What Do We Need in our International Financial Institutions? Nicholas C. Hope Director Stanford Center for International Development Aug, 3, 2012.

What Do We Need in our International Financial

Institutions?

Nicholas C. HopeDirector

Stanford Center for International DevelopmentAug, 3, 2012

What Do We Need in ourInternational Financial Institutions (IFIs)?

Outline: 1. Why are they there? 2. The Big Three:

The International Monetary Fund (IMF) The World Bank Group (WBG) The World Trade Organization (WTO)

3. Issues in International Governance4. What should IFIs do in the 21st Century?

What are your perceptions, if any, of the IFIs? Essential contributors to international financial stability, economic growth and development Irrelevant relics of a past era Undemocratic preservers of the (inequitable?) international status quo Inefficient bureaucracies unaccountable for their, largely ineffective, actions Are they needed in their current forms? If they should be replaced, with what ?

Some Statements to Motivate Discussion

1. Why are they there?

The Bretton Woods Institutions (IMF, World Bank, GATT/WTO) designed in the mid-1940s to avoid a repetition of the 1930s: Rules of the game – ensure acceptable policies to deal with balance-of-payments problems Facilitate trade and capital movements Assist in post-war recovery (unlike 1920s) Promote growth in lagging economiesMy view: they have served us well

1. Why are they there? Worldwide Growth in Real GDP/Capita, 1000–Present (%)

-5

15

35

55

75

95

Ce

ntu

ry's

Gro

wth

in

Re

al

Wo

rld

G

DP

pe

r C

ap

ita

11th 12th 13th 14th 15th 16th 17th 18th 19th 20th

Century

Source: Reproduced from Economic Growth in the 1990s: Learning from a Decade of Reform, Page 1; Original source: DeLong 2000.

1. Why are they there?

The BWIs (and the others – are there too many?) have contributed to an era of unprecedented global prosperity.Continuing in the new century, despite recent, severe economic problems (esp. for OECD)

A major contribution of BWIs and UN system: compilation of vast quantities of standardized date on countries’ economic and social performance; leadership in analysis of the dataDespite which, many perceive them largely as failures

2. The Big Three: The International Monetary Fund (IMF)

Enjoys almost universal membership: 188 countries, with 98% of the World’s population (notably excludes: Cuba, Myanmar – could change soon [?], North Korea)Still has the original mandate, somewhat expanded: surveillance of the international monetary system and the global economy

Aims to foster global monetary cooperation, facilitate international trade, maintain financial stability, promote high employment and sustainable economic growth, and reduce poverty (a more recent and possibly controversial addition) – inclusive growth

Has played a crucial role in virtually all international financial disturbances since its inception; important examples: post-OPEC- shock financing (including Trust Fund) in the 1970s; the wide-spread debt crisis of the 1980s; the East Asian problems of 1997-98 (note the criticism); the current problems, in which EU member countries are more prominent beneficiaries than poor countries

Source: IMF, UNdata (http:// data.un.org), as of July 1, 2012

0

5

10

15

20

25

1974 1982 1991 1997 2002 2010

Per

centa

ge o

f Tot

al

United States Japan Germany FranceUnited Kingdom China India Russian Federation

2. The Big Three: IMF Quotas (major shareholders; percent of total) 1974-2012

Source: IMF Members’ Quotas and Voting Power, and IMF Board of Governors, IMF, July 10, 2012

http://www.imf.org/external/np/sec/memdir/members.htm

QUOTA VOTES

Member Millions – Special

Drawing Rights

% of Total Number % of Total

U.S. 42,122.4 17.69 421,964 16.75

Japan 15,628.5 6.56 157,022 6.23

Germany 14,565.5 6.12 146,392 5.81

France 10,738.5 4.51 108,122 4.29

U.K. 10,738.5 4.51 108,122 4.29

China 9,525.9 4.00 (up from 3.72)

95,996 3.81 (up from 3.65)

Italy 7,882.3 3.31 79,560 3.16

Saudi Arabia 6,985.5 2.93 70,592 2.80

Canada 6,369.2 2.67 64,429 2.56

Russian Federation

5,945.4 2.50 60,191 2.39

India 5,821.5 2.44 (up from 1.91)

58,952 2.34 (up from 1.88)

Netherlands 5,162.4 2.17 52,361 2.08

2. The Big Three: IMF Members’ Quotas and Voting Power, 2012

Before the financial turmoil that erupted in 2008, the Fund’s budget was in such poor shape that staff cuts were imposed. Not the first time that good times had sidelined the IMF to the point that it was handicapped in responding to crises. Issues: In practice, how effective is the Fund in dealing with global imbalances? Does the fund have leverage over the G-7; G-20? How effectively is the Fund mitigating the effects of the recent global financial turmoil? How should responsibility be shared between surplus and deficit countries to moderate global imbalances? To what extent does the Fund’s advice (e.g. to embrace greater flexibility of exchange rates and freer capital movements) align with members’ own interests?

2. The Big Three: Some Current Issues/Concerns for the IMF

The Asian continent, generally, and China in particular now have a larger voice in the governance of the IMF? What further changes are desirable in IMF quotas? How are changes in voting rights likely to affect IMF policies and programs?

How well-adapted to the circumstances of individual countries are the Fund’s programs? Are they well-designed to assist countries to restore the confidence of domestic and foreign investors and creditors? For example, were the Fund’s responses to the East Asian crisis/the recent financial turmoil appropriate? If not, what should have been done differently?

Should Asia (and other regions) have an independent capacity to respond to regional disturbances (Chiang Mai)? Would regional organizations that could assist distressed countries remove the pressure on some to accumulate massive “war chests’ of international reserves, with the associated global imbalances?

2. The Big Three: Some Current Issues/Concerns for the IMF

2. The Big Three: The IMF’s Commitments to Europe

Member Date of Arrangemen

t

Expiration Total Amount Agreed

Undrawn Balance

IMF CreditOutstandingUnder GRA

Extended Arrangements (EFF) (In Thousands of SDRs)

Greece March 15, 2012

March 14, 2016

23,785,300

22,386,200

18,940,900

Ireland Dec 16, 2010 Dec 15, 2013 19,465,800

4,438,375 15,027,425

Portugal May 20, 2011 May 19, 2014 23,742,000

7,796,000 15,946,000

Source: IMF Lending Arrangements, as of July 10, 2012

Note: GRA is General Resources Accounts

As of 5/21/12:Loans committed: US$247 billion, of which US$189 billion have not been drawnBiggest borrowers: Greece, Portugal, IrelandBiggest precautionary loans: Mexico, Poland, Colombia

2. The Big Three: The World Bank Group (WBG)

What is today’s “World Bank Group?” International Bank for Reconstruction and Development

(IBRD -- 1944), International Development Association (IDA --1960) the “World Bank”

International Finance Corporation (IFC -- 1956), International Center for the Settlement of Investment Disputes (ICSID -- 1966), and Multilateral Investment Guarantee Agency (MIGA -- 1988)

How is it funded? What does it do? Shareholders; creditors; donors – their functions Its services -- economic analysis; policy advice; loans,

credits and grants; technical assistance; guarantees; insurance; equity (IFC); donor coordination; arbitration

How big is the “World Bank”?In FY2011, the WBG committed $52.6 billion in loans, grants, equity investments, and guarantees to its members and to private businesses in member countries. (FY2010: $72.9 billion and FY 2009: $58.8 billion ).

188 members/owners -- IBRD; link to IMF. (172 members of IDA).

Joint commitments of IBRD and IDA amounted to $43 billion in FY2011. ( $26.7 billion in 132 operations from IBRD; $16.2 billion in 228 operations from IDA). For comparison: $58.7 billion in FY 2010, $46.9 billion in FY2009 , $24.7 billion in FY2008; $23.6 billion in FY2006; $20.1 billion in FY2004)

Note: $29 billion in FY1999 (EA crisis); $15 billion in FY2000! World Bank lending responds to crises; complements IMF, others. In good times, countries much less interested in WBG support.

Cumulative Lending (FY2011): IBRD (US$ 550 bill.), IDA (US$ 237 bill.)

2. The Big Three: The World Bank Group (WBG)

2. The Big Three: The World Bank Group (WBG)

Source: The World Bank Group, 2011 Annual Report

FY08US$ 24.7 billion

6%8%

17%

6%

7%6%

20%

20%

10%

FY10US$ 58.75 billion

4%8%

17%

16%

12%2%

19%

15%

7%

Agriculture, fishing and forestryEducationEnergy and miningFinanceHealth and other social servicesIndustry and trade Information and communications Public administration, law, and justice Transportation Water, sanitation, and flood protection

FY11US$ 43 billion

5% 4%

14%

2%

16%

5%1%22%

20%

11%

2. The Big Three: The World Bank Group (WBG)

WB Lending By Sector

Source: The World Bank Group, 2011 Annual Report

05

101520253035404550556065

FY05 FY06 FY07 FY08 FY09 FY10 FY11

US$

billion

Agriculture, fishing and forestry EducationEnergy and mining FinanceHealth and other social services Industry and trade Information and communications Public administration, law, and justice Transportation Water, sanitation, and flood protection Sector Total

IFC 184 member countries Has committed more than $38 billion of its funds, plus $7.5 billion in syndications for 1,490 companies in 122 countries In FY2008, IFC committed $11.4 billion and mobilized an additional $4.8 billion, to finance 372 investment projects in 85 countries. In FY2009, IFC’s new commitments totaled $10.5 billion; the portfolio became less concentrated on a country basis, with the top ten countries representing 48% (down from 51%). In FY2011, IFC committed $12.18 billion, slightly lower than $12.66 billion in FY2010.

ICSID 243 concluded cases (as of July 10, 2012) 149 pending cases (as of July 10, 2012)

MIGA Since its inception in 1988, MIGA has issued guarantees worth more than $21 billion for more than 600 projects in 100 developing countries. In FY2011, MIGA issued $2.1 billion in guarantees, up from $1.5 billion in FY2010 and $1.4 billion in FY2009.

2. The Big Three: The World Bank Group (WBG)

The World Bank Project Cycle (note that the other multilateral development agencies – and many bilateral ones have adopted [some] similar procedures) A lengthy process: from conception to evaluation could take a decade or more. Key steps: Country Assistance Strategy (and/or poverty reduction strategy) Identification Preparation Appraisal Negotiation and Approval Implementation/Supervision Completion—ICR Evaluation—OEDIssue: Are WBG procedures too intrusive, costly, and time consuming? Do countries exclude the Bank from projects as a result?

2. The Big Three: The World Bank Group (WBG)

In recent years the World Bank has cooperated with many partner agencies in striving to attain the Millennium Development Goals (MDGs), which set specific targets for:

1. Reducing poverty2. Advancing educational attainment3. Raising the status of women4. Reducing child mortality5. Improving maternal health6. Combating HIV/ AIDS, malaria and other diseases7. Ensuring environmental sustainability8. Enhancing development cooperation

2. The Big Three: The World Bank Group (WBG)

Increasingly, since the mid-1990s the WBG has emphasized its commitment to and role in transferring knowledge to its developing country members. For some middle-income countries, which have been able to access the international capital markets with less “bureaucracy” than involved in borrowing from the WB, the availability of Bank expertise has been the main attraction of membership. The WBG offers: Analysis and advice on economic management Technical expertise Information technology skills; the “digital divide” Assistance in establishing global distance learning Advice on how to improve governance

2. The Big Three: The World Bank Group (WBG)

2. The Big Three: Some Current Issues/Concerns for the WBG

The World Bank’s critics emphasize: failures rather than successes (more countries remain poor after decades of development assistance than have ascended to developed country ranks); the priorities are always wrong! Though development takes time, there’s not a lot of patience with strategies that don’t work wonders.Some issues: Should the Bank do some things well rather than attempting to solve all problems? Would countries borrow from the Bank if they could access more trouble-free capital? Do countries value the WBG’s economic and other advice? Are the Bank’s approaches influenced too much by its major shareholders?

2. The Big Three: The World Trade Organization (WTO)

The GATT proved an effective, if administratively cumbersome, organization that succeeded in its primary tasks – liberalization of the global trading regime, and arbitration of international trade disputes. The successor organization, the WTO (1995), has similar objectives, but to date has been unsuccessful in achieving a major, multilateral reduction in trade barriers. Its lack of success in the Doha round has contributed to a proliferation of regional trade agreements (RTAs). They have the disadvantage of creating potential for inefficient diversion of trade and investment; but a potential advantage is that their exclusionary nature might eventually force countries to agree on multilateral measures. “Some movement might be better in the long run than no movement.”

Despite difficulties in reducing trade barriers further, the WTO is playing a constructive role; bringing in important new members; effectively mediating some disputes; codifying behaviors. Issues:

To what extent can major developing economies contribute positively in concluding multilateral trade agreements? How important for developing/developed countries was the agricultural safeguards issue that sank Doha? Should the focus of multilateral trade agreements be restricted mainly to issues affecting merchandise trade? Is it premature to seek freer trade in services and in conditions for international investment? Is the international interest well-served by the current and prospective proliferation of regional and bilateral free trade agreements? How effectively can the WTO mediate trade disputes involving, for example, China and the U.S.? How does it cooperate with the IMF?

2. The Big Three: The World Trade Organization (WTO)

3. Issues in International Governance

Given that international institutions play an indispensable role in the management of the complex interactions that arise in international trade, payments, investment and aid, how should they be governed in future to enable them to discharge their functions more effectively?

One country, one vote – the UN, but note the Security Council Consensus of members – WTO, others Votes weighted by population – China, India, US Votes weighted by income/economic standing – US, Japan, China More complex weighting systems – quotas in the IMF, MDBs (income, trade, contributions)

Important decisions are taken as well in regional organizations (APEC, ASEAN, ASEAN+3) and more or less comprehensive economic arrangements (EU, NAFTA). These decisions have international implications; how is the international perspective represented?

For economic and financial issues, the G-7 (now the G-7+1+1 and onlookers) has been the key forum for important decisions to harmonize economic policies internationally that eliminate global imbalances and deal with pressing problems. These decisions materially affect the prospects of other countries: how should their voices be heard?

3. Issues in International Governance

Since 1950, the position of the US on international economic issues has been very influential, and in many areas (trade reform, capital mobility and investment conditions, the role of the IMF) the US position effectively has determined (dictated?) the outcome. In the 21st Century, with a presumed decline in the economic dominance of the US, how will important decisions be made? Will the G-20 replace the G-7 as the major international forum promoting economic policy change? Is it sufficiently representative (G-24)? Is it too unwieldy for effective decision making? If so, what alternatives might serve instead?

3. Issues in International Governance

WTOFrom Michael Moore (who served as Prime Minister of New Zealand) to Pascal Lamy, a French political advisor, a businessman, and a former European Commissioner for Trade. How has he done? 

IMFFrom Dominique Strauss-Kahn to compatriot Christine Lagarde on July 5, 2011. She was Minister of Finance, and before that Minister of Agriculture and Fishing and Minister of Trade in the government of Dominique de Villepin. How is she doing?

World BankFrom Robert Bruce Zoellick (how did he do?) to Korean-American Jim Yong Kim. Kim promised to immediately focus on helping poor countries navigate a fragile global economy. Jim Yong Kim was President of Dartmouth College from 2009 to 2012,; former Chair of the Department of Global Health and Social Medicine at Harvard Medical School; co-founder and executive director of Partners in Health and director of WHO’s HIV/AIDS department in 2004. How will he do?

Implications? Time for change?

3. Issues in International Governance: leadership

4. What should IFIs do in the 21st Century?

Have raised issues – let’s discuss. Do we need IFIs?What should they do? Advise, lend, coordinate, arbitrate?Have they changed since 2000?

John Lipsky – Fund lending (much more) with “appropriate conditions” Bob Zoellick – recently at Hoover, Bank now “views countries as clients” [!!!!] Is the WTO’s main role destined to be dispute resolutionAre they expected to do too much? Who sets the agenda?