By MAGGIE JARUZEL POTTER
[Editor’s note: On April 24, U.S. Treasury Secretary Timothy Geithner hosted meetings with finance ministers from the world’s top economies to discuss increased oversight of the global financial system. The meetings preceded semi-annual gatherings of the International Monetary Fund and World Bank in Washington, D.C.]
The April G-20 meeting in London secured a lot of positive media attention after world leaders announced a $1.1-trillion global package for economic recovery and reform, mostly for the International Monetary Fund (IMF).
However, Jesse Griffiths, coordinator of the London-based Bretton Woods Project, says the package actually will deliver less than half that amount in new or guaranteed resources. And, he says, the plan did not include specific information about the much-needed operational reforms to the IMF and the World Bank. [See related Web sidebar]
Decades ago, those who created the IMF and World Bank designed a system for a very different world, Griffiths says. Because it has not been adapted for current global changes, the system is now fundamentally flawed, he says, so it is time to develop a new one.
“The ideology [of the IMF and World Bank] has failed and the accompanying structures have failed,” Griffiths said.
“In addition to the current enormous economic instability, the system has failed to create equity and eradicate poverty; it has failed to ensure that human rights are protected, and it has failed to address environmental issues.”
The system Griffiths refers to was first designed during World War II when leaders from 44 nations met in Bretton Woods, New Hampshire, to rebuild the international economic system. Along with policies and procedures, leaders also created the IMF and World Bank, which have come to be known as the Bretton Wood institutions.
The Bretton Woods Project was established in 1995 by a group of environment and development organizations in the United Kingdom. Today, its staff members work with non-governmental organizations (NGOs), researchers and public officials to monitor policies and practices and push for reforms at international financial institutions (IFIs).
The Bretton Woods Project is housed in ActionAid. Under the International Finance for Sustainability program area of the Mott Foundation’s Environment program, ActionAid has received six grants totaling $1.2 million since 2000 for the project.
Fundamental changes are needed at the IFIs, Griffith says, and it is problematic to pour hundreds of billions of dollars into the IMF and World Bank without first committing to making those crucial changes.
Yet, the G-20’s much-publicized $1.1-trillion Global Plan for Recovery and Reform fails to mention much about IFI reforms at all. Instead, it broadly outlines where huge chunks of money will go. For example, it notes that $500 billion will be allocated for the IMF, which is misleading, Griffiths says, because $250 billion of that amount was a general promise from the G-20, and not a firm commitment from specific countries.
Of the remaining $500 billion, $200 billion had been announced previously -- $100 billion each from Japan and the European Union -- so it is not considered new money. Most of the new $50 billion would come from China’s reserves. Another $250 billion has been promised to countries through new allocations of the IMF-issued Special Drawing Rights (SDRs).
A SDR allocation is akin to “printing new money” because it is the IMF’s own internally created reserve asset, Griffiths explains. SDRs don’t have strings attached like other IMF funding, he says, but they are allocated according to IMF voting shares, which are dominated by industrialized northern nations. Consequently, the primary benefit will be to these industrialized northern countries and not the poor developing ones.
Griffiths says the current financial and economic crisis creates a clear and strong link between people from developed countries in the North, who traditionally have access to power and decisionmakers, with those from poorer developing countries in the South, who have little access to either but are most affected by the decisions made.
“Hopefully, that North/South linkage will be one of the things changed as a result of this economic crisis,” Griffiths said. He added that there are two other necessary elements of change: building more transparency and inserting more public accountability into the system.
Although the global media were welcomed to cover the G-20 talks in London, he says, the leaders of dozens of other countries were excluded from the meeting. Also, there was no provision made for civil society representatives to be at the talks, and some of the few who were allowed to be there as media were excluded by the British government at the last minute.
Additionally, Griffiths says, there is an enormous transparency gap, with most G-20 information kept from the public. For example, there are four G-20 working groups, but the names of group members were not given to the public, even after NGOs requested them.
“It was difficult to get specific information about these groups, even for the Bretton Woods Project, and we’ve got good contacts within the U.K. government,” Griffiths said.
“We want to know who is negotiating on our behalf, but there’s no transparency with citizens.”
Institutional reform was not a topic at the recent G-20 meeting, which caused concern for Griffiths and also Fraser Reilly-King, coordinator of the Halifax Initiative, which is an Ottawa, Canada-based IFI reform project of the Tides Canada Initiatives, a Mott grantee.
“The G-20 meeting and the accompanying leaders’ communiqué delivered something big and flashy [the $1.1 trillion announcement], but it completely failed on substance,” Reilly-King said.
He and Griffiths agreed that several issues were not addressed. They included:
- The lack of tools to help developing countries address corporate tax abuses.
- No commitment to end controversial pre-lending conditions, such as requiring borrowing countries to either freeze or reduce public sector wages and increase interest rates before receiving IMF bailouts.
- No international plan for addressing “toxic assets” in banks around the world. (A term that describes financial assets whose value has fallen so significantly that there is not a market available where they can be sold reasonably).
- The absence of details about the promised availability of $250 billion of trade finance raises concerns that this financing will go through export credit agencies (ECAs), which have poor track records, according to Griffiths. (ECAs are institutions that act as finance companies, providing government-backed loans, guarantees, and insurance for private domestic entities conducting business abroad.)
- Not a single reference to the March 2009 preliminary report released by the United Nations’ commission of experts about the need for IFI reform, which was chaired by Nobel Prize-winning economist Joseph Stiglitz and focused on the impact of the global economic crisis on developing countries.
“The reforms announced at the G-20 meeting are superficial. It is akin to a group hug on the deck of the Titanic,” Reilly-King said.
New rules for global finance -– similar to those developed by the United Nations’ Commission of Experts on Reforms to the International Monetary and Financial System –- should ensure the development of a long-term sustainable and productive economy, “not a better regulated casino,” he said.
“Without fundamental economic reform, the current crisis will simply be the next in a long and continuing line of financial booms and busts.”
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International financial institutions, such as the World Bank and the International Monetary Fund (IMF) have failed in many ways, including by strictly adhering to the belief that all developing countries will benefit from the same solutions, no matter how different their internal challenges are, said Jesse Griffiths, coordinator of the London-based Bretton Woods Project.
“It has proven pretty disastrous to use the same solutions for every country,” he said.
IFIs also got it wrong about the financial markets.
“They said, ‘Let the market run on its own.’ But we’ve learned that the global economy and national economies need to be managed,” Griffiths said.
“If we are going to eradicate poverty, address global climate change, and protect human rights, we can’t cling to ideologically based assertions.
“We need to accept that governments and citizens need to manage economies so that they deliver the outcomes we want.”
While there have been some positive changes at IFIs in the past 20 years -– largely due to NGOs and social movements playing a watchdog role -– there are still more changes needed, Griffiths said.
“People only get serious about change when it is categorically obvious to everyone that the system has failed, and the global economic system has definitely failed,” he said.
Simply put, the current structure of governance of the world economy doesn’t work because it isn’t democratically accountable, Griffiths says. Additionally, to make more positive changes, world leaders need to set objectives for IFIs that are concrete, equitable and measureable.
According to Griffiths, the key to reforms can be summed up in two words: citizen participation. He says things would begin to change if people around the world stopped accepting “pat answers” from their government leaders and started asking critical questions such as, “What kinds of global financial institutions are needed in the 21st century? Why didn’t the IMF warn the world that there were trade imbalances and lack of regulation in financial markets that could cause global economic problems? Are World Bank policies really helping eradicate poverty or are they making it worse?”
Questions like these are necessary on a global scale, Griffith says, because “we’re all in this together.”