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Friedrich Ebert Stiftung
Governance reform of the Bretton Woods institutions and the UN development system

Dirk Messner, Simon Maxwell, Franz Nuscheler, Joseph Siegle

Occasional papers N° 18

Friedrich Ebert Stiftung (FES)

May 2005

SARPN acknowledges the FES website as the source of this report:
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Executive Summary

The key messages of the present report can be summarized in six propositions:
  • First, we face unprecedented problems at a global level – questions of war and peace, of climate change, of environmental sustainability, and of poverty.
  • Second, these problems cannot be solved by nation states, however powerful, acting alone – we can only ameliorate our present and safeguard our future if people and their governments work together.
  • Third, that means we need strong international cooperation and a strong multilateral system.
  • Fourth, we do not have a strong system: it does not work well and it lacks legitimacy.
  • Fifth, there are reform proposals on the table, most recently those made by Kofi Annan for the MDG Summit in September 2005.
  • Sixth, those do not go far enough: We can and should do more.
The report makes the case for each of these propositions, and in particular lays out a program of action for 2005 and beyond. This year, however, is crucial. Attention is focused on international development as never before. The preparatory work has mostly been done. The decision-making structures are in place. It is imperative that the opportunity will not be missed. Above all, when governments meet in New York in September, for the MDG Summit, they must take the opportunity to make major changes to the multilateral development system.

New Global Problems

Eight major challenges confront the international community today. They exceed the capacity to cope of individual countries. They are: poverty and social polarization; global population growth; failing states; new wars and privatized violence; insufficient drinking water supplies; climate change and shrinking biodiversity; volatile international financial markets; and economic marginalization of groups of countries and regions.

Ineffective Structures of Global Governance

The legitimacy of the international development community is undermined by the unequal distribution of power between the G-7 and the largely disenfranchised developing countries. In addition, the system is characterized by its fragmented structure, by the dominance of institutional and national interests, and by overlapping responsibilities.

Ten Principles to Build an Effective Global Governance Architecture

There are ten principles that should drive reform:
  1. A centralized, effective and representative entity is needed within the UN on the development side, corresponding to the Security Council.
  2. This calls for a single UN agency that would require adequate financial, human, and conceptual resources comparable to those of the World Bank.
  3. Mergers or closures of multilateral agencies should be considered.
  4. What is needed is a clear-cut division of labor within the international development system.
  5. Coherence for development cooperation should be organized first and foremost at the country level.
  6. Competition within the international system should be fostered in order to induce innovation.
  7. As stakeholders, governments of the developed nations must take responsibility for leadership in the international system.
  8. Developing countries should be given a stronger voice.
  9. The EU should play a larger role.
  10. More participation of civil society actors is needed.
The UN Development System

Our main recommendations for a new global governance architecture are:
  1. Creation of a Council for Global Development and Environment with an enhanced mandate and sufficient legitimacy to counterbalance the Bretton Woods Institutions, corresponding to the Security Council, but with additional powers. The Council for Global Development and Environment (CGDE) should become the principal funding vehicle for the UN development system – and should not be created unless a deal has been struck on funding.
  2. Pending the creation of the CGDE, donors should channel funds to the Secretary-General, in order to create a system-wide UN budgeting system.
  3. Elevating the G-20 group of Finance Ministers to the level of heads of state and government. If representatives of the World Bank, the IMF, and the WTO were to participate in G-20 meetings, an L-20 (Leaders) Forum would emerge. This could form a Global Council with high-level authority since the UN-Secretary-General and the ECOSOC President would also participate. The G-7 (8) would form the core of the G-20 or L-20.
The Bretton Woods Institutions

Our main recommendations for governance reform of the Bretton Woods institutions are:
  1. Voting structures, particularly the weight of developing countries, should be strengthened at the IMF and the World Bank. While each of the major shareholders in the IMF has its own chair, there are only two Executive Directors available to represent, respectively, the interests of English- and Frenchspeaking African countries. How difficult would it be to provide this diverse and important constituency with a few more seats on the Board?

  2. A recalibration of the quota system distributing relative shares of influence among member countries (and translated into regional constituencies on the Executive Board) every 10 years. This would be based on 3-5-year average shares of global GDP to avoid overrepresentation of fluke performers. Adding such flexibility would provide a mechanism to adapt to the ongoing changes in the global economy. Countries such as Brazil, South Korea, and Chile would gain a greater voice in the Fund, commensurate with their sustained growth.

  3. The creation of advisory boards for country directors is recommended. If that could be achieved, the country directors would neither be the exclusive instruments of a shareholder nor an instrument of the Executive Board.

  4. Performance can also be enhanced by means of certain management reforms. Prime among these is the need to remove loan volume criteria from staff or agency appraisals. This tends to discount the value placed on development effectiveness.

  5. Democracies consistently achieve development outcomes superior to those of non-representative governance structures. Therefore, the political prohibition clause of the IFIs should be adapted to allow a more open discussion of political substance and democratic governance in the design and implementation of their support programs. The European Bank for Reconstruction and Development (EBRD) already comes close to this ideal. The IFIs should not relinquish their commitment to fiscal and monetary prudence. Sustained economic reform is a matter of negotiating among complex competing interests so that the broader social good is advanced. Democratically selected leaders and an informed and enfranchised public in collaboration with the IFIs are the logical focal points for balancing a country’s short-term welfare versus efficiency trade-offs.

  6. An autonomous evaluation unit should be established within the World Bank and regional development banks – akin to the IMF’s Independent Evaluation Office.

  7. The Fund should create more space for staff somewhat removed from a country context to voice its concerns. This could take various forms, including a mechanism for anonymous input to be communicated to senior leadership, allowing for dissenting opinions in country reports, or appointing an independent analyst as a devil’s advocate to actively highlight a country’s potential susceptibility to financial instability.

  8. The notes of all Executive Board meetings should be made public. By allowing for a gradation of opinion to be expressed on any given circumstance, this procedure would increase the individual accountability of all Executive Directors in playing an active oversight role.

  9. Equally important are the new guidelines within the overall framework of support for national strategies for poverty reduction (Poverty Reduction Strategy Papers, PRSPs), which have replaced the classic and mainly donorcontrolled structural adjustment measures of the 1980s and 1990s.

  10. The IMF, in particular, has a critical role to play in promoting debt relief. The Fund should have the mandate and dexterity to adopt more timely lending instruments without regard to the past practices of a predecessor regime. IFI and bilateral lending is often contingent on an ongoing IMF arrangement. Timely negotiations on appropriate IMF financing with a new democratic government could catalyze additional sources of financial support during the critical transition period. The World Bank and the IMF should also enter into larger-term financing agreements (e.g. 10 years) with developing country democracies. This would facilitate the integration of larger planning horizons into economic policy-making while facilitating necessary short-run compromises.

  11. Commensurate with its monetary mandate, the IMF should be encouraged to collaborate more intensively with the World Bank and the United Nations in pursuing the Millennium Development Goals. Along with the Bank, the Fund should also be encouraged to continue efforts to engage civil society on major issues involving growth, stability, and welfare. Regional development banks should focus on three areas: first, their specific regional development programs; second, the construction of cross-border regional infrastructure; third, the development of adequate conceptual expertise to be better able to represent the developing regions and their governments within the Bretton Woods institutions or the WTO.
Cooperation between the Bretton Woods Institutions and the United Nations

Coordination alone cannot solve the governance problems of the UN development system and the Bretton Woods institutions if the coordinating institution does not have the power and resources it needs to do the job effectively. Cooperation should be a matter of self-interest and needs to be reinforced by a corresponding culture. This is more likely to occur when all actors, including the richest and most powerful, gain and when – at the same time – defection entails significant costs. In other words: Cooperation requires a mix of culture and calculus. It has to be longlasting, broad and deep, and part of a shared vision.

Achieving Change

Finally, achieving change is not simply a matter of political will in the abstract. Improving the effectiveness of the multilateral system is an exercise in collective action. It will require building trust, establishing new ways of working together, modifying incentives to collaborate, and increasing the cost of defection from the world community.

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