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Common ground and differences of view between the Bretton Woods Institutions (IMF and World Bank) and the WCC

22 October 2004

(Document issued at a high-level encounter between the three organizations at the Ecumenical Centre in Geneva
22 October 2004)

The following summarizes the current status of discussions between staff of the BWIs and the WCC by stating what we have identified as common ground and (inside brackets) differences of view. The document reflects "work in progress" in the continuing dialogue among the three organizations.

Central to the common ground that we have identified is our common concern with fighting poverty. The three organizations share the objective of reducing poverty, and are working to achieve this objective in the respective areas of our mandates and responsibilities. Important among the aims of our dialogue are that it should help to increase the effectiveness of our work to reduce poverty, including by improving the communication and cooperation between the BWIs and the WCC.

I. BWIs—Institutional and Governance Issues

1. The BWIs' Roles, Human Rights, and the UN

The BWIs are needed to organize, facilitate, and promote international economic cooperation among governments, in accordance with the Articles of Agreement by which they were established.

The Universal Declaration of Human Rights was adopted in 1948 by the General Assembly of the United Nations, representing member states from around the world that are also member countries of the BWIs and from whose people the WCC's membership is drawn. The BWIs and WCC agree, in particular, that poverty and underdevelopment can foster violations of human rights and that such violations make fighting poverty more difficult and less durable.

[The WCC believes that the BWIs should play a more active role in promoting human rights, including through policy conditionality. The BWIs view their work as contributing to human rights in the sphere of economic, development, and related social policies, through their promotion of economic development, rising living standards and poverty reduction, high employment, macroeconomic and financial stability, etc.. But the BWIs consider that they have neither the mandate nor the expertise to promote human rights more broadly defined, which they view as belonging to the UN, among international organizations, and to individual governments, which have the primary responsibility for maintaining human rights within their borders.]

[The WCC would argue that the BWIs should be primarily accountable to the UN. The BWIs, however, point to their direct accountability to their member countries, established by their Articles of Agreement, which make them legally and operationally independent of the UN. At the same time, the BWIs point to their close collaboration with the UN on many issues and in many activities. (See also section I (4) on accountability of the BWIs, below.)]

2. Representation and Voice of Member Countries of the BWIs

Improvements are needed in the distribution of votes, representation, and voice among the member countries of the Fund and the Bank, particularly to strengthen the representation of developing and emerging market countries—both those that have grown in economic importance since the last revision of representation and those whose relative positions are weak and have weakened. Recent steps to strengthen the voice of African countries by expanding the offices of African Executive Directors at the BWIs are welcome but insufficient. There are strong arguments both for a revision of IMF quotas and World Bank capital subscriptions to reflect up-to-date economic data on the relative economic size of countries, and for an increase in "basic votes" (the equal number of votes allocated to each member country in the Articles of Agreement) to their original level in proportion to total quotas, in order to increase the representation of low-income countries. However, to achieve these steps a consensus among the members countries of the BWIs would be needed that does not currently exist.

[The WCC would say that country representation in the BWIs should not be based wholly, or at all, on their relative economic size, and that there should be a democratic sharing of power between developing countries and rich countries. The WCC is particularly concerned that the veto power of the richest countries on some decisions should end. Equal country representation, as in the UN General Assembly, or representation based on country populations, would be fairer in their view. The BWI staffs view it as likely that votes and representation will continue to be determined largely by measures of relative economic size, not only because of the established legal basis of the institutions but also because of the expectations of the countries that provide the largest financial support to them. On this view, if representation were determined by a system based on one-vote-per-country or one-vote-per-head-of-population, the institutions would become unable to perform their functions because of lack of support from the largest and richest countries. The BWI staff also point out that a one-vote-per-country system is far from democratic, given the widely differing populations of different countries.]

3. Accountability of the BWIs

The BWIs are accountable to the authorities of their member countries. The increase in the openness and transparency of the BWIs over the past decade is welcome, partly because it has increased their broader accountability to citizens of their member countries, including through interaction with parliaments, civil society organizations, and the media.

[The WCC would say that the accountability of the BWIs is still inadequate, that they should take clearer responsibility when mistakes are made, and that further steps should be taken to increase the institutions' openness and transparency, including through more open access to Board proceedings, to make it clear that they are "accountable to the general public".]

II. Objectives of Economic and Social Policy and the Work of the BWIs

1. The primary objective of economic and social policy is to improve human welfare, notably through the promotion of sustainable growth in real incomes; high employment; poverty reduction; efficient use of resources; reasonable equity of income distribution, across generations as well as at any point in time; and macroeconomic and financial stability.

2. The roles, missions, and activities of the BWIs have evolved over time, owing to internal and external pressures that have, in turn, reflected such developments as the expansion of their membership, the evolution of the world economy and financial system, and the lessons of experience. The World Bank's mandate, in particular, has evolved to encompass a broader definition of economic development that recognizes that economic growth is not sufficient: a more holistic view of development is now widely accepted, one that includes access to health, education, and housing, and aims for the empowerment of individuals and communities. The IMF's activities have evolved in recent years toward a sharper focus on its core responsibilities in the macroeconomic and financial sphere; the prevention of financial crises; and the promotion of sustainable economic growth, including in low-income countries, where the IMF collaborates with the World Bank in promoting poverty reduction.

3. The BWIs and WCC are working to contribute in their areas of responsibility and expertise to achieve poverty reduction and the UN's Millennium Development Goals (MDGs), which are a welcome statement of objectives agreed by the global community. The BWIs and the WCC agree that poverty reduction at the pace that is needed requires not only economic growth but more equitable distribution of income and wealth.

[The World Bank would underline the importance they attach to the issue of equity, as evidenced in the dedication of the 2005 World Development Report to this topic. The IMF would concur, pointing, for example, to the emphasis it places on protecting and strengthening social safety nets, and health and education spending, when there is pressure to contain or reduce government expenditures. The WCC, nevertheless, would say that they place more emphasis on the objective of equity than do the BWIs. They would also emphasize that "man shall not live by bread alone" and that there are non-economic objectives on which economic policy should place higher priority, including the advancement of social and cultural rights, and social justice.]

III. Economic and Social Policy Strategies

1. For any country, successful economic and social development calls not only for good economic and social policies domestically, but also for international commerce, international financial transactions (lending and borrowing), and international cooperation. In normal circumstances, the main responsibility for achieving economic and social objectives in a country lies with the government of the country itself. For developing countries, international assistance from richer countries and the appropriate international organizations is essential, including aid, other forms of financial assistance, technical assistance, and policy advice.

2 Successful economic and social development, characterized by the achievement of the above objectives, cannot be obtained through unfettered free markets. Indeed, the BWIs exist because of the recognition of the existence of market failures and work in many arenas to ensure that markets work more transparently, fairly, and equitably [The BWIs, consider that, as shown by history, a market-based economy provides the only economic system that makes it possible to achieve successful economic and social development and to promote individual freedom. The WCC does not ascribe to this view—see next paragraph.] A successful economy (successful in terms of sustainable and equitable growth in living standards) [--which, in the view of the BWIs, must be market-based--] requires the government to play a number of roles: the provision of good governance (including transparency and accountability); a sound legal framework; appropriate regulation of markets and of private sector activities; disciplined and stabilizing macroeconomic (fiscal and monetary) policies, to promote macroeconomic and financial stability and thus sustainable economic growth; the provision of other public goods (including, essentially but not exclusively, basic health care and education); and social safety nets to support the weak and those who suffer from the structural changes and dislocations involved in the development of a dynamic market economy. Unproductive or wasteful public spending, including military spending, should be avoided or minimized.

[The WCC does not believe that market-based economies are necessary to improve human welfare. The WCC considers it particularly important that local economies built on freely accepted communitarian principles need to be respected and protected, including by legislation and property rights. The WCC would thus say that they emphasize more than the BWIs the need to prevent economic development from disrupting local economies and societies, and bringing unwelcome changes to values and the established "way of life." The WCC also believes that a market-based economy, unless there is much more government intervention than envisaged by the BWIs, leads to the exclusion and marginalization of many poor communities. The WCC would therefore see a broader role for governments, including in the provision of goods and services, especially essentials like water. The WCC is generally skeptical of, or opposed to, the privatization of the provision of public services, which they view as violating the rights of the poor to have direct access to public goods. The BWIs, however, take a pragmatic approach on privatization, pointing to the problems that have often arisen with state-provided services and the benefits of using market mechanisms.]

[They would also argue, more often and strongly than the BWIs, that the goal of macroeconomic stability should be subordinate to social goals.]

[The WCC would also see a need for taxation to play a larger role in promoting a more equitable distribution of income and wealth.]

3. Openness to international trade, though not a panacea, benefits a country's growth and poverty reduction, and the BWIs have consistently been strong advocates of open trade and fair trade rules. When a country liberalizes its imports, the main beneficiary is the country itself. But although the country as a whole benefits, especially in the longer run, and although consumers and most producers benefit (from cheaper imports and the stimulus of foreign competition), trade liberalization can also cause economic damage to the sectors of the economy that compete with the liberalized imports, and to the workers in those sectors. Such damage needs to be assessed ex ante, and should be addressed by policies, including social safety nets and retraining arrangements to help those who suffer. Such policies are inadequate in many countries.

[The WCC would emphasize more than the BWIs the distortions and imbalances of economic power associated with the role in trade of multinational corporations, and would call for stronger regulation of these. The BWIs would emphasize more than the WCC the benefits that multinational corporations have brought to developing countries, through investment, new technologies, employment opportunities, and relatively favorable pay.]

[The WCC would also argue that the BWIs often press poor countries to liberalize too far and too fast, without allowing enough time for safety nets to work. They also argue that the BWIs are able to press small, low-income countries to liberalize whereas they are powerless to remove the major barriers to market access and agricultural subsidies in the advanced countries, even though these are harmful to the interests of the poor as well as the advanced countries themselves.]

4. Capital flows

a. Foreign direct investment is broadly beneficial to the countries to which it flows. It boosts growth and development by promoting fixed investment and the transfer of technology, and it is relatively stable—usually not a source of instability. But FDI inflows to developing countries are not evenly distributed among them: they are concentrated in the most rapidly growing successful countries, and most low-income countries face the challenge of attracting larger FDI inflows.

b. Short-term capital flows are more problematic, because they are more easily reversed and thus more likely to be a source of instability, including for the domestic financial system. These problems were demonstrated in the Asian financial crisis of 1997-98. They show that an economy should not be fully opened up to all capital flows until macroeconomic policies and the financial system are sufficiently strong.

[The WCC considers that short-term capital flows should be brought under restrictive controls and be subject to international taxation. The BWIs consider that short-term capital flows, while posing dangers that call for appropriate macroeconomic and financial sector policies, play vital roles, including in helping to stabilize foreign exchange markets and finance economic activity and investment. They also question the feasibility, as well as the desirability, of international taxes on capital flows.]

5. Balance of payments problems

Most countries that borrow from the BWIs have balance of payments problems. A particular purpose of the IMF is to provide temporary financial assistance, under adequate safeguards, to help countries correct balance of payments problems "without resorting to measures destructive of national or international prosperity".

[The BWIs consider that improving export performance will usually be an important aim of policies to correct a balance of payments problem, and restore external viability and sustainable growth. The WCC disputes this, instead focusing on the aim of increasing domestic production for the domestic market, in order to reduce imports.]

6. Resource transfers

a. Data for official development finance, export credits, and private capital flows show a positive net resource flow to developing countries from advanced economies. After deducting interest payments and profit remittances, net transfers to developing countries are much smaller, but still positive. However, private flows, including direct investment, are concentrated in relatively successful developing economies, and they have declined markedly since the Asian crisis. Thus for some, mainly middle-income, developing countries, there is an outward net resource flow and a negative net transfer of financial resources. Most low-income countries continue to receive net inward transfers of resources, but they are too small to meet the extensive human needs in these countries. Given also the relative shortage of capital throughout the developing world, this situation is far from optimal.

b. Part of the answer lies in increasing aid. Aid to the developing countries from the richer countries is too small. All donor countries should increase aid to the UN target of 0.7 percent of their GNP. The BWIs and WCC support the full implementation of the Monterrey Consensus, and call for the advanced economies to meet their commitments to increased ODA and improved market access. Donors and recipients should work together to ensure that aid is used effectively and "aid fatigue" is eliminated. Specifically the WCC and the BWIs share a concern that the issue of corruption be effectively addressed, both as a technical issue (waste of resources and undermining rule of law) and as a moral problem.

c. The WCC and BWIs also agree that some advanced economies need to reduce their own net foreign borrowing (i.e. their external current account deficits).

[The WCC views debt reduction (including cancellation) and the regulation of capital flows as the key to achieving the desired reversal of net transfers. The BWIs support debt reduction (see (7) below), but put more emphasis on the need for developing countries to implement more effectively policies that would encourage more long-term capital inflows.]

7. Policies need to be "owned," not only by the authorities of the country concerned, but also by its people. At the same time, it makes sense for the provision of financial assistance (except for humanitarian/emergency assistance) to be based on policy conditionality, so that the assistance provided achieves agreed objectives and is not wasted. Hence, the need for dialogue and negotiation between donors and creditors, on the one hand, and recipients, on the other, and also the need for participation by civil society in the policy-making process, as in the Poverty Reduction Strategy Paper (PRSP) process. The PRSP process provides an appropriate framework for the formulation and implementation of nationally-owned policy programs in, and international support for, the low-income countries.

[The WCC is skeptical about much of the policy conditionality required by the BWIs. It would emphasize the shortcomings of the PRSP process, including what they consider to be the excessive conditionality, and the lack of adequate public participation and scrutiny. They argue, in particular, that there is often little or no participation in the formulation of the macroeconomic policies associated with PRSPs or the Poverty Reduction and Growth Facility (PRGF).]

8. Debt relief, including debt reduction, is an essential element in the international community's strategy to reduce poverty in low-income countries.

[The WCC would call for the unconditional cancellation of the foreign debts of low-income countries, including debt to the BWIs, and especially the debts accumulated by despotic regimes.]

[The BWIs view debt cancellation as (1) resource-constrained (it may compete with aid; debt cancellation by the BWIs would seriously reduce their ability to help other countries); (2) not necessarily directly helpful to poverty reduction, since the resources provided to reduce debt can be wasted; (3) not fair to countries that do not qualify for debt cancellation (because they do not meet the definition of "low-income" or "HIPC-eligible"), or to the poor within them; (4) potentially harmful to the country's creditworthiness and economic prospects (creditworthiness being important because successful development requires borrowing from abroad). They would therefore emphasize the need to link debt reduction to policies, as in the HIPC initiative, and they have been working actively to promote and achieve debt reduction in that context. Following the recent decision of the BWIs to extend the HIPC Initiative for two more years, the BWIs are working on (1) establishing a single framework to help low-income countries achieve and maintain robust debt sustainability while pursuing their development objectives, and (2) how further debt relief might be financed.]

9. Globalization—international trade and capital flows, discussed above—has helped to raise real incomes and reduce poverty in many countries. It does, however, bring risks (see, for example, above section on capital flows); it also imposes costs on some, at least in the short run; and some countries—especially in Africa—have been sidelined, and have benefited little, or not at all. The risks and costs have to be addressed by government policies and by international cooperation, including through the BWIs. The potential marginalization of low-income countries, particularly in Africa, from the globalization process demands special attention from the global community, including the WCC and the BWIs.

IV. Economic and Social Progress Report

1. The post-Second World War period has been characterized by unprecedented growth in real incomes and reductions in poverty, but also a widening of income disparities among countries, with most countries becoming richer but several countries in recent decades stagnating or declining. Poverty reduction appears to have accelerated since about 1980, thanks partly to globalization, and it appears to have been accompanied by a decline in income inequality globally. China, South-East Asia, and India have been particular success stories. Indeed, the decline in global income inequality is accounted for largely by the rapid improvement of real incomes in China and India, two low-income countries with very large populations. There has been much less progress in many other countries, especially in Africa, the Middle East, and Latin America. In most of Africa, in particular, there has been little economic progress in recent decades, and in some countries there has been regress and decline of living standards. Africa's difficulties have been exacerbated, especially in the past decade, by the dreadful toll of the HIV/AIDS epidemic.

2. Progress in low-income countries, and particularly in Africa, requires improved governance; better economic policies, including increased openness to trade; increased openness to African exports in the advanced economies; and increased aid from the rich countries. This progress thus requires action by both the low-income countries and their international partners, including the richer countries and the BWIs. The Monterrey Consensus, the MDGs, the Doha Development Agenda, and the PRSP process provide a sound framework for progress.