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Thursday, August 28, 2014
- The annual meetings of the World Bank and the International Monetary Fund (IMF) ended Wednesday in Istanbul in a climate of cautious hope for the economy and with a mixed bag of opportunities and challenges for the two institutions.
Throughout the event, which lasted one week, including plenary sessions, committee meetings and side conferences, the mantra, first pronounced by World Bank president Robert Zoellick, that “it is too early to declare success”, resounded in the halls of the Istanbul Congress Centre.
The IMF revised before the meeting its forecast on the future of the worldwide economy to 1.1 percent shrinkage this year and 3.1 percent growth next year. Its July forecast had been 0.3 and 0.6 percentage points lower respectively.
But growth will not be equally shared by all countries. China and emerging Asian economies are likely to expand by 9.2 and 7.8 percent respectively by the fourth quarter of 2010, while high-income nations are forecast to achieve 1.7 percent expansion only.
Although 1.6 billion people, living quasi exclusively in poorer countries, are directly exposed, emerging economies seem to be less vulnerable to the crisis than developed ones, in relative terms.
In spite of positive outlooks, the number of people reaching levels of poverty is bound to increase by 90 million next year, while at least 59 million workers are estimated to join the ranks of the unemployed, according to Zoellick, in his speech opening the World Bank’s annual meeting.
The Central Asian region looks particularly weak in this respect. The impoverished population – those earning less than 2.50 dollars a day, will rise to 35 million, and the vulnerable population, earning less than five dollars a day, will jump to 150 million by the end of this year.
Job losses seem to affect more the middle-income households than the poorer ones. Unemployment in Turkey has doubled in 2009 in comparison with 2008, according to the Bank’s data.
The Turkish government’s statistics are less pessimistic on the subject, putting current unemployment at 14.8 percent, as compared with 11 percent nine months ago. Opposition parties, however, estimate that actual jobless rates in the country are closer to 18 or even 20 percent.
This uncertainty about the future of the economy and the nature of the true dangers has raised questions about the role of the Brentwood institutions – the World Bank and the IMF. But the tide is changing. From initial criticism, at the outbreak of the crisis in September 2008, for the institutions’ failure to foresee and prevent the downturn, both the World Bank and the IMF have emerged as the potential saviours of humanity from future economic disasters.
Dominique Straus-Kahn, IMF managing director, better known in the financial and political circles as DSK, has been quick to seize the opportunity for the Fund to play a broader role in coordinating and influencing the international economy.
In preparation this week for the annual meeting of the Fund’s 186 members, the International Monetary and Financial Committee (IMFC), which acts as the IMF’s policy steering committee, asked for the delegates to address four key reform areas for the institution: the IMF’s mandate, its financing role, multilateral surveillance, and governance.
“These ‘Istanbul decisions’ will be a focal point of our activities for the coming year”, Straus-Kahn said at the conclusion of the annual meeting.
The decisions include a plan to review IMF’s mandate to allow the body to be more active in formulating and monitoring macro-economic and financial sector policies that affect global stability. They are also aimed at boosting the success of the Flexible Credit Line programme. IMF’s ambition is to become the leading provider of insurance to countries and the “lender of last resort”.
One of the main challenges for Straus-Kahn in his drive to give the IMF new clout and aura will be convincing countries, which self-insure themselves by building up large reserves, to rely on the Fund for their protection, recovery and growth needs. Reserves accumulation creates imbalances among economies.
But the Fund will have to work hard to secure acceptance by members of its legitimacy in the role it contemplates. The Group of the 20 largest economies (G20) at its recent meeting at Pittsburgh expressed its intention to exert stricter control over IMF’s expanded role. It also requested a wide range of reforms in respect to the governance of the Fund, in order to create a more equitable influence between the developed and developing economies on decision-making.
Straus-Kahn applauded on several occasions in Istanbul the expansion of the G7 into G20, and took the opportunity to say that the Fund’s membership was composed of 186 countries, representing all levels of the world’s economy. This is actually where the contention between the central management of the IMF and its constituency lies. The smaller and poorer states among the latter are unhappy with the extent of power of the former.
With an aim by the G20 of one trillion dollars to be granted to the IMF in 2010 in order for it to create a central fund in view of balancing the economy, the least developed countries are eager to have access to decision-making and overseeing of the distribution of the money.
This has led to a movement among emerging economies to demand greater voting power on the Washington-based institution’s board, which is at present dominated by well developed, mostly western, economies. As an example, Germany has 5.9 percent of the votes at the IMF, while China has 3.7 percent, although its GDP is approximately 20 percent higher than Germany’s.
This has prompted the G20 and the IMFC to recommend that the Fund revise its governance rules and convince its more developed members to transfer 5 percent of their quotas, in terms of voting rights, to emerging economies.
Both the issues of reserves reduction and power-transfer are likely to be met with resistance from members.
Opposition to reserves reduction comes from developing, rather than developed economies. Brazilian central bank governor Henrique Meilelles said this week that “self insurance works better.”
China and India are also likely to have concerns over relinquishing their rights to currency reserves. Nearly 60 percent of the growth of global GDP was attributed to these countries alone, even before the crisis. This year almost the entire growth will come from developing markets.
Such sustained relative growth in the emerging economies has raised the expectations for a better balance of controls among south and north. U.S. President Barack Obama is favourable to empowering developing nations in the Fund’s governance, but many of his G20 partners have so far displayed skepticism. Mexican central bank governor Guillermo Ortiz said Monday in Istanbul he was concerned that “(IMF) legitimacy is not likely to happen anytime soon.”
“The IMF is accountable to its shareholders and that is going to be an issue (for Strauss-Kahn),” Nobel Prize winning economist Joseph Stiglitz told the media Monday in Istanbul. “Some countries will want to return to business as usual as the crisis passes.” While Strauss-Khan is doing a very good job, he said, “it will be hard for him to take charge of such a complex institution and navigate it through change.”