Mar 5, 1998

 

FINANCE: FUND/BANK SHOULD PRACTICE GOOD GOVERNANCE!

 

Geneva, 4 March (Chakravarthi Raghavan) -- The International Monetary Fund and the World Bank which have set standards of good governance for their borrowing members need to apply it to themselves through reform of constitution rules, and decision-making procedures and practices.  

In reaching this conclusion, a research paper ('Governance in International Organizations: The case for reform in the Bretton Woods institutions) for the Group of 24 (the developing country group in the BWIs), argues that, more specifically, in order to enhance their own accountability, transparency and members' participation, the IFIs should consider redrawing quotas, revitalize basic votes, and ensure operational decisions are made in an open and recorded way - "and not by the practice of consensus on the Board".  

"Even though consensus is seen by some as a way to 'open up' discussions, this is not its only effect," says Ms. Ngaire Woods, author of the paper, due to be published soon by UNCTAD in its series on International Monetary and Financial Issues. 

"We found in the experiences of other organizations, such as the UN Security Council and the GATT/WTO that consensus decision-making can reduce transparency and accountability within an organization. This is equally true in both the Fund and the Bank, where some argue consensus simply masks US dominance. To counter such criticism, the Fund and the Bank have an interest in making their procedures transparent and accountable, and in examining where and how consensus adds to or detracts from these standards."  

Ms. Woods is a Fellow in the department of politics of University College, Oxford, UK. A summary of the views have been circulated via internet by non-governmental groups in their briefing papers on the Bretton Woods institutions. 

While the Woods paper, written in December 1997, does not specifically address the Fund/Bank policies and conditionalities in relation to their making available to Asian countries in the current crisis, a number of mainstream economists and other critics have brought out that these policies have been formulated by the Fund to suit the interests of the US, and in fact have been shaped and changed by the US Treasury. 

The two Bretton Woods institutions, Ms Woods says, should also ensure that clear and impartial rules govern the use of special majorities and introduce double-majorities where particular stakes or stake-holders need safeguarding.

Also, the staff within each organization "need to represent better the range of views of the membership, since participation requires not just 'better explanation' but the full involvement of the membership in the definition of problems and solutions that the institutions need to address."  

An analysis of the staffing of the two institutions, she notes, shows "an enormous homogeneity" in the intellectual background of the staff. Some 90% of the IMF professionals with a Ph.D. have received the degrees from universities in the United States or Canada.  

Similarly, a study of the high-lvel staff in the World Bank in the Policy, Research and External Affairs Departments showed that some 80% had been trained in economics and finance at institutions in the USA and the UK.

At present, Ms. Woods adds, the institutions are vulnerable to the critique that, rather than offering a genuinely 'universal' approach to problems and solutions of economic policy, "they reflect a narrow, predominantly, Anglo-Saxon view". 

At the same time, increased participation places a heavier burden on groups such as developing countries 'to come up with the goods' -- by "concentrating and deploying research and lobbying resources more efficiently in order to make a case for policies within the institutions."  

The Fund and the Bank, Ms. Woods notes, have recognized for good governance in their borrowers core values such as

And while the institutions are pressing for these standards to be applied within member governments, members of the IMF and World Bank are pushing for the same standards to be applied within the nstitutions themselves.

While good governance within international organizations are often described as balancing between requirements of effectiveness and legitimacy, the two are seldom separable.  

Overall, the effectiveness of an institution depends to a large degree on its members' perceptions as to how representative, inclusive and procedurally fair the institution is.  

Analysing the voting structures and decision-making in regional development banks (the Inter-American Development Bank, the African Development Bank and the Asian Development Bank), often presented as more decentralised and democratic, the Woods paper notes that despite the Latin-American ownership of the IDB and their voting power, the US enjoys enormous dominance due to the formal and informal decision-making processes.

The US has a veto on constitutional decisions requiring either a three-fourths or two-thirds majority of regional members and until recently even the Board's quorum required the presence of the US Executive Director at the meeting. And though its contribution to the funding of the concessional window has dropped to 8.22 percent, the US retains a veto. And even in the ordinary capital account of the IDB, where the US does not have a blocking minority vote, it has negotiated a procedure to retain a power to delay loans that it disapproves. The US also enjoys a more diffuse influence from the IDB being based in Washington, with one quarter of its top management coming from the US.  

And despite its determination to preserve its "African character", the AfDB has not translated into an African ownership, but rather very distant from its African membership. Despite a majority representation on the Board, it is not the African members that define the overall direction of the Bank. To add to these are poor relations between management and the Board. 

While the US also plays an important role in the AsDB, its influence there is greatly diluted by Japan's. And while developing countries do not have a controlling share of votes in the bank, the governance of the AsDB has evolved in a way which does balance out concerns over regional representation and effectiveness.  

The experience of the regional development banks shows that a majority share of capital and votes does not translate directly into greater participation in defining an organization's purpose and character, and in shaping its policies and directions. 

Examining the experience of the UN Security Council and the GATT/WTO in terms of voting vs consensus decision-making, and the arguments advanced for an Economic Security Council at the UN (by the Global Governance Commission, UNDP's 1994 report etc), the Woods paper says that the arguments in these underplay some of the negative aspects of governance raised by the working practices of consensus decision-making within the UN. 

Consensus decision-making within the UN Security council has bred a much higher level of informal consultations, with decisions taken outside of the meeting. Even on procedural matters, when votes are taken, the decisions are pre-cooked. The informal processes are also unrecorded which means that the reasoning for a decision is not open to scrutiny by other States.  

Even the reforms and decisions taken to improve access to information and consultations are "rather frail".  

Again, the UN Charter provisions of accountability of the UN Security council to the UN Assembly, through the budget processes requiring a two-thirds majority of the Assembly, have been altered not by an amendment of the Charter, but by resolutions of the Assembly. 

Referring to the GATT/WTO processes, Ms. Woods notes that in the GATT the consensus decision-making played down the equality of States to vote, and enhanced the informal powers of States to offer concessions or use retaliatory threats. Powerful countries could push negotiations behind the scenes, apply bilateral pressures and simply not hold meetings until a consensus is reached. The effect was to concentrate negotiations among a small group of powerful members, usually the Quad (US, EU, Japan and Canada), which tended to present decisions virtually as a fait accompli to others and particularly developing countries. 

Ms. Woods suggests that there has been an important change in the WTO, which in the dispute settlement process provides for a 'reverse consensus'.  

However, she notes, that residual problems remain with consensus decision-making within the GATT/WTO (with the WTO calling for the GATT practices, including consensus decision-making to be followed).  

Firstly, there is ambiguity about precise scope and parameters of consensus. And while some would argue that in subordinate bodies with their own rules of procedure, voting should apply, in practice decisions are 'bumped up' so that consensus may be reached at the next level, and further bumped up until the decision reaches the General Council, and consensus becomes an all pervasive practice. 

[Other trade observers say that under the WTO and its informal decision-making, the focus has shifted even more than before to meetings of small groups outside the WTO. This has been shown in several rule-making negotiations and accords since the WTO came into being, as also in the functioning of WTO bodies.]  

"The experience of both the UN Security Council and the GATT/WTO highlight the several adverse consequences of consensus decision-making practices: members are excluded from informal fora within which core bargains are made; accountability is reduced by unrecorded meetings; formal decision-making rules are superseded; only those present are represented, and these members can even obviate a vote which could give votes to parties not in attendance at a particular meeting. In summary, consensus, while often applauded as a step towards good governance, can have the opposite effect, reducing transparency and accountability and thereby increasing the challenge of improving governance." 

Focusing on the IMF voting, the Woods paper points to the dramatic diminution in the original proportion of "basic vote" (intended to give all members equal rights) to total votes - from the original 11.6% in 1946 to around three percent in 1996. 

The periodic adjustment of quotas have also been as political, resulting in "unfair" representation at the IMF and the Bank, with large and populous economies are left under-represented. Thus Brazil has a quota of only 1.47%, Spain 1.32%, and Mexico 1.19%, while small economies such as Belgium has 2.1%, the Netherlands 2.33% and Switzerland 1.68%. 

And while the Fund and the Bank in their analysis have been using the purchase power parity, this has not been adopted for quotas, since it would double developing countries' share in quotas.  

The institutional arrangements for change within the Fund and the Bank are "highly politicised". While the IMF and World Bank articles were originally fashioned to safeguard the sovereignty of members, they now exercise policy leverage through use of financial resources and transactions.  

And while developing countries have become stake-holders of a new kind, not just interest-paying borrowers, their voice has slipped together with their basic votes.  

Ms Woods makes a strong case for ending the consensus decision-making, and says that while this may be appropriate to formulating general policies, it should not be applied to specific operational decisions, where the new wisdom about good governance, participation and accountability should apply. There is a good case for voting on operational decisions, with a voting structure to ensure participation.  

The roles of the Fund and Bank also arise from their capacity to make influential declaratory statements. The status of such statements reflects the reputation of both institutions as research centres of excellence, but the staffing of these organizations is not representative of different approaches and traditions of its members. Rather than offering a genuinely 'universal' approach to problems, due to their staffing, their solutions to economic policy problems reflect a narrow, predominantly Anglo-Saxon view.