Similarly our Finance Minister represents his counterparts among our Irish and Caribbean constituency members when he speaks at the policy-making committees at the Spring and Fall meetings of the Fund and Bank. In other words, Canada has a “North-South” constituency consisting of both developed and developing countries. This enables Canada, if it so chooses, to play a more inclusive role by articulating and endorsing the positions of our developing country constituents. Other chairs at these organizations typically cannot to do this—nor can Canada speak for other countries at the United Nations, where it represents only itself.

Let me conclude. We welcome this opportunity to engage in a discussion on the international financial institutions. But the issues are many and complex. To do them justice, the Standing Committee should ensure more regular opportunities to have these discussions, and provide sufficient time to allow greater depth. Perhaps a standing subcommittee on the international financial institutions should be re-established, or even more broadly a committee that oversees all multilateral institutions dealing with economic and social cooperation.

Multilateral institutions are too important to be left wholly in the custody of our officials, as competent and conscientious as they may be. If these organizations are to do the right thing, as well as do things right, parliamentarians and civil society need to play a more active role in shaping their policies, activities and impacts.

House of Commons
Standing Committee on Foreign Affairs and International Development
Notes for Remarks by John Dillon, Program Coordinator, Global Economic Justice
KAIROS: Canadian Ecumenical Justice Initiatives
April 26, 2007

I commend the Department of Finance for its informative Report on Operations Under the Bretton Woods and Related Agreements Act and also the staff of the Halifax Initiative coalition for a report card that gives credit to the Finance Department for a much improved report.

In the time available I propose to comment on three of Canada’s objectives as chronicled in the report.

1. The contradiction between Canada’s goal of Improving Aid Effectiveness and the policy advice routinely dispensed by the IMF.

Let me cite one example of this contradiction:

Last June, I was reading an article by an African colleague concerning IMF policies when one sentence leapt off the page. It said

"In the case of Zambia, the government was not allowed to employ more health workers by the IMF despite the willingness of the Canadian government to foot the wage bill for the next 5 years."

Could it be really true? I asked myself. Was the IMF actually preventing Zambia, a country with an HIV prevalence rate of 17% of the adult population, from hiring more health care workers even though our own Canadian International Development Agency was willing to pay these workers over a period of five years?

I undertook to contact colleagues in Zambia only to learn that, sadly, this was part of a larger problem.

Not only CIDA but other aid agencies including the United Kingdom’s Department for International Development, the United Nations International Children’s Fund and the World Health Organization were all having difficulties in transferring funds to pay health care workers especially in rural areas where only half of the clinics have adequate staff. Despite aid agencies’ willingness to make donations, the funding was not being dispersed because the Zambian Ministry of Finance had been told that this would put IMF agreements in jeopardy.

Is Zambia perhaps an exceptional case? Unfortunately not. The IMF itself commissioned a study by its own Independent Evaluation Office to examine allegations that “IMF-supported programs have blocked the use of available aid to sub-Saharan Africa through overly [restrictive] macroeconomic policies.” The report examines IMF activities in 29 sub-Saharan African countries over the years 1999 to 2005.

The results of this study are in my view truly shocking. They show that the IMF has allowed only 28% of anticipated aid increases to be spent while the other 72% is held back as public savings. In other words only about $3 out of every $10 in annual aid increases were programmed to be spent, while the other $7 was set aside as international reserves or domestic savings.

A prime reason for the IMF’s refusal to allow more public spending - even when it would be funded by international donors - is its overly zealous commitment to combating inflation. Countries with inflation rates below 5% were allowed to spend $8 of every $10 of aid increases while those with inflation rates above 5% were restricted to spending just $1.50 out of each $10 in promised aid increases.

Most economists accept that moderate inflation, in the 10% to 20% range, generates few costs, while attempts to impose very low inflation by holding back government spending can be very costly and sometimes quite devastating for developing countries.

A prime weakness of Canada’s report on activities at the Bretton Woods Institutions is a failure to commit to resolving this contradiction between the laudable goals of our aid program and the restraints imposed by the Canadian government’s continued support for inappropriate macroeconomic conditions.

2. The Canadian priority of Promoting Sustainable Development is contradicted by World Bank support for fossil fuels leading to increased greenhouse gas emissions that cause climate change.

Canada along with other G8 countries has called upon the World Bank to develop an investment framework for clean energy development.

The good news is that the World Bank is making some progress in this regard. However, Bank lending for energy efficiency and renewable energy projects is still overshadowed by lending for fossil fuel extraction.

Between 1992 and late 2004 the World Bank approved US$28 billion in financing for fossil fuel-related projects and 82% of the petroleum extracted was for export to Northern countries. This lending was seventeen times as much as its financing for energy efficiency and renewable energy projects.

In fiscal year 2005 World Bank lending for renewables and energy efficiency actually exceeded lending for fossil fuels (US$459 million versus US$451 million). But in fiscal year 2006 the pattern again reversed with lending for fossil fuels growing by 93% to US$869 million while lending for renewables and energy efficiency only grew by 46% to US$668 million.

If we are to assist genuine sustainable development in the South, Canada should insist that the World Bank adopt the recommendations of its own Extractive Industries Review, this is, “to phase out investments in oil production by 2008 and devote its scarce resources to investments in renewable energy resource development, emissions-reducing projects, clean energy technology, energy efficiency and conservation.”

3. The third Canadian priority - reforming the IMF to strengthen the international financial system - needs to take into account the emergence of new international financial institutions.

The IMF itself is in a much weaker state than the Canadian report suggests.

Decisions by nine middle-income countries* to repay their loans from the IMF ahead of schedule have led to an income shortfall for the Fund, as the Department of Finance Report points out. They are also indicative of a broader crisis of legitimacy as more and more governments choose to free themselves from IMF policy conditions.

Bank of Canada Governor David Dodge has observed that the IMF is viewed with so much suspicion in Latin America that it is no longer the best organization for fostering a stable monetary environment.

Indeed Asian, Latin American and African countries are all considering regional alternatives to continued reliance on the Bretton Woods institutions. The idea of an Asian Monetary Fund, first discussed at the time of the Asian financial crisis of the 1990s, has been revived. African central bank governors are discussing a single African currency and common central bank.

Argentina, Bolivia, Ecuador, Paraguay and Venezuela, in consultation with Brazil, are actually drawing up the statutes for a Bank of the South with an initial capitalization of US$7 billion. A chief motivation for its formation is to allow loans to be made without the kind of conditions that are usually attached to World Bank and IMF credits.

Currently Southern countries invest their foreign currency reserves in low-yielding investments such as US Treasury Bills. By pooling a portion of their reserves into a new institution like the Bank of the South they will put them to more socially useful endeavours. For example loans to the education and health sectors in Bolivia have been identified as early priorities.

Canada should welcome these Southern initiatives and encourage sovereign countries to take control over their own finances and build institutions that serve regional needs.

* Nine countries that have repaid loans in advance to the IMF or declared an intention not to borrow are Brazil, Argentina, Bolivia, Serbia, Indonesia, Ecuador, Uruguay, Philippines and Venezuela. Turkey is reported to be considering early payment.

Angola has cancelled consultations with the IMF.