Democratizing the Bretton Woods Institutions

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Democratizing The Bretton Woods Institutions. A book of Susanna Cafaro

Democratizing The Bretton Woods Institutions. A book of Susanna Cafaro

[Documenti]

This is the Preface by Jo Marie Griesgraber to an e-book written by Susanna Cafaro, “DEMOCRATIZING THE BRETTON WOODS INSTITUTIONS. Problems and tentative solutions”

You are about to read a clear and thorough description of how the World Bank and the International Monetary Fund are organized and make decisions. The two Bretton Woods Institutions (BWI) were set up at a Conference by the same name in New Hampshire, US, in 1944 during the closing days of World War II. Professor Susanna Cafaro, of the University of Salento in Lecce, Italy, provides a consistent comparison of the governance structures of the two institutions, revealing the seldom recognized way that the IMF’s decisions on allocating voice and vote among its members have a parallel impact on its sister institution, the World Bank.

 

This “little e-book” analyzes the governance and notes the weaknesses this same structure presents for their effective and legitimate operations. To correct these significant weaknesses, Cafaro proposes eight ways to improve the BWIs’ democracy and efficiency, the majority of which could be implemented within the parameters of their founding documents or Articles of Agreement.

 

Her most innovative suggestion is to allow regional intergovernmental organizations to become members in their own right. In support of this proposal, she points to the current participation of the European Commission at the IMF Executive Board, sometimes as an observer, and other times as anspokes person when EU-wide issues are being discussed. Such a proposal warrants support if it strengthens the voice and coherence especially of weaker member-states through an alternative to the current loosely unified constituencies. However, if the quality of the regional body is no better than what is currently available through existing Board constituencies, then such membership could result in yet another layer between the BWI and national governments, parliaments, and affected people.

 

Remaining on the theme of EU participation, Cafaro develops an interesting argument for reducing European chairs, in this case, at the IMF. Analyzing European law, she describes the tension between membership in the IMF and membership in the Euro-currency zone (and European Central Bank). IMF member states have obligations to adjust their inflation rates, exchange rates and other macro-economic policies to support IMF goals. As members of the EZ [euro zone] they have conferred most of this authority on the ECB. The obvious question then is: how can they be full members of the IMF as individual nation-states? Should the EU not be their representative since it is the receptacle for such powers?

 

This line of argumentation provides additional arrows to the quiver of those who would change the current allocation of voice and vote which provides the European member states with approximately one-third of the total votes and 8 or 9 of the 24 chairs. The changes approved (but not yet implemented) by the G20 in Korea in 2010 will modify this allocation only slightly. The foundation for the current distribution is based on the 2010 quota formula, with the understanding that serious flaws remained. The Executive Board was instructed to report to the Governors (and the G20) by early 2013: the Board’s report was that no consensus existed on how to reform the Quota Formula further(!!). The G24, a caucus of developing countries in the IMF and World Bank, has argued for dropping elements of the formula that double count the same reality (Openness and Variability), which favor small open economies within the Euro-zone, whereby all cross-border trade is treated as international trade, even though within the same currency zone. This acrimonious debate within the Fund continues unresolved.

 

Several issues that Professor Cafaro raises are associated with making the IMF (and World Bank) Executive Boards more effective and accountable. For example: having the Boards of Governors appoint and remove EDs, establishing Ministerial Committees within the Board of Governors to provide political guidance for the Executive Boards, comparable to the G20, that could evolve into occasional Summits for heads of state. Effort to make the Board of Governors more effective are clearly in order. Their annual meeting is a ritual of set speeches with no audience and no consequence. At present, the Governors have only a single committee that relates to the IMF, the International Monetary and Finance Committee (IMFC). While formally an advisory committee, serves as the de facto as the Governors’ executive committee providing instructions to the Executive Board. The Development Committee, though formally over both the IMF and World Bank, serves a comparable function for the World Bank.

 

A weakness of both the Board of Governors and the IMF Executive Board is they always act in plenary—even the IMF Board Committees are open to all EDs, and all attend, replicating the same positions and lack of vision and compromise as the Board as a whole.

 

What is sorely lacking is an effective Board of Governors that is able to set strategic direction for the institution(s), and to evaluate the performance of the Executive Board(s) as a whole, assessing their competencies in anticipating and dealing with contemporary challenges and opportunities.

 

Other “lesser” suggestions might also be considered beyond Cafaro’s suggestions, such as: encouraging a higher caliber of all Executive Directors (without denigrating the quality of many EDs) and longer tenures for EDs so they can master the intricacies of the institution and truly contribute to strategic planning and positioning;

 

Even as the Governors fail to hold the Executive Board(s) accountable for their collective behavior, they also fail to hold accountable individual Executive Directors, as well as for the IMF Managing Director and for the World Bank President. The Fund has begun to provide criteria for MD candidate selection, though the actual selection is wholly political; and to articulate responsibilities, and ethical standards to be followed. There is no similar job description or criteria for selection for Executive Directors. Only the 5 largest countries that appoint their EDs can remove them—at will; other EDs cannot be removed, even for cause, at any time during their 2-year term.

 

Without accountability at the top, it is scarcely conceivable that the institution as a whole can be accountable for its policy prescriptions, or its actions or inactions. Only after disasters does the IMF say it made mistakes, but no one loses their jobs, no is money returned, no affected people are compensated for loss or suffering.

 

Some proposals to have the Executive Boards less submerged in minutiae would get rid of the full time body resident in Washington, the headquarter city. While this could save money and ease the burden of staff to respond to the many Board demands, it is opposed by developing member states, who insist that a non-resident board would further erode their ability to speak for themselves and to represent their interests against those of the major economies.

 

This “little e-book” is one of several products of the broader Group of Lecce, formed by Italian academics in 2009. All are well researched, and thoughtful contributions to the debate on how to improve global governance of the financial system. Professor Susanna Cafaro and the entire Lecce Group are to be congratulated for their initiatives and the quality of their contributions to this global dialogue.

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