CHAPTER THREE - REFORMING THE BRETTON WOODS INSTITUTIONAL FRAMEWORK:
FROM ADAPTATION TO ACCOUNTABLE "REINVENTION"

3. CLARITY OF MANDATES

In the Committee's view, this must be a priority, since so much else flows from it. In the case of the IMF, its distinctive surveillance and currency stabilization roles have been greatly constrained in the first case and effectively abandoned in the second. In the words of Gerald Helleiner, it is "actually relatively weak" from the standpoint of global macro-economic management and is "barely tolerated" in the meetings of the G-7. [16:18] As well, the Fund is seen as lacking in being able to cope adequately with Mexico-type shocks, much less the potentially larger "financial earthquakes" that University of Montreal professor of Economics Rodrigue Tremblay warned of [23:13]. We will be returning to these issues in a later section on international monetary system reforms. At this point, we wish simply to flag the need to revitalize such functions if the IMF is to retain a credible separate role as a central guardian of that system.

The Fund's macro-economic adjustment role was never intended to go beyond short-term balance of payments stabilization. Essentially, the idea is that of a revolving fund. Members are assigned "quotas" related to the size of their economies and pay in a "subscription" to the Fund (Canada's is in the range of 3%). Members experiencing temporary liquidity problems can then draw on these resources in credit "tranches" under "standby arrangements" that are subject to a rising scale of conditionality. One of the original weaknesses (foreseen by Keynes who had earlier proposed an International Clearing Union) is that the burden of balance of payments adjustments falls unevenly on deficit countries. In other words, it is only when countries get into severe trouble financing these deficits, to the point of being forced to turn to the Fund, that it is able through its lending conditions to have much real influence in regard to corrective action. Where that is not the case, the IMF is effectively a spectator, - as, for example in regard to the imbalances vexing the Japanese-U.S. trade relationship given the former's huge and persistent surpluses.

Moreover, as several witnesses pointed out, the IMF is in danger of being left behind by a burgeoning global private financial system. In 1970 the IMF introduced "Special Drawing Rights" (SDRs) with the aim of eventually replacing a less reliable U.S. dollar as the principal world reserve asset. In fact, however, SDRs currently account for under 2% of global foreign exchange reserves (versus a still 60% share for the U.S. dollar). In order to increase its financing capabilities, the Fund can supplement its paid-in resources through quota increases; other options include using proceeds from sales of its gold reserves, accessing other international reserves through its General Arrangements to Borrow (GAB), and (most controversially) undertaking new allocations of SDRs.12 However, the IMF's role as "lender of last resort" has essentially become one that is restricted to developing countries. Moreover, in this regard it has established several concessional compensatory and structural adjustment facilities,13 moving into terrain occupied by the World Bank. A number of highly-indebted poor countries, notably in Africa, have accumulated large obligations and arrears to the Fund. As Professor John Loxley of the University of Manitoba observed, IMF debt, and the type of conditionality which accompanies it, have become part of the problem, casting doubt on its de facto, if unintended and undesired, longer-term role in development finance.

Therefore, the Committee recommends that the Task Force's review of the IMF's mandate concentrate on reforms to strengthen the Fund's specialized surveillance, stabilization, and technical assistance functions, and to extricate it from confused de facto long-term development finance roles which overlap those of the World Bank.

Turning to the multilateral development banks (MDBs), the Committee is struck by the size of this growing "family" of institutions, compared to the shrinking role, as earlier noted, that official development finance now plays in global investment. The "World Bank" is actually shorthand for the two principal institutions of the World Bank Group - the IBRD established in 1945, and its "soft-loan" affiliate, the International Development Association (IDA), established in 1970. Two other IBRD affiliates are the International Finance Association (IFC, established 1956) and the Multilateral Investment Guarantee Agency (MIGA, established 1988). The Bank also runs several smaller institutions, and is involved on a joint basis with UN agencies in other bodies (notably as administrator of the Global Environmental Facility). In addition, there are now five regional development banks (RDBs).14

Canada is unique in having a seat on the boards of all of the MDBs, and in terms of relative ability to pay among G-7 countries, is easily the most generous contributor to them (an "over-contributor", in Professor Kirton's view, though that was contested by other witnesses).15 In cumulative terms, by 1993 Canada had contributed over $19 billion to the MDBs.16 The Main Estimates documents for 1995-96 indicate that Canada (through the Department of Finance for the World Bank and CIDA for the RDBs) will be negotiating intently in upcoming replenishments of MDB concessional facilities, both as to the need to reduce Canada's contribution levels and to monitor performance on poverty-reduction goals. Furthermore, following the Auditor General's warnings about potential risks associated with callable capital subscriptions, CIDA has conducted financially viability studies of all the RDBs and is pursuing strong corrective action in regard to the troubled African Development Bank.

Various arguments have been put forward for the competitive advantages of this plethora of multilateral banks. For example, senior officials of the Inter-American Development Bank who met with us defended their lending profile as specially geared to Latin American needs and more oriented to micro-level projects. They made the additional point that in the regional banks, ownership is more shared between donor and borrowing country members (50% in the case of the IDB). Chief economist Robert Hausmann compared the constructive merits for borrowers of having several potential sources of finance to the role played by competition in the private sector. Roy Culpeper, while acknowledging the particular problems with the African Bank that require special attention, supported a strong role for the regional banks. John Loxley went further to suggest focusing energies there, and gradually withdrawing the World Bank and IDA from much of their current lending. "We can probably preserve the World Bank as a central raiser of funds on the international capital market for these [regional] banks and for its own use. It could confine its activities to very large projects or large countries." [21:9] Culpeper took issue with that, maintaining that "there is some virtue in having in the system a degree of . . . `competitive pluralism' ". [21:25]

In a recent paper, John Williamson raises another cautionary flag:

Were anyone inventing the system from scratch, I cannot imagine that they would choose to create a large central organization and a series of parallel regional banks with a large area of overlapping responsibilities (although some still seem intent on creating yet more sub-regional banks!). However, the inefficiencies involved in the excessive overlap between the World Bank and its regional counterparts are not so great as to justify the certainty of upheaval and the risk of falling afoul of Parkinson's nth law, according to which most administrative reorganizations end up by increasing the size of what is supposedly being rationalized.17

As the Committee was informed by Roy Culpeper, the joint Development Committee of the World Bank and the IMF is conducting a review of the MDBs that is scheduled to report sometime in 1996. We would hope that this inquiry and its findings would be useful to the work of the G-7 initiative that we propose. However, and notwithstanding the cautions duly noted above, the Committee emphasizes its concerns that the mandates of all these institutions are not clearly distinguished in the public mind, and that without better lines of separation, conflicting and competing tensions are as likely to arise as synergistic "pluralism".

Confusion of roles does not help to make the case for more support at a time when IDA, the major concessional fund for poor African countries, is entering crucial and difficult negotiations on its eleventh replenishment. (The U.S. is already insisting that its current 21% share must shrink substantially. Some Congressional proposals would eliminate it.) Moreover, within the World Bank Group there are also unresolved issues involving the adoption of new private-sector orientations, and notably the relationship of the IFC, which has been rapidly increasing its lending (to US$2.5 billion in 1994), to the parent IBRD, which still lends almost six times as much. The focus should be on defining the essential needs that continue to call for direct public or publicly-guaranteed finance from the Bank. Assisting the growing private-sector role in development should take place in ways that truly require a public presence, thereby avoiding any needless competition with private sources of investment using the advantages of infusions of public money. At present, the newest member of the IFI family, the EBRD, which unabashedly lends to the private sector and was set up explicitly as a temporary assistance for post-Communist economies in transition, seems to be the only one of these institutions with any actual prospect of phasing itself out.18

Therefore, the Committee recommends that the G-7 Task Force review the mandates of the multilateral development banks with the aim of reducing the confusion of overlapping roles and responsibilities; and in that process, determining in each case which functions remain essential, which benefit by being carried out separately, and which might be amalgamated or phased out. This review should also pay particular attention to redefining the World Bank Group's future relationship to the private sector, such that its role as a public lending agency is clearly related in this regard to high-priority development needs, and does not lead it into competition with private financial markets.