Key Points

  • The international financial institutions face a crisis of legitimacy, not only in the countries where they operate but also in the countries that provide their resources.
  • A key aspect of the perceived lack of legitimacy of these institutions is the widespread belief that their secretive nature undermines democratic decisionmaking.
  • Civil society organizations around the world have called for opening the decisionmaking of these institutions to public scrutiny.

The international financial institutions (IFIs), particularly the International Monetary Fund (IMF) and the World Bank, but also including the regional development banks such as the Asian Development Bank and the Inter-American Development Bank, have come under unprecedented criticism in the United States. Many now ask whether these institutions do more harm than good, and whether resources contributed to these institutions are an effective use of U.S. tax dollars.

Criticisms of the IFIs include the following: their failure to promote economic growth or reduce poverty in the past twenty years; their insistence on collecting debt payments from the poorest countries in the world at the expense of spending on health care and education; their insistence on policy conditions, such as user fees on primary health care and education; reduced subsidies for poor people to access clean drinking water; and their enforcement of labor flexibility policies that make it easier to fire workers and harder for workers to organize. The World Bank’s continued support of socially and environmentally destructive projects such as oil, gas, and mining extraction and large dams is also widely criticized.

But the most commonly expressed concern about these institutions is that they are secretive in their decisionmaking and that this secrecy undermines democracy in developing countries. Key economic and social policies are removed from the effective control of democratically elected parliaments in borrower countries to closed negotiations between government finance officials and officials of the IMF and the World Bank. Meetings of the policymaking bodies of the IMF and the World Bank—the boards of directors—are closed to the scrutiny of the public and the news media.

There are no recorded votes on IMF and World Bank loans and policy documents, nor publicly available minutes or transcripts of IFI board meetings, and key policy and project documents are also withheld from the public. This secrecy undermines democratic decisionmaking not only in borrower countries but in creditor countries as well, as it is almost certain that the majority of people in the U.S., for example, would never support keeping children out of school in Africa because their parents cannot pay school fees.

IMF and World Bank officials often profess amazement when their legitimacy is questioned, noting that they represent the governments that are members of the institutions. Critics point out that the institutions operate on the basis of one dollar, one vote, with the G7 countries having a working majority of the shares.

Yet the secrecy of operation of the IFIs is more indefensible than the voting shares. So long as board meetings of the IFIs remain closed to public scrutiny, so long as there are no minutes or transcripts of board meetings, so long as key policy and project documents are withheld from the public or only released after they are approved—too late for public input to affect decisionmaking—it may well be that the IFIs represent the member governments, but the member governments will not represent their own citizens at the IFIs, even in countries where the government is democratically elected.

To counter the mounting criticism of their lack of transparency, the IFIs respond that confidential deliberations are necessary to ensure candid discussion, to protect sensitive financial information, and to support developing country governments’ opposition to greater transparency. The claim that there are certain discussions in which lack of public disclosure might serve a legitimate purpose is easily addressed. Every democratic body that has open deliberations has exceptions for certain topics. Moreover, if disclosure of certain financial information would rattle financial markets, that is an argument for more transparency, not less, because on strict neoclassical economic grounds that would imply that markets are being denied information that would make them operate more efficiently.

Finally, about “candor of discussions,” it can only be said that somehow the U.S. Congress manages to function with open meetings and even the Federal Reserve of the United States publishes its minutes after a delay. If “candor of discussions” means ability to say things that one could not defend before public opinion, then it is not necessarily a good thing.

Problems with Current U.S. Policy

Key Problems

  • Treasury officials determine U.S. policies at the IFIs without effective congressional or public oversight.
  • Congress passed legislation requiring the U.S. to oppose user fees on primary health care and education at the IFIs, but Treasury has not complied with congressional intent
  • If IFI board meetings were open to public scrutiny, Treasury would have to comply with laws that require it to oppose particular policies at the IFIs.

The obstacles that IFI secrecy places in the way of efforts to eliminate harmful IFI policies is illustrated by the recent fate of efforts to stop IFIs from promoting the imposition of user fees on primary health care and education. These user fees have been associated with lower school enrollment and reduced access to primary health care. For some years, the World Bank, while acknowledging problems with the implementation of user fees, defended them in principle on the grounds that there were, or were supposed to be, exemptions for the poor. However, as the World Bank was eventually forced to admit, the track record indicates that such exemption schemes do not work.

In response to the World Bank’s refusal to abandon support for user fees on primary health and education, the U.S. Congress in October 2000 passed legislation requiring the U.S. representatives at the IMF and the World Bank to oppose any loan or debt relief agreement which included “user fees” on access to primary health care and education. This legislation was supported by a broad array of civil society groups in the United States.

Two months later, the “Poverty Reduction Strategy Paper” (PRSP) for Tanzania came before the World Bank and IMF boards. The PRSP is purported to be a planning document prepared by developing country governments, in consultation with the IMF and the World Bank, with broad civil society participation, which outlines a plan for reducing poverty in the country in accord with the reformed focus of the institutions on poverty reduction in poor countries announced as part of the “enhanced” Heavily Indebted Poor Countries (HIPC) debt relief initiative agreed to at the G7 meeting in Cologne. Endorsement of the PRSP by the IMF and World Bank boards is a precondition for countries to receive debt relief under HIPC.

At the time of the board meetings to consider its endorsement, the Tanzania PRSP—a document that supposedly resulted from a broad consultation with civil society in Tanzania—was a secret document. However, based on previous agreements between Tanzania and the IFIs, it was suspected by nongovernmental organizations (NGOs) that the PRSP contained user fees on health care. NGOs and congressional members who had supported the legislation requiring the U.S. to oppose user fees on primary health care and education took their complaints to the U.S. Treasury Department (then still under the supervision of the Clinton administration). They reminded Treasury that U.S. law required Treasury officials to oppose the Tanzania PRSP if it included user fees on primary health care.

Based on the public record, since the board of directors meetings are secret and no transcripts or minutes are publicly available, the public would have no way of knowing what took place at the IFI board meetings that considered the Tanzania PRSP. However, the staff summary of the World Bank board meeting was leaked to NGOs. The staff summary is a secret document that is only distributed to World Bank and IMF management and government representatives. The cover page states: “This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.”

The staff summary is a redaction of the minutes, in the sense that it does not indicate who said what, a critical piece of information for holding governments accountable for what policies they support or oppose at the institutions. Nonetheless, in this case the summary is revealing. The summary reports, “Staff noted the concern of many NGOs over the existence of user fees in the health sector but pointed out that the poor were exempt from these charges.”

The nongovernmental organizations that were concerned about the inclusion of user fees on primary health care were concerned precisely because exemption schemes have failed. Thus, while “noting” the concern of NGOs, the institutions were in fact completely ignoring them. What is truly revealing is that this is the only mention of the issue of user fees on health care in the document. The document summarizing the discussion is seven pages long, and has a specific section on health care. Yet while the concern of NGOs is noted, there is no record of any government representatives in the meeting registering any objection or concern. Although the summary does not tell us who said what among the government representatives, it does tell us that no government representative—including the U.S. representative—said anything on the subject whatsoever, unless we are to believe that an objection or comment by the representative of the government holding one-fifth of the shares of the institution would not be considered noteworthy by the staff person preparing the summary of the discussion.

It is a remarkable fact that even when the U.S. Congress, which controls U.S. appropriations to these institutions, went to the trouble of passing a specific law requiring the U.S. representative to oppose a particular policy and oppose any agreement containing that policy, the U.S. representative apparently had nothing to say when the subject was discussed in the board meeting.

It is precisely because the meetings of the IFIs are closed to public scrutiny that U.S. Treasury officials are able to represent the people of the U.S. at these institutions without any effective oversight.

Toward a New Foreign Policy

Key Recommendations

  • Congress should condition U.S. appropriations to the IFIs on open board meetings and administration compliance with congressional mandates to oppose harmful IFI policies.
  • Congress should pass legislation directing the administration to seek open board meetings at the regional development banks.
  • Congressional efforts to reform U.S. policy at the IFIs should focus on requiring the U.S. to oppose specific harmful IFI policies.

Effective democracy requires information. This is why the Freedom of Information Act exists in the United States and why many states have “open meetings” laws that require public notice and open meetings whenever a majority of officials on a government body meet to discuss policy at that body. If the IMF and the World Bank were subject to the Illinois Open Meetings Act, for example, G7 meetings would also have to be open to the public and the news media, since IMF and World Bank policies are often determined in G7 meetings, and Americans would be able to find out what our government is doing at these institutions.

Conversely, if the IFI boards of directors were open to the public and to the news media, if there were recorded votes, if the minutes and transcripts of board meetings were immediately published on the institutions’ web sites, if draft policy and project documents and agreements between the IFIs and borrower countries were released prior to their approval to give civil society groups the opportunity to lobby their governments against odious provisions, this would of course not immediately or automatically eliminate the harmful policies of the IFIs. But it would greatly level the playing field on which battles over IFI policies are fought out, and would dramatically improve the chances of achieving the reforms of IFI policies that civil society groups are seeking.

Ultimately, the ability of people in the U.S. to affect the policies of the international financial institutions depends on Congress. Few Americans can get a meeting with the Treasury officials who conduct U.S. policy at the IFIs, but most Americans can get a meeting with, if not their congressional representative, then at least that congressional member’s staff person who covers U.S. policy at the international financial institutions. The leverage of Congress, in turn, ultimately depends on the power of the purse. Congress can refuse to appropriate more money for these institutions if they refuse to abandon harmful policies, and can attach conditions to funding, such as requirements to oppose particular policies.

Representative Doug Bereuter (R-NE), chair of the subcommittee of the House Financial Services Committee that oversees U.S. policy at the international financial institutions, has introduced legislation that requires the U.S. to seek open board meetings at the regional development banks (H.R. 2604). Rep. Bereuter’s bill would also strengthen the existing requirement that the U.S. oppose user fees on primary health care and education at the regional development banks. Representative Jan Schakowsky (D-IL) is offering an amendment to the bill that would require the U.S. to oppose policy conditions that increase fees on poor people to access clean drinking water, while Representative Barbara Lee (D-CA) is offering an amendment that would require the U.S. to oppose regional development bank financing of dams that violate the recommendations of the World Commission on Dams, such as those involving forced relocation.

While these mandates would not directly apply to the International Monetary Fund and the World Bank, by passing this legislation Congress would clearly indicate to the administration, to the management of the IMF and the World Bank, and to member countries of these institutions what Congress’ expectations of these institutions are likely to be in the future. Congress would indicate that it expects the international financial institutions to be open to news media and public scrutiny, that it expects them to stop promoting user fees on primary health care and education, that it expects them to stop promoting policies that undermine access to clean drinking water, and that it expects them to stop supporting large dams.

The donor countries are currently negotiating the terms of an increase in funding to the International Development Authority (IDA), the World Bank’s lending arm in the poorest countries. It is anticipated that an increase in funding for IDA will be before Congress next year. If critics of the international financial institutions succeed in placing effective reform conditions on the regional development banks in this year’s appropriations cycle, they will be in a good position to impose these reforms on the World Bank next year in the context of the IDA authorization.

If a precedent were established this year with respect to removing harmful policies of the regional development banks, Congress and civil society organization would not be limited to the above-mentioned reforms as conditions for appropriations to IDA. Congress could also require that the World Bank cancel 100% of its debt claims against poor countries, that the World Bank convert 50% of its future lending in poor countries to performance-based grants linked to increased access to education, health care, clean drinking water, and sanitation and delinked from policy conditionalities like privatization. It could also require that the World Bank cease policy conditions such as freezing the minimum wage and imposing labor flexibility conditions that make it easier to fire workers and harder for workers to organize into effective trade unions.

In years past, when Congress expressed its desire for reform of the international financial institutions, it often contented itself with vague and unenforceable exhortations. If the principle is established that Congress can effectively compel the abolition of harmful IFI policies as the price of U.S. contribution to these institutions, there is no limit to what policies might be removed. The removal of harmful IFI conditionalities with respect to education, health care, and water alone would significantly advance the internationally agreed upon goals of providing universal access to these basic human needs.

Robert Naiman a senior policy analyst with the Center for Economic and Policy Research in Washington (CEPR), has authored numerous articles on globalization and U.S. foreign economic policy, including “The Emperor Has No Growth: Declining Economic Growth Rates in the Era of Globalization” (co-authored with Mark Weisbrot), “Is U.S. Treasury Above the Law?,” and “World Bank Grants Would Reduce Poor Country Debt Without Cost to the United States” (CEPR, 2001).