Select Committee on Treasury Written Evidence


Memorandum submitted by Christian Aid

INTRODUCTION

  1.  Christian Aid welcomes this opportunity to give evidence to the Treasury Select Committee on the role the International Monetary Fund (IMF) plays in the process of globalisation. Given Christian Aid's work in more than 50 developing countries, our submission will focus on the role that the IMF plays in the developing world.

  2.  We will highlight the different ways in which the IMF limits the policy choices available to developing-country governments and pushes them into rapid and extreme liberalisation. This "structural adjustment" has caused massive increases in poverty and severely hampered the ability of developing countries to participate in the global economy.

  3.  This submission will consider how the IMF has stepped far beyond its original mandate in compelling developing countries to liberalise. It will show that the IMF continues to attach liberalisation conditions to their loans, despite their protestations to the contrary, and uses other informal means such as research, technical assistance and policy advice to push further liberalisation.

  4.  Finally, this submission will consider the democratic deficit evident at the IMF. This deficit pervades its activities at a country level, where the IMF negotiates with government in ways that undermine democratic process, and the institution itself, where decision-making is opaque and balance of power lies in the hands of the world's most powerful countries.

  5.  Our recommendations to reform this situation are as follows:

    —  The IMF should ensure that its support for development strategies is objective—not rigidly bound by liberalisation dogma. This means examining the viability of alternative policies, not automatically assuming that all forms of liberalisation will foster growth or poverty reduction. Instead, the impact of liberalisation options should be carefully assessed, enabling countries to make their own informed choices.

    —  The IMF must end the practice of making loans or grants conditional on the recipient adopting specific economic policies. It should also review all activities which influence the policies of client countries, not just the conditions attached to loans, with a view to reducing those that aim to promote liberalisation.

    —  The IMF should actively and publicly support developing countries' use of the flexibility their international trade agreements allow them, in particular, their right to raise tariffs.

    —  Where there are provisions for parliamentary approval or civic involvement, IMF practice should change to ensure that they are complied with. This means immediately withdrawing a loan if a parliament rejects it and requiring that all relevant documents are submitted to parliament. This could include country strategies and analytical work, as well as standard loan documentation.

    —  We believe that the IMF voting structure should be based on the principle of one country, one vote. However, we recognise that this is unlikely to be achieved in the near future. We therefore call for the share of basic votes allocated to all countries to be increased, and for remaining votes to be allocated through a fair and transparent formula that ensures low-income countries greater representation than at present. Board seats should also be redistributed to achieve more of a balance between industrialised, middle-income and low-income countries.

    —  Detailed board minutes should be published within two weeks of a meeting. Formal votes should replace consensus decision-making. At a minimum, executive directors should be required to publish statements they make to the board.

    —  A democratic process for selecting the World Bank and IMF's leaders is essential. All countries should be able to nominate candidates; there should be no restrictions placed on a candidate's nationality; and the voting process should be fair and transparent. When selecting leaders, each country should have a single vote.

MISSION CREEP

  6.  The IMF's role was initially limited to policy-surveillance, or an annual check, on countries' monetary and exchange-rate policies to help them avoid financial difficulties. It was also mandated to provide short-term foreign-exchange assistance to countries suffering from temporary shortages because of trade deficits.

  7.  However, as industrialised countries' need for the Fund's short-term lending declined, the IMF moved into new areas: providing loans to emerging-market countries in financial crisis and giving long-term loans to developing countries. IMF policy-surveillance also "evolved rapidly"[34] to cover other economic areas such as financial systems (banks, securities exchanges, pension funds, insurers, central banks and national regulators); institutional issues (central-bank independence, financial-sector regulation, corporate governance, and policy transparency and accountability) and structural policies (such as a country's international trade, labour markets and energy sectors). [35]

  8.  The IMF's loans help developing countries with ongoing balance-of-payments difficulties, but also compel such countries to adopt macroeconomic and structural reforms. In pushing structural reform in particular, the IMF is stepping beyond its mandate into an area in which it does not have a clear competence.

  9.  The IMF's power over poor countries' economic policies is further reinforced by the influence it has over other donors. If the IMF labels a poor country "off-track" on its macroeconomic and structural-policy performance, then most donors are unwilling to offer it debt relief or will cut the amount of aid they give it. In some cases, this sudden drying up of aid can actually trigger a macroeconomic crisis—the very thing the IMF is meant to guard against.

  10.  Often IMF economic conditions require countries to liberalise far further than the World Trade Organisation (WTO) agreements they have signed up to. For example, there are conditions that compel governments to privatise or commercialise public services, regardless of the exemption provided by the General Agreement on Trade in Services (GATS). IMF conditions also undermine the position of developing countries at WTO negotiations. If a country has completely dismantled trade barriers in a particular sector prior to trade negotiations, it has given up its bargaining chip and lost its ability to make tariff reductions conditional on beneficial reforms from richer countries. Developing countries negotiate hard to obtain provisions for special treatment in WTO agreements, but IMF conditions can undermine this.

  11.  In response to widespread criticism that it is not its place to push structural reforms, the IMF claims to have reduced the extent of its trade conditionality. This was a welcome assurance, but the IMF is continuing to strongly influence poor countries' trade policies, as we will show in the following section.

ENFORCING LIBERALISATION

  12.  In response to IMF claims that it had reduced its trade-policy conditions, Christian Aid commissioned research to analyse the full impact of IMF and World Bank activities on trade policy in eight low-income sub-Saharan African countries.

  13.  The findings were published in Christian Aid's recent report, Business as Usual: The World Bank, the IMF and the Liberalisation Agenda. It showed clear evidence that the IMF continues to have considerable influence over trade policy in developing countries and still pushes its dogmatic vision of trade liberalisation.

  14.  In direct contradiction to the Fund's claim that trade-policy conditions have been "sharply reversed", such conditions are still being attached to aid and debt relief in many countries.

  15.  In countries where previous IMF conditions have already secured the rapid reduction of trade tariffs, the institution has shifted its attention to other policies to free up the flow of money and goods across borders, such as fiscal reform, non-tariff barriers to trade, customs and trade facilitation, to complete the liberalisation process. While reforming these areas is not necessarily harmful in its own right, the IMF's strongly pro-liberalisation philosophy forces countries down a particular path, regardless of their own spending or trade priorities.

  16.  At present, the burden of IMF conditions falls mostly on low-income countries that require the institution's funding and the positive signal being "on-track" with IMF conditions sends other donors. But the IMF is designing a new tool, the policy support instrument (PSI), which will allow it to introduce an invasive programme of monitoring and conditionality for countries that do not need or want IMF money. This new tool will significantly increase the IMF's influence over all developing country governments, who will need to be on track with the PSI if they want donors to provide them with funds.

  17.  The IMF only measures formal conditions, while turning a blind eye to the other ways in which it influences governments. As the IMF itself notes, "Recent years have seen . . . an upswing in aspects of trade-related surveillance, research and other activities." [36]This includes annual assessments of countries' economic policies, which make recommendations that countries need to implement to access IMF loans.

  18.  The Fund's general research and advice also influences the policies of developing-country governments. The pursuit of greater coherence between the IMF, World Bank and WTO has seen the IMF produce numerous "speeches, letters and communique«s in support of the Doha round"[37] of WTO negotiations, consistently pushing poor countries to adopt a more liberalising or "ambitious" stance. This often directly contradicts developing-country submissions and negotiating positions, and undermines their ability to negotiate successfully. The IMF has encouraged countries to set tariffs far lower than those they have agreed at the WTO, for example.

  19.  Christian Aid is particularly alarmed by the "aid for trade" package promoted by the IMF and World Bank. This is being linked to an "ambitious" result in the current round of WTO talks that brings about greater liberalisation and integration between members, and will increase technical assistance and lending to "help the poorest countries take advantage of new opportunities and cope with any adjustment costs"[38] of trade agreements. Unless this funding is additional to existing pledges, has no conditions attached and finances activities that are demand-driven then it will push countries into signing up to policies that are often damaging. No amount of financing will be enough to compensate a country if its trade policies are wrong for its economic circumstances.

  20.  The IMF continues to hold a very dogmatic position on liberalisation, and uses various methods to force countries to liberalise, despite recent proclamations by both the UK government and the G8 that countries should be allowed to decide their own economic policies. A recent IMF strategic review defined the Fund's role as being to support its members to meet the challenges of globalisation. [39]But the risk of this definition is that it will allow the IMF to further enforce liberalisation on countries desperate for both its cash and its approval.

Recommendations

  21.  The IMF should ensure that its support for development strategies is objective—not rigidly bound by liberalisation dogma. This means examining the viability of alternative policies, not automatically assuming that all forms of liberalisation will foster growth or poverty reduction. Instead, the impact of liberalisation options should be carefully assessed, enabling countries to make their own informed choices.

  22.  The IMF must end the practice of making loans or grants conditional on the recipient adopting specific economic policies. It should also review all activities which influence the policies of client countries, not just the conditions attached to loans, with a view to reducing those that aim to promote liberalisation.

  23.  The IMF should actively and publicly support developing countries' use of the flexibility their international trade agreements allow them, in particular, their right to raise tariffs.

UNDERMINING DEVELOPING-COUNTRY DEMOCRACY

  24.  As well as being important in their own right, good governance and democracy are vital if poor countries are to develop. However, the IMF frequently undermines and opposes democracy in these countries. The IMF negotiates with governments behind closed doors, demanding policy shifts that have a massive effect on the lives and livelihoods of the world's poor, while resisting scrutiny by citizens or their elected representatives.

  25.  In 2005, Christian Aid published the findings of a study examining the IMF's role in the government of Ghana reneging on its decision to increase import tariffs on poultry, as part of a plan to rescue the domestic industry. [40]The tariff increases were part of a parliamentary approved budget. But numerous sources in Ghana confirmed that the IMF had told the Ghanaian government not to implement the tariff increases, immediately prior to its policy u-turn. This reveals the IMF's power in pushing governments into following liberalisation policies, regardless of the impacts of those policies on the country's people and the effect on democracy.

  26.  Christian Aid and many of its partners have been actively supporting the International Parliamentarians' Petition, signed by MPs from rich and poor countries alike. The petition calls for democratically elected representatives to have the right to control their countries' economic policies, rather than the IMF and World Bank. [41]

Recommendation

  27.  Where there are provisions for parliamentary approval or civic involvement, IMF practice should change to ensure that they are complied with. This means immediately withdrawing a loan if a parliament rejects it and requiring that all relevant documents are submitted to parliament. This could include country strategies and analytical work, as well as standard loan documentation.

DEMOCRATIC DEFICIT AT THE IMF

  28.  The majority of the world's countries are members of the IMF. However, while its influence is mainly felt by the poor countries that receive its loans, it is the world's richest countries who have most of the power. All countries have a basic vote, or share, in the IMF, but this is worth only three per cent of the total votes. The rest of the votes are allocated according to a formula which leaves the US with a 16 per cent share, while the combined votes of 80 of the world's poorest countries amount to only ten per cent of the total. [42]

  29.  This inequality is further evident in the distribution of board seats. The UK, US, Germany, Japan and France each have their own seat, while the other 19 seats are multi-country constituencies. The sizes of those constituencies vary considerably, with the two sub-Saharan African seats for 44 countries.

  30.  In addition, the disclosure practices of the institution are highly opaque, making it hard to hold decision-makers to account for the IMF's policies and activities. Detailed minutes are not available for meetings of the board of governors (which Gordon Brown chairs) nor for the board of executive directors (on which a senior UK civil servant sits), which oversees the day-to-day running of the institution on behalf of its member countries. Transcripts of Gordon Brown's speeches to the governing board are available, but those of the UK director are not.

  31.  In 2004 the IMF executive board conducted only one formal vote to reach a decision, while the board of governors conducted just five. The rest of the Fund's decisions were reached by consensus, so it is vital that the relevant minutes and statements are made public to allow citizens and their elected representatives to scrutinise the activities of the UK government at the IMF. This is especially important given the disjuncture between the new UK position on not using conditions to force liberalisation, and the IMF's continued use of such conditions.

  32.  Despite the international community's pledges to reform the IMF and its sister institution, the World Bank, progress to date has been very slow. The Monterrey Consensus of March 2002 agreed that the IMF and World Bank should "continue to enhance the participation of all developing countries and countries with economies in transition in their decision-making".[43] However, since then, very little has happened beyond the establishment of an analytical trust to fund research and policy dialogues for the two executive directors from sub-Saharan Africa.

Recommendations

  33.  We believe that the IMF voting structure should be based on the principle of one country, one vote. However, we recognise that this is unlikely to be achieved in the near future. We therefore call for the share of basic votes allocated to all countries to be increased, and for remaining votes to be allocated through a fair and transparent formula that ensures low-income countries greater representation than at present. Board seats should also be redistributed to achieve more of a balance between industrialised, middle-income and low-income countries.

  34.  Detailed board minutes should be published within two weeks of a meeting. Formal votes should replace consensus decision-making. At a minimum, executive directors should be required to publish statements they make to the board.

  35.  A democratic process for selecting the World Bank and IMF's leaders is essential. All countries should be able to nominate candidates; there should be no restrictions placed on a candidate's nationality; and the voting process should be fair and transparent. When selecting leaders, each country should have a single vote.

January 2006
















34   "IMF Surveillance", factsheet, September 2005 available at www.imf.org/external/np/exr/facts/surv.htm Back

35   Op cit. Back

36   IMF review of work on trade, 7 February 2005. Back

37   Ibid. Back

38   Joint statements by the heads of the World Bank and the IMF October 2005, quoted in update 48, Bretton Woods Project, November 2005. Back

39   IMF Strategic Review: Reform or left Behind, Update 48, Bretton Woods Project, November 2005. Back

40   The Damage Done: Aid, Death and Dogma, Christian Aid, May 2005. Back

41   To date the petition has gathered over 1,000 signatures and been particularly popular in the UK where 282 MPs have signed up to it www.ippinfo.org Back

42   Struggling to be Heard: Democratising the World Bank and IMF, Christian Aid, September 2003. Back

43   The International Conference on Financing for Development was held at Monterrey in 2002. The declaration and more information are available at www.un.org/esa/ffd/. Back


 
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