*{Democracy and accountability: The IMF's deficit Search/Site map Home >> Oxfam International >> Advocacy >> Oxfam International Briefing paper September 2000 Democracy and accountability: The IMF's deficit} This year's annual meetings in Prague offer new IMF managing director Horst Kohler the chance to set out his vision of how the IMF can break with the mistakes of the past, and make good its stated commitment to promote equitable growth and poverty reduction. Oxfam argues greater democracy and accountability should be at the heart of reform. *partie=titre The IMF under seige *partie=nil In Prague this week thousands of people will once again take to the streets to protest against undemocratic and unaccountable Bretton Woods institutions and the unequal effects of globalisation. The setting for this year's annual meetings will give the demonstrations particular resonance. The countries of Eastern Europe and the former Soviet Union have been going through a dramatic process of transition, with varied outcomes. Russia has little to show for ten years of transition under the tutelage of the IMF with an unsustainable external debt, a crumbling infrastructure, corruption run riot, increased poverty and inequality, and a sharp deterioration in human development levels. Many developing countries also have little to show for years of adjustment under Fund programmes. For the IMF, Prague will be a critical event. It will provide the new Managing Director, Horst Kohler, with a unique opportunity to set out his vision of how the IMF can deliver on poverty reduction in the global economy. The demonstrators in Prague will want to see how the IMF and World Bank intend to break with the mistakes of the past, and make good their stated commitment to promote equitable growth and poverty reduction.1 They will also be looking for greater democracy and accountability in the Bretton Woods institutions. *partie=titre Democracy and Accountability *partie=nil The democratic deficit at the heart of the IMF should be at the top of the agenda for the Prague meetings. Under the current system of representation, the distribution of voting power at the IMF is proportional to quotas, that are in turn determined by a country's economic might. The G7 and EU countries enjoy 56 per cent of the votes in the Executive Board, despite representing only 14 per cent of the world's population and being effectively immune from Fund policy conditions. The United States alone accounts for 18 per cent of votes on the IMF Board - more than Latin America, South Asia, and sub-Sahara Africa combined. It is unacceptable that people in Africa, whose lives are arguably most affected by Fund programmes, account for only around 2 per cent of IMF votes. Voting power distribution at the Fund is a politically-charged issue that goes to the heart of the debate on IMF reform and accountability. It is not just a question of formal democracy, increased interdependence among countries in the global economy implies that more countries need a voice. The establishment of the G20 reflects this new reality. The G20 group of countries, set up in 1999 to broaden the discussion on global financial affairs, includes large, systemically significant countries such as Brazil, China, and India. The IMF would be well advised to follow suit, with smaller, less strategically important developing countries also participating in discussions on global issues. However, it is unlikely that any progress will be made on the issue until the Board has reviewed the findings of the Committee that has been looking into Fund quota formulas. There may be progress in Prague on the proposal to establish an independent Evaluation Office (EVO) at the Fund. The EVO is expected to be operational before the Spring meetings next year. Establishing an effective evaluation procedure at the Fund would be a step in the right direction for an institution that has been encouraging increased transparency and accountability in its member governments, but has failed to apply such high standards to its own operations. Fund staff has, in the past, had too much scope to define policy conditions in poor countries. The Evaluation Office could play a valuable role in assessing the potential implications of IMF loan conditionality, making public critical assessments of IMF programmes, and identifying more effective strategies for linking macro-economic reform to poverty reduction and the achievement of the 2015 poverty targets. It will be important that mechanisms be put in place for the participation of outside experts in the EVO, including representatives from international civil society. *partie=titre The Role of the IMF *partie=nil This year's annual meetings, Horst Kohler's first as Managing Director, provide the opportunity to set out a more clearly defined role for the IMF. Kohler will have taken stock of the widespread criticism of the Fund's response to the Asian crisis, congressional opposition to the Fund's role in the poorest countries, and debate around the IMF's new poverty reduction focus. Some of the key questions will be how the Fund and the Bank will work together, which lending facilities the Fund will retain and how they will work, and how the IMF will navigate the inevitable trade-offs between its growth and poverty reduction objectives. Much of the recent debate on the role of the Fund has concentrated on whether the IMF should get out of long-term development financing in low-income countries, with lending facilities aimed at the poorest countries transferring to the World Bank, and focus its efforts on crisis prevention and crisis management. Initially it appeared that Kohler might have taken the IMF along this path, but a string of visits to poor countries in Latin America, Asia, and Africa have convinced him of the Fund's role in low-income countries. This is just as well, as it is important that all member countries should have access to IMF financial support when they need it. Rather than reduce the number of countries it assists, the Fund needs to roll-back its activities. Kohler has indicated that the IMF will focus on its core task of providing policy advice on monetary, fiscal and exchange rate issues to member countries, as well as promoting international financial stability. Fund programmes will developed in close co-operation with the World Bank and other development agencies. In longer-term programmes, and when responding to crises, macroeconomic policies should be developed that are consistent with poverty reduction goals. There are many unanswered questions on exactly how macroeconomic conditionality attached to Fund programmes is changing to help meet poverty targets. Moreover, there is a danger that the poverty focus and the commitment to incorporate social impact analysis of reforms, and minimise potential adverse effects, is being confined only to the PRGF. The objective of equitable growth and poverty reduction should be at the heart of all Fund programmes in middle-income, as well as low-income, countries. *partie=titre IMF facilities - the PRGF *partie=nil While progress on debt relief captured the media attention at the IMF/World Bank Annual meetings in September last year, agreements reached on the nature of IMF and World Bank programming were more fundamental. The IMF and World Bank agreed to negotiate their programmes in low-income countries through a government owned and driven Poverty Reduction Strategy Paper (PRSP), developed in consultation with civil society and other stakeholders. These agreements have the potential to place poverty reduction, 'front and centre' of IMF and World Bank programming in these countries, with civil society having a major role to play. In recognition of these changes, the IMF renamed its Enhanced Structural Adjustment Facility (ESAF) the Poverty Reduction and Growth Facility (PRGF), its key instrument for providing support to countries in implementing the PRSP. The IMF has committed to ensuring the PRGF is derived from the PRSP, and as such should be properly owned by government, and with reduced and more relevant conditionality. It has committed itself to working within a narrower scope, focusing on its main areas of expertise - monetary, fiscal, and exchange rate policies - although it may still negotiate with the World Bank on which institution leads on various structural issues depending on the country context. The IMF has also committed itself to ensuring that budgets are more pro-poor, with spending directed at poverty reduction. This is a key shift from the past, where under IMF adjustment programmes many countries saw large falls in social sector spending, and an increase in cost recovery, with poor people paying for health and education. For example, in one IMF survey, 16 countries in Africa saw education spending fall, with growing numbers of children being forced out of school. The IMF also intends to allow budgets that accommodate higher externally financed fiscal deficits. Another key change is that the IMF has agreed to undertake social impact assessments of major reforms, prior to implementation. Re-design of reforms may take place if there are adverse impacts on the poor, or compensatory measures undertaken to reduce the impact of necessary reforms. These are a wide range of commitments to reform at the Fund, and are to be welcomed. The Fund is paying more attention to social spending in PRGFs, although more could be done to push for an immediate termination of cost-recovery in health and education. The Fund is also allowing for increasing amounts of aid to be incorporated in budgets as revenue, but not in all cases. It would be better if all PRGFs made explicit analysis and decisions in this regard. The problem is, however, a year after agreeing the PRGF and major change, IMF practice in many other key areas has not yet altered. At a broader level, the IMF has still not explained how macroeconomic policy design will be altered to promote achievement of international and national development goals - such an explanation is vital if the IMF is to demonstrate how it is placing poverty reduction in the centre of its programming, and ensuring that growth serves this end. Ensuring that the benefits of growth are better distributed will require improved reform design, and an enhanced role for the state, as opposed to a blind belief in the role of the market to deliver on growth and poverty reduction. In many low-income countries, such as Tanzania or Honduras, the PRGF is no more than a re-named ESAF, and as a consequence there is limited national ownership, and poverty reduction relevance. These problems are partly understandable, since only two countries actually have a full PRSP from which an improved PRGF could be derived. However, it is not acceptable. It should be remembered that the External Review of ESAF noted that three-quarters of ESAF programmes went off-track, partly because of ownership problems. Just renaming the facility PRGF will not in itself promote ownership of the macroeconomic reform programme. More must be done by the IMF to allow governments to lead in reform design. Given the IMF's commitment to ex-ante impact analysis of reforms, the IMF must immediately undertake to ensure that reforms proposed in the PRGF do not undermine poverty reduction efforts, and that such reforms are reviewed for their impact on the poor. Where the analysis may take substantial time, reforms could be delayed, and more detailed and thorough analysis can follow as the PRSP is being developed. The World Bank should be helping more in this area, as should the UN system, academics and appropriate civil society organisations - helping governments with analysis and choices. The discussion of trade-offs around reform design, must be an open one, to allow a wide and informed debate, with country level decision-making improving ownership of the programme. In a range of cases, IMF conditionality is broad ranging, beyond its expertise - frequently addressing structural reforms such as privatisation or trade reform, areas more within the World Bank's expertise. While the IMF says it intends to reduce conditionality, it is still enforcing a wide range of conditionalities in low-income countries. This is particularly evident for HIPC countries, where the IMF is using debt relief as a carrot to force agreement in a wide range of areas. In Honduras for instance, entry into HIPC was delayed while the IMF demanded more progress on electricity privatisation as part of the PRGF. Subsidies are also being reduced in water supply, electricity and public transport as part of the PRGF, with the poor less able to afford price changes. Meanwhile trade liberalisation has meant that cheap imports, mainly from the US, which heavily subsidises agricultural produce, undermine local production, again hitting the poor hardest. In Malawi, the IMF is demanding rapid implementation of increased expenditure controls, and settlement of government arrears with the private sector, prior to agreeing the PRGF and thus entry into HIPC. In both cases, poverty reduction is not seen as the priority issue, and the benefits of debt relief, and increased social sector investment, have been delayed while negotiations on these conditions take place. *partie=titre Non-Concessional Lending *partie=nil In addition to the PRGF, the IMF has five further facilities designed to deal with balance of payments problems (the Standby, and the Extended Fund Facility), terms of trade shocks (the Compensatory Financing Facility), and capital account-led crises (the Supplemental Reserve Facility and the Contingent Credit Line). Following on from discussions at the spring meetings, the pricing of non-concessional Fund lending will be reviewed in Prague. The idea is to introduce incentives to discourage what is being termed 'unduly prolonged' borrowing by countries using these facilities. There are two major problems with this discussion. First, while no-one would advocate prolonged borrowing under Fund programmes, least of all the borrowing countries themselves, it is essential that the international community does not penalise countries that are forced to seek assistance. Higher interest charges on Fund loans made to countries in crisis run the risk of being self-defeating, as raising the cost of debt servicing could merely serve to slow recovery and make countries more vulnerable to future shocks. More importantly, the discussion around pricing is something of a red herring given the enormous challenges faced by the IMF in responding effectively to crises. Widespread criticism of the Fund's response in east Asia, Russia, and Brazil, provoked an intense debate on the adequacy of existing IMF facilities and the efficacy of standard policy conditionality. Recovery in many crisis-hit countries has diminished the impetus for reform, but these issues remain unresolved. The IMF has indicated that conditionality attached to its lending programmes will be scaled back in future, but is unclear as yet whether this will imply the more expansionary approach to stabilisation and recovery that many have argued for. An internal review of conditionality attached to IMF programmes during capital account-led crises, currently being carried out, will inform future Fund policy. Yet no attempt has been made to include the views of people living through IMF programmes in the countries concerned. The financial crises of the 1990s illustrated the need to mobilise sufficient resources to stem large-scale private capital outflows and so avoid damaging economic retrenchment. Debate has centred on whether and how the Fund should act as an International Lender of Last Resort, and how the private sector could be encouraged to participate in the resolution of crises. Little headway has been made on these issues, although two additional IMF facilities, the Supplemental Reserve Facility and the Contingent Credit Line (CCL), have been created. The CCL, designed as a precautionary arrangement that can be used by pre-qualifying countries when hit by contagion, has not been taken up by a single country. It is likely that efforts will be made during the Prague meetings to make the CCL more attractive, chiefly by changes to pricing. But again, pricing is not the real issue. The CCL has stringent pre-qualification criteria, fails to provide automatic access to funds in the event of a crisis, and any country that does sign-up and is later disqualified for any reason is likely to be hammered by the markets. Instead of re-jigging the price incentives of existing non-concessional facilities, the Prague meetings could have been seized as an opportunity to address the real issue of how the Fund's facilities and policies could better assist member countries facing difficulties caused by volatile international capital markets and commodity prices. *partie=titre Private Sector Involvement *partie=nil The crises of the 1990s illustrated how increased private capital flows to developing countries can quickly translate into unsustainable debt. Under current arrangements, IMF loans have been used to 'bail-out' private creditors, while the pain of adjustment has fallen almost entirely on the debtor countries. One of the major challenges facing the international community is the need to establish a more orderly and equitable set of arrangements for dealing with the problem of unsustainable debt owed by developing countries to private creditors. The starting point for such arrangements should be a debt sustainability framework, along the lines of that developed under the HIPC initiative. Once the scale of the necessary debt relief has been established, options for different categories of creditors can be determined. It is essential that debt workout procedures do more than stave off an impending debt crisis for a few years, but instead set a country on a viable medium-term path to equitable growth. This is clearly in the interests of both creditors and debtors. Private capital flows have come to play an increasingly important role in financing the balance of payments in many developing countries. The major shift toward credit from private sources, and particularly from international bond markets, has not been accompanied by the establishment of rules of the game for resolving crises when they do occur. Reforms are needed that will make it easier to reschedule loans and bonds, in order to limit financial crises, and to write-off bad debts, in cases of excessive indebtedness. The absence of some kind of international bankruptcy regime that could facilitate orderly and equitable restructuring has resulted in long delays in reaching agreements with creditors, during which time considerable damage has been inflicted. The devastation of the Indonesian economy might have been avoided had such a regime been in place when the Asian crisis struck. In Ecuador, poverty levels have increased and human development has been seriously undermined as a result of the delay in restructuring the country's external debt. During the last two years, the IMF and G7 governments have clearly stated that burden-sharing between the private and official sectors during financial crises will have to increase. Yet progress on establishing rules of the game to govern private sector involvement has been frustratingly slow. The IMF has been examining what role it could play in an international regime and testing out new approaches in its treatment of countries facing debt problems - most recently in Ecuador. One proposal is that when a country facing crisis seeks IMF assistance, it would be expected to declare a 'standstill' on debt servicing while it negotiated with the Fund and its private creditors. The IMF would provide financial support during the negotiations, and could also verify the sustainability of the debtor country's restructured debt profile. The G7 governments remain divided over whether such arrangements should operate on an ad hoc basis or whether clear multilateral rules should be established, while the private sector is opposed to standstills altogether. This stalemate cannot be allowed to continue, as protracted debt crises have devastating economic and social costs, particularly in poor countries. If the Fund is serious about its objective of poverty reduction and sustainable and equitable growth, it cannot afford to delay addressing this issue for much longer. *partie=titre Financial Havens *partie=nil The international community has become increasingly concerned about offshore financial centres and the escalating problem of financial crime. The abuse of the international financial system will be a theme of the IMF discussions in Prague. There will no doubt be support voiced for the range of useful country-led and multilateral initiatives on money laundering and financial crime. These meetings also provide a good opportunity to raise the issue of the negative impact that global tax competition is having on financing in developing countries. Problems arise as markets have globalised, yet tax structures have remained largely national. Tax competition between states, intensified by the increased mobility of capital and the driven on by the proliferation of on and offshore tax havens, now represents a serious obstacle to poverty reduction. Global tax competition limits the capacity of governments, in both industrialised and developing countries, to raise revenue through taxation both on their own residents and on foreign capital. This undermines the ability of governments in poor countries to make vital investments in social services and economic infrastructure upon which broad-based economic growth depends. A recent Oxfam study estimated that developing countries as a whole could be losing out on over $50 billion each year as a result of harmful tax competition; roughly equivalent to the global aid budget. Recouping even some of this revenue could make a significant contribution to the internationally agreed target of halving world poverty by 2015. International efforts to crackdown on harmful tax practices are currently being led by the Organisation for Economic Co-operation and Development (OECD). However, the OECD initiative primarily represents the interests of northern governments and lacks a poverty perspective. A global approach to this issue, reflecting human development concerns, is desperately needed. The international community should consider proposals such as those for a multilateral tax-information sharing agreement and the taxation of multinationals on a global unitary basis. There is also a strong case for the establishment of a global tax authority with the prime objective of ensuring that national tax systems do not have negative global implications, particularly for the poorest countries.