The Crisis of Multilateralism

Mar 06

Already
buffeted by institutional crisis and policy conflicts, the
International Monetary Fund (IMF) and the World Bank are heading into
their fall meeting—scheduled to begin September 13 in Singapore—with
yet one more problem. Desperate to win credibility among civil society
groups, the Bank and the Fund had given official accreditation to
representatives of four civil society organizations. The Singapore
government had a different idea. It banned the groups “for security
reasons.” This commentator was among those specifically named and
banned as a “security threat.”

The two institutions have formally protested the
government's action. But they are simply reaping the consequences of
their decision to hold the fall meeting in the authoritarian
island-state in order to avoid street protests like those that have
attended WTO ministerial meetings. Angry at the banning of their
colleagues, many civil society representatives are now asking the Bank
and Fund to cancel the annual meeting, demanding that the two agencies
be consistent with their declared support for practices of “good
governance.”

Controversial Reforms

Prior to the controversy over the banning of the
NGO's, the IMF's Executive Board was trying to steer through two
reforms intended to “safeguard and enhance the Fund's credibility.” The
first involved reallocating the voting power of IMF member countries
according to the current size of their gross domestic product. This
proposal was ostensibly intended to increase the voting power of a
selected number of big developing countries—Korea, Turkey, China, and
Mexico—while laying the ground for eventually expanding the
decision-making power of other developing countries. The other
initiative the IMF leadership was trying to get off the ground would
give the Fund the new role of solving “global macroeconomic
imbalances”—a euphemism for disciplining countries with large trade
surpluses like China. Both reforms are mired in controversy.

A bloc of about 50 developing countries objects to
the proposed GDP-based formula. These countries see the move as
dividing developing countries while producing only one real winner: the
United States, which would increase its voting power under the new
system. The second initiative has generated opposition for attempting
to get the Fund to do Washington's dirty work of pressuring China to
revalue its currency to reduce the massive U.S. trade deficit with
Beijing.

These troubles are the latest in a string of crises
to plague the two agencies, also known as the “Bretton Woods
institutions” after the site of the July 1944 conference where they
were founded. The Fund, in particular, is in a state of demoralization.
“Ten years ago, the IMF was flying high, arrogant in its belief that it
knew what was the best for developing countries,” notes one civil
society policy paper. “Today, it is an institution under siege, hiding
behind its four walls in Washington, DC, unable to mount an effective
response to its growing numbers of critics.”

The IMF's Stalingrad

The IMF's equivalent of Stalingrad—where the defeat
of the German Sixth Army marked the turning point of World War II—was
the Asian financial crisis, where it “lost its legitimacy and never
recovered it,” according to Dennis de Tray, a former IMF and World Bank
official who is now vice president of the Washington-based Center for
Global Development.

The Fund was blamed for pushing policies of capital
account liberalization that made the Asian economies vulnerable to the
volatile movements of speculative capital; assembling multibillion
dollar rescue programs that rescued creditors at the expense of the
debtors; imposing expenditure-cutting programs that merely worsened the
downspin of the economy; and opposing the formation of an Asian
Monetary Fund that could have provided the crisis countries with
financial reserves to save their currencies from speculative attacks.

The Fund went from one financial disaster to
another. The Russian financial collapse in 1998 was attributed to its
policies, as was Argentina's economic unraveling in 2002.

Resistance was not long in coming. In the midst of
the Asian financial crisis, Prime Minister Mohamad Mahathir of Malaysia
broke with the IMF approach and imposed capital controls, saving the
country from the worst effects of the crisis. Mahathir's defiance of
the IMF was not lost on Thaksin Shinawatra, who ran for prime minister
of Thailand on an anti-IMF platform and won. He went on to push for
large government expenditures, which stimulated the consumer demand
that brought Thailand out of recession. Nestor Kirchner completed the
humbling of the IMF when, upon being elected president of Argentina in
2003, he declared that his government would pay its private creditors
only 25 cents for every dollar owed. Enraged creditors told the IMF to
discipline Kirchner. But with its reputation in tatters and its
leverage eroded, the Fund backed off from confronting the Argentine
president, who got away with the radical debt write-down.
By 2006, underscoring the crisis of legitimacy of the institution, the
governor of the Bank of England described the IMF as having “lost its
way.”

From Crisis of Legitimacy to Budget Crisis

The crisis of legitimacy has had financial
consequences. In 2003, the Thai government declared it had paid off
most of its debt to the IMF and would soon be financially independent
of the organization. Indonesia ended its loan agreement with the Fund
in 2003 and recently announced its intention to repay its
multibillion-dollar debt in two years. A number of other big borrowers
in Asia, mindful of the devastating consequences of IMF-imposed
policies, have refrained from new borrowings from the Fund. These
include the Philippines, India, and China. Now, this trend has been
reinforced by the move of Brazil and Argentina earlier this year to pay
off all their debts to the Fund and declare financial sovereignty.

What is, in effect, a boycott by its biggest
borrowers is translating into a budget crisis for the IMF. Over the
last two decades the IMF's operations have been increasingly funded
from the loan repayments of its developing country clients rather than
from the contributions of wealthy Northern governments. The burden of
sustaining the institution has shifted to the borrowers. The upshot of
these developments is that payments of charges and interests, according
to Fund projections, will be cut by more than half, from $3.19 billion
in 2005 to $1.39 billion in 2006 and again by half, to $635 million in
2009. These reductions have created what Ngaire Woods, an Oxford
University specialist on the Fund, describes as “a huge squeeze on the
budget of the organization.”

Role Crisis

The erosion of the Fund's role as a disciplinarian
of debt-ridden countries and an enforcer of structural adjustment has
been accompanied by a futile search to find a new role.
The Group of Seven tried to make the Fund a central piece of a new
“global financial architecture” by putting it in charge of a
“contingency credit line” to which countries about to enter a financial
crisis would have access if they fulfilled IMF-approved macroeconomic
conditions. But the prospect of a government seeking access to a credit
line that could trigger the very financial panic that it sought to
avert doomed the project.

Another proposal envisioned an IMF-managed
“Sovereign Debt Restructuring Mechanism”—an international version of a
Chapter 11 bankruptcy mechanism that would provide countries protection
from creditors while they came out with a restructuring plan. But when
South countries objected that the mechanism was too weak and the United
States opposed the proposal for fear it would curtail the freedom of
operations of U.S. banks, this new prospect also collapsed.

The role of righting “global macroeconomic
imbalances” assigned to the Fund during the spring meetings of the IMF
leadership earlier this year is part of this increasingly desperate
effort by the G 7 governments to find a task for an international
economic bureaucracy that had become obsolete and irrelevant.

Hiding the World Bank's Crisis

While it does not have the aura of controversy and
failure that surrounds the IMF, the World Bank is also in crisis, say
informed observers. A budget crisis is also overtaking the Bank,
according to Ngaire Woods. Income from borrowers' fees and charges
dropped from US$8.1 billion in 2001 to US$4.4 billion in 2004, while
income from the Bank's investments fell from US$1.5 billion in 2001 to
US$304 million in 2004. China, Indonesia, Mexico, Brazil, and many of
the more advanced developing countries are going elsewhere for their
loans.

The budgetary crisis is, however, only one aspect of
overall crisis of the institution. The policy prescriptions offered by
Bank economists are increasingly seen as irrelevant to the problems
faced by developing countries, says de Tray, who served as the IMF's
resident officer in Hanoi and the World Bank's representative in
Jakarta. The problem, he says, lies in the emphasis at the Bank's
research department on producing “cutting edge” technical economic work
geared to the western academic world rather than coming out with
knowledge to support practical policy prescriptions. The Bank is
currently staffed by some 10,000 professionals, most of them
economists, and de Tray claims that “there is nothing wrong at the
World Bank that a 40% staff reduction would not fix.”

American University Professor Robin Broad, an expert
on the Bank, claims that the Bank is, in fact, in more of a crisis than
the IMF but that this is less visible to the public. “The IMF's
response has been to withdraw behind its four walls, thus reinforcing
the public perception of its being besieged,” she notes. “The Bank's
response, however, has been to engage the world to hide its mounting
crisis.”

Broad identifies three elements in the Bank's
offensive. “First, it goes out and tells donors that it is the
institution best positioned to do lending to end poverty, for the
environment, for addressing HIV-AIDS, you name it…when in fact its
record proves that it's not. Second, it has the world's largest
‘development' research department—funded to the tune of about $50
million—whose raison d'etre is to produce research to back up
predetermined conclusions. Third, it has this huge external affairs
department, with a budget of some $30 million—a PR unit that feeds
these so-called objective research findings to the press and fosters
the image of an all-knowing Bank.” But, she concludes, “This can't
last. Inside the Bank, they know they're in crisis and are scrambling.
And sooner or later, if we do our work, the truth will come out.”

Multilateralism in Disarray

The crisis of the Bretton Woods institutions must be
seen as part of the same phenomenon that has overtaken the World Trade
Organization, whose latest round of trade liberalization negotiations
fell apart in July. Noting that “trade liberalization has stalled, aid
is less coherent than it should be, and the next financial
conflagration will be managed by an injured fireman,” the Washington
Post's Sebastian Mallaby contends that “the great powers of today are
simply not interested in creating a resilient multilateral system.”

What is troubling for people like Mallaby, however,
offers an opportunity for those who have long regarded the current
multilateral system of global economic governance as mainly concerned
with ensuring the hegemony of the developed countries, particularly the
United States. Proposals for alternative institutions for global
finance have been circulating for some time. The current crisis may be
the break in the system that will make governments, especially those in
the South, willing to seriously consider the alternatives.

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