IMF and World Bank Face Declining Authority as Venezuela Announces Withdrawal

Venezuela's decision this week to pull out of the IMF and the World Bank will be seen in the United States as just another example of the ongoing feud between Venezuelan President Hugo Chavez and the Bush Administration. But it is likely to be viewed differently in the rest of the world, and could have an impact on both institutions, whose power and legitimacy in developing countries has been waning steadily in recent years.

Other countries may follow. President Rafael Correa of Ecuador announced last week that it was kicking the World Bank's representative out of the country. It was an unprecedented action, which President Correa punctuated by stating that "we will not stand for extortion by this international bureaucracy." In 2005, the World Bank withheld a previously approved $100 million loan to Ecuador to try to force the government to use windfall oil revenues for debt repayment, rather than the government's choice of social spending.

This is the way these two institutions have operated for decades. With the IMF as leader, and the U.S. Treasury department holding veto power, they have run a "creditors' cartel" that has been able to exert enormous pressure on governments over a wide variety of economic issues. This pressure has not only generated widespread resentment, but has also often led to economic failure in the countries and regions where the IMF and World Bank have had the most influence. Over the last 25 years Latin America has had its worst long-term economic growth performance in more than a century.

Venezuela also has specific grievances against the IMF, which are likely to generate sympathy in other developing countries with democratic, left-of-center governments. On April 12, 2002, just hours after Venezuela's democratically elected government was overthrown in a military coup, the IMF stated publicly that it was "ready to assist the new administration [of Pedro Carmona] in whatever manner they find suitable."

This instantaneous show of financial support for a newly installed dictatorship - one which immediately dissolved the country's constitution, general assembly, and Supreme Court - was unprecedented in the IMF's history. Typically the IMF does not react so quickly, even to an elected government. It is no wonder that this move was seen in Venezuela and elsewhere as an attempt by the IMF to support the coup itself. Washington, which dominates the Fund, had advance knowledge of the coup, supported it, and funded some of its leaders - according to U.S. government documents.

In additions, Venezuela has not been happy with the IMF's consistently under-projecting its economic growth in recent years, as the Fund has also done with Argentina. The IMF's forecasts are widely used and can therefore influence investors.

But the resentment against the IMF and World Bank, and demands for change, are worldwide. The scandal over Paul Wolfowitz's leadership at the World Bank, which is about to topple the Bank's most unwanted president ever, is just the tip of the iceberg. Last month the IMF's Independent Evaluation Office stated that since 1999, nearly three-quarters of aid to the poor countries of Sub-Saharan Africa are not being spent. Rather, at the IMF's request, it is being used to pay off debt and accumulate reserves. This is a terrible thing to do to some of the poorest countries in the world, who desperately need to spend this money on such pressing needs as the HIV/AIDS pandemic.

Venezuela's decision is likely to strengthen the hand of developing nations within the IMF and World Bank who are demanding serious reforms. Right now the United States, with less than 5 percent of the world's population, has more votes in the IMF than countries representing the majority of the planet. The world's developing countries, which bear the brunt of these institutions' mistakes, have little or no voice in their decision-making. Venezuela's move - and any other countries that follow - will show the IMF and World Bank that the option of quitting these institutions altogether is a real one.

Whether this will spur reform that can actually change the colonial relationship that these institutions maintain with their borrowers remains to be seen. More likely, they will simply continue to become less relevant to the developing world, as has happened drastically over the last decade.

Confronting the Contradictions

The case against the IMF on education
In the world’s poorest countries many children have gone without quality education for far too long, and as a result, the human capital that these countries need to grow and develop sustainably is still in desperately short supply.
One reason is that the key ingredient to learning is missing: there are not enough trained teachers. Our research in Malawi, Mozambique and Sierra Leone shows that a major factor behind the chronic and severe shortage of teachers is that International Monetary Fund (IMF) policies have required many poor countries to freeze or curtail teacher recruitment.
The report recognises that wage bill ceilings are closely linked to wider economic policies imposed by the IMF - and suggests that it is time for us all to challenge an approach "which encourages nations to believe that there is just one truth, one concept of macroeconomic stability and that this is an on-off position, stable or unstable, on-track or off-track."
The report makes the following core recommendations:
The IMF should stop attaching specific policy conditions to their lending and surveillance programmes;

Any advice they give must provide a range of policy options to enable governments and other stakeholders – including parliaments and civil society – to make informed choices about macroeconomic policies, wage bills and the level of social spending;

Governments should place education and development goals at the centre of their macro-economic planning. They should develop long-term and costed education plans detailing the actual need for teachers and resources for training in order to provide quality learning for all;

Donors need to keep their promises by committing to close the annual US$15bn financing gap needed to achieve education for all with increased and predictable aid over the long term. There is an urgent need to front-load increases in aid to education and

Civil society organisations need to develop their own economic literacy so they can better scrutinise government budgets, increase the sensitivity of budgets to the needs of girls, poor people and other excluded groups, and engage in discussions about alternative macroeconomic policies.

Confronting the Contradictions

The IMF, wage bill caps and the case for teachers
A new report by ActionAid’s multi-country International Education Team and based on in-depth country case studies from Malawi, Mozambique and Sierra Leone, shows that a major factor behind the chronic and severe shortage of teachers is that International Monetary Fund (IMF) policies have required many poor countries to freeze or curtail teacher recruitment. The IMF may have varying degrees of influence in directly setting the wage bill ceilings. However, by insisting on overly restrictive macroeconomic policies that constrain government spending on wages, it is in part responsible for the persisting teacher shortage. In all three countries examined, the wage bill ceiling is too low to allow the government to hire the teachers they need to achieve the pupil-teacher ratio (PTR) of 40:1 recommended by the Education for All – Fast-track Initiative (EFA-FTI). There is considerable evidence that the current ceilings compromise the quality of education in each of these countries. There is a growing contradiction between donors who are trying to “scale-up” aid and spending to train and hire enough teachers meet the Millennium Development Goals (MDGs) and the IMF macroeconomic policies that are discouraging recipients from spending the new aid. This contradiction must by confronted by education advocates.

IMF plutocracy condemns developing world to misery

LONDON: The disease that afflicts all British governments is an inability to let go. Unable to accept the end of empire, they cling to past glories. However much they speak of modernity and democracy, they cannot help managing other people’s lives, preserving foreigners — often at gunpoint — from the mistakes they would make if they were allowed to govern themselves.
I was going to call this an imperial delusion, but Britain has been remarkably successful at defending its powers. The UK government has retained a permanent seat on the UN Security Council.
Its membership of the G8 is unchallenged. Most important, it has preserved its unwarranted share of the vote on the boards of the International Monetary Fund (IMF) and the World Bank. And it has no intention of giving this up.
In advance of the IMF’s spring meeting (just concluded in Washington), France and Britain rejected any political reform to the organisation, which is charged with maintaining global financial stability.
It is true that the fund’s proposals are feeble. It is true that even after far more ambitious reforms the IMF would remain the wrong body, constitutionally destined to fail. But this is not why the British government is holding out. It is resisting change because it wants to preserve its imperial rank.
Britain, with 1% of the world’s population, has 5% of the IMF’s votes. Sub-Saharan Africa, with 12% of the population, has 4.6%. Britain’s share equals that of China and India put together. It is five times as big as Argentina’s, 19 times Bangladesh’s, 35 times Kenya’s, 124 times bigger than Malawi’s.
The G7 nations — Britain, the US, Japan, Germany, France, Canada and Italy — together possess 45% of the vote. The other 177 members are left to squabble over the remainder.
Even these numbers tell only half the story. The five countries with the biggest quotas — the US, Britain, Japan, Germany and France — are each allowed to appoint their own executive director to the IMF’s board. The rest must submit their candidates for election. Because poor nations don’t know what’s good for them, they are assigned to the tutelage of richer ones.
The votes of the English- speaking Caribbean countries are given to Canada. Mongolia is represented by Australia, Kazakhstan by Belgium. The reason that Britain and France are resisting even the most timid reforms is that these would tip them below the threshold for automatic election: like the other countries, they would be represented on the board as part of a bloc.
Power is distributed like this because the IMF is a plutocracy. A country’s vote represents its ‘quota’, which is allocated according to its gross domestic product. In theory, the quota reflects countries’ financial contributions to the fund. But this is no longer the case, as the IMF receives much of its income from loan repayments from poorer nations.
But the old formula has resisted 60 years of complaints. The result is that governments that are never made subject to the IMF’s strictures control it, while those whose countries have been reduced to an IMF franchise have no say in the way it is run. The allocation of votes is a perfect inversion of democracy.
A new report by ActionAid gives us a glimpse of how this unfair distribution of power affects the poor. After years of protest by poor countries and their supporters in the rich world, the IMF and the World Bank at last permitted the provision of healthcare and education without charge.
The rich nations also promised, in 2000, to ensure that by 2015 every child in the world would have primary education. It looked like a great victory for the global justice movement. But the IMF is ensuring that the promise won’t be met. It has, in effect, forbidden the poorest nations to hire sufficient teachers.
No one disputes that public-sector wage rises can contribute to inflation. No one denies that governments have to exercise some degree of restraint. But the paternalists who run the IMF — who are fixated on creating safe havens for foreign capital — cannot help micro-managing the economies of the poor nations, without reference to the needs of the people who live there. The limits they have imposed on the bill for public-sector pay ensure that schooling can’t be improved.
ActionAid studied three very poor countries with major education problems: Malawi, Mozambique and Sierra Leone. After fees were abolished (and when the civil war ended in Sierra Leone), vast numbers of pupils enrolled. But a combination of the rich nations’ failure to provide the foreign aid they had promised and the restrictions imposed by the IMF has prevented these countries meeting the new demand.
As a result, the pupil to teacher ratio in Sierra Leone is 57:1; in Malawi 72:1 and in Mozambique 74:1. That’s the average; in rural areas it can be much higher. Many of the teachers are untrained, and many give up because they cannot survive on their wages. In Malawi, the goods required for the most basic level of subsistence cost $107 a month. A trained teacher receives $55.
So crowds of pupils strain to hear a scarcely literate teacher somewhere in the middle distance seeking to instruct them without books, chalk, paper or pens. We should not be surprised to discover that 40% of children fail to complete primary school in Sierra Leone and Mozambique, and 70% in Malawi. Most of the drop-outs are girls.
As a result, these countries are stuck in a vicious circle of misery. Until education improves, GDP remains low. Until GDP rises, there is little money for education. As one of the agencies charged with rescuing countries from poverty, the IMF should be seeking to break this circle.
But the conditions it attaches to its loans keep these countries in their place. In Malawi the IMF sets the ceiling for public-sector wages directly; in Sierra Leone and Mozambique the broader macro-economic rules it imposes have the same effect.
ActionAid argues that these fiscal targets are outdated and unnecessary: all these countries have now achieved sufficient stability to start raising teachers’ pay. But in no case did the IMF consult either the public or the state’s own ministry of education before laying down the law.
The amount of money a teacher in rural Malawi is paid is decided by the men in London and Washington. Except for the district commissioners in pith helmets, little has changed since the country was called Nyasaland.
Last year Tony Blair acknowledged that the IMF “must become more representative of emerging economic powers and give greater voice to developing countries.”
But he just can’t let go. The proposed reforms do nothing to democratise the IMF: by linking the quota to purchasing power parity rather than raw GDP, they simply turn it into a more sophisticated plutocracy. But they could have the effect of very slightly empowering some middle-income countries while taking a few votes away from some of the rich ones. And even that is too much for the Emperor of Africa.
If the British government wants to help the poor, it must first give up its power to tell them how to live. Until that happens, everything the prime minister says about “partnership” and “solidarity” with the world’s oppressed is humbug. – The Guardian News & Media