Select Committee on International Development Written Evidence


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:

    "Odious Lending: Debt Relief as if Morals Mattered"

    (also available at http://www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?PID=229)

    "Debt Relief as if People Mattered: a Rights-Based Approach to Debt Sustainability"

    (also available at http://www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?PID=223)

    "Chapter 9/11? Resolving International Debt Crises—the Jubilee Framework for International Insolvency"

    (also available at http://www.jubileeresearch.org/analysis/reports/jubilee_framework.pdf)

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.

REFERENCES

  Buira, Ariel (2003d) "An Analysis of IMF Conditionality". In Ariel Buira (ed) Challenges to the IMF and World Bank: Developing Country Perspectives. London: Anthem Press.

  Buira, Ariel (2005). "The Bretton Woods Institutions: Governance without Legitimacy?", in Ariel Buira (ed) Reforming the Governance of the IMF and World Bank, London: Anthem Press.

  Chen, Shaohua and Martin Ravallion (2004) "How Have the World's Poorest Fared since the 1980s?". Development Research Group, World Bank, Washington DC http://www.worldbank.org/research/povmonitor/MartinPapers/How_have_the_poorest_fared_since_the_early_1980s.pdf

  Dreher, Axel (2006) "IMF and Economic Growth: the Effects of Programs, Loans and Compliance with Conditionality". World Development 34(5):769-788.

  Eggers, Andrew, Ann Florini and Ngaire Woods (2005) "Democratizing the IMF". In Barry Carin and Angela Wood (ed.) Accountability of the International Monetary Fund. Ottawa: International Development Research Council.

  Hanlon, Jo (2006) "`Illegitimate' loans: lenders, not borrowers, are responsible", Third World Quarterly, 27(2).

  House of Commons Treasury Committee (2006) Globalisation: the role of the IMF. Ninth Report of Session 2005-06, House of Commons, London, July. http://www.publications.parliament.uk/pa/cm200506/cmselect/cmtreasy/875/875.pdf

  Leech, Dennis and Robert Leech (2003) "Voting Power in the Bretton Woods Institutions". Warwick Economic Research Papers No. 718, Department of Economics, Warwick University.

  Mandel, Stephen (2006a) "Odious Lending: Debt Relief as if Morals Mattered". nef (the new economics foundation), London. http://www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?PID=229

  Mandel, Stephen (2006b) "Debt Relief as if People Mattered: a Rights-Based Approach to Debt Sustainability". nef (the new economics foundation), London. http://www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?PID=223

  ODI (2006) "Bretton Woods Reform: Sifting through the Options in the Search for Legitimacy". Overseas Development Institute, London. http://www.odi.org.uk/publications/briefing/bp_may06_bretton_woods.pdf

  Pettifor, Ann. (2002) "Chapter 9/11: Resolving International Debt Crises—the Jubilee Framework for International Insolvency" Jubilee Research, nef (the new economics foundation), London. http://www.jubileeresearch.org/analysis/reports/jubilee_framework.pdf

  Rustomjee, Cyrus (2005) "Improving Southern Voice on the IMF Board: Quo Vadis Shareholders?". In Barry Carin and Angela Wood (ed) Accountability of the International Monetary Fund. Ottawa: International Development Research Council.

  Woods, Ngaire and Domenico Lombardi (2006) "Uneven patterns of governance: how developing countries are represented in the IMF". Review of International Political Economy, 13(3), August.

  Woodward, David (1999) "Time to Change the Prescription: A Policy Response to the Asian Financial Crisis". Catholic Institute for International Relations (now Progressio), London.

  Woodward, David and Andrew Simms (2006) "Growth Isn't Working: the Unbalanced Distribution of the Benefits and Costs from Economic Growth". nef (the new economics foundation), London. http://www.neweconomics.org/gen/z_sys_publicationdetail.aspx?pid=219

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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