By MAGGIE JARUZEL POTTER
Maggie Jaruzel Potter (MJP): How have international financial institutions (IFIs) responded to the world’s financial crisis since 2009?
Jessie Griffiths |
Jessie Griffiths (JG): The headline is “Not a great deal has changed.” Overall, the system has not been reformed in such a way that if there were another crisis we would be better able to address it. With the IMF (
International Monetary Fund), there was the realization that the body formed to prevent international banking and economic crises had failed; the failure of the IMF is at the heart of the problem. There was recognition that things needed to change but what has happened since then hasn’t really resulted in the scale of change that is needed if we want to say there is a credible international system that is going to prevent or mitigate such a crisis in the future.
There are a number of issues at the IMF. First, accountability and governance of the institution is important. Obviously, we need an institution that all the people in the world can have faith in and that also is accountable. There have been some improvements in the transparency of the IMF, but there is still a fairly long way to go. One of the most disappointing areas is the very small commitments on governance reforms. Part of the problem is that the IMF is heavily dominated by a few of the wealthiest countries. Therefore, most of the population of the world and most of the countries of the world have very little stake in the IMF.
There are also ongoing discussions about what the role of the IMF should be, which is critically important. Was it doing the right things? It did have some firefighting capabilities but in terms of preventing a crisis from happening, it was totally toothless.
MJP: Describe the current situation at the World Bank and any recent changes there. JG: We (Bretton Woods Project) did an independent analysis. If you take the high-income countries and put them in one box and then put the middle and low-income countries in another box, the high-income countries have 60 percent of the vote. So the reality is that the World Bank is still heavily dominated by the richest countries.
Yet, this is an organization that only works in developing countries. That’s a real problem for accountability, because the people who are affected by the World Bank’s positions have very little say in how it is run. There is a long way to go and that is only the first set of issues. It is worth saying that we did have quite a victory on World Bank transparency last year because they have greatly improved their policy. It only began to be implemented in July of this year so the next big test is whether or not it will be implemented properly.
The IMF is slightly different only because all the countries in the world at some point might use the IMF, although in practice it is almost always developing countries. The IMF is even more heavily skewed toward the wealthiest countries and they are only promising a small shift – only 5 percent. So in an institution that is controlled 70 percent by the rich countries, it is not going to change a great deal.
The IMF reform is being watered down and they are not talking about the one key issue: how can countries control international flows of capital, which is at the heart of the financial crisis and has also been at the heart of challenges for developing countries for many years. When capital flows in and out of the country very rapidly, it can destabilize the country and cause all kinds of problems but that doesn’t seem to be the focus of the IMF and the World Bank reforms at the moment. These kinds of more tricky issues, the more important issues, are gradually falling off the table, but at least they are on the table and they were not on the table before, so that’s a good thing. Another thing that happened in 2009 was a significant increase in the IMF’s capital, although it is nowhere near as big as they claimed it was.
MJP: What, if anything, are you hopeful about for the upcoming G20 Seoul Summit in November 2010?
JG: We are still focusing on a lot of the same issues. Our hopefulness is dimmed from last year because things have gone slightly backwards. IMF reform is on the agenda for Seoul, but I don’t think it is going in the right direction. Systemic reform or banking reform or financial sector reform – whatever you call it – appears to be going very slowly.
This financial crisis is still working its way through the system. We can see the problems in Europe, including sovereign debt problems, but Europe is not the only region that will face these kinds of problems. Globally, the level of uncertainty is still very high and I think we could have a double dip recession or another banking crisis around the corner. The real crisis – the crisis in people’s lives – is still there. If you wrap that all up with this being another crucial year on climate change, it feels a bit like the crises – environmental, economic, and social – are still as bad as ever, even if it feels like the immediate economic crises are a little bit behind us.
MJP: You mentioned the European debt crisis. Discuss what has been happening there. JG: The IMF promised loans to Greece several times bigger than anything they have ever promised before. The moment a country like Greece – a relatively wealthy country that is still quite small – gets into trouble, you see that the system simply is not set up to cope. There is the money but the more important side of that is to ask, “What conditions get attached to the lending?” We have already seen in Greece’s case and in all of the countries that have taken on IMF loans in the last year, that it is the same old austerity measures – cut public spending, cut services, cut wages. Economists can argue about that at different levels but one thing is for sure – it hits the poor the hardest.
It is also very politically destabilizing, which is one reason why the IMF is such an unpopular institution in every country in which it has had a major impact. It is essentially an unaccountable, unelected institution that comes in and tells your government how to run its economy. Although there were some improvements last year – reduction in the numbers of conditions and the types of conditions, making it less onerous than it was previously – we can see that the impact is still pretty much the same. Its whole economic approach is problematic.
MJP: Are you suggesting a major overhaul of these IFIs instead of adjusting some policies?
JG: Yes. These institutions need to A) change the way they think, B) get a better understanding of who will be impacted by their policies and C) become more democratic and rethink who gets to decide those policies. Why should things be decided in Washington rather than in the countries affected?
When you are facing a global crisis, it simply doesn’t make sense to have the same policies everywhere. You can exacerbate the problem if everybody cuts spending at the same time. In terms of emergency lending, there are still a lot of problems. Yet, we have seen the need for some kind of institution to lend to countries in crisis, but the way the IMF does it, is the most damaging way you could think of doing it.
Either we reform the IMF, which is what we (Bretton Woods Project and other non-governmental organizations) are pushing for, or we create alternatives, which is also what we have been pushing for. There are different ways of thinking about the solutions, but we are glad this issue is now on the agenda in a way it was not before.