Memorandum submitted by nef (the new economics
foundation)
This submission provides evidence on four of
the areas covered by the Committee's inquiry:
— the division of responsibility between
the IMF and the World Bank;
— World Bank and IMF conditionality;
— how best to increase the voice of
developing countries in the governance of the IMF; and
— debt cancellation for "illegitimate
and odious" debt.
It begins with a discussion of the historical
context of the IMF and World Bank, relevant to the first three
issues.
The following documents are provided as attachments
to this submission:
1. THE HISTORICAL
CONTEXT
The IMF and the World Bank were established
following the 1944 Bretton Woods Conference primarily by and for
developed countries and better-off developing countries, mostly
in Latin America,[98]
while most of the poorer developing countries (including almost
the entire of Africa, South Asia and the Anglophone Caribbean)
remained under colonial rule.
The original roles of the two institutions were
fundamentally different, with minimal potential for overlap. The
Fund's primary role was to provide occasional financial support
to its members, without policy conditions, when they faced temporary
balance of payments problems. The Bank's role was to provide financial
support for investment projects, primarily in the context of post-war
reconstruction.
During the 62 years since their foundation,
however, the nature and roles of both organisations, and the contexts
within which they work have been transformed.
— Both institutions have changed fundamentally,
from "clubs" made up of a minority of countries to institutions
whose membership is almost universal.
— They have also been transformed from
mutual institutions, whose members both provide capital and borrow,[99]
into polarised institutions divided between (developed and other
high-income) creditors and (low- and middle-income) borrowers.[100]
— The IMF has adopted economic policy
conditionality as a basis for its lending (see the attached note
on IMF conditionality), and extended this into a progressively
wider field of policies; and the World Bank has moved extended
its role from funding public investment projects into "policy-based
lending". (See Sections 2-3 below.)
— Through the increasing application
of direct or indirect cross-conditionality by other creditors,
for both lending and debt reduction, IMF programmes and World
Bank policy-based lending have become virtual preconditions for
most of the financing available to their developing country members.
— The accession of much poorer countries
(compounded by economic divergence between richer and poorer countries),
together with the acute financial problems faced by most low-income
countries since the 1980s, has also transformed the nature of
the relationship between the IMF and its borrowing members: rather
than borrowing on an occasional basis, in response to temporary
economic disturbances, much of the membership is now critically
dependent on IMF funding on a continuous basis over the long term,
as a result of structural economic problems in these countries
themselves, and structural inequalities in the global economic
system.
The result is that the IMF and World Bank—in
stark contrast to the purposes for which they were originally
designed—now play a central role in economic policy decisions
in much of the developing world, over a period of decades in the
case of most low-income countries. Moreover, the cross-conditionality
of other sources of financing on IMF and World Bank loans means
that the sanctions attached to non-compliance with their conditions
are formidable.
This transformation has largely been driven
by their governance structures, which give a dominant role to
developed country governments, who have used their power within
the institutions to turn the Fund and Bank into instruments by
which they can indirectly exert a high level of control over policies
in developing countries. Conditionality is the main mechanism
through which they are able to do so.
The new nature and role of the IMF and World
Bank as drivers of economic (and other) policies in developing
countries make their current governance structures wholly inappropriate,
and fundamentally incompatible with contemporary democratic standards.
However, developed country governments have also used their dominant
position to resist pressures for the fundamental reforms which
are clearly necessary, and are continuing to do so.
2. THE DIVISION
OF RESPONSIBILITY
BETWEEN THE
IMF AND THE
WORLD BANK
The historical trends noted above have resulted
in a convergence of the IMF and the World Bank from almost entirely
unrelated roles into territory which neither was originally intended
to occupy—the direction of economic policies in developing
countries, and particularly low-income countries (very few of
which were among the institutions' founding members, or therefore
had any say in their design).
Initially (or at least from the 1950s—see
below), this territory was occupied exclusively by the IMF, which
made its loans conditional on a narrow range of macroeconomic
policies, and limited its role to approving a programme designed
by the borrowing country. As time progressed, however, the Fund's
role in programme design increased as the focus of its lending
shifted from developed to developing countries, as did the number
of conditions it applied from the 1970s. In 1979, the World Bank
entered the field of economic policy for the first time, supplementing
its traditional project financing activities with policy-based
lending in the form of structural and sectoral adjustment loans;
and from the early 1980s, the IMF broadened its role progressively
further from macroeconomic to structural policies.
The overlap was formalised, in the case of low-income
countries, with the IMF's Structural Adjustment Facility, which
gave way to the Enhanced Structural Adjustment Facility, and subsequently
the Poverty Reduction and Growth Facility.
This has taken both institutions a long way
from their traditional territory. The IMF's original role was
to provide unconditional financing on a strictly temporary basis,
to smooth adjustment and maintain economic stability in the face
of liquidity problems resulting from shocks to the balance of
payments current account in developed and middle-income countries,
in a system of fixed exchange rates and capital controls. It is
now engaged in micro-management of macroeconomic and structural
policies in low- and middle-income countries. In the case of the
former, this role extends over a period of decades, because the
countries are insolvent rather than illiquid, and is at least
notionally driven by poverty reduction. In the case of the latter,
it represents a temporary response to liquidity problems, but
as a result of shocks to the capital account rather than the current
account. The overall system within which this process takes place
is characterised predominantly by free movement of capital and
floating exchange rates, both of which have been actively promoted
by the Fund.
The Bank's original role was quasi-commercial
financing of post-war reconstruction in developed countries, and
of public investment projects in middle-income countries. Like
the Fund, it now lends exclusively to low- and middle-income countries;
and, while it remains active in project lending, its policy-based
lending also takes it into the design of economic policies in
low- and middle-income countries, again (at least theoretically)
driven by poverty reduction.
While both institutions have taken to their
new roles with alacrity, their performance in the policy arena
has been at best questionable, even in terms of their declared
objectives. The IMF has failed to resolve the debt problems of
the developing countries for the last quarter century, with enormous
economic and social costs to the countries affected. While it
contributed to the resolution of the debt problems of middle-income
countries, particularly in Latin America in the 1980s, this proved
largely temporary and contributed substantially to the creation
the conditions which ultimately led to renewed crises in many
of the same countries (notably Mexico, Argentina and Brazil) in
the mid- to late 1990s. Its policy responses to the Asian financial
crisis and its broader contagion effects in the late 1990s have
been widely criticised as inappropriate even among orthodox economists,
as has its role in the transition process in the Former Soviet
Union.
While the empirical evidence on the economic
effects of IMF programmes themselves is mixed, the balance has
become unambiguously unfavourable in recent years, as methodological
issues in earlier analyses have been identified and resolved,
and longer periods have been analysed. Despite the IMF's increasing
emphasis on economic growth as an objective of its programmes,
of the 15 major regression-based analyses reviewed by Dreher (2006),
seven found a significant negative effect of IMF programmes on
growth, five no significant effect, and only three a significantly
positive effect. All of the six studies covering a period of at
least 20 years found a negative effect; and none of the seven
conducted after 2000 found a positive effect.[101]
Similarly, while the World Bank has declared
the reduction of poverty as its over-arching goal, its increased
involvement in policy-based lending since 1979 has coincided with
a major slow-down in the rate of poverty reduction, even based
in its own ($1-a-day) definition and analysis, from 1.4% pa in
1981-90 to 0.9% pa in 1990-96 and just 0.3% in 1996-2001 (based
on Chen and Ravallion, 2004, Table 2). This is almost entirely
the result of a major reduction in the proportion of the additional
income generated by global economic growth going to households
below the poverty line between the 1980s and the 1990s, from 2.2%
to just 0.6% (Woodward and Simms, 2006).
This suggests an urgent need to look beyond
the division of labour between the IMF and the World Bank as the
sharing of a given set of activities, to a more fundamental reconsideration
of the role of each within the global economy. The failure of
the Bank's policy-based lending to promote poverty reduction and
sustainable human development indicates a need for it to return
to its traditional role of project finance, but targeting its
projects more effectively than has historically been the case
to social objectives (particularly poverty reduction, health and
education) and environmental sustainability (eg reducing its financing
for the production and use of fossil fuels).
The IMF has proved itself to be an inappropriate
forum for the resolution of debt problems, particularly where
these entail insolvency rather than illiquidity. There is a fundamental
conflict of interest inherent in the IMF performing this function,
in that it is not only a creditor in its own right, but also controlled
by creditors (developed country governments, who have a majority
of the votes), who themselves also have a vested interest in the
protection of a third set of creditors (the commercial banks under
their jurisdiction).
We therefore propose that the IMF should be
replaced in this role by a fair and transparent arbitration process,
based on arbitration panels co-convened by each debtor government
and its creditors (Pettifor, 2002).
The experience of the Asian financial crisis
of the late 1990s also demonstrates the inappropriateness of the
financial instruments available to, and policies promoted by,
the Fund in the case of liquidity crises caused by major shifts
in capital movements. This role would be better performed by automatic
or quasi-automatic intervention in foreign exchange markets, using
pooled foreign exchange reserves on a global or regional basis
(Woodward, 1999).
The greatest challenge now facing the stability
of the global financial system is the risk of a "disorderly
adjustment" of the dollar, as a result of the massive twin
deficits of the US economy. However, the IMF is powerless in the
face of this threat, because of its lack of influence over US
economic policy, and the position of the US as the holder of substantially
the largest vote in the Fund, which gives it both a veto over
major policy decisions and an influence over other IMF decisions
grossly disproportionate to its share of the world population
(House of Commons Treasury Committee, 2006, paras 6, 21).
In short, the Fund has proved itself incapable
of fulfilling its central role of maintaining the stability of
the global economic system in the latter part of the 20th century,
and is powerless in the face of the greatest threat of the early
21st century. This suggests a need to find alternative means of
achieving these objectives, within a fundamentally reformed global
economic system better suited to the needs and values of the contemporary
world. In this context, in view of the considerations above, the
role of the Fund (or a successor institution) might be better
limited to one of crisis prevention, early warning and contingency
planning. This would imply a much smaller, and differently configured
institutions.
To be appropriate and legitimate such fundamental
changes need to be decided through processes which observe contemporary
standards of democracy, in terms of representativeness, accountability
and transparency. This means taking the process outside the existing
decision-making processes of the IMF and World Bank, which fall
far short of these standards on all counts, as discussed in Section
4 below. This suggests a need to convene a process comparable
to the Bretton Woods process which established the IMF and World
Bank—but a more inclusive process, which itself complies
with contemporary democratic standards.
3. IMF AND WORLD
BANK CONDITIONALITY
Despite US pressure, policy conditionality was
deliberately excluded from the IMF's original role, due to almost
universal opposition from other founder members. A link between
use of IMF resources and economic policies was first established
by an Executive Board decision in 1952, but it was only incorporated
into the Fund's Articles of Agreement in 1969. Since then, the
extent of Fund conditionality has expanded enormously: in the
1970s, the average Fund programme had six conditions; those for
countries affected by Asian financial crisis in the late 1990s
had between 73 and 140. This partly reflected an extension of
the scope of conditionality, from macroeconomic variables to a
much wider range of structural economic policies such as trade
and investment liberalisation, market deregulation and privatisation
since the 1980s, and to governance since the 1990s.
The extension and intensification of conditionality
coincides with the shift of the Fund's role from lending to both
developed and developing countries (until the late 1970s) to lending
exclusively to developing countries (since the early 1980s). While
they still borrowed from the Fund, the developed countries were
unwilling to allow a major intrusion by the Fund into their policy-making.
Since they have been unaffected themselves, however, they have
had free rein to pursue much stronger and more intrusive conditionality
in programmes than they would have accepted themselves. At the
same time, the much more unequal relationship of developing countries
with the IMF, as compared with developed countries, has resulted
in the locus of the design and conditions of IMF programmes shifting
decisively from the borrowing country governments to the IMF staff
and Management.
Apart from issues around the appropriateness
and costs/benefits of the specific policies enforced through conditionality
(which are beyond the scope of this submission), the principles
and process of conditionality themselves raise a number of serious
issues.
First, there are real issues around the implications
of conditionality for governance and political processes in borrowing
countries. The highly unequal relationship between developing
country borrowers and the Fund mean that borrowing governments
have limited scope to negotiate the content of IMF programmes.
At the same time, the minimal influence of most developing countries
in the decision-making of the Fund as a result of the weighted
voting system means they are also unable, even collectively, to
influence either the general parameters of programmes or the modalities
of programme negotiation and conditionality.
Moreover, the Fund is required by its Articles
of Agreement to interact with Ministries of Finance and Central
Banks in developing countries—a relic of its original role,
which did not entail involvement in policy processes. As the Fund's
policy role has extended beyond macroeconomic policy into a broad
range of structural policies, this has become ever less appropriate.
The result is that the key policy-making process largely or wholly
excludes other ministries, even where they are directly affected,
and excludes the legislature entirely. The exclusion of the legislature
is further compounded by the secrecy of the negotiation process
(Eggers et al, 2005).
In addition, conditionality is a serious obstacle
to the accountability of governments to their populations. This
operates on two levels. First, the lack of transparency in the
negotiation process gives rise to a lack of clarity as to who
is responsible for particular policy decisions, so that the government
and the Fund often blame each other for unpopular or unsuccessful
policies, leaving it unclear where responsibility lies. Second,
the considerable sanctions attached to non-compliance with IMF
and World Bank policy conditions gives rise to an "upward"
accountability which competes with, and is often much stronger
than, "downward" accountability to people.
There is also a serious risk that the removal
of political choice may undermine democracy and governance. Both
candidates and electorates in countries which are chronically
dependent on IMF and World Bank support know that whoever comes
to office will have little choice but to negotiate, and largely
adhere to, Fund and Bank programmes. Since the contents of such
programmes is essentially decided by the Fund and Bank rather
than the government, and follow a broadly common pattern, this
means that the potential range of policies available is very narrow.
This may contribute, for example, to perpetuating political systems
in which ethnic, tribal and regional differences predominate over
ideological differences, increasing the risk of patronage and
conflict; and/or discourage those motivated by the public good
from standing for office, contributing to corruption.
(A further issue is the inclusion of extraneous
conditions in IMF programmes in response to the wishes of major
shareholders. The best known example is the inclusion in the programme
for Korea, during the Asian financial crisis of the late 1990s,
of conditions requiring the lowering of trade barriers to spare
parts for cars. This had no conceivable relevance to the needs
of Korea at the time, but had been a long-running issue in bilateral
discussions between the US and Korea. This represents a clear
abuse of conditionality.)
On the economic level, the increasing number
of conditions in IMF programmes since the 1970s has been associated
with a major increase in the frequency with which programmes break
down (Buira, 2003d). This causes disruption to financing (compounded
by the cross-conditionality of funding and debt cancellation from
other donors and creditors on IMF programmes), with a potentially
destabilising effect on recipient countries, and detrimental effects
on economic and social development. It also suggests that conditionality
is ineffective, and may even be counter-productive, in terms of
its ostensible justification—to ensure that countries making
use of Fund and Bank resources will be able to repay them as due.
Even assuming that the policies prescribed are conducive to this
objective, if conditionality fails to ensure their implementation,
such benefits will fail to materialise.
However, the most fundamental issue in relation
to IMF and World Bank conditionality is that the anachronistic
governance structures of the IMF and World Bank, established during
the colonial era with only minimal involvement by one or two low-income
countries, mean that they do not have the level of legitimacy,
accountability or representativeness required for them to play
a substantial role in the setting and enforcement of policies
in developing countries. Because of the weighted voting system,
developing countries, and especially low-income countries, have
no effective influence over the nature, extent, scope, intensity
or direction of IMF and World Bank conditionality. This turns
the IMF and World Bank, through policy conditionality, into instruments
by which developed country governments, through their substantial
majority of the votes, can exercise effective control over the
policies of developing countries.
Unless and until these structures are changed
fundamentally, it is wholly inappropriate for the IMF and World
Bank to do more than advise governments on their economic policies.
Any policy conditions attached to their loans should be established,
not by the IMF and World Bank, but by borrowing countries themselves.
And even advice should show much greater independence and objectivity,
and much less ideology, than is evident at present.
4. THE GOVERNANCE
OF THE
IMF AND WORLD
BANK, AND
THE VOICE
OF DEVELOPING
COUNTRIES
The result of the Fund and Bank's weighted voting
systems is that the developed countries, which account for 20%
of Fund members and 15% of the world's population, have a substantial
majority of votes in both institutions (60.4% in the IMF, 57.0%
in the IBRD and 60.1% in IDA). The developing countries, by contrast,
are seriously under-represented relative both to their share of
Fund and Bank membership and to their share of world population.
The whole of Sub-Saharan Africa has only 4.6% of the votes in
the Fund, fewer than the US, Japan, Germany, France or the UK,
while Luxembourg (population 500,000) has twice as many votes
as Ethiopia (population 70,000,000). The weighted voting system
also gives the US alone, and any four other G7 members acting
together without the US, sufficient votes to block policy decisions
in the 18 areas requiring a qualified majority of 85% of the votes.
By contrast, all Sub-Saharan African countries
(including South Africa) and all other low-income countries (including
India), though accounting for nearly one-third of the Fund's membership
and 40% of the world's population, together have only 8.4% of
the vote—little more than half of what would be required
to block a vote on the most stringent qualified majority requirement.
The inequality in power between developed and
developing countries in the Executive Board resulting from the
weighted voting system is compounded by the need for developing
countries—unlike the major developed countries—to
share Executive Directors through a system of constituencies which
may include as many as 24 countries. This further reduces the
influence of developing countries in several ways.
First, Directors representing constituencies
are much less accountable to the countries they represent than
those appointed by a single country (including those of the US,
Japan, Germany, France and the UK) (Woods and Lombardi, 2006).
Second they are unable to split their votes—and many developing
countries are in constituencies dominated (and represented on
a permanent basis) by developed countries, further reducing developing
countries' voting power in the Board, as well as their representation.
Directors representing only high-income countries, or constituencies
dominated by them, account for 66.7% of votes in the Fund. Using
voting power analysis, Leech and Leech (2003) find that, even
if every constituency operated on a democratic basis, the need
to cast votes as a single block would leave 41 countries (22.3%
of the membership, with 4.4% of the votes) entirely powerless,
including 38 developing countries.
Even in constituencies made up entirely of developing
countries, the diversity of their circumstances and interests
makes finding a common position problematic. Managing the relationship
of each (developing) constituency member with the Fund is a major
task, giving rise to a formidable workload for Directors representing
large constituencies, limiting their ability to engage effectively
on policy issues—which is generally further reduced by the
much more limited support their capitals are able to provide on
such issues, as compared with developed country Directors.
A further problem is the difference in the ability
of developing and developed countries to coordinate their positions
in the Board, due to the much greater number and diversity of
countries required to achieve a decisive block of votes, compounded
by the problems of workload and capacity. Thus, while the G7 is
able to coordinate its position very effectively, thereby wielding
47% of the votes, attempts to do so by the developing country
Directors, meeting periodically as the "Group of 11",
have been considerably less effective (Woods and Lombardi, 2006).
Moreover, even if they succeeded, they could muster only 30.1%
of the votes.
The skewed composition of the Executive Boards
also pervades other decision-making bodies in the Bank and Fund,
such as the International Monetary and Finance Committee and the
Development Committee, whose memberships are based on them, and
ad hoc bodies such as the Working Group on the Selection Process
for the Managing Director. The IMFC includes the Governors of
ten of the richest 20 countries, but only two of the poorest 80.
The developing countries are further disempowered by the "tradition"
(to use the official euphemism) by which the EU members collectively
nominate the IMF Managing Director, while the US nominates the
World Bank President, through a process which is entirely non-transparent
and unaccountable, and includes no effective process of scrutiny.
Besides skewing the decision-making strongly
towards the interests of developed countries, these factors reduces
the quality of the Fund's decision-making, by largely excluding
those closest to the problems it has to deal with them, and seriously
undermine its legitimacy. Together, these problems have contributed
to the serious shortcomings in the Fund's response to low-income
countries' debt problems and the Asian financial crisis, as well
as the problems arising from conditionality and failings in the
design of instruments such as the Poverty Reduction and Growth
Facility (Rustomjee, 2005).
Increasing the say of developing countries in
the IMF's decision-making processes is therefore essential; and
it is increasingly recognised as such. However, the major proposals
for dealing with the issue fall far short of resolving the problem.
The three main proposals currently on the table are discussed
in turn below.
(a) Adjusting Quotas in Line with the Increased
Economic Importance of "Emerging" Economies
This would increase the votes of some successful
middle-income countries, notably in East and South East Asia and
Latin America, substantially. However, under current quota formulae,
this would come at the expense of poorer developing countries
which have generally been much less economically successful. The
net effect would be to leave developing countries as a whole no
better off, and quite possibly worse off, while skewing representation
among developing countries from the poorer to the richer.
Developed countries would retain their overwhelming dominance
of decision-making, and the US would retain its veto over major
policy decisions.
The reduction in the quotas of (most) low-income
countries is particularly perverse, as this is largely a result
of the economic damage done to these countries by the Fund's failure
to deal with the debt crisis effectively, which is itself in part
a product of the inadequate representation of the countries concerned.
(b) Increasing Basic Votes
The current "voice" proposals within
the IMF propose "at least doubling" basic votes—the
part of the vote which is the same for all countries, as opposed
to the quota, which is economically weighted. However, it is left
ambiguous whether this means a doubling of the absolute
size of the basic vote or its size as a proportion of the total
vote. In the former case, the effect will be greatly reduced by
the expected increase in quotas and reduction in the share of
quotas of most low-income countries. If quotas were also doubled,
for example, the effect would be only to avoid a further dilution
of basic votes.
Even in the more optimistic interpretation of
a doubling of basic votes as a proportion of total votes, however,
the effect is minimal. This would increase basic votes only from
2.1% of the total to 4.2%. This is far below half of their original
level (11.3%), and would remain well below the level when this
was first raised as a serious concern in 1983 (5.6%).
The most ambitious proposal on basic votes is
to restore them to their original proportion of total votes (11.3%).
In practice, however, even this would have a very limited effect.
As noted above, all low-income and Sub-Saharan countries combined,
though a third of the Fund's membership and 40% of the world population,
currently account for only 8.4% of the vote. Even without an increase
in quotas, increasing basic votes to 11.3% of the total vote would
increase this share only to 11.0%. This means that, even if these
countries were able to develop a common position (notwithstanding
the obstacles noted above, and ignoring the fact that some are
in constituencies overwhelmingly dominated by high-income countries),
they would fall far short of being able to harness even the 15%
of the vote required to block a major policy change requiring
the most restrictive special majority.
(c) Basing Quotas on GDP at Purchasing Power
Parity (PPP) instead of at Market Exchange Rates
This could have a significant effect on developing
countries' votes in the IMF, and would have the advantage of having
(on average) the greatest effect on the votes of the poorest countries.
The scale of the effect would depend on the weight given to GDP,
and the other variables included in the calculation.
The current proposal by the G24 (Buira, 2005)
would base quotas 90% on PPP GDP, and 10% on volatility. This
would reduce the votes of the developed countries as a whole slightly
below an absolute majority, to 47.3%; but the US veto would remain
(the US vote increasing to 18.7%). Among developing countries,
the largest gains would accrue to India and China. The total vote
of Sub-Saharan Africa would increase from 3.72% to 6.67%, but
would increase considerably more if greater weight were given
to volatility. This would also shift the overall balance between
developed and developing countries further in the direction of
the latter. Even if 40% of the weight were attributed to volatility,
however, the voting share of the developed countries would remain
above 34%, more than double their 15% share of world population
(ODI, 2006).
(d) Conclusion
In terms of increasing the voting power of developing
countries in the IMF, the strongest effect could be gained through
a combination of restoring basic votes to at least their original
level of 11.3%, and changing the quota formula to one based exclusively
on GDP at purchasing power parity and volatility, giving the greatest
weight possible to the latter. However, even this would skew decision-making
strongly in favour of developed countries relative to their share
either of Fund membership, or of population.
In practice, however, this is not on, and will
not get onto, the official agenda. The current voting weights
give the US a de facto veto over quota review decisions,
and the developed countries an overall majority of the votes.
This enables them to block any decision which would weaken their
power within the institution; and thus, together with the considerable
discretion available to the Board in the allocation of quotas,
to set quotas on an essentially political rather than a technical
basis. The developing countries, by contrast, have much less power
(and in the case of Sub-Saharan and low-income countries no
power) even to block such decisions if they are against their
interests. Thus the problems of the existing system constitute
an insuperable obstacle to the changes necessary to rectify the
problems.
(It is worth noting, in this context, that the
resolution on quotas and "voice" adopted at the 2006
Annual Meetings was adopted despite receiving the support of Governors
accounting for only 90.6% of the total vote. It is noteworthy
that the resolution could have been opposed by every Sub-Saharan
African country and every low-income country, and still
received more support than this. In fact, it appears that only
23 countries opposed the measure—but the lack of transparency
in IMF decision-making processes means that it is impossible to
ascertain which countries these were.)
There are, however, more fundamental questions
which are not even being asked in official circles. Specifically:
— why is a system of economically weighted
voting established during the colonial era for a "club"
of relatively prosperous countries considered appropriate in the
21st century, in an institution which has become an institution
of global governance with almost universal membership? and
— how can a governance system be justified
in which decisions which affect poorer countries profoundly, but
have a minimal effect on richer countries, taken almost exclusively
by the latter?
We consider that the only tenable solution to
these challenges is to replace the existing system of economically
weighted voting in the IMF (and the World Bank) with a system
which conforms to the basic standards of democracy which are taken
for granted at the country level. This implies a system of voting
at some point on the spectrum between one-person-one vote, and
one-country-one-vote. It also means a large number of further
measures, in particular to democratise the selection of the heads
of the IMF and World Bank, to ensure appropriate accountability
within both institutions, and to establish basic principles of
transparency in their decision-making bodies.
As with the changes proposed above to the roles
of the IMF and World Bank, however, the insuperable inertia of
the existing decision-making systems, and their effective exclusion
of the large majority of the world's population, means that such
decisions can only take place outside the existing structures
of the IMF, in an inclusive global forum which applies appropriate
standards of democracy, accountability and transparency.
5. ILLEGITIMATE
AND ODIOUS
DEBT
While there is a considerable literature around
the legal doctrine of odious debt,[102]
there are currently no mechanisms in place to deal with such debts
systematically. Nonetheless, the issue is rising up the global
agenda—and the recent announcement by the Norwegian government
that it would unilaterally cancel the odious debts of five developing
countries is an important and valuable further step.
Previously, the concept of odious debt had been
applied only selectively, when it suited the interests of one
or more of the major developed countries. This generally occurred
either when a government had taken over the control of a territory,
and sought to avoid or limit its responsibility for the debts
of the previous authorities of that territory; or as a one-off
multilateral deal for a particular country, at the instigation
of a major developed country, for geopolitical reasons.[103]
The absence of any general mechanism for the
cancellation of odious debts means that many new democratic governments
have inherited considerable debts from undemocratic and unrepresentative
predecessors in recent decades. These debts were incurred without
the consent of, and often without any significant benefit to,
the people of the countries concerned, and in some cases paid
for the repression of those striving for democracy.
Our starting point is that odious regimes do
not have the right to incur debts on behalf of their populations,
or to impose the costs of servicing them on subsequent legitimate
and representative governments. Legitimate governments should
therefore not be any worse off financially than if odious debts
had not occurred; and the financial cost of restoring their financial
position should be borne in full by those creditors which lent
to previous odious regimes, thereby enabling them to remain in
office.
There is an important distinction between cancelling
debts originally incurred by odious regimes and restoring the
financial position of subsequent legitimate governments. Over
time, as odious debts are serviced, the amount of debt outstanding
under loans contracted with a past odious regime is reduced. However,
in order to make interest payments and repayments of capital on
these debts, their successors incur new debts, or divert scarce
resources from alternative uses. In consequence, odious debts
are effectively "laundered": while the amount of debt
which might be considered eligible for cancellation as odious
under a conventional approach is reduced, the financial burden
on legitimate governments arising from such debts continues to
increase. The cumulative effect of these costs can be very considerable—often
much larger than the original debts—but they are generally
overlooked in discussions of odious debt.
nef's recent study, "Odious Lending:
Debt Relief as if Morals Mattered" (Mandel, 2006a) estimates
how much higher the debts of 13 developing countries[104]
are as a result of lending to previous odious regimes, including
the cumulative effect of servicing these debts since the transition
to democracy. In most cases, the effect is greater than the total
value of outstanding debt. In effect, all new borrowing by the
legitimate government has been necessary to cover the debt-service
payments on odious debts—and additional resources have also
had to be diverted from other uses.
We identify 10 of the 13 countries as having
100% odious debt.[105]
To return these countries to their financial position if the debts
had not been incurred, all of their debts—including borrowing
since the advent or return of democracy, which has effectively
been used to service odious debts—would need to be cancelled.
They would also require some $383 billion of compensation for
the diversion of other resources to servicing odious debt, in
addition to the cancellation of a total of $343.5 billion of debt
for the 13 countries.
nef views this as a serious problem,
and is proposing a new process for dealing with it. The key elements
of this proposal are:
— an internationally recognised independent
body to decide whether particular regimes are legitimate or odious;
— declaration of all loan agreements
with regimes deemed odious as unenforceable in international law,
through a formal interpretation or amendment of Article VIII.2(b)
of the IMF's Articles of Agreement;
— arbitration panels for each country
with a past odious regime, convened jointly by debtors and creditors,
to determine the terms of a debt work-out, based on the principle
that no debtor country should be worse off than if odious debts
had not been incurred;
— cancellation of existing debts to
the amount required; and
— compensation by lenders to the odious
regime to creditors which had only lent to legitimate governments,
and where applicable to the successor government for cumulative
payments on odious debts in excess of the level of debt outstanding.
As well as relieving legitimate governments
of the burden imposed on them by undemocratic predecessors, this
would make it much more difficult for future dictators and other
corrupt regimes to raise loan finance, thus greatly strengthening
the forces of democracy and justice.
While there is a tendency to equate the terms
"odious debt" and "illegitimate debt", it
should be noted that there are other grounds than lending to odious
regimes for judging debts to be odious. These include, in particular
illegal debt (where due process has not been followed in the contracting
of a loan), onerous debt (where terms are unreasonable) and unsustainable
debt (beyond the capacity of the borrower to repay).
Of these, only unsustainable debt is currently
dealt with in the international system, through the Heavily-Indebted
Poor Countries (HIPC) Initiative. However, the debt relief provided
remains seriously inadequate, as a result of:
— the largely arbitrary basis on which
countries are included in or excluded from the HIPC process;
— the judgement of sustainability purely
on financial grounds rather than in terms of the human impact
of debt;
— the setting of sustainability thresholds
at levels defined by creditors' willingness to recognise losses,
rather than the level at which debt is actually sustainable; and
— the long delays built in to the process
as a means of enforcing conditionality, which have deliberately
left countries with clearly unsustainable levels of debt for many
years since the launch of the Initiative in 1995.
As a result, by any reasonable human development
criterion, considerable amounts of debt remain illegitimate on
grounds of unsustainability; and the burden of debt-servicing
on many developing countries is such as to prevent the attainment
of economic and social rights by their populations.
nef's recent paper, "Debt Relief
as if People Mattered: a Rights-Based Approach to Debt Sustainability"
(Mandel, 2006b), estimates the amount of debt reduction which
would be required by 136 developing countries for debt-servicing
not to impede the attainment of economic and social rights. This
indicates that between 51 and 54 countries need complete cancellation
of their debts, and between 32 and 53 needed partial cancellation,
depending on the assumptions used. The amount of debt cancellation
required is between $424 billion and $589 billion. In assessing
this cost, however, it should be noted that much of this debt
should in any case be cancelled on the grounds of odious lending,
and at the expense of lenders to odious regimes. The remainder
could readily be financed by the developed countries meeting their
commitment to provide 0.7% of their national income as aid, which
would generate an additional $125 billion per year beyond current
aid levels.
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October 2006
98 The Fund's 45 founder members comprised 17 developed
countries (accounting for 80.4% of quotas), 19 countries in Latin
America, and three each in Asia, Sub-Saharan Africa and the Middle
East. Back
99
The exception is the position of the US in the World Bank, where
it was always envisaged as a creditor. Back
100
The IMF has not lent to a developed country since the completion
of Iceland's programme in 1983. Back
101
Dreher's own analysis also finds a significant negative effect,
only partly mitigated by compliance with conditionality. Back
102
See Hanlon (2006) for an overview. Back
103
This has happened most recently in the case of Iraq, which received
exceptionally generous terms from the Paris Club of official creditors
following the US invasion. Previous instances include the repudiation
of the debts of the Southern States by the 14th Amendment to the
US Constitution following the US Civil War in 1862; the repudiation
of Cuban debts to Spain by the US when they took control of the
island from Spain in 1898; the repudiation of debts owed by the
Boer republics taken over by the UK in the Boer War in 1900; the
relief of Poland's debts under the Treaty of Versailles in 1919;
and the 50% cancellation of Poland's debts by the Paris Club in
1991. Back
104
The countries included in the study are Argentina, Democratic
Republic of Congo, Ghana, Haiti, Indonesia, Malawi, Nicaragua,
Nigeria, Pakistan, Peru, the Philippines, South Africa and Sudan. Back
105
The other countries-Ghana, Malawi and Haiti-require debt cancellation
of between 72% and 94%. Back
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