+ + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + BRETTON WOODS UPDATE A bi-monthly digest of information and action on the World Bank & IMF Number 66, July/August 2009 Published by BRETTON WOODS PROJECT Working with NGOs and researchers to monitor the World Bank and IMF + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + 1. World Bank health work flawed: still pushing privatisation of services 2. IMF austerity chills crisis countries 3. COMMENT: Hungary and the IMF: indebted future,By Zsolt Boda, Védegylet, Budapest, Hungary 4. The IFC: opportunist expansion? 5. Record World Bank lending 6 The International Center for the Settlement of Investment Disputes (ICSID) 7. U-turn on Doing Business: time to withdraw from the knowledge bank? 8. Reviews fail to erase doubts over World Bank conditionality 9. Controversy continues: The World Bank's hydropower 10. Will rights and gender be at heart of World Bank's climate response? 11. International monetary reform: IMF not in the game 12. Economic crisis: rich countries block reform at UN summit 13. ICSID in crisis: Straight-jacket or investment protection? 14. Evaluation: IMF trade policy advice biased 15. IMF encourages debate on governance reform 16. World Bank loses legal battle in Bangladesh 17. World Bank backs away from Bertin 18. Inspection Panel raps World Bank in Ghana 19. IEG: IDA anti-corruption measure inadequate 20. Controversy over REDD credits 21. Racial discrimination at World Bank 22. World Bank pays top dollar in East Timor =================================================================== 1. World Bank health work flawed: still pushing privatisation of services --------------------------------------------------------------------- A recent evaluation of the World Bank’s health work is damning in its criticism of the lender’s approach, particularly in Africa. Meanwhile, the Bank is continuing to push privatisation in public services such as health, education and water, despite fierce criticism. A World Bank Independent Evaluation Group (IEG) report on almost $18 billion worth of health, nutrition and population work covered projects from 1997 to 2008 across the World Bank Group. It rated 220 projects according to how well they met stated objectives, regardless of how good those objectives were. Highly satisfactory outcomes were almost unheard of, and only about two-thirds of projects had moderately satisfactory outcomes or better. Projects in Africa were "particularly weak", with only 27 per cent achieving satisfactory outcomes. Overall only 29 per cent of freestanding HIV projects had satisfactory outcomes, falling to 18 per cent in Africa. Repeating a consistent criticism of past reports, the IEG found that monitoring and evaluation "remains weak" while "evaluation is almost nonexistent" Only 27 per cent of projects had "substantial or high" monitoring and evaluation structures. This has led to "irrelevant objectives, inappropriate project designs, unrealistic targets, inability to measure the effectiveness of interventions." Even those projects that meet their objectives "may be performing at substantially lower levels than their outcomes would suggest." For example, an on-the-ground assessment of one Indian programme showed that "more than half of the pieces of equipment procured were not delivered or not installed," while "'severe construction deficiencies' were found on the Orissa Health Systems Development Project in buildings that [were] reported to be complete and performing according to specification." The report also found that pro-poor projects were only about half the total, and that only 13 percent of projects had a specific poverty-reduction objective. A March review of the implementation of the Bank’s new health sector strategy, which was approved in mid-2007 (see Update 56), also had bad news for the Bank. Despite claims in the response to the IEG that the Bank recognised problems with health project performance back in 2007, the review reported the outcome data for the first 20 months of the new strategy and found satisfactory outcomes in only 52 per cent of projects worldwide. Sub-Saharan Africa had the most projects but an abysmal satisfactory rating of 25 per cent. Most of the projects would have started before the new strategy was adopted, but it points to an unwillingness to adapt existing projects based on lessons learned. Crucially, the review admits that Bank management did not commit enough resources to implement the new strategy until more than one year after it had been finalised. NGOs have pointedly compared the results of the IEG evaluation to the impact evaluation done of the Global Fund to Fight AIDS, Tuberculosis and Malaria, which some campaigners think is more effective. Its results evaluation found that overall 75 per cent of the portfolio received high ratings while only five per cent showed "unacceptable performance". In Africa, 69 per cent of programmes received the highest ratings while only 6 per cent showed "unacceptable performance". The Bank’s performance is so far below par that some IEG recommendations seem to reiterate the obvious: "undertake thorough institutional analysis, including an assessment of alternatives, as an input into more realistic project design"; "supervision in the field by the Bank and the borrower to ensure that civil works, equipment, and other outputs have been delivered as specified, are functioning, and are being maintained"; and "monitor health, nutrition, and population outcomes among the poor, however defined." Additionally it called for less complex projects, phasing of reforms, better assessment of decisions to earmark funds for specific diseases, and staff incentives for monitoring and evaluation. Despite civil society concerns, the IEG recommended that the IFC "support public-private partnerships through advisory services to government and industry and through its investments, and expand investments in health insurance." However, it also suggested a more innovative contribution the IFC could make for the poor: "expansion of investments in low-cost generic drugs and technologies that address problems of the poor." Management essentially accepted all of the IEG recommendations and in the strategy implementation review admitted "much remains to be done during the next phase of the strategy implementation." It produced a plethora of reform targets for fiscal year 2010. Emma Seery, head of essential services at NGO Oxfam, said the IEG report "calls into question the UK government’s decision to make the World Bank a central part of their efforts to improve health services in poor countries." Still pushing private health ----------------------------- At end April, just after the evaluation was released, the Bank said it was trebling support to the health sector this year, planning to spend $3.1 billion. However, civil society continues to be sceptical of its focus on the private sector’s role in health delivery (see Update 65). The World Bank’s private sector arm, the International Finance Corporation (IFC), decided in early June to invest $20 million in The Health in Africa Fund, a private equity fund that focuses on private sector health insurance. The fund will be managed by Aureos Capital, which is run from London. The use of a private equity fund means the IFC cannot direct the investments or guarantee the application of its safeguards or performance standards, let alone make development outcome assessments of the final projects. An NGO coalition paper from May 2008 deplored the fad for private health insurance investment saying little evidence supported its effectiveness. It noted that private insurance "is known to be particularly inequitable unless poor people are subsidised. As can be seen in the United States, [private health insurance] without strong government intervention can lead to rising costs and inequitable access." A recent paper on provision of anti-retroviral therapy (ART) in India has thrown fuel on the flames of the debate over whether public or private provision is better. Dr Mead Over, a senior economist at the US-based think tank Center for Global Development, found that low- quality care has negative effects beyond just the patient receiving the care, and concludes "public sector delivery of ART can be justified not only because it protects poor AIDS patients from catastrophic health expenditures, but also because it might differentially 'crowd out' the cheapest (and therefore perhaps the worst) of the private sector AIDS treatment. If this crowding out slows or postpones the development and spread of drug resistant HIV, this is an important reason for preferring public to private sector delivery." Pushing private education ... ------------------------------ A recent Bank report has touted public-private partnerships (PPPs) as a key way to deliver education in developing countries. The report states "The existing evidence from around the world shows that the correlation between private provision of education and indicators of education quality is positive, which suggests that the private sector can deliver high-quality education at a low cost." The Global Campaign for Education pointed out that this is in total contradiction to the findings of UNESCO’s Education for All Global Monitoring Report, which finds: "public-private partnerships have a mixed and modest record on learning achievements and equity. And low- fee private schools are a symptom of failure in public provision, not a solution to the problem. The lesson: transferring responsibility to communities, parents and private providers is not a substitute for fixing public-sector education systems." ... and private water ----------------------- The IFC is also planning to increase its investment in Veolia Voda, one of the largest water services companies in the world, raising questions again about the dubious development impact of public institutions providing finance to large Western-owned companies for operations in developing countries. The proposed 50 million euros ($70 million) will be used for expansion of the company’s water and sanitation operations primarily in less-developed regions of Ukraine and Russia. The Bank is also planning to lend more to the Senegalese government for water projects, including its contract with a subsidiary of French multinational Bouygues. The $50 million will go towards extending the contract of the private provider in urban areas as well as expanding private sector participation in rural areas. Hawa Ba of the Senegal office of NGO Fahamu noted "The process of privatisation has resulted in the right of access to water...being relegated to a lower level of priority." It also raises the spectre of an "investment gap". A UNDP International Poverty Centre working paper by Hulya Dagdeviren and Simon Robertson found that water-sector investment by private actors did not offset the declines in public investment in slums in Africa. The paper casts "serious doubt on the potential gains of privatising network utilities in countries where problems of urban planning and development persist. There remain concerns about the pricing and quality of services provided by small-scale water sellers. Ultimately, these concerns can be resolved by investing in the expansion of the public water and sanitation network." A separate working paper from the same centre authored by Kate Bayliss furthers this argument. She writes that private sector involvement was theoretically to transfer risk and responsibility to the private sector. However the World Bank, IFC and donor initiatives mean that "as a result, on offer to the private sector are the least challenging and most lucrative aspects of delivery, which are tightly ring-fenced and bound by guarantees. ... risk is not reduced, it is transferred. As a result, African governments, taxpayers and end- users bear high levels of risk in order to accommodate the priorities of investors." Bayliss recognises that the frameworks for privatisation have changed and become more flexible but they still do not tackle the underlynig problems. "The efforts being made to bring in the private sector are potentially detracting from the development of long-term, cohesive, integrated government policies. Sectors need a coherent strategy rather than ad hoc attempts at privatisation." Evaluation of health, nutrition, and population, IEG http://www.worldbank.org/ieg/hnp Implementation of the World Bank's strategy for health, nutrition, and population results Achievements, challenges, and the way forward, World Bank http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/03/2 5/000334955_20090325043030/Rendered/PDF/478800BR0SecM2101Official0Use 0Only1.pdf The role and impact of public-private partnerships in education, World Bank http://go.worldbank.org/O7K2SG9X80 Access to water in the slums of the developing world, UNDP International Poverty Centre http://www.ipc-undp.org/pub/IPCWorkingPaper57.pdf Health insurance in low-income countries: Where is the evidence that it works? A joint NGO briefing paper, Oxfam http://www.oxfam.org.uk/resources/policy/health/downloads/bp112_healt h_insurance.pdf EFA - Global Monitoring Report 2009, UNESCO http://www.unesco.org/en/efareport/ Access to water in the slums of the developing world, UNDP International Poverty Centre http://www.ipc-undp.org/pub/IPCWorkingPaper57.pdf =================================================================== 2. IMF austerity chills crisis countries --------------------------------------------------------------------- Criticism of the IMF continues to mount as some crisis lending dishes out heavy conditionality. Meanwhile emerging markets have agreed to stump up the cash to refill the Fund's coffers, but only on their own terms. Romania, the latest Eastern European country to need a rescue package from the IMF (see Update 65, 64, 63), had a loan of nearly 13 billion euros ($17 billion) approved in early May. Romania’s austerity package cuts public spending by about 1 per cent of GDP per year in 2009 and 2010, and a further 1.5 percent in 2011. This is on top of a fiscal consolidation of 3 per cent of GDP that Romania put in place before the IMF programme. These cuts will be achieved by eliminating a planned 5 per cent wage increase, closing all current public sector vacancies without filling them, leaving 15 per cent of future public sector vacancies unfilled and increasing taxes on some kinds of fixed investment. The letter of intent commits the Romanian government to safeguarding the real incomes of the lowest paid public sector workers, and investing 60 million euros in social protection, but this is small compared to the expected 1.4 billion euros in public sector spending cuts. Iceland, which was the first country to go to the IMF in the wake of the financial crisis, has been unable to come to an agreement with the IMF to release the next tranche of money from the loan. The first review of the package was originally due in February, with a second review three months later. By the end of June even the first review had not been completed, as the new centre-left Icelandic government has been disagreeing with the Fund about how much to cut public spending. At end June the new government presented its domestic spending package to parliament in an attempt to make some of the cuts that the previous government promised to the IMF, hoping for the first review to be completed in July. It included hiking value added taxes on food, which could potentially hurt those on low-incomes, and the Icelandic labour confederation expressed worry about the medium-term spending plans. Another area of disagreement has been the interest rate. Immediately hiked to 18 per cent as part of the IMF package in November 2008, the central bank lowered rates back down to 12 per cent in early June. According to an Associated Press news report, "this came just one week after IMF mission head Mark Flanagan visited Reykjavik and said that it was difficult to see that 'conditions were in place to reduce interest rates,' and that doing so could be risky for the Icelandic krona and inflation targets." Furthermore, it is rumoured that the IMF lending package has been a negotiating chip in the dispute between Iceland, and the UK and Netherlands over compensation to British and Dutch depositors in a failed Icelandic bank. The People's Voices movement, which helped topple the rightwing government in Iceland last year has started organising protests against the compensation deal, with some of their bloggers saying the IMF and EU members have been strong-arming the government over the package. Latvia’s first review was also delayed as the government scrambled to meet the IMF’s austerity package demands, including a 10 per cent budget cut. When it was finalised, health minister Ivars Eglitis, a former doctor and leader of the largest party in parliament, resigned saying he could not accept the cuts. Iraq is the next government lining up for a massive IMF loan, with press reports indicating it is seeking $5.5 billion. Mixed IMF messages? -------------------- While some countries are facing hard conditions, others are receiving advice to match the IMF’s rhetoric on counter-cyclical fiscal policy (see Update 65). In May, Colombia became the third country to be approved for use of the Flexible Credit Line, a facility which provides high levels of access to conditionality-free resources, but only for countries that are deemed to already have ‘strong policies’. Interestingly, Tanzania and Mozambique were advised to implement a fiscal stimulus; maybe the first time the Fund has recommended low- income countries to spend more. However, a forthcoming G24 policy brief argues that 30 low-income countries may have sufficient foreign reserves to finance a fiscal stimulus of 3-5 per cent of GDP and still leave more than 3 months of import coverage in cash. Of these, only three have been advised to spend more (India has also received such advice) to counteract the global recession and job losses. Bhumika Muchhala of international NGO Third World Network called it irresponsible that the G20 gave more money to the IMF without demanding changes in policy advice and lending conditionality. "The G20's decision to channel funds predominantly through the IMF, rather than a more diverse allocation of funds, is a narrow mechanism through which the developing countries may be imposed with the same type of pro-cyclial and contractionary policies that contributed to creating the crisis." Martin Khor, the director of the South Centre, an intergovernmental body of developing countries, also lamented the G20 strengthening the IMF: "Unfortunately the G20 did not insist on any IMF policy reform, but boosted its resources. This may be the most serious error of the summit." NGO network Global Campaign for Education was particularly worried about the impact on education spending in low-income countries. In an April report it found that "what the IMF has done since the global financial crisis took hold shows that little has yet changed in practice. LICs will benefit little from the hundreds of billions of dollars announced at the G20. They may have access to some new money, but if present trends continue, that money will come with conditions attached that actively undermine investment in education. There is an urgent need to hold Dominique Strauss Kahn to his word and ensure that a fully comprehensive review of IMF macroeconomic conditions imposed on LICs leads to real change." A June paper from NGO Results assessed the impact of IMF policies on health spending in Kenya, Tanzania and Zambia, finding that "IMF programmes in these countries have been unnecessarily restrictive." US Congressperson Maxine Waters expressed concern in a Congressional hearing on the sale of IMF gold, some of which is being proposed to finance increased IMF lending to low-income countries. "The IMF may condition assistance to developing countries on austerity measures, as it has done in the past. Such measures would undoubtedly exacerbate the crisis instead of stimulating the local and global economies. I am also concerned that most, if not all, of the assistance for low-income countries will come in the form of loans, rather than grants." IMF resource increase ----------------------- The G20’s increase in resources for the IMF (see Update 65) is only coming in drips. The G24 policy brief highlights that few of the promises made in London or after have actually resulted in new money being signed off for the Fund. Canada signed off on $10 billion and the next closest are the United States and the UK, who pledged $100 billion and $15 billion respectively. The UK’s commitment of public money will most likely be approved without any parliamentary discussion, but in the US there was extensive debate. Commentators on both the right and left wing urged the US Senate to vote against the funding provision which president Barack Obama's administration had amended to a defence spending bill. Mark Weisbrot, co-director of Washington-based think tank Center for Economic and Policy Research, noted that given the IMF's track record and recent loan agreements, "throwing $108 billion at the IMF without any reforms is a mistake, and one that Americans will later regret." In the end the measure was approved, meaning that it is up to the administration to finalise the deal with the IMF. IMF bonds ---------- A significant portion of the money pledged to meet the G20 commitments will come from developing countries buying the IMF’s first ever issue of bonds. The IMF announced in early July that it would issue $150 billion worth of SDR-denominated bonds, which will be sold only to IMF member governments. China has promised to buy $50 billion, with India, Brazil, Russia and South Korea each promising to buy $10 billion. Developing countries had demanded that their contributions to the IMF not be provided through existing bilateral mechanisms such as the New Agreements to Borrow, an IMF mechanism for accessing additional resources from donor countries, both because of fiscal and budgeting rules at home and because they wanted to maintain pressure on the Fund for further governance reform. One commentator in India called it a "cash for voice gambit", while Eswar Prasad, a former Fund staffer and now a fellow at think tank the Brookings Institution, said "temporary augmentation of the IMF’s resources through bonds rather than a direct and permanent [New Agreements to Borrow] expansion would at least keep symbolic pressure on Europe to support substantive governance reforms." Reality behind the hype of G20 summit, Third World Network http://www.twnside.org.sg/title2/resurgence/2009/twr224.htm New funds for IMF approved by US Senate would worsen global economic downturn, economists say, CEPR http://www.cepr.net/index.php/press-releases/press-releases/new- funds-for-imf-approved-by-u.s.-senate-would-worsen-global-economic- downturn,-economists-say/ IMF bonds: details and implications, Brookings Institution http://www.brookings.edu/articles/2009/0504_IMF_bonds_prasad.aspx =================================================================== 3. COMMENT: Hungary and the IMF: indebted future,By Zsolt Boda, Védegylet, Budapest, Hungary --------------------------------------------------------------------- In October 2008 Hungary borrowed 12.5 billion euros ($17.5 million) from the IMF. Together with 6.5 billion euros from the EU this has increased the GDP to foreign debt ratio to almost 80 per cent, destroying the Hungarian dream of joining the euro-zone in the foreseeable future and putting a huge burden on our future. Hungary certainly has deep economic problems. In the past seven years, while neighbouring Slovakia grew by five to six per cent per year, Hungary experienced only two per cent economic growth while debt slowly increased. Liberal economists usually blame the relatively high redistribution rate and generous social spending as the main causes. While Hungarian social policy is more generous than others in the region, the economic slowdown can at best only be partially attributed to excessive spending. More importantly, the neoliberal development model was exhausted in the past years before the global crisis. Like the others in the region, Hungary based its development on the availability of external capital: foreign direct investment and loans. This is largely explained by the lack of available capital in the post-communist countries, but it also reflects a policy choice influenced by neoliberal economic thinking. Unlike other Eastern European countries, Hungary inherited debt from the 'ancien régime', which amounted to 100 per cent of GDP. In the early 1990s, half of all foreign investment coming to Central and Eastern Europe landed in Hungary. However, the flow has slowed in the past decade, despite desperate efforts to maintain it. Combined with underdeveloped local enterprises this has inevitably led to economic slowdown. In October 2008, speculation against the Hungarian forint threatened dramatic depreciation, which would have had tragic consequences for both the public and private sector (many households have either euro or Swiss franc loans). At the same time, a George Soros fund attacked OTP, the largest Hungarian bank, with unlawful methods according to the financial authority. The agreement with the IMF was designed to back the government’s efforts to stabilise the exchange rate. The IMF loan has had an important role in preventing the worst from happening, but approaching the EU could have been an alternate, perhaps less painful, solution. The willingness of the EU and Western European countries to contribute has been limited. The new EU member states have to acknowledge once more that their wellbeing is not in the focus of the old member states; that European solidarity has strict limits. Under the IMF loans, the Hungarian government committed itself to cutting public sector wages, pensions, social benefits, and other government spending. Some financial sector reforms were also promised. Apparently, unlike in previous times, the IMF was not very strict in enforcing its conditions, as some items have already been softened. The most important target the IMF set was keeping the budget deficit relatively low, at 2.6 per cent of GDP. This is an important and quite demanding condition - the EU average now is about 6 per cent. This requires cutbacks in social spending and it limits the possibility of providing assistance to the struggling economy, which will shrink by 6 per cent this year. This is highly problematic: the already accepted social reforms are not well prepared, and the economy needs counter-cyclical measures in a recession period. The IMF accepted the government’s argument that a strict fiscal policy cannot be maintained during the crisis and the budgetary deficit was allowed to be 4.6 per cent. The details of the new agreement are not yet known, but the minister of finance declared that a new tax on estates and municipal financing reform are included. The tax reform was already voted in parliament and its direction, reducing taxes on labour while increasing on consumption, seems to be acceptable. However all reforms need political consent as well as proper preparation. The IMF seems to be modestly improving its flexibility and conditionality compared to its dreadful practices in previous decades. It is unclear if this is a temporary moment of self- reflection and self-restraint because of the crisis, or a new self- definition. If the IMF can limit itself to providing immediate help to countries in need, this is a role that can be accepted. The main problems - lack of transparency of the agreements, a still distinctively neoliberal vision of how economies work - are just as much, or rather more, attributable to the Hungarian government, as to the IMF. The deficits of democracy and poor economic governance in Hungary make our indebted future increasingly bleak =================================================================== 4. The IFC: opportunist expansion? --------------------------------------------------------------------- The financial crisis which has rocked developed and developing country economies alike has resulted in an expanded role for the International Finance Corporation (IFC), but its methods may leave a bitter taste with civil society. Since April the IFC has announced several new programmes. These come on top of the flurry of initiatives announced earlier in the year (see Update 64 ) and expanded coverage for the Multilateral Investment Guarantee Agency (MIGA), including a Global Trade Liquidity Programme, an Asset Management Company and $150 million for a Microfinance Enhancement Facility. Increased disbursement is not apparent from the IFC's spending figures released at the beginning of July, but will likely surge over the next year. The IFC has benefitted from a rush of credit to support this expansion. In early April it raised $3 billion from a global bond issuance, which was oversubscribed by $1 billion. The IFC's trade liquidity programme aims to channel $5 billion through banks to provide trade financing to under-served clients globally. The total will include $1 billion from the IFC with additional contributions from G20 governments. To help reach the $250 billion for trade finance pledged by the G20, the IFC claims that this $5 billion will over three years support $50 billion worth of trade. The IFC will provide the funds to commercial banks who will pass it on as trade finance to their clients in developing countries. Global banks must provide 60 per cent of the ultimate loan from their own resources. For regional private banks the IFC will fully fund the credits. To date four multinational banks have agreed to participate: Standard Chartered Bank (UK), Citibank (US), Commerzbank (Germany), and Rabobank (Netherlands). Standard Bank (South Africa) is the first regional bank to join. The five banks will be receiving a total of up to $2.2 billion. Given that these banks face high funding costs in capital markets, the deal likely subsidises their activities in the sector, though the exact terms of the contracts are secret. Public money or private equity? -------------------------------- Adding another string to its bow, at the beginning of May the IFC launched the IFC Asset Management Company to buy shares in emerging market companies. It is the first subsidiary company that the World Bank has ever created, and for the first time it will be seeking to attract and invest third party funds. The company will initially manage the $3 billion IFC recapitalisation fund, designed to inject funds into the banks of emerging markets (see Update 64 ). It will also manage a $1 billion private equity fund set up in late 2008, to invest in Africa, Latin America and the Caribbean. They hope to attract national pension funds, sovereign funds, and other sovereign investors to co-invest with the IFC's $200 million contribution. Aldo Caliare from Center of Concern sees the downside for developing countries, "access to credit has traditionally rigged the playing field against developing country companies. Now, instead of fixing those asymmetries, this device will allow foreign investors to help themselves to any company they might have in their sights, bearing little or no risk, courtesy of IFC-provided public money. It'll be the 'coup de grace' for many banks and corporations, and it could worsen capital concentration trends at a global level." The IFC project document about the private equity fund states that investments will be "in accordance with the IFC's investment principles, including the IFC's policy on social and environmental sustainability." Despite owning the subsidiary outright however, the IFC's investment will be considered as channelled through a financial intermediary (see Update 58). In August 2007 the IFC's Independent Evaluation Group found that financial intermediary investments, while required to comply with IFC standards, were very weak at monitoring impact on the ground. In this instance there has been no reassurance that the fund will conduct assessments of the development impact of projects. ECA surge? ----------- With the private finance sector reluctant to take on risks, the significance of export credit agencies (ECAs) providing lending and guarantees has been rapidly rising. In tandem with increased activity for ECAs worldwide, MIGA has been expanding its guarantee coverage to cover state-owned companies (such as ECAs), particularly to include situations where financial risk is coupled with political risk. Peter Frankental of Amnesty International UK cautions that "a higher profile and bigger footprint for MIGA needs to be matched with the necessary screening of projects to ensure that they are complying with appropriate social and environmental safeguards." IFC note on asset management company, IFC http://www.ifc.org/ifcext/media.nsf/content/SelectedPressRelease?Open Document&UNID=FD0A212B06FCC317852575AF00646966 IFC note on trade finance programme, World Bank http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22127460~ menuPK:34463~pagePK:34370~piPK:34424~theSitePK:4607,00.html =================================================================== 5. Record World Bank lending --------------------------------------------------------------------- In June, the World Bank announced record levels of lending with much of the funding for infrastructure projects, where the Bank's record has been particularly controversial (see Update 41, 36). Earlier this year, in response to the economic crisis, the Bank promised to substantially increase its lending, particularly to middle income countries (see Update 64). Provisional figures released by the Bank show that it spent a record $58.8 billion in fiscal year 2009 (which ended in June), $20.6 billion more than the previous fiscal year. The International Bank for Reconstruction and Development (IBRD, the Bank's arm which lends mostly to middle-income countries) was the main source of the Bank's expansion, lending $32.9 billion, up from $13.5 billion the previous year. Almost half IBRD lending went through development policy loans (DPLs, see Uodate 66) Concessional lending through another Bank arm, IDA, increased by $2.8 billion to reach $14 billion, of which $2.6 billion was provided as grants. Most of this cash was raised through the money markets, though the Bank press release claimed that donors have given it an extra $6.8 billion "over and above previous commitments to the institution." Despite reports that the Bank's borrowing costs were increasing as governments pumped money into their banking systems, it is still able to borrow at a far cheaper rate than developing countries. While a $6 billion short-term bond issuance in March was expensive, a 3 billion euros ($4.2 billion) bond offered in May was the cheapest 10 year bond any supranational lender had issued this year. In Africa, governments are turning to the Bank for emergency support as their public finances deteriorate. In June, the Bank approved $535 million for Ghana: $300 million to support the government's budget and $235 million for transport. Mozambique is seeking $120 million from the Bank and Fund, and Nigeria and Kenya are in exploratory talks with the Bank for around $1 billion. Big boost to infrastructure ----------------------------- The Bank has recently announced its intention to increase spending in several sectors, including health (see Update 66), education and agriculture, but the biggest boost is reserved for infrastructure. Education lending is set to double to $4.1 billion per year, agriculture loans increase from $4 billion in 2008 to $6 billion per year for the next two years, and social protection funding rise from $2 billion to $6 billion per year for the next two years. The Bank also intends to increase its facility for the food crisis (see Update 65) to $2 billion, up from the $1.2 billion it initially earmarked. Infrastructure, however, accounted for $20.7 billion, over a third of all Bank lending in the 2009 fiscal year. The newly established Infrastructure Recovery and Assets Platform (INFRA) promises $45 billion in infrastructure lending over the next three years, an annual increase of around $5 billion per year. Latin America seems set to be a major recipient. In the year to June, Bank lending to Latin America rose to $17.1 billion, an increase of 70 per cent. The Bank expects to maintain this level of lending in the region and to continue to focus on infrastructure projects and social programmes. María José Romero, of the Third World Institute based in Uruguay called this a "warning beacon" as "in many cases these are megaprojects with strong social and environmental impacts." She added that "the solution to the crisis for Latin American countries won't come as new loans from the World Bank which only benefit transnational corporations". With India pushing the Bank to increase the borrowing limit for individual countries, which is currently set at $15.5 billion, and donors appearing to increasingly favour the Bank as their solution to a lack of emergency financing for developing countries, the Bank's rise looks set to continue. World Bank press release http://go.worldbank.org/8DGWX94PS0 =================================================================== 6. The International Center for the Settlement of Investment Disputes (ICSID) --------------------------------------------------------------------- The International Center for the Settlement of Investment Disputes (ICSID), part of the World Bank Group, is an arbitration forum between governments and foreign investors to settle investment disputes. Two thirds of international investment disputes go through ICSID. Use of ICSID has expanded rapidly as bilateral investment treaties (BITs) have increased from 385 in 1989 to over 3,000 today. Investment and free-trade treaties offer compensation to foreign investors if the government from the 'host' country 'expropriates' the investment or disrupts it. Most treaties contain an investor- state dispute resolution mechanism. Using this mechanism companies can by-pass domestic courts and go directly to international arbitration when they believe their contracted rights have been violated. ICSID was established with 20 members through a Convention in 1966. Today there are 143 contracting states. Bolivia is the only country to have officially withdrawn from ICSID in 2007 and Ecuador recently has begun the exit procedure (see Update 66). ICSID's use has risen in parallel to the increase in international capital flows, particularly foreign investment. However, some countries such as Brazil and India, which attract the largest amount of foreign investment, are not involved in ICSID. China only ratified in 1993. ICSID's organisational structure consists of an administrative council chaired by the World Bank president and a secretariat. The council is made up of a representative from each of ICSID's contracting states, with equal voting power. Decisions are adopted with a two-thirds majority. The ICSID secretariat supports the tribunals and committees that form during an arbitration. All administrative costs are funded by the Word Bank, but dispute costs are covered by the conflicting parties. The secretariat is comprised of a secretary general and 29 members of staff. The ICSID secretariat maintains two panels, one for conciliation and one for arbitration. Each contracting state may allocate four persons of any nationality to each panel and the chairman may allocate 10. During a dispute a tribunal is constituted from the panel, with the two parties appointing its members. ICSID has concluded 162 cases since its inception and has 125 cases pending, a third of which are against Argentina. Almost half of cases involve the services sector, and all cases involving the natural resources sector are in mining, oil and gas exploration activities. Reports of the tribunals need not be published if a disputing party objects. Since reforms in 2006 it is now at the tribunal's discretion (not the parties') to consider requests for third party submissions. Only two cases have done so, and no arbitration has permitted public attendance. ICSID, operating as an ad hoc arbitration panel and not a court with permanent judges, lacks a formal appeals process. Instead there is a review committee which lacks the power to overturn judgements made by the original panel. The largest known payment in an investor-state settlement is $877 million, paid by the Slovak Republic to the Czech bank CSOB in 2004. The biggest claim still pending is of the UK-based Group Menatep, a major shareholder in the large Russian oil company Yukos, which seeks damages of $28.3 billion allegedly incurred through stock losses during the government's takeover of Yukos. ICSID's revenues from arbitration proceedings were over $17 million in 2008, compared to $250,000 a decade earlier. Revenues include the payment of fees and travel costs of arbitrators, and other supporting services. Most tribunals are held at the permanent court of arbitration at The Hague. Payments made but not yet disbursed to ICSID are managed by the World Bank. The legal fees and arbitration costs are borne by the losing party. The implications for developing countries are substantial, in respect to the technical capacity to handle investment disputes, the effect of the award on the national budget, and the resultant damaged investment reputation to the country. The proportion of cases filed against G8 countries is 1.4 per cent, all of which have been filed by US investors. Cases against middle- income countries account for 74 per cent of all ICSID cases and low- income countries 17 per cent. Twenty per cent of ICSID cases are brought by companies that rank within the top 500 globally, seven of these companies have revenues that exceed the GDP of the country they are bringing a case against. Seventy per cent of ICSID cases have favoured the investor, whether through settlement in or out of court. =================================================================== 7. U-turn on Doing Business: time to withdraw from the knowledge bank? --------------------------------------------------------------------- The World Bank Group recently admitted that crucial assumptions of its Doing Business report were misguided, and faces a fundamental critique of its knowledge role. In April the World Bank's private sector lending arm, the International Finance Corporation (IFC), executed a massive u-turn, by ditching its 'employing workers indicator' and promising to review its 'paying taxes indicator' for its flagship Doing Business annual report. The report ranks countries according to how easy the IFC judges it is for companies to operate. It has been criticised by trade unions (see Update 60, 57, 53) and the Bank's internal evaluation unit (see Update 62) for encouraging countries to adopt controversial policies, such as weakening labour market regulations and social security programmes. In a statement posted on its Doing business website in April, the IFC said that they would now, contrary to their previous system, "accord favourable scores to worker protection policies that comply with the letter and spirit of the relevant International Labour Organisation (ILO) Conventions, recognizing that well-designed worker protections are of benefit to the society as a whole." Furthermore, the employing workers indicator "does not represent Bank policy and should not be used as a basis for policy advice or in any country programme documents". It will be "removed as a guidepost in the Country Policy and Institutional Assessments (CPIA)." The CPIA, which controversially assesses countries' governance and policies (see Update 52) is a critical feature of Bank planning and budgeting decisions, particularly for the allocation of IDA funds to the poorest countries. However, in early July, the unchanged methodology and indicator were still on the Doing Business website. The International Trade Union Confederation said it was pleased that "the World Bank is turning the page on a one-sided deregulatory view on labour issues and proposing to adopt a more balanced approach." According to the IFC, "A working group including representatives from the ILO, as the international standard setting body, trade unions, businesses, academics and legal experts" will help devise a new 'worker protection indicator', as well as re-examine the 'paying taxes indicator'. The paying taxes indicator, which the IFC developed with multinational accounting firm Price Waterhouse Coopers (PWC), has been described by Richard Murphy of Tax Research UK as "fundamentally flawed, and horribly biased to value-added tax - which is deeply regressive and wholly unsuitable for the uses PWC propose for it through the World Bank." Bank research under fire again ------------------------------- In a recent World Bank publication assessing the Bank's World Development Report (WDR), Princeton economics professor Angus Deaton produces a withering critique of the Bank's role as a global provider of research and knowledge services. In 2007, Deaton chaired a panel of academic experts that found that key Bank research was "not remotely reliable" (see Update 54). Deaton argues that WDRs are expensive, and that evidence that they influenced opinion or guided development strategies is "notably thin". "The WDRs have not had a distinguished history of handling empirical evidence; too often bad - or simply incredible - evidence is presented along with useful and interesting new findings." Though he does support the Bank's role as a collector and measurer of data, he is scathing about the declining quality of staff in the Bank's research department. He "suspects" that "the decline in the attractiveness of being a Bank researcher results from a growing scepticism that the Bank is doing much for international development and about whether aid, particularly as dispensed by the Bank, does much for economic growth and the reduction of poverty." He is sceptical about the value of 'expertise' supplied by the Bank, arguing that it can potentially undercut the development process which is based on ownership, accountability and participation. If this is true, he suggests that "the development expertise that is the centre of the World Bank's mission may not exist in useful form or, at the least, needs to be fundamentally rethought and restricted." IEG tries to assess the intangible ------------------------------------ This fundamental critique seems to have been lost on the Independent Evaluation Group (IEG), an arms-length Bank evaluation unit, which recently evaluated the IFC's advisory services (AS, see Update 62). Despite the "often intangible nature of knowledge transmission," the IEG somehow managed to put precise numbers on the success of these intangible services, arguing that AS projects between 2006-2008 gained an "an overall development effectiveness success rate of 70 percent," though Latin America and the Caribbean were weaker and "evaluated global projects also did not perform well." IFC AS "have been growing rapidly, with an active portfolio approaching $1 billion and employing 1,262 staff, a sevenfold increase in the last seven years." They note that "AS staff now make up the majority of the Corporation's presence in the field in developing countries." The IEG's main criticism was that IFC AS lacked a strategic framework, and the "rapid growth of AS has happened in a largely unchecked manner." The IEG paper also contained the annual review of the overall IFC portfolio. As with past reviews (see Update 61, 57) it argued that, while development results are acceptable overall, "performance lagged considerably in East Asia and the Pacific, and in the mainly low- income Middle East and North Africa, and Sub-Saharan Africa". Barely half of the projects in these regions met "specified benchmarks and standards", and "oil, gas, mining, and chemicals projects achieved relatively poor ratings." Why has the Bank changed its views on tax and labour standards?, Eurodad http://www.eurodad.org/blog/index.aspx?id=3607&blogid=1758 IFC note on changes to doing business, IFC http://www.doingbusiness.org/documents/EWI_revisions.pdf IEG annual review of IFC 2009, IFC IEG http://www.ifc.org/ifcext/ieg.nsf/Content/Highlights_IEDR2009 =================================================================== 8. Reviews fail to erase doubts over World Bank conditionality --------------------------------------------------------------------- Reviews of World Bank development policy lending and poverty and social impact analysis leave questions as to the extent to which the Bank's budget support in developing countries targets pro-poor initiatives. The Bank is currently conducting a review of its development policy operations (DPOs) approved between March 2006 and June 2008 (see Update 47). Formally known as structural adjustment lending, development policy loans (DPLs) are budget support loans given by the Bank. They finance DPOs. The retrospective, a follow up to the 2005 review (see Update 47) will assess the effectiveness of DPOs in supporting the design and implementation of a borrower's medium-term development policy agenda. Though conducting global consultations, the Bank has not heeded calls to conduct an independent review. According to the Bank, the number of prior actions, conditions which must be fulfilled before a government has access to Bank lending, has decreased. Conditionality related to public sector reform has increased while conditionality focused on "trade and economic management", and on "financial and private sector development" has declined. However, past reviews by the Bank of its conditionality have shown that their assessment of what counts as a condition and how they categorise conditions is controversial (see Update 47). Critics also complain that the exercise fails to assess the content of the conditionality in terms of ownership, effectiveness and appropriateness. In the reports from the country level consultations, civil society made it clear that they felt alienated from the DPL process and negotiations among the Bank, donors and governments. Civil society representatives argued that they should be engaged in policy dialogue at the earliest stage of the policy cycle. Participants from the Tanzanian consultation were particularly critical, concluding that DPO lending may not deliver sufficient value added beyond individual projects. The government of Tanzania also admitted being too quick in agreeing conditions and timeframes - raising questions over ownership. PSIA reviews ------------- Two reports have also been released covering Poverty and Social Impact Analysis (PSIA) by the Bank, one of which explores the link between PSIA and development policy loans (DPLs). A classification of 652 prior actions from 56 DPLs approved in 2007, found an incredible majority (90 per cent) of prior actions to be neutral in their impact on poverty. Only 41 prior actions had a potentially adverse distributional effect but, of these, only half had PSIAs. By the Banks own admission, the classification relied "to some degree on subjective judgment." The report has no quantitative assessment of how many DPL's design was influenced by a PSIA or any indication as to whether these analyses were carried out before the DPL was approved. An in depth PSIA takes between 12-18 months to prepare while DPLs take between 6-12 months. Therefore, the PSIA process should begin at least 6 months prior to the commencement of DPL preparations. From 2006 to 2008, 85 PSIAs were completed whilst over 166 DPOs took place. Lack of capacity is cited as a constraint on the amount and depth of PSIA conducted - in particular in terms of PSIA budget, staffing, time constraints and prioritisation. A second report on the effectiveness of PSIA at country level find them to be influential. Amongst its recommendations is that governments be given more discretion over the use of PSIA funds, opening up the possibility that PSIAs could be conducted independent of the Bank. World Bank Development policy lending retrospective 2009, World Bank http://go.worldbank.org/0QMSM8S6P0 =================================================================== 9. Controversy continues: The World Bank's hydropower --------------------------------------------------------------------- A recent paper by World Bank staff, which argues for enhanced support of large hydropower projects, has reignited controversy over the Bank's approach, with NGOs claiming that project planning and implementation still show disregard for social and environmental considerations. The Bank committed to re-engage in large water infrastructure projects in 2003. Since then, lending to large projects supplying over 10 megawatts increased from $23 million to over $1 billion in 2008. Additional projects worth $2 billion are in preparation. In Directions in Hydropower: Scaling up for development, Bank staff write that the Bank will further increase its lending with a trend towards larger projects and more private sector involvement through the International Finance Corporation (IFC). The first allocation of the newly established Clean Technology Fund (see Update 60) will allow the development of private sector hydropower to be counted as a renewable energy source. Turkey is among the first to receive financing from the CTF and is expected to invest in hydropower. The paper argues that hydropower projects both allow better management of water resources and offer an alternative to fossil fuels, thereby reducing countries' dependence on oil imports and global CO2 emissions. However, it acknowledges that hydropower "is and will remain risky and sometimes controversial". According to Bank estimates, 77 per cent of feasible hydropower potential in developing countries is unexploited. Peter Bosshard from the NGO International Rivers argues that estimates would be much lower if the Bank incorporated environmental and social costs. "The World Bank thus touts a propaganda line of the dam industry and ignores the negative social and economic experience of countries such as Zambia, Zimbabwe and Ghana, which have exploited much of their existing hydropower potential," he says. The Bank's new paper argues that the new aproach of the Bank internalises environmental considerations and social inclusion. It claims that the Bank has a new sustainable approach, which fully internalises the impacts on affected populations; incorporates responsible environmental management; leverages development opportunities such as benefit sharing with local populations; integrates economic, social and environmental values for analysis; and integrates questions of institutional development such as compliance mechanisms. Critics point out that local communities have not been involved in decision-making processes; impacts on the surrounding ecosystems have been downplayed; and agreed social and environmental commitments have been broken in various projects (see Update 60, 63). Bosshard argues that the Bank has not accepted responsibility for social and environmental damage done by previously funded projects, such as uncompensated displacements, massive debt burdens, damaged ecosystems and serious human rights violations. The IFC may be learning some lessons. In the Kafue hydropower project in Zambia (see Update 64, 61), the IFC has recommended to downsize the project for environmental reasons. Several major NGOs are working together with the World Bank on hydropower initiatives and how to get them right. WWF and Oxfam participate in the Hydropower Sustainability Assessment Forum, which will develop a new sustainability assessment tool this month. However, even the Forum has been criticised because the guidelines might replace the tougher framework developed by the World Commission on Dams (see Update 47, 20) and because affected communities are not formally represented. Directions in Hydropower, World Bank http://go.worldbank.org/68WVUM1450/ New directions in hydropower?, International Rivers http://www.internationalrivers.org/en/blog/peter-bosshard/new- directions-hydropower =================================================================== 10. Will rights and gender be at heart of World Bank's climate response? --------------------------------------------------------------------- Initially flagged as a global environmental problem, increasing attention is being drawn to the impacts climate change has on human rights and equity related issues such as gender, as well as the World Bank's role in tackling them. In an address at the World Bank's spring meetings in April, Mary Robinson, the former UN High Commissioner for Human Rights and former President of Ireland highlighted the human rights dimension of climate change. She said that those who are most at risk from its impacts are least responsible for greenhouse gas emissions, creating power struggles and the need for access to justice. She also emphasised that climate change will undermine progress on almost all of the rights enshrined in international human rights instruments, just as it will undermine achievement of the MDGs. As such, she called for considerable care to be taken in the design and implementation of the wide range of adaptation projects that the World Bank is set to finance in the coming years and drew attention to its role in mitigation. "The World Bank is often the target of criticism because its energy portfolio is still heavily weighted toward carbon-producing projects," said Robinson. "Both the authority and the power of the Bank are enormous, and I would urge you to reconsider this portfolio." The World Bank is increasing fossil fuel investments and a new report by the Environmental Defense Fund highlights that the Bank has contributed $5.3 billion in coal fired power plants alone since 1994. Robinson also emphasised the importance of technological leap- frogging and appropriate technology, highlighting the need for the Bank to provide support and resources to developing countries to meet their right to development and energy needs in ways which are sustainable, primarily through scaling up of renewable technologies. Gender and climate -------------------- A recent report by the Heinrich Böll Foundation, Gender and Climate Finance: Double Mainstreaming for Sustainable Development, focusses on issues of equity, primarily gender. It highlights that women are least considered by environmental financing mechanisms. This is linked to broader impediments for women in development and include lack of access to capital and markets; lack of legal protections and ownership over land and other resources; and cultural biases against women's engagement in learning, political participation and decision-making processes. Among issues raised are the differentiated impacts on women of adapting to climate change because of their different roles in use and management of natural resources. Due to gender roles dictating economic activities and livelihoods, transport and travel needs it is estimated that women's carbon emissions are generally lower than men's. However, few if any studies have looked at the issue. While there has been a proliferation of instruments for climate financing, many housed under the World Bank, none have integrated gender according to the Böll report. "There can be no fair and equitable global climate agreement without a comprehensive global climate finance understanding. And this understanding can only be fair, equitable and comprehensive when it incorporates gender awareness and strives toward gender equitable climate financing solutions." The World Bank has repeatedly highlighted that poverty reduction and development can only be achieved together with women's equality (see Update 54). However, these conclusions have not been carried forward into the development of the Bank's controversial Climate Investment Funds (CIFs, see Update 60). According to a report by Gender Action, Doubling the Damage, the Bank documents establishing the CIFs never mention gender or women in relation to the funds' objectives, governance, project criteria, evaluation measures or budget targets with one exception. The only reference arises in the criteria for selecting adaptation expert group members under the Pilot Programme for Climate Resilience. While a gender lens is also lacking from the United Nations Framework Convention on Climate Change and facilities such as the Global Environment Fund, the climate financing which has already been dedicated to the Bank as well as its ongoing work on gender, necessitate the Bank's leadership on this and broader human rights and equity issues. Anna Rooke of Gender Action stated, "The Bank must abandon its policy-based lending and loan requirements that often push women out of formal sector employment, increase their care burdens at home, and deepen the feminisation of poverty." Mary Robinson Remarks-Social Dimensions of Sustainable Development, Realizing Rights http://www.realizingrights.org/pdf/World_Bank_M_Robinson_22April09FIN AL.pdf Gender and climate finance: Double mainstreaming for sustainable development, Heinrich Boll Stiftung http://www.boell.org/docs/DoubleMainstreaming_Final.pdf Doubling the Damage: World Bank Climate Investment Funds Undermine Climate and Gender, Gender Action http://www.genderaction.org/images/2009.02_Doubling%20Damage_AR.pdf =================================================================== 11. International monetary reform: IMF not in the game --------------------------------------------------------------------- The financial crisis has reinvigorated discussion of exchange rate management and reform of the monetary system, but lack of progress at international forums like the IMF means change is only happening at the regional and bilateral level. The debate over the role of the international monetary system was given a jolt in March when the governor of the People’s Bank of China made a statement calling for an end to the use of the dollar as the world’s reserve currency and a stronger role for the IMF’s special drawing rights (SDRs, see Update 65). Despite playing it low-key in April during the spring meetings, the Chinese have continued to press their case including at the Italian hosted G8 summit in July. The China Financial Stability Report 2009, released by the central bank at the end of June, made the governor’s speech official policy when it stated: "An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis." The bank urged a rethink of the system and that the IMF exercise closer supervision of the economic and financial policies of major reserve-issuing countries. This call was endorsed by Brazil, Russia and India at a summit with China in June, though the Russian finance minister distanced himself from those calls a few days after the meeting. The French finance minister also echoed the demand in July. However, when the IMF, the only international body tasked with monetary affairs, was asked in early July about its thinking on the now three-month-old paper from China, its spokesperson responded: "we don’t have anything that we’ve taken up particularly now. I suppose if it’s put on the table, and we are asked to look at it, we will." Professor Jan Kregel of the US-based Levy Economics Institute, who also served as the rapporteur for the UN commission of experts on financial reform, warned that the problem is not the asset that serves as the medium of international exchange or reserves, but the mechanism of countries adjusting to deficits or surpluses. "The introduction of SDRs or another global currency cannot resolve the problem of the adjustment mechanism's operation. Even the simple creation of a notional currency to be used in a clearing union cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. This is a function that was to have been undertaken by the IMF, under its Article IV surveillance mandate, but which has been just as asymmetric as the Bretton Woods system; it is only effective where the IMF has the sanction of a lending program-that is, in deficit countries." IMF u-turn on surveillance, not capital controls -------------------------------------------------- China's massive reserves and fixed exchange rate have long been a topic of conversation, including the IMF consistently saying that the Chinese currency (the yuan) is undervalued (see Update 57). In a riposte to media blaming China for global imbalances that the IMF has been unable to resolve, Terry McKinley, director of the Centre for Development Policy Research (CDPR) in London, argues "that the main source of global instability is to be found in the US, the world's economically dominant, reserve-currency country-and its most profligate. What is now most problematic is certainly not the current policy response of China to the crisis, but the difficulties faced by the US in correcting its own imbalances." China won a victory at the IMF in June. It had been angered by the 2007 decision on surveillance (see Update 57, 56) that included a clause saying that "fundamental misalignment" of exchange rates would be a trigger for additional consultations between the IMF and the country. In late June IMF management quietly admitted in a revised guidance note that this terminology "has proved an impediment to effective implementation of the decision." The note was published without an accompanying press release or summary of the informal board discussion on the topics that was held in late May. The new guidance "eliminate[s] the requirement to use specific terms such as 'fundamental misalignment' and to make a number of other changes that will acknowledge the large degree of judgment required" in exchange rate analysis. Another briefing by CDPR, authored by Annina Kaltenbrunner and Machiko Nissanke, argues for policies that IMF has continually rejected: intermediate exchange rates regimes with matching mixed monetary policy and the selective use of capital controls. Based on the Brazilian experience, they suggest combining "a 'half- independent' monetary policy with a 'half-fixed' exchange rate, namely, some form of intermediate regime. Such a choice would be even more viable, and thus become more credible, if policymakers adopted some degree of management of capital inflows and outflows." The IMF has generally been keen to promote all or nothing solutions - meaning either fully liberalised exchange rates or hard pegs - and has been reticent to suggest capital controls (see Update 58). Despite all the recent literature and proposals on exchange rate and capital account management, the Fund has maintained a stony silence. Its staff position paper released in late April, Coping with the crisis: Policy options for emerging market countries, contains the usual long analysis of the need for exchange rate depreciation, and does include a short paragraph on capital controls. However it only warns that countries "could as a last resort regulate capital transactions-though these carry significant risks and long-term costs," and does not provide any analysis or advice about how to do so. Regional initiatives take off ------------------------------ Impatience with and distrust of the IMF has pushed Asian countries in the ASEAN+3 grouping into finalising the arrangements for their own regional reserve pooling arrangement, the Chiang Mai Initiative. The structure of the so-called multilateralisation of the initiative was decided in May, presenting a challenge to the IMF's hegemony. The CMIM, as it is being dubbed, will be worth $120 billion, with 80 per cent of the funds coming from China, Japan and Korea. ASEAN countries will be able to borrow either 2.5 times or 5 times the amount they put in, which is larger than the corresponding normal limits of IMF access, at 3 times quota. An egalitarian governance structure based on the one-country one-vote principle will set the CMIM apart from the IMF. The countries "agreed that an independent surveillance unit will be established as soon as possible to monitor and analyze regional economies and support CMIM decision-making." Crucially though, the agreement "has not amended the old rule that Chiang Mai Initiative members can freely draw money, without the consent of the IMF, up to 20 percent of the total size of the fund," according to Oh Yong-Hyup of the Korea Institute for International Economic Policy. "When Asian economies had recourse to IMF loans during the Asian crisis of 1997-1998, this condition was enforceable. However it is not at all clear why this condition should be kept." "The idea is for the ASEAN+3 countries to effectively look after ourselves with our own reserves," Thai finance minister Korn Chatikavanij said at the announcement. The Asian countries promised to have the CMIM up and running by the end of the year. Future of the yuan ------------------- The Chinese, sitting on what most researchers assume to be almost $1.5 trillion worth of dollar-denominated assets, are hedging their bets even further by increasing the international role of their own currency. Over the last six months, the central bank has signed swap arrangements with numerous countries including Hong Kong, Malaysia, Korea, Indonesia, and Argentina. This will allow those countries to extend credit in yuan to their own importers and exporters and thus allow trade with China to be invoiced in yuan rather than dollars. At end June China and Brazil confirmed that they are exploring ways of promoting local-currency invoicing as well. Chinese journalists Liu Zie and Zhang Chongfang argue in the latest edition of Third World Resurgence magazine, that Chinese officials want "the currency to have a bigger global role but are wary of sudden or excessive change, so they are taking gradual steps to make it easier to use in trade and investment. But any major global role might be as long as 10 to 30 years away, analysts in China admit." According to a Reuters report, Li Lianzhong, who heads the economics department of the Communist Party of China's policy research office, also said in late June that the yuan should eventually be included as one of the currencies in the basket that makes up the SDR, which currently includes the dollar, pound, euro and yen. The next SDR basket review is due in 2010, but unless the Chinese fully liberalise international trade in the yuan, meaning making it a free-floating currency, it cannot meaningfully be included in the SDR basket. Changes in the international monetary system are coming, with or without the latest moves from China. With the IMF sitting in the stands, seemingly unable to influence the debate, the ball is in China’s court. China Financial Stability Report 2009 (in Chinese), Peoples' Bank of China http://www.pbc.gov.cn/detail.asp?col=641&ID=33 The 2007 surveillance decision - revised operational guidance, IMF http://www.imf.org/external/np/pp/eng/2009/062209.pdf ASEAN+3 finance ministers' communiqué On the Chiang Mai Initiative, ASEAN http://www.aseansec.org/22536.htm =================================================================== 12. Economic crisis: rich countries block reform at UN summit --------------------------------------------------------------------- The first major conference on the financial and economic crisis to involve all countries ended with rich countries blocking substantive reforms demanded by developing countries. The UN conference did however push key issues up the international agenda, such as the need for a better system of international reserves, and for genuine policy space for developing countries. North and south battle to a standoff The United Nations Conference on the World Financial and Economic Crisis and its Impact on Development, which concluded June 26, was the first opportunity for all the countries of the world to discuss the crisis on an equal footing. During acrimonious preparations, developing countries, who wanted substantive reforms to the global economic and financial system, battled rich northern countries who wanted to curtail the role of the conference and the UN. Unlike April’s G20 London summit (see Update 65) where negotiations were shrouded in secrecy, drafts of the UN’s outcome document were circulating freely and civil society organisations had constant access to negotiators. The G77 group of 130 developing countries were trying to insert text that mandated a major role for the UN in dealing with the crisis and backed a comprehensive set of reforms, while northern countries including the US and the EU played a blocking game. Earlier complications had arisen as the president of the general assembly, Miguel D'Escoto Brockmann had issued his own draft version of the outcome document, which had to be reconciled with that of the co-facilitators. He had also postponed the conference by three weeks to give more time to reach consensus. Western countries, angered by these unorthodox tactics, and D'Escoto's championing of radical reforms and a strong role for the UN, briefed against him in the press. In the end both sides battled to a standoff. Two days before ministers and heads of state were due to arrive, the co-facilitators of the process, the Netherlands and St Vincent and the Grenadines produced a compromise draft of the outcome document and, surprisingly, it was accepted by all countries. Knowing that the gap between their positions was so wide, neither side wanted to reopen discussion on the text and risk being blameda for the collapse of negotiations. No further changes to the text took place, leaving high level delegates with little to do but to twiddle their thumbs during the three days of the conference. Diana Aguiar of the International Gender and Trade Network said that "the pressure put on the G77 group of developing countries by the rich industrialised nations undermined the group's ability to stand up against an extremely poor document." Perhaps the most remarkable feature of the process, however, was the fact that the G77 grouping united around a comprehensive set of fundamental reforms, including many of those proposed by the Stiglitz Commission (see Update 65), such as major reforms of the IFI governance and policy approaches, a global economic council, and a major allocation of special drawing rights (SDRs, see Update 65) which would be a significant step towards the creation of global reserve currency. Key issues raised, but little concrete agreed ---------------------------------------------- In the end, the final outcome document was stripped by western countries of most concrete proposals for change, but it includes language on many of the critical issues raised by developing countries, and the genesis of a follow up process that could expand the UN’s role in this area. The conference produced the most honest assessment of the nature of the "worst financial and economic crisis since the Great Depression" yet produced by an intergovernmental forum. The links between the financial crisis, global inequality, "increased food insecurity, volatile energy and commodity prices and climate change" are highlighted. Blame is laid at the foot of developed countries, and the "loss of confidence in the international economic system" is recognised. There were "major failures in financial regulation" which were compounded by "over-reliance on market self-regulation" demonstrating "the need for more effective government involvement to ensure an appropriate balance between the market and public interest." Though the language in the text was watered down from preceding drafts, in two key areas it goes beyond previous international agreements. Firstly, it highlights the need for developing country policy space. To the chagrin of the United States and others, who issued statements distancing themselves from several paragraphs, it includes a recognition that countries have "the right to use legitimate trade defense measures" and to "impose temporary capital restrictions". The issue of IFI conditionality was one of the most controversial topics during the negotiations and many developing countries spoke forcefully against it from the floor of the general assembly. At the IFIs themselves, where they do not operate on the same equal footing with western countries as they do at the UN, developing countries have tended to be more reticent to speak out. However, though previous drafts had included strong language on the continued use of pro-cyclical conditionalities by IFIs (see Update 65) the final text said only that new and ongoing [IFI] programmes should not contain "unwarranted pro-cyclical conditionalities." Secondly, the issue of the creation of an international reserve currency to replace the dollar is referred to, albeit in very tentative language. The "potential of expanded SDRs to help increase global liquidity" and "to help prevent future crises" should "be further studied" and "calls by many States for further study of the feasibility and advisability of a more efficient reserve system" are acknowledged, but no follow up action is mentioned. The theme of raising important issues but promising little new action is continued throughout the document. Governance reform of the Bretton Woods institutions is an "urgent need" but the text and timetables have merely been copied from the April G20 communiqué. However the recognition that there should be "fair and equitable representation of developing countries" hints at a move towards the demand of the G24 group of developing countries at the World Bank for a parity of voice and vote between borrowers and lenders. Financial sector reform, which has dominated the efforts of policy makers across the globe in recent months, merits only a couple of paragraphs. There is a "critical need for expanding the scope of regulation and supervision and making it more effective, with respect to all major financial centres, instruments and actors". Standard setting bodies such as the Financial Stability Board and Basel Committee on banking supervision (see Update 63) are encouraged to "review their membership" in order to enhance "the representation of developing countries as appropriate." Observant participants noticed that many of the world’s leading tax havens had sent strong delegations to the conference, so unsurprisingly there was little new on combating tax evasion and capital flight. The conference called for "international standards for exchange of information" but did not mention who should implement these or how rigorous they should be. Commitments to "examine the strengthening" of "international cooperation in tax matters" including the UN tax committee did not take agreement further than that reached in Doha at the UN finacning for development conference in in December 2008. Previous commitments made during trade negoiations have been reiterated, and, once again, there is a call for the completion of the Doha trade round. There is little new on emergency finance or aid, though donors are encouraged to "work on national timetables" to meet "established ODA targets" which presumably means the 0.7 per cent target, though this is not spelled out. Interestingly, despite a strong push by the European Union and others, the Paris Declaration on aid effectiveness and last year’s follow up Accra Agenda for Action are pointedly not mentioned, reflecting an unwillingness on the part of many developing countries to highlight an OECD-led process. Innovative financing gets a paragraph, and the fact that these should "be a supplement and not be a substitute for traditional sources" reflects a longstanding demand of many NGOs. However, there are no new commitments. Martin Khor, head of the South Centre, a n intergovernmental institution representing 50 developing countries said: "the greatest deficiency [was] that there was no decision made to give concrete financing to countries that are now facing major problems". Despite the warnings of many that another global debt crisis is imminent, the language is weak. "Temporary debt standstills" are touted, though only as a possible agreement which could be made between debtors and creditors. Donors are urged to "increasingly consider providing grants and concessional loans". The affirmation of the need to use "existing frameworks and principles" will bring no comfort to the critics of processes such as the highly indebted poor countries (HIPC) initiative, which contained heavy conditionality and limited debt cancellation. However, the need to explore "the feasibility of a more structured framework for international cooperation" leaves the door open for campaigners who have long pushed for a fair and transparent international debt workout mechanism that follows principles of equity and justice. Finally, the need for a climate change deal at the upcoming Copenhagen summit is mentioned, but overall the language on green recovery, as at the G20, is weak: "we acknowledge that the response to the crisis presents an opportunity to promote green economy initiatives." A civil society statement issued at the conference highlighted the need for forward thinking action across a range of issues, but a civil society scorecard of the conference judged that governments had failed the test, with the outcome falling "far below what is necessary to provide developing countries with the resources and tools they need to deal with the crisis." What happens next? ------------------- All eyes will now turn to the "ad hoc open-ended working group of the General Assembly" who have been mandated with the task of following up on the outcome document. The success of this group will depend on the level at which it sits and the degree of support it gets from member states, civil society and others but it will not officially start work until after the UN General Assembly in September. Many other the concrete proposals for follow up mechanisms were stripped from the final outcome document. Instead the UN’s Economic and Social Council (Ecosoc) is asked to make further recommendations, and consider the "possible establishment of an ad hoc panel of experts on the world economic crisis and its impact on development." The opposition of western countries to using the UN to coordinate or lead on international economic issues was expressed forcefully by the US: "Our strong view is that the UN does not have the expertise or the mandate to serve as a forum for meaningful dialogue or to provide direction on issues such as reserve systems, the international financial institutions and the international financial architecture". "The US and EU appear to be resistant to even exploring structural change, despite World Bank figures showing one trillion dollars likely to drain from the poorest economies this year," said Raman Mehta, of ActionAid India. While the conference claimed to "highlight the importance of the role of the United Nations in international economic issues" and all nations signed a document saying they were "resolved" to strengthen the role of the UN "in economic and financial affairs", it is clear that the richest countries of the world will continue to fight to prevent the UN from taking the lead. The main message from this conference however, is that they will not achieve this without a fight. UN conference on economic crisis, outcome document, UN http://www.un.org/ga/search/view_doc.asp?symbol=A/CONF.214/3&Lang=E UN Commission on the financial crisis, May 2009 draft of report (Stiglitz Commission), UN http://www.un.org/ga/president/63/interactive/financialcrisis/Prelimi naryReport210509.pdf CSO website on UN conference, including statements http://www.ffdngo.org/cs-crisis-watch =================================================================== 13. ICSID in crisis: Straight-jacket or investment protection? --------------------------------------------------------------------- The International Center for the Settlement of Investment Disputes (ICSID, see Update 66) is facing an explosion of cases and increasingly vocal criticism from Latin American countries. Questions remain over whether it helps channel productive investment to developing countries or serves as a tool for multinational corporations to get their way. At end May, Ecuadorian president Raphael Correa publicly denounced ICSID and claimed Ecuador's withdrawal from the ICSID is necessary for "the liberation of our countries because [it] signifies colonialism, slavery with respect to transnationals, with respect to Washington, with respect to the World Bank." Following this, at the UN conference on the economic crisis at end June, the presidents of Bolivia and Ecuador called for the closure of ICSID and challenged existing free trade agreements. Ecuador's threatened departure follows Bolivia's decision to withdraw from ICSID in 2007 (see Update 58, 56). ICSID is currently handling $12 billion worth of requests for arbitration over several disputes against Ecuador, not to mention the dozen of cases outstanding against Argentina. This explains Ecuador's current dissatisfaction. Most recently, Ecuador's cancellation of US oil company Occidental's contract in 2006 leaves the company now seeking $3.2 billion in damages. However, the controversies surrounding ICSID are deeper, including problems of loss of sovereignty, unequal bargaining power and poor governance. ICSID's latest award brought a hefty penalty of $133 million against Egypt for expropriating the land of two Italian citizens, making it the largest award rendered to individual claimants and ICSID's seventh largest yet. Conflicting messages have been sent out as to whether ICSID can be lenient when governments take measures that they view as necessary to shield their citizens from an economic meltdown, with many prominent lawyers arguing that contract maintenance is a priority. This is at the heart of the accumulation of cases filed against Argentina. Some decisions are still pending but for others where decisions were reached, Argentina has not paid out the awards. US-based investors who are owed money are applying pressure on their own government to step up its demands that Argentina comply with the ICSID awards. This indicates how an investment dispute is easily politicised with investors lobbying government to force other states to pay reparation fees and uphold its obligations under bilateral investment treaties (BITs). However, now the tables may be turning, as a Chinese investor may bring forward an arbitration case against the Belgian government because of its role in pushing the sale of Fortis Bank, a Dutch- Belgian financial firm, to BNP Paribas, a French financial firm, during the financial crisis. Ping An, a Chinese investment house, suffered a 90 per cent loss on its investment in Fortis during the crisis. In the takeover process the Belgian government took a 12 per cent stake in BNP in return for a bailout and guarantees in relation to the acquisition. The lack of leniency which ICSID tribunals have exhibited in dealing with cases from Argentina's financial crisis, may now come back to haunt rich countries. Investment Treaty News, ITN http://www.investmenttreatynews.org/ =================================================================== 14. Evaluation: IMF trade policy advice biased --------------------------------------------------------------------- An evaluation by the IMF’s Independent Evaluation Office (IEO) finds that the IMF’s trade policy work between 1996 and 2007 had patchy effectiveness, was "not evenhanded" and has "diminished credibility of IMF independence". It confirmed NGO criticisms that "a recurring problem was underestimating negative revenue effects from tariff cuts" and that the IMF gave poor advice on financial services liberalisation. The IMF "tended to urge greater openness almost indiscriminately - seldom did they assess risks, costs or benefits." The board largely agreed with the recommendations. Including "that attention should be given to ... policies in systematically-important economies." http://www.ieo-imf.org/eval/complete/eval_06162009.html =================================================================== 15. IMF encourages debate on governance reform --------------------------------------------------------------------- The IMF has launched a so-called 'fourth pillar' to open discussion on its governance reforms to civil society organisations (CSOs). The interactive "by-invitation" website has a discussion board where members can post ideas, questions, and documents for other members to comment. Jo Marie Griesgraber, who runs the site, has said "nothing is taboo, no issue is off the table" and encourages academics, think tanks and CSOs in developing countries to organise their own discussions on the site. The CSO consultation is supposed to be on an equal footing with the eminent persons committee report on governance (see Update 65), the IMF executive board sub-committee and the IEO report on governance (see Update 61).. http://www.thefourthpillar.org =================================================================== 16. World Bank loses legal battle in Bangladesh --------------------------------------------------------------------- For the fourth time an appeal by the World Bank has been rejected by the Supreme Court in Dhaka. The Bank had petitioned for the dismissal of a case filed by a former employee at the Bank's Dhaka office, who had challenged the termination of her employment in 2001. The Appellate Division of the Supreme Court upheld the High Court's verdict of June 5, 2008 that ordered a Dhaka court to dispose of the case against the Bank within six months according to newspaper, New Age Bangladesh. The Bank has also sought to have a law enacted which would provide it with immunity from lawsuits in the country. No such law has yet been enacted. http://www.newagebd.com/2009/apr/07/front.html#18 =================================================================== 17. World Bank backs away from Bertin --------------------------------------------------------------------- A chorus of voices are celebrating the news that the International Finance Corporation (IFC), the private sector arm of the World Bank, has withdrawn a $90 million loan to the Brazilian cattle farming company Bertin (see Update 55). In the Brazilian Amazon, 80 per cent of deforested land is used for cattle farming. Paulo Adario of Greenpeace Brazil called on the Bank to "guarantee that it will not invest in such damaging projects in the future." The IFC press release has not mentioned any environmental reasons for the withdrawal, insisting instead on their commitment to sustainability in the beef sector in Brazil. http://www.greenpeace.org/international/press/releases/world-bank- withdraws-bertin-loan-130609 =================================================================== 18. Inspection Panel raps World Bank in Ghana --------------------------------------------------------------------- A complaint to the World Bank Inspection Panel has resulted in a report confirming violations of Bank policies on forced evictions and environmental hazards at a planned landfill near Accra, Ghana. The complaint was made by the NGO Centre on Housing Rights and Evictions (COHRE), on behalf of the Agyemankata community (see Update 59). The Panel found that the original environmental and social assessment was seriously flawed and called for meaningful consultation, discussion of alternative resettlement options and analysis of alternative project sites. COHRE's Bret Thiele stressed that "advocates must continue to push for the inclusion of human rights in the Panel's analyses.". http://cohre.org/ghana =================================================================== 19. IEG: IDA anti-corruption measure inadequate --------------------------------------------------------------------- The Independent Evaluation Group (IEG) published in April its Review of IDA Internal Controls examining the loss of World Bank funds due to corruption. The report, quietly released just before the Spring meetings, found deficiencies in the fiduciary processes and controls the Bank has set up to manage the risk of corruption in IDA operations. It recommended that the governance and anticorruption (GAC) programme, a controversial initiative of the previous president Paul Wolfowitz (see Update 55), be implemented rapidly, that specific measures be taken that target the risk of corruption, and that money be spent on improving developing country fiduciary systems. http://web.worldbank.org/external/default/main?noSURL=Y&theSitePK= 1324361&pagePK=64253958&contentMDK=22142204&piPK=64252979 =================================================================== 20. Controversy over REDD credits --------------------------------------------------------------------- An article in the Economist highlights that no market has been formalised for trading carbon credits generated by programmes for reducing emissions from deforestation and forest degradation (REDD). REDD is a controversial proposal under climate negotiations to reduce emissions through protecting the world's forests in recognition that deforestation and forest degradation account for approximately 17 per cent of global greenhouse gas emissions. Traders have agreed to buy and sell credits in a voluntary market, including through the World Bank, however no government can legally issue credits without the existence of a framework. Nonetheless, Papua New Guinea has been issuing credits raising controversy as land for one of the projects for which credits are being issued is disputed. A recent report by NGO International Institute for Environment and Development (IIED) aims to take the debate forward by identifying a typology of tenure regimes in rainforest countries. It identifies some of the challenges they present for REDD; the nature of tenure of usage rights within specific countries; and the issues that will need to be engaged with if REDD is to have a sustainable impact in countries. It evaluates seven tropical rainforest countries likely to be major players within an international REDD system including Brazil, Cameroon, Democratic Republic of Congo, Guyana, Indonesia, Malaysia and Papua New Guinea. http://www.iied.org/pubs/display.php?o=13554IIED =================================================================== 21. Racial discrimination at World Bank --------------------------------------------------------------------- A review of the treatment of black employees at the World Bank in recruitment, retention and justice decisions has been released by US NGO Government Accountability Project. Although the Bank has adopted measures to raise awareness, the report found that meaningful measures to improve retention of black staff members are still lacking. The report details the scale of discrimination: of 1000 professional grade American World Bank staff worldwide, there are only four black Americans. Co-author of the report, Shelley Walden called the World Bank's anti-discrimination policies "largely cosmetic" and lacking in "effective, impartial enforcement mechanisms." http://whistleblower.org/doc/2009/RDWB.pdf =================================================================== 22. World Bank pays top dollar in East Timor --------------------------------------------------------------------- In May, the World Bank was forced to defend the salaries paid to its consultants in East Timor after they were leaked to the press. The salaries, paid by the Bank and donors, ranged from $100,000 to more than $500,000 in a country where half the population live below the poverty line. The Bank insisted that the salaries are in line with internationally accepted market rates. The general secretary of the opposition party, Fretilin, has also accused the Bank of being complicit in covering up allegations of misconduct. http://www.watoday.com.au/world/world-bank-defends-east-timor- salaries-20090513-b39v.html + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Published by Bretton Woods Project Critical voices on the World Bank and IMF No permission needed to reproduce articles. 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