Governance & Impact Report 2014 - New Rules...Governance & Impact Report 2014 3 the new Global Legal Entity Identifiers System (GLEIS). However, progress has been very slow on cross-border

Governance & Impact Report 2014

About Us

New Rules for Global Finance is a non-governmental organization, with the aim to promote reforms in the rules and institutionsgoverning international finance and resource mobilization, in order to support just, inclusive and economically sustainable globaldevelopment. New Rules is a networking, idea generating organization that convenes critical actors and policymakers from developedand developing countries to identify politically feasible and technically sound solutions to systemic issues of international finance andresource mobilization which impede inclusive development. The US Internal Revenue Service recognizes New Rules as a tax exemptorganization according to Section 501 (c) 3 of the US Internal Revenue Code.

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About this publication

This material was finalized September 23, 2014. All information is accurate to the best of our knowledge through that date.

Under terms of the Creative Commons, non-commercial organizations and private individuals may copy, distribute and display all orpart of this publication subject to citing New Rules for Global Finance as the original source. Commercial organizations seeking licenseto reproduce all or part of this publication should contact New Rules for Global Finance.

Questions and comments can be sent to:New Rules for Global Finance2000 M Street NW, Suite 720Washington, DC 20036www.new-rules.org

Acknowledgments

New Rules for Global Finances thanks the Ford Foundation, the Heinrich Boell Foundation, and the N. Shaw Smith Memorial Fund forfinancial support.

The lead Editors were Dr. Matthew Martin, Executive Director of Development Finance International and Debt Relief Internationaland a Board Member of New Rules, and Dr. Jo Marie Griesgraber, Executive Director of New Rules. This publication was designed byNathan Coplin, Deputy Director of New Rules who also served as an editor. The Staff, Nathan Coplin and Jo Marie Griesgraber, thankthe Board for their vision and support, and of course and especially, all the amazing Authors: Peter Bakvis, Navin Beekarry, BenBestor, John Christensen, Pamela Gomez, Katarzyna Hanula-Bobbit, Markus Henn, David Kempthorne, Matthew Martin, Steve Price-Thomas, John Ruthrauff, Emma Seery, Marcus Stanley, Tiago Stichelmans and Steven Suppan. The organizations behind the authorsare identified by their logos on the back cover. We also thank Americans for Financial Reform, Oxfam Great Britain and OxfamInternational for their contributions. We are indebted to the valiant New Rules Interns: Martha DiSimone Fiamma de Nardo, PaulaOmiyi, Chaz Rotenberg, Amanda Saville, N'dèye N'doungou Traore; technical advisors: Andrew Cornford, Martin Edwards andYesenia Lugo; and Participants in Impact Assessment Workshops: hosts Eva Hanfstaenfl of Brot Fuer die Welt and Markus Henn ofWEED, the representatives of the German government and civil society organizations and academics; Kevin Watkins, Dirk Willem teVelde and staff of the Overseas Development Institute, and Jeannette Laouadi from DFI; Dr. Nora Lustig of Tulane University, andthe representatives of the FSB Secretariat, the IMF, the OECD and the World Bank. Doyle Printing and Offset Company in HyattsvilleMD, were great to work with. Thank you all.


Contents

Executive Summary .…………………………………………………………………………………………………..1

Introduction ……….……………………………………………………………………………………….……………..4How We Assess Governance & Impact

Overall Findings

Recommendations…………………………………………………………………..…………………………..…….. 9

Group of Twenty (G20)……………………………………………………………………………………………..12Governance 12

Impact 18

Financial Stability Board (FSB)……………………………………………………………………………….. 22Governance 22

Impact 28

International Monetary Fund (IMF)………………………………………………………………………………………………..38

Governance 38

Impact 43

World Bank……………………………………………………………………………………………………………….50Governance 50

Impact 56

Global Tax-Rule Making Bodies (Tax)………………………………………………………………………64Governance 64

Impact 69

Scoring References……………………………………….…………………………………………………………. 75Impact Scorecard 75

Governance Scorecard 77


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This report is the second critical assessment of the major global institutions engaged in internationalfinancial rule-making: the Financial Stability Board (FSB), Group of Twenty (G20), International MonetaryFund (IMF), Organization for Economic Co-operation and Development (OECD) and World Bank. It is acollaborative effort by New Rules Board and staff, and several civil society organizations and academicswho share our urgency regarding the need for a global financial system that incorporates the perspectivesof low income countries (LICs) and generates positive outcomes for world’s poorest people.

We continue to use our “GOVERNANCE scorecard” to evaluate the four core elements of good governance:Transparency, Inclusiveness, Accountability and Responsibility. The scores are slightly higher than lastyear, due to new information from the institutions and revised assessments by independent analysts onaccountability and responsibility processes, as well as a slight increase in their ex ante analysis of potentialimpact. Occasionally, authors and editors differed on scoring. Editors slightly adjusted scores in order tomaintain appropriate scoring consistency across all institutions. Where discrepancies exist, authors’ scoresare noted. Nevertheless, as Chart 1 shows, all institutions’ overall governance scores remain at moderateor poor levels.

Executive Summary

Chart 1 Governance Financial Governance Scores from 2013 and 2014


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The G20 and OECD continue to perform especially poorlyacross all governance criteria. To address this, werecommend that the G20 should formally engage withthe UN; design more inclusive representation; establishformal channels of engagement for low-income countriesand other external stakeholders; become moretransparent; establish a more comprehensiveaccountability framework; ensure ex ante and ex postevaluations are conducted regularly; and, create a formalexternal complaint mechanism. We do not feel that it ispossible for the OECD to be sufficiently inclusive giventhe composition of its membership, and thereforerecommend the establishment of a World Tax Authorityunder the UN.

Our principal recommendations for Governance can befound on page 9 while specific recommendations for eachinstitution are in the text of respective chapters.

Last year’s report assessed the IMPACT of the institutionsusing an ad hoc framework. This year, in an effort toimprove the impact analysis, we invited the institutionsthemselves and independent analysts to advise us on howto establish a better framework. Their primary

recommendation was to use combating inequality as thisyear’s organizing theme. This is because inequality: hasintensified under the current financial system where therules and structures serve the interests of a few; hasincreasingly been seen as a core part of the mandate andresponsibilities of global financial governance; and looksset to be a strong part of the post-2015 globaldevelopment framework.

We have therefore considered qualitative andquantitative information to assess each institution’scontribution to reducing inequality, based on itsmandate. The assessment uses a four point scale:1-worsening impact on inequality; 2-no observablemovement; 3-some progress; and 4-excellent progress.The results are not very encouraging, as Chart 2 shows.

In terms of impact, the best performing institutions arethe FSB and the IMF:

· FSB member state regulators and Secretariat staffhave been making considerable progress onaddressing some root causes of the 2008 financialcrisis, especially on Over-the-Counter Derivatives and

Chart 2 Overall Impact Scores of Global Financial Rule-Making Institutions


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the new Global Legal Entity Identifiers System (GLEIS).However, progress has been very slow on cross-border crisis resolution, stopping institutions frombeing “too big to fail”, and reining in shadow banking.

· The IMF has made limited progress in monitoring andencouraging anti-inequality spending on educationand health, and remains a key source of financing tocombat inequality by offsetting global instability. Ithas also produced very positive policypronouncements and research studies supporting therole of redistributive policies in reducing poverty andinequality, in turn making growth more sustainable.Yet on crucial policy issues such as employment andwages, progressive taxation and pro-poor financialsystems, the authors could not find consistentevidence of policy advice yielding reduced inequality.

The World Bank and the OECD fall slightly behind, for thefollowing reasons:

· The World Bank’s commitment to eliminating abjectpoverty and ensuring greater equality for the bottom40 per cent by 2030, is grounded in its positivecommitment to universal education and health care,and in its strong record of financing developmentprograms. However, its policy assessment frameworks(Country Policy and Institutional Assessment (CPIA),Doing Business) and economic policy conditions arein some respects likely to be exacerbating inequality,

as is its private sector support via the InternationalFinance Corporation (IFC).

· The OECD has made some recent progress oncurtailing illicit flows and combating tax evasionthrough its recent efforts to enhance exchange ofinformation among tax authorities; and has over theyears played a positive role in exchanging bestpractices on efficient and effective tax administration.However, it has made little progress on tackling taxavoidance, combating tax wars or promotingprogressive tax policies.

The G20, which has had the lowest impact, has pledgedgreat advances and demonstrated little progress at theglobal level, and most members have made only minorpledges and delivered less at national level. It deservessome credit for having reignited serious debate about theneed for global tax reform and mandating the OECD workon illicit flows and tax evasion. However, it is neithermonitoring nor acting against rising inequality,deteriorating employment conditions and falling realwages, and has done nothing discernible to promoteeither anti-inequality development policies, orconcessional financing to combat inequality.

Our principal recommendations for Impact can be foundon page 10, while specific recommendations for eachinstitution are in the text of respective chapters.

Introduction


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Introduction

Our method for assessing the quality of global financialGOVERNANCE has not changed from last year – thoughinformation available to support the assessments hasimproved due to close cooperation with the institutionsthemselves and additional groups of independentanalysts. The basic criteria remain the same:

· Transparency: Any institution making rules thataffect the entire world, must be held to the higheststandards of transparency, so that those who makethe rules will know the interests of and the poten-tial impacts upon those excluded from the room;while those who are rule-takers can have maximumknowledge of how rules are made, whose interestsare promoted, and whose rights protected. Eachinstitution needs to make all documentation anddata publicly available at the earliest possiblestage, as well as providing all information necessaryto explain their functioning and put stakeholders intouch with their representatives. For internationaltax rule-makers, we also consider the transparencyof the policies the institutions promote: the cur-rent “system” favors secrecy so that the privileged

or deceitful can hide and not pay their fair share forthe common good.

· Accountability: Each rule-setting organizationmust be fully accountable to member and nonmember governments and to citizens and civil soci-ety, in line with its mandate, constitution and inter-nal rules, as well as objective best practices forgovernance and management. All segments of theinstitution need to exercise responsibly the author-ity granted to them as limited by their charters, andnot to exceed it through the exercise of raw power.This requires designing, monitoring and imple-menting measurable accountability frameworks;having open and merit-based selection processesfor leaders and senior management; and regularlyreviewing the functioning and achievements oftheir governance structures and meetings in hold-ing management to account.

· Inclusiveness: By rights all who are impacted byrules should have a voice in how they are made,evaluated, and amended. However, in a world of

A GLOBAL FINANCIAL GOVERNANCE AND IMPACT REPORT IS EVEN MORE VITAL

For over a decade New Rules for Global Finance (NewRules) has engaged in reform of the institutions shapingglobal finance. We persist in asking: Who wins? Wholoses? And, who decides? We continue to championreform of the governance of these institutions, workingto bring the voices of the excluded and affected peoplesinto the decision-making rooms; or as a poor second best,at least indirectly by getting their concerns and theirwisdom inside the room. Those not among the decidersare likely to be the losers.

This second edition of the Global Financial Governance& Impact Report continues the immodest task ofassessing the governance and impact of the institutionsthat write the rules for global finance: the Financial

Stability Board (FSB); Group of Twenty (G20);International Monetary Fund (IMF); World Bank; andinternational tax rules-making bodies, focusing this yearon the OECD.

Some might ask why this is important given that theworld economy has largely emerged from the globalfinancial crisis of 2008. The answer is that high-qualitygovernance of global finance, ensuring that it has apositive impact on reducing global poverty andinequality, is even more vital if we are to accelerateglobal growth (which will be more sustainable if povertyand inequality are reduced), and avoid future criseswhich would throw such progress off course.

HOW WE HAVE ASSESSED GOVERNANCE AND IMPACT


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billions of citizens, we must accept representativedemocracy. New Rules supports constituency mod-els which make governance inclusive yet smallenough to get work done. The key to an equitableconstituency model is a sound, objective basis onwhich voice and votes are allocated. The powerfulwill always be represented; but the real challenge ishow well each institution ensures the presence andvoice of the less powerful and those in need. Therepresentation of non-state or non-governmentalinterests is also vital: again, while the “for profitsector” will have resources to make its viewsknown, the key concern should be how well eachinstitution listens to the poor and their representa-tives, and the silent imperatives of the global com-mons.

· Responsibility: The external counterpart to Ac-countability is Responsibility. Each institution needsto ensure that its actions result in a stronger finan-cial system that promotes more just and economi-cally sustainable global development, especially forpeople in low income countries, without harm tothe global commons. Responsibility requires thatinstitutions assess ex ante for themselves whethertheir actions and recommendations are sure to havethis positive impact; conducting independent expost evaluations and impact assessments; and oper-ating formal and independent complaint and anti-corruption mechanisms, with protections for com-plainants, and compensation for those harmed byany institutional action or inaction. It also requiresthat each institution learn from these assessmentsand change its behavior.

These four criteria are essential for good governance ofany institution, especially when its actions and inactionssignificantly impact every country. Each governancesection of this report analyses governance performancein detail, and uses a “Governance Scorecard” (availableat the end of this report) to provide a summaryassessment scale for each criterion, from “Poor” (1) to“Excellent” (4).

STRENGTHENING OUR ASSESSMENT OF IMPACT

The center of attention this year has been on improvingour methodology for assessing IMPACT. We have workedclosely with a wide range of independent analysts andstaff from the institutions themselves, who reached aconsensus that the key criteria should be how these

institutions affect poverty and inequality, based on theprominence of these issues in the post-2015 developmentframework and their prominence in all discussions(inclusive development is the theme of the BrettonWoods Institutions (BWI) Annual Meetings at which thisreport is launched). Global finance has a huge impacton the lives of the poorest people, and through them onthe sustainability of growth as the institutions themselveshave increasingly realized.

This becomes evident from examining the mandates ofthe institutions and their most recent statements ofpurpose. For each it has been relatively easy to identifyfive clear ways in which they should be combating povertyand inequality, though sometimes less easy to identifywhat they did to accomplish those objectives.

The G20 heads of state have defined their task as toensure “balanced, sustained, and inclusive growth”. Toachieve this goal, the identified priorities of the G20should be:

1. To address Global Tax Reform beginning with baseerosion and profit shifting (BEPS), automatic ex-change of information and public identification ofbeneficial owners of wealth;

2. To shift its focus toward Inclusive Growth, address-ing inequality globally and within G20 countries;

3. To refocus its Development Working Group agendaaround combating poverty and inequality, to make itmore consistent with the post-2015 developmentframework;

4. To promote Decent Work/Labor Rights and higherwages, and minimum social protection floors; and

5. To mobilize long-term (especially concessional andofficial) development financing, including traditionalofficial development assistance (ODA) and SouthSouth cooperation, innovative financing, and reduc-ing the costs of remittances.

The Financial Stability Board is mandated by the G20 topromote and ensure global financial stability – as theDeputy Secretary General has said “for what stabilityachieves” in terms of promoting sustainable growth. Itspriorities to achieve this goal were:

1. To end Too Big to Fail financial and insurance institu-tions;

2. To design and implement cross-border financial res-olution regulations (to resolve bankruptcies);


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3. To make transparent and regulate over-the-counterderivatives;

4. To bring shadow banking into the sunlight of trans-parency, regulation and stability; and

5. To organize the new Global Legal Entity Identifica-tion System (GLEIS) so every financial entity is identi-fied and every financial transaction carries the“names and phone numbers” of all participants.

The International Monetary Fund works to ensuresustainable growth and the Managing Director hasdefined combating inequality as a core part of theirmandate. It should be achieving these ends by promoting:

1. Inclusive growth and decent and well-remuneratedemployment;

2. More progressive taxes and more efficient tax collec-tion, and combating tax evasion/avoidance;

3. Anti-inequality spending, especially on education,health, social protection and water, sanitation andhygiene (WASH);

4. Domestic and international financial systems thatpromote greater equality; and

5. Lending adequate (low-conditionality) funds tocountries to overcome balance of payments prob-lems.

The World Bank has rearticulated its mission as riddingthe world of extreme poverty and promoting greaterinclusion for the bottom 40 per cent by 2030. It shouldbe achieving this by:

1. Defining strong targets for dramatically reducing in-equality;

2. Redefining its policy assessment and policy-basedlending to ensure they fight poverty and inequality;supporting universal free education and health ser-vices, and social protection floors;

3. Supporting the private sector in ways which reducepoverty and combat inequality;

4. Providing large amounts of loans and grants to coun-tries requiring long-term development finance; and

5. The development of an overall framework tomeasure it own impact.

The OECD has long coordinated and advised on itsmember-states’ cross border tax policies. In 2013, the G8and G20 expanded its mission to reduce the loss ofincome to all governments from tax avoidance and

evasion through “Base Erosion and Profit Shifting”. Wereview the OECD’s achievements in:

1. Monitoring, measuring and reducing illicit financialflows and tax evasion;

2. Reducing major forms of tax avoidance;3. Ending “tax wars” or “tax competition,” which re-

sults in a race to the bottom for national revenue;4. Encouraging more efficient national tax administra-

tions; and5. Promoting progressivity in national tax systems.

Authors assessed each of these functions in terms of theirsuccess in reducing poverty and inequality. The four pointscale rated: 1-increased inequality; 2-no movement orinability to measure progress; 3- some positivemovement; and 4-excellent progress. The total pointswere then averaged for a score for each institution.

A broad framework was designed to guide assessment ofimpact (see end of report).

The authors and the editors acknowledge that, in spite ofimprovements, the methodology used in this Report isstill imperfect. It relies on publicly available data, andmuch more could be done to increase what is publiclyavailable. A diverse panel of experts contributed mostgenerously to thinking about results and methodologies.We incorporated this advice into our assessment and ouroverall findings are below. New Rules once againwelcomes all feedback, especially whatever will improvethe data sources and the methodologies used to assessboth the Governance and the Impact of these institutions.As public bodies designed to promote the public good ofa financial system at the service of reduced inequality andpoverty in low income countries—with staff and facilitiespaid for by public taxes—we welcome the collaborationof the staff, management and leadership of theinstitutions, as well as that of the informed, articulate,and even boisterous public.


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Governance Gapin Global Finance

Overall Governance Scores

Governance RemainsInadequate

Overall, the Governance Gap remains at 50 per cent.Of greatest concern is that all global financial-rulemaking institutions score worst in Responsibility.

Average Governance Score: 1.9 (out of 4)Assessed as Poor, just below Moderate.

Governance Gap is based on the Total AggregateGovernance Score: 9.5 (out of 20)

Chart 3 Overall Scores of each institution disaggregated by the four components of governance


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Overall Impact Scores

Limited to No Impacton reducing inequality or positively impacting thereal economy, especially in low-income countries.

Average Impact Score: 2.1 (out of 4)Assessed as None or Limited Impact, with slightpositive impact


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Some governance findings are similar across all institutions, and lead us to several principal,but generic recommendations:

· Transparency must encompass all discussions, which should ideally be transcribed andbroadcasted live; websites must be easily accessible, with excellent search engines, in allUN languages; all meetings between institution staff, management and officers must bepublicly documented, and all contact with parties having material interest in decisions mustbe documented including the content of discussion.

· Inclusion needs to be assured by establishing constituency systems in G20 and FSB; morerepresentative economic and population formulas for voting rights in the BWIs (building onrapid implementation of the IMF reforms agreed in 2010); and greater diversity of staff,notably from non-OECD economies.

· Accountability requires selection of leadership and staff based on objective merit; separa-tion of functions of CEO and Board Chair; biennial evaluations of the performance ofgoverning bodies and top managers; and an accountability framework to which the institu-tion can be held responsible.

· Responsibility dictates that all international financial institutions have a complaint mecha-nism to receive complaints from affected people; routine ex ante analysis of potentialimpact of measures on poverty and inequality; as well as regular independent evaluationsof their achievements.

Governance

Governance Recommendations


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ImpactImpact Recommendations

· The G20 should monitor and combat inequality, improve employment conditions and raiseminimum wages to bring full-time workers out of poverty, make taxes more progressive andraise social protection floors, focus its development framework on fighting inequality, andincrease concessional funding flows.

· The FSB should ask the G20 to strengthen its institutional mandate, staffing and capacity, toallow it to galvanize agreement and enforce rapid progress on a global “regulatory floor”(minimum standard) which safeguards public interests and enhances equality of access tofinancing. Early priorities should be cross-border crisis resolution, stopping institutions frombeing “too big to fail”, and reining in shadow banking.

· The IMF should monitor poverty and inequality in its reports to G20, and set targets for reducingthem in all country programs, by recommending increases in decent employment and wagelevels, more progressive taxes and measures to combat evasion, much higher anti-inequalityspending, and pro-poor financial systems. It should also sharply increase its lending capacity,especially with low-conditionality.

· The World Bank must set an ambitious target to increase the share of the bottom 40 per cent innational wealth (to match the top 10 per cent), and ensure this is implemented by: focusing itspolicy assessments and conditions on reducing poverty and inequality; committing to universalsocial protection floors; and making sure IFC finance is subject to an anti–poverty/inequalityresults framework as part of “One Bank”.

· Finally, the OECD could continue to exchange information on best practices among its members,and promote their involvement in improving tax policy and administration through their aidprograms. However, a World Tax Authority would be much better placed to take a comprehen-sive overview of global tax policy, dramatically reinforce the fight against illicit flows and taxevasion/avoidance, combat tax wars, revise tax treaties and promote progressive tax policies tofight inequality.


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Group of Twenty

G20 Governance


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Group of Twenty

G20 GovernanceJohn Ruthrauff and Ben Bestor, InterAction

In 1999, following the Asian financial crisis, the Groupof 20 (G20) Finance Ministers and Central BankGovernors began holding annual meetings to encouragepolicy coordination between advanced and emergingeconomies. This arrangement continued until September2008, when the Lehman Brothers financial firmcollapsed, leading to the largest bankruptcy filing in UShistory. Iceland’s banking system subsequently collapsed,and the foreign exchange market froze. It became clearthat the global financial sector was in danger of a totalmeltdown.¹

At the urging of French President Nicolas Sarkozy and UKPrime Minister Gordon Brown, US President George W.Bush convened the first G20 leaders’ summit inWashington, DC on November 15, 2008. The publicrationale for elevating the finance ministers’ and thecentral bank governors’ forum to a leaders’ summit wasthat addressing the 2008-2009 global financial crisisrequired quick, decisive action.² In 2009, at the third G20summit in Pittsburgh, leaders declared the G20 to be “thepremier forum” for international economic cooperation.³Today, the G20 represents 88 per cent of global GDP,two-thirds of the world’s population, and 60 per cent ofthe world’s poor people.⁴

Unlike the other global financial institutions evaluated inthis report, the G20 has no central governing body orsecretariat, no formal rules, and no permanent staff. Eachyear, leadership of the G20 falls to the host

country government, which assumes the rotatingpresidency of the body. The G20 President sets theagenda and invites guest representatives from regional

organizations and other non-G20 countries. The hostcountry convenes working and

expert groups, and decides when Sherpas and ministers(finance, labor, agriculture, etc.) will meet. (Sherpas arethe personal representatives of heads of state taskedwith coordinating the preparatory work.) The hostcountry also decides how the G20 will relate to non-governmental stakeholders from civil society, labor,business, and other interests. The G20 recentlyestablished a Troika consisting of the current, previous,and succeeding host governments to better align summitagendas for consecutive years. However, there has beenlittle observable reduction in the host government’sdominance over decision making.

While the G20 is often described as the world’s twentylargest economies, this is not actually the case. Spain, a“permanent guest” of the G20, has a larger economy thaneight other G20 countries but is not a member of thegroup. Conversely, Argentina and South Africa are bothmembers of the G20, even though they fall below the toptwenty, at 21st and 33rd, respectively.

The G20 countries in Table 1 are listed by size of grossdomestic product (GDP).⁵ The G8 countries are in boldand the BRICS (Brazil, Russia, India, China and SouthAfrica) in italics. The GDP ranking of the bottom twocountries is listed after the country.


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At the 2010 Seoul summit, leaders decided to invite nomore than five non-member countries to future summits.They further stipulated that at least two of the countriesinvited should be African.⁶ The G20 President typicallyinvites countries that serve as the chairs of regionalorganizations, such as: the African Union (AU), the NewPartnership for Africa’s Development (NEPAD), theAssociation of South East Asian Nations (ASEAN), theGlobal Governance Group (3G), Asian-Pacific EconomicCooperation (APEC), the Commonwealth of IndependentStates (CIS), and the Community of Latin American andCaribbean States (CELAC).

This form of “guest country” outreach has limited impact,however, as only three regional groups (AU, NEPAD, andASEAN) are consistently represented at each summit, andthe lead country representing each region changes yearly.The invited regional representatives are not full membersof the G20, and as such have limited influence. In pastyears, guest countries have included Benin, Brunei,Cambodia, Chile, Colombia, Equatorial Guinea, Ethiopia,Kazakhstan, Malawi, the Netherlands, Spain, Switzerland,Thailand, the United Arab Emirates, and Vietnam.

While the G20 is clearly more representative than the G8,there is nevertheless significant criticism directed towardsthe G20 by NGOs, academics, and think tanks for its lackof inclusiveness. When the G20 was established in 1999at the finance ministers’ and central bank governors’ level,members were selected not on a basis of shared,transparent, objective, or measurable criteria, but by theirability to “contribute to global economic and financialstability.”⁷ Following the onset of the 2008‐2009 globalfinancial crisis, the rush to upgrade the G20 to a summitof national leaders created significant governanceproblems. Efficiency was prioritized over legitimacy, andwhile this was an expedient decision at the time, thecontinued lack of a resolution on the issues of governanceand representation can no longer be excused. ⁸

Recommendations: To increase its inclusiveness, theG20 should:● Define clear parameters for determining

membership. The selection of members and thecriteria through which they are selected should betransparent, and G20 member countries should bereassessed every five years so that G20membership accurately reflects the world’s largesteconomies.

● Encourage greater engagement with externalstakeholders. This includes using multilateralchannels, such as the United Nations, to engagenon-member countries.

● Establish formal channels through which externalviews, especially those of low income countries, canbe taken into consideration and incorporated intodecision making.

● Conduct regular public consultations with interestedparties and share the consultation agenda in advance.

● Create more standardized criteria for determiningwhich non-member countries are invited to eachsummit, taking into account important factors suchas geographical representation.

The G20 must also take steps to improve transparency.One problem is the lack of public access to basicinformation and documents. Because the G20 lacks asecretariat, there is no central source that gathers andreleases information and documentation related to theG20’s activities. Each year, the G20 host countrymaintains a website to serve as a hub of information forthe summit. Unfortunately, the websites from previoussummits are often closed shortly after the change inleadership.

Public disclosure of information regarding decision-making is limited. While the G20 will release

Table 1: These rankings are derived from the most recent figures from the World Bank's World Development Indicatorsdatabase and reflect GDP in 2013.

United States France Italy South Korea Saudi ArabiaChina Great Britain India Mexico Argentina (21st)Japan Brazil Canada Indonesia South Africa (33rd)Germany Russia Australia Turkey European Union


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declarations, communiques, action plans, and otherofficial documents, the materials used to prepare thesedocuments and early drafts are typically confidential andnot accessible to the public.⁹ In instances where thisinformation is disclosed, it is often neither timely norcomprehensive.

The G20 process is divided into the Finance Ministers’Track and the Sherpas’ Track. The focus of the two trackschanges depending on the host country and since 2009have included a range of issues:

Finance Ministers’ Track: Framework for Strong,Sustainable and Balanced Growth, Financial Reform,Global Imbalances, Infrastructure Investment, Trade(under both Finance and Employment Ministers)

Sherpas’ Track (non-financial issues): Development,Employment, Anti-Corruption, Tax Evasion, EnergySustainability, Climate, Fossil Fuel Subsidies, Protectionof the Marine Environment, Agriculture

Issues are handled by working or expert groups, or arediscussed in ministerial meetings; however, there is norequirement to share materials or to issue reportsdescribing or justifying these groups’ decisions. Each G20government can release materials, statements, andcommuniques from the Sherpa, ministerial, and workinggroup meetings, but they rarely choose to do so.¹⁰ It isleft to the host country to provide a summary of thesekey decision-making meetings, which means that G20transparency during any given year primarily depends onthe host government. In the case of Russia in 2013, thereleases were little more than announcements the groupshad met, with few details on what was decided. Thisbehavior, unfortunately, is fairly typical of host nations.No host government has released a list of the countryrepresentatives attending the range of preparatorymeetings, leaving civil society representatives to petitionfor the release of this information. In many countries, itis difficult or impossible to obtain specific information onrepresentatives and decisions in the preparatorymeetings.

Recommendations: To increase transparency, the G20should:● Create standardized procedures for the timely

disclosure of information by the host country to thepublic. This should include not only products ofconsensus such as declarations, action plans, andcommuniques, but the minutes of ministerial, andexpert and working group meetings as well.

● Ensure that information regarding decision-makingis available to all external stakeholders. Establishingwebsites for G20 task forces and working groupscould help achieve this end.

● Establish a formal channel through which informationcan be requested.

The G20 also needs to improve accountability around theimplementation and monitoring of its decisions. Becausetheir commitments are not legally binding and there areno enforcement mechanisms, G20 countries are not heldproperly accountable for failing to deliver on theircommitments. As a consequence, there is often “a gapbetween rhetoric and delivery.”¹¹

Each G20 government is primarily accountable to itself,with some governments also accountable to their citizens.There are occasions when the G20 governments committo the implementation of a policy or the submission of areport by a specific deadline. However, in many instances,the G20 has made commitments in a way that limits theiraccountability.

For example, most of its “commitments” have no firmdeadlines and no benchmarks of progress. Paragraph 10in the Los Cabos Leaders Declaration (2012), for instance,states that G20 countries “will implement all ourcommitments in a timely manner and rigorously monitortheir implementation,” which provides no specifics forwhich they may be held accountable.

On the issue of green growth and sustainabledevelopment, paragraph 73 of the 2012 LeadersDeclaration states that G20 countries “will self-reportagain in 2013, on a voluntary basis…” Self-reporting on avoluntary basis greatly reduces the availability of reliablehard data with which to judge progress.

Nevertheless, the G20 has made some progress towardgreater accountability. The Anti-Corruption WorkingGroup has released annual progress reports since 2010and the Development Working Group conducted its firstaccountability assessment in 2013. Unfortunately,however, the G20 has not conducted assessments ofprogress in other areas. The G20 should create acomprehensive accountability mechanism thatencompasses all aspects of its work.


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Recommendations: To become more accountable, the G20needs to:● Establish firm deadlines for all of its commitments.● Strengthen the Mutual Assessment Plan (MAP) and

expand the Accountability Assessment Framework toassess progress in meeting all of the G20’s commitments.

● Adopt a standardized process for host countries tofollow during their respective presidencies that ensuresgreater accountability of host countries and greaterharmonization of year-to-year priorities.

● Create mechanisms to ensure that ex post assessmentsare being conducted regularly and that the G20 usesthese assessments to change its behavior.

Under the current process, responsibility is difficult to assigndue to two primary factors: the lack of a central organizationor secretariat; and the reliance upon other financialinstitutions to implement (or not) G20 decisions. At the 2013St. Petersburg Summit, for example, the country leadersdelegated over 30 tasks to other institutions. The tablebelow lists examples of assignments from the 2013 G20Communique.¹²

If the G20 wants to ensure that its policies and decisionsresult in a stronger and more stable global financial systemwhich promotes equitable and sustainable global

development, it needs to establish monitoring andevaluation procedures to assess the impact andeffectiveness of its actions and recommendations. The G20should conduct ex ante assessments to determine whetherits actions will positively impact other countries, particularlylow income countries. The G20 should also conduct ex postevaluations and assessments to determine the impacts ofits actions and recommendations. These assessmentsshould take into account economic, social, andenvironmental outcomes. Furthermore, the G20 should usethese assessments to change its behavior, when necessary.

While the G20 has conducted ex ante and ex postassessments of some of its actions, it does not conduct suchassessments for all of them. The G20 should take steps toadopt a standardized procedure to conduct assessmentsand evaluate its impacts on all actions. Increasingresponsibility also entails the creation of a formalizedexternal complaint mechanism through which grievancesfrom non-G20 governments and civil society may be heard.

Recommendations: To increase its responsibility, the G20should:● Create standardized procedures for conducting regular

ex ante and ex post assessments on all G20 actions andrecommendations.

● Create mechanisms to ensure that ex ante assessmentsare being conducted regularly and that the G20 usesthese assessments to change its behavior.

● Create a formal external complaint mechanism throughwhich grievances may be heard.

Organizations TasksInternational LabourOrganization (ILO)

Partner with the G20 Task Force on Employment to consider how G20 countries might contribute tosafer workplaces. (Para. 34)

FSB Monitor financial regulatory reforms impact on long-term investment financing. (Para. 38)

Global Forum Establish a mechanism to monitor and review the implementation of the new global standard onautomatic exchange of information. (Para 51)

OECD, Global Forum Work with the Development Working Group to show how developing countries can overcomeobstacles with the new automatic exchange of information standard. (Para 51)

IMF, World Bank Assist low-income coutnries to develop prudent medium-term debt management strategies andenhance their debt management capacity. (Para. 57)

IMF Develop proposals on how to incorporate global liquidity more broadly into the IMF’s surveillancework. (Para. 58)

FSB Monitor, analyze and report on the effects of evolving regulator reforms on emerging markets anddeveloping countries. (Para. 65)


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¹ Paola Subacchi, “Adapting to the New Normal: The G-20 and the Advanced Economies from Five Years afterWashington,” from The G-20 at Five: Time for Strategic Leadership, Kemal Dervis and Peter Drysdale, editors, BrookingsInstitution, 2014, page 34, footnote 34.² Kemal Dervis and Peter Drysdale, editors, “The G-20 at Five: Time for Strategic Leadership”, Brookings Institution,2014, page 3.³ G20 Leaders Statement: The Pittsburgh Summit, 24 September 2009, paragraph 19.https://www.g20.org/sites/default/files/g20_resources/library/Pittsburgh_Declaration_0.pdf⁴ Peter I. Hajnal, “The G20: Evolution, Interrelationships, Documents, Global Financial Series,” Ashgate, 2014, page 19.⁵ These rankings are derived from the most recent figures in the World Bank's World Development Indicators databaseand reflect GDP in 2013. http://databank.worldbank.org/data/download/GDP.pdf⁶ The Seoul Summit Document, 12 November 2010, paragraph 74.https://www.g20.org/sites/default/files/g20_resources/library/Seoul_Summit_Document.pdf⁷ Peter I. Hajnal, “The G20: Evolution, Interrelationships, Documents, pages 19‐20.⁸ Kemal Dervis and Peter Drysdale, editors, The G‐20 at Five: Time for Strategic Leadership, Brookings Institution, 2014,page 38.⁹ Peter I. Hajnal, The G20: Evolution, Interrelationships, Documents, page 171.¹⁰ Some countries have been quite open in terms of sharing information. The U.S. anti‐corruption team, consisting ofstaff from the White House, Treasury, Justice, and State, has been very open with civil society, sharing information andencouraging feedback.¹¹ Peter I. Hajnal, The G20: Evolution, Interrelationships, Documents, page 148.¹² Ben Bestor, “G8/G20 Delegation of Duties,” July 2014, InterAction.


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Steve Price-Thomas, Oxfam InternationalEmma Seery, Oxfam Great Britain

G20 Impact

G20: High Ambitions, Limited Post-Crisis Impact¹

For 10 years, the G20 was a relatively obscure meetingof finance ministers. In 2008 the global economic crisisthrust this Group of 20 into the limelight, upgraded it toa summit-level meeting of world leaders, and led to itbeing cast as the world’s premier economic forum.The G20’s mandate is to promote ‘open and constructivediscussion between industrial and emerging-marketcountries on key issues related to global economicstability’. Chairing of the G20 rotates on an annual basis.It is an informal forum – without a home or a secretariat– but with G20 countries representing around 90 per centof global gross national product, 80 per cent of worldtrade (including intra-EU trade) as well as two-thirds ofthe world population, its influence on the world economyis unrivalled.

This influence goes hand in hand with the ability to makedecisions that affect the poorest countries and have animpact on development, as most of the G20’s decisionshave so-called ‘spill-over effects’ that can be positive ornegative for non-members. In 2010 the G20 committedto a development agenda with the Seoul DevelopmentConsensus as a foundation. However, the G20’s lack ofinstitutional memory means that many of itscommitments are not followed through. Even where theG20 has published accountability reports (such as by theDevelopment Working Group (DWG) in 2013), they do notgo so far as to look at the real-world impact of the G20’spolicies.

The G20 are global rule-setters, so they should measureand be accountable for the impact of their economicpolicy decisions (nationally, as a group, and in otherinstitutions). This would be arguably more telling interms of whether they will be a force for good indevelopment in the coming 20 years.

On tax for instance, they should be committed tomeasuring the impact of profit shifting on their economiesand on developing countries, and then measuring theimpact of their policies in reversing this trend. That wouldbe meaningful.

Responding to public pressure in several G20 countries,especially following tax scandals involving majormultinational corporations such as Apple² and Starbucks,³in 2012 the G20 mandated the OECD Secretariat and itsCommittee of Fiscal Affairs (CAF) to initiate a set ofreforms of the international tax system. In February 2013,the OECD published a report, addressing Base Erosion andProfit Shifting (BEPS). This report gave a damning analysisof the deficiencies in today’s global tax system, includingthe loopholes and secrecy that allow profit-shifting, andthe failure of international rules to ensure that companiespay taxes where real economic activity takes place, andvalue is created.⁴ The G20 played a role in demonstratingthe scale of the problem, and the need for internationaltax rules to be urgently reformed.

Building on this, in July 2013, the OECD launched its ActionPlan on Base Erosion and Profit Shifting. The reportidentifies 15 actions to tackle BEPS, and assigns eachaction to concrete working parties and task forces, andsets deadlines for the delivery of the expected outputs.

The G20 Summit in September 2013 endorsed the OECDaction plan and called on the OECD to produce guidelinesin the coming years, and have taken a number of specificsteps since initiating the process that have helped toprogress this agenda. However they have not done


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enough to recognize the urgent need for developingcountries to participate and benefit from tax reform.

The G20 have for instance agreed a new global standardfor the automatic exchange of tax information. However,to date they have made no commitment to allowdeveloping countries to benefit from this arrangementuntil they are able to fully reciprocate, indicating a lack ofrealism and urgency in ensuring tax reforms are supportingthe countries that most desperately need to recoup lostrevenue.

Developing countries have been consulted on the BEPSprocess, but the G20 and OECD have failed to give themthe opportunity to participate fully in the reform processon an equal footing. The process has also been prone toinfluence by vested interests. Almost 87 per cent of thesubmissions to the OECD’s 2013 consultation on draft rulescame from the business sector who were almost allopposed to country-by-country reporting.

Recommendation: The G20 must do more to show thatthey are serious about the urgent need for tax reform thatmatches the scale of the challenge identified by the OECD,and to ensure developing countries have an equal say andopportunity to benefit from reforms. The G20 will remainunder public and media scrutiny to see through this agenda.

After the G20 was established as a summit-level body in2008, it set itself an ambitious agenda of promoting“shared”, “balanced” and in 2013, “inclusive” growth.Whilst never going as far as committing to economicpolicies that reduce economic inequality, the explosion ofinequality in the last 30 years, along with the financial andeconomic crises, has certainly pushed the G20 to seek toget ahead of debates about a fairer global economy.

Economic inequality is a barrier to poverty reduction, andwith G20 countries themselves being home to more thanhalf of the world’s people living in poverty,⁵ this should beof immediate concern. Projections by Oxfam and Brookingshave indicated that reducing inequality could lift millionsof people out of extreme poverty in the G20’s emergingeconomies⁶ for instance.

Despite this, the G20’s actions have failed to match itsambitions or keep up with the demand for action, and

most recently, the 2014 Australian Presidency has to datestepped back from the 2013 Russian Presidency’s focuson “inclusive” growth. Even “at home” this agenda isfailing, with income inequality increasing in most G20countries.⁷

If the G20 is serious about tackling inequality as part ofa fairer economic agenda that is in the interests of themajority – both in and beyond G20 nations – they mustmake more specific commitments. A promising startwould be a collective commitment to measuring thebenefit of national economic and development policy tothe poorest 40 per cent, and to report publicly on this.The G20 are also well positioned to ensure that majorinstitutions like the IMF and World Bank do the same, forinstance getting the IMF to include Gini data in Article IVconsultations.

The G20’s record on tackling gender inequality as part oftheir growth is equally questionable. Only one high-income country in the G20 – South Korea – has achievedgreater income equality alongside economic growth since1990.⁸ However, this growth is built on gender inequalityin wages and discriminatory practices: South Korea ranksworst among OECD countries on the gender wage gap.⁹Evidence also points to the role that economic policieswhich aim to close the gap between women and men canhave on growth. For instance if women’s paidemployment rates were the same as men’s, the US’s GDPwould increase by 9 percent, and growth could increaseby 20 percent across fifteen major developing countriesby 2030.¹⁰

Recommendation: The G20 should also support a post2015 goal to reduce economic inequality by 2030, andcommit to reducing income and wealth inequality in allcountries.

Average global income per person has doubled over thelast forty years¹¹. The proportion of the world’spopulation living in poverty has fallen significantly overthe same period, but the absolute number remains highand the gap between the rich and the poor is still growing.The poorest billion people in the world have increasedtheir share of world income since 1990, but from a tiny0.2 per cent to just short of 1 per cent.¹² And despitesome progress, G20 countries are still failing the very


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poorest people; in 2009, more than half of people livingon less than US$1.25 per day were in G20 countries.¹³

Through the 2010 Seoul Development Consensus forShared Growth, G20 countries raised hopes that theywould deliver reductions in poverty and inequality for all, arguing that ‘for prosperity to be sustained it must beshared’. However the G20 needs to match action torhetoric, and thus far their development agenda has beenstymied by a lack of political will and a failure ofmultilateralism.

The DWG has largely been separated from the economicand political power of the Finance and EconomicsMinistries of G20 countries, meaning there has been afailure to connect and align the highly charged debateson global tax rules and economic policy to a developmentobjective. The lack of momentum behind domesticresource mobilization is a case in point; significantprogress cannot be made on this agenda without politicalcommitment from Finance Ministries yet the debate hasbeen largely confined to Development Ministries.

Recommendation: Rather than measuring the delivery ofactivities, the G20 must move to measuring and beingpublicly accountable for the positive and negative impacton development, including the spill-over of their decisionson non-G20 countries. This is far from the reality today.

Whether looking at G20 members, or the entire globe, orjust at the poorest countries, unemployment continuesat elevated rates. Youth unemployment is strikingly huge:on a global level 13.1 per cent are unemployed but in partsof the Middle East and North Africa it reaches 40 per cent.Overall participation in the global labor market hasdeclined as people drop out or revert to the informalsector. Even where unemployed has improved, wageshave stagnated or even declined.¹⁴ This reality challengesthe strength of the G20 commitment to “strong, sustainedand inclusive growth.”

Recommendation: The G20 should recommit its energiesto strong, sustained and inclusive growth—with equity byproviding and raising minimum wages that bring full timeworkers out of poverty, while raising the social protectionfloor for all.

The G20 has commissioned work on innovative financingfor development, but has largely failed to follow throughon the recommendations of the reports it has received.The G20 is to be commended for an initiative to reducethe costs of remittance flows within its existing strand ofwork on Financial Inclusion. However the real-worldimpact of this work is currently unclear.

The G20 has not picked up the remit of aid, but theirmembership does of course include G8 countries thatcollectively made a significant aid commitment in 2005that was not delivered. The G8’s Deauville AccountabilityReport produced in 2011 claimed to have delivered $49of their $50 billion promise, when in fact the OECDshowed that the accurate figure – with inflationadjustment – was just $31 billion.¹⁵ Whilst this is not a G20failure, it is a failure of some G20 nations to live up to theiraid and development finance commitments.

Recommendation: All G20 nations should comply withtheir commitments to aid and development finance.


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Financial Stability Board

FSB Governance

¹ This chapter draws on several recently published Oxfam papers.² US Senate Committee, Homeland Security and Governmental Affairs, Permanent Sub-Committee on Investigations, May 2013Hearing, Report 15 October 2013. http://www.hsgac.senate.gov/subcommittees/investigations/media/levin-mccain-statement-on-irelands-decision-to-reform-its-tax-rules³ UK Parliament, Public Accounts Committee inquiry, HM Revenue and Customs Annual Report and Accounts, Inquiry TaxAvoidance by Multinational Companies, November 2012.http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/71605.htm⁴ OECD, (2013). Addressing base erosion and profit shifting. http://www.keepeek.com/Digital-AssetManagement/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en#page1⁵ Sumner, Andy. Global poverty and the 'new bottom billion': what if three-quarters of the world's poor live in middle-incomecountries? Working paper No. 349, Institute of Development Studies, 12 September 2010.⁶ Oxfam, (2014). Inequality Report forthcoming.⁷ Oxfam, (2012). Left Behind by the G20? How inequality and environmental degradation threaten to exclude poor people from thebenefits of economic growth. http://www.oxfam.org/en/policy/left-behind-by-g20⁸ Ibid.⁹ South Korea slipped from 108th to 111th position on the World Economic Forum (WEF)’s Gender Gap Index due to declines inlabor force participation and wage equality. Asia News Network, (2013). Philippines best performer in Asia-Pacific in gender equality,says WEF.¹⁰ UN Women. Facts and Figures: Economic Empowerment. Available at http://www.unwomen.org¹¹ Based on global GDP per capita in constant prices; World Bank Development Indicators Database (1970–2010).¹² Cummins, M., Ortiz, I. (2011). Global Inequality: Beyond the Bottom Billion, UNICEF April 2011.¹³ Sumner (2010).¹⁴ International Labor Organization, (2014). Global Employment Trends 2014: ExecutiveSummary.http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_234107.pdf¹⁵ Oxfam, (2011). Cooking the Books Won’t Feed Anyone: The G8 Shamefully Try to Cover Their Tracks on Broken Promise.http://www.oxfam.org/sites/www.oxfam.org/files/g8-cooking-the-books-briefing-180511.pdf


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Financial Stability Board

FSB GovernanceDavid Kempthorne, Centre for International Governance Innovation (CIGI)

The Financial Stability Board (FSB) was created at theG20 Leaders Summit in April 2009, replacing itspredecessor, the Financial Stability Forum (FSF). Whereasthe FSF was primarily tasked with promoting compliancewith existing international financial standards after theAsian financial crisis, the FSB was tasked with coordinatingthe creation and implementation of new financialstandards in concert with sector-specific standard settingbodies. The task of the FSB has been immense.

The FSB burst on to the international financial regulatoryscene with lofty promises as US Treasury Secretary TimGeithner stated that the FSB would become “a fourthpillar” in global economic governance alongside theInternational Monetary Fund (IMF), World Bank (WB), andWorld Trade Organization (WTO). Geithner’s statementbrought with it the promise of a renewed commitment tostrengthening the international financial architecture andthe resiliency of the global financial system. As the post-crisis reform process has unwound, the promise ofmeaningful and coordinated regulatory reform has wanedand the same set of governance and regulatory challengesof previous crises remain.

INCLUSIVENESS

The FSB is a financial regulatory club, which is, bydefinition, exclusive. Membership is restricted to G20members, Hong Kong, the Netherlands, Singapore,Switzerland, Spain, the European Commission andEuropean Central Bank. The FSB is much less exclusive than

its predecessor, as it now represents 70 per cent of theworld’s population and 90 per cent of the world’s GDP. Incontrast, the G8 only represents 14 per cent of the world’spopulation and 65 per cent of the world’s GDP.¹ Theinclusion of a wider set of countries is expected to helpstrengthen the implementation of financial standards byfacilitating regulatory ‘buy-in’ from emerging markets andother previously excluded countries. Despite theexpansion of membership, an exhaustive list of non-member countries remains. Given the wide-reachingeffects of decisions made at the FSB, combined with thepressure placed on countries to adopt financial standardsthat they had no role in negotiating through the IMF’sReport on the Observance of Standards and Codes (ROSC)program, this is problematic.²

In order to strengthen the participation of non-members,the FSB has established six regional consultative groups(RCGs) in the following regions: Americas, Asia,Commonwealth of Independent States, Europe, MiddleEast and North Africa, and Sub-Saharan Africa. The FSB’sRCGs have a relatively broad membership base with a largegroup of FSB members and non-members occupying a seaton each of the respective RCGs. The creation of the RCGsis a welcome addition to the exclusive regulatory club.

RCGs provide two important functions that are critical tothe international regulatory regime. First, the aim of theRCGs is to create an effective mechanism that allowsnon-member countries to discuss the regulatory issuesand systemic risks that their jurisdictions face.


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Second, RCGs allow non-members to communicate theirpreferences on regulatory issues and their impact on localfinancial markets to the FSB and its members. A prevailingproblem in the governance of global financial markets isthat international financial standards have historicallybeen created by an exclusive group of regulators fromdeveloped financial centers. Financial standards are thenapplied to local market contexts and they often fail toreflect the real differences between national financialmarkets, which ultimately hamper their effectiveness.Additionally, the regulatory decisions of developedfinancial centers can directly impact least developed,developing and emerging markets. For instance, nationaleconomies that are heavily reliant on commodity exportsor imports are directly affected by derivatives marketregulation through its impact on the global market pricefor certain commodities.

So, to what extent have RCGs been effective? The simpleanswer is that it is unclear. Since there is no public recordof who attends each meeting, it is difficult to ascertain theextent to which non-member regulators find thesemeetings useful. Recent publications produced by Asianand Americans RCGs on a number of regulatory issue areashave provided a more in-depth discussion of salient policyissues. These publications have been promising as theyindicate that there is a stronger degree of coordinationand cooperation between RCGs. However, the impact thatthese discussions have on FSB decision-making processesis unclear. One of two co-chairs (one FSB member and onenon-member) from each RCG report to the FSB plenary.However, this responsibility is not explicitly delegated tonon-member co-chairs, which means it is likely that theFSB member co-chair reports on behalf of the RCG.Nonetheless, there is no formal channel for RCGs toensure their concerns or recommendations will beconsidered by the FSB.

Recommendation: The FSB should strengthen thecommunication mechanisms between the FSB’s maindecision-making bodies and RCGs. To do this, the FSB mustdevelop a clear and transparent framework that outlinesthe constitution of RCGs and the way in which RCGs feedin to the FSB’s standard setting and policy process.Another less obvious challenge is that some RCG memberslack sufficient resources to attend international regulatorycommittee meetings. This can hamper some countries’participation in standard setting and, ultimately, weakensthe international regulatory regime in two ways: first byreducing the political buy-in of non-member countries;and second, through the creation of standards that are

not best-fit for local financial, judicial and legislativecontexts.

Relative to its predecessor, the FSB has improved on itsinclusiveness by expanding its membership and throughthe creation of RCGs, which remain a weak mechanismfor influencing policy outcomes. Strengthening thesemechanisms would make a significant improvement to theinclusiveness of the FSB and the effectiveness of financialgovernance.

TRANSPARENCY

The FSB is one of the more opaque international economicgovernance institutions. The opacity of the FSB’s policy-making process is a double-edged sword. It has thepotential to protect financial regulators from the pressureof private financial market actors. At the same time it hasthe potential to make the FSB less accountable to thewider public.

The FSB does publish a comprehensive list of consultationpapers, discussion papers, financial standards, andthematic and peer reviews of the implementation offinancial standards; it should be presented in an accessibleformat on its website. The FSB has also introduced regularconsultative periods on initial drafts of financial standardsto enable public comment, which are published at the endof the consultative period, unless submitters specificallyrequest otherwise. This has significantly improved thetransparency of the financial standard setting process.The FSB’s outputs are relatively transparent but how theFSB makes its decisions and conducts internal work is not.

Little information is available to the public regardingmeetings of the FSB Plenary and the RCGs, providingneither meeting schedules beforehand nor informationon who attended the meetings. A press release after thefact provides only a broad picture of the agenda discussedat each meeting. Meetings of the FSB’s key committees,³within which the bulk of the FSB’s key decisions are madebefore being signed off by the Plenary, are similarlyconfidential.

International financial regulatory organizations havetraditionally granted private financial market actorsprivileged access to the standard setting and policy-making process. Standard setting bodies have traditionallyregarded financial firms as the primary stakeholders instandard setting processes as the regulatory burden fallslargely on these actors and because financial firms


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implement these financial standards through their internalprocesses. In truth, financial standards have a far broaderarray of stakeholders because financial markets and theallocation decisions that they impact affect the everydaylives of households, farmers, and the broader businesscommunity. Unfortunately, unlike other issue areas in theeconomy, the connection between finance and economicoutcomes has been harder to conceptualize (see FSBimpact section). This has meant that at both the domesticand international levels the balance of power betweenthe lobbying power of private financial firms and publiccivil society heavily favors financial firms who have a directmaterial interest in the outcomes of internationalstandards setting bodies. The FSB’s policy-makingprocesses need to be sufficiently transparent so the publiccan be assured that parties with direct material interests(private financial firms) and other interested parties (e.g.,academics and civil society) have comparable access tothe FSB’s policy-making process and that the policy inputfrom private financial actors is clearly disclosed. The FSBhas made progressive steps towards the greater inclusionof civil society actors. Over the past year, the FSB hasengaged with civil society on a number of occasionsaround the world including hosting FSB Watch – a coalitionof public interest groups – in June 2014.

Recommendation: The G20 should update the FSB’sCharter to require the FSB to publicly disclose: 1) whichactors or groups, both financial and civil society, and whichfinancial regulators were consulted or otherwiseparticipated in the policy-making process; and, 2) a list ofFSB Working Groups that are responsible for financialstandards. This list may be published after the FSB hasreleased a financial standard rather than during thepolicy-making process to protect the integrity of thestandard setting process.

ACCOUNTABILITY

The FSB is accountable to the G20, which provides itsmandate and approves and/or guides the regulatory workprogram of the institution. The FSB reports annually to theG20 Summit on the progress it has made on assignedtasks. The FSB has also developed a number of internaland relatively informal decision-making procedures thatensure that the FSB’s decisions and outcomes reflect theinterests and preferences of its members. The Secretariatis led by a Secretary General who serves a 5-year term andis answerable to the Chairman of the FSB. The Chairmanof the FSB is appointed by the Plenary. The FSB’s maindecision-making bodies are empowered to appoint their

own chair and decision-making procedures have beendescribed as a “rough approximation between consensusand general agreement.” There are around 25 secretariatstaff who are seconded to the FSB from nationalregulators and by international institutions such as theIMF. A few (around 6) are full time FSB staff. The powersof each decision-making body to endorse financialstandards and agree to their release ensure that FSB staffis held accountable to the member states.

The FSB is held accountable to the G20 and its memberstates but not to the broader set of stakeholders that areimpacted by its decisions. There are real and meaningfulreasons why standard setting bodies, like the FSB, havechosen to maintain exclusive memberships and to makethose institutions accountable to its members. However,it is also important to recognize that the decisions madeby these institutions have an immense impact on a widearray of stakeholders and that mechanisms must becreated to ensure that the FSB is held accountable forthose impacts and how they can be addressed.

As the previous sections have discussed, to ensure thatthe FSB is made more accountable it is necessary that theorganization be made more transparent and moreinclusive. In order for interested parties and affectedstakeholders to effectively respond to the policypreferences and financial standards created by the FSBand its associated institutions, these actors must haveaccess to the information used to make these decisions.Doing so will enable interested parties to communicatetheir views, to effectively criticize the decisions made bythe FSB, and to draw attention to the impact of the FSB’sdecisions on the affected parties. Furthermore, affectedstakeholders must have access points to the FSB policy-making process to ensure that their views can be heardand effectively communicated to FSB policy-makers. Doingso will ensure that regulators and decision makers havefull access to the information necessary to make informedpolicy choices.

Recommendation: The FSB should establish an internalworking group that establishes the FSB’s external relationspolicy with the aim of designing effective mechanisms toensure the FSB effectively and adequately engages andcooperates with its stakeholders.

RESPONSIBILITY


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The international financial regulatory regime has beenplagued with the issue of non-compliance and thechallenges of implementation. The FSB and other financialstandard setters are soft-law bodies, denoting that theirmembers are not legally bound to implement financialstandards in the same manner that members of othermultilateral organizations such as the IMF, WB, and WTOare required to. The FSB and the international standardsetting regime lack a strong set of institutionalmechanisms to ensure compliance with internationalfinancial standards.

The review of the FSB charter reiterated that the G20intends to maintain the FSB’s soft-law status by statingthat turning the FSB in to a multilateral treaty-basedorganization was “not an appropriate legal form at thisthis juncture.”⁴ The FSB continues to rely on the “namingand shaming” of non-compliant countries who areoverseen by the FSB’s peer-review process for G20countries, and the IMF’s Report on the Observance ofStandards and Codes (ROSC) and Financial StabilityAssessment Program for all countries. The problem withthis approach, as revealed by the events preceding thecrisis, is that coordination of national financial regulatoryframeworks and the commitment to the adoption ofinternational financial standards remains reliant ondomestic political processes. A 2011 IMF Review of theStandards and Codes Initiative concludes that theeffectiveness of the ROSC in addressing critical gaps indomestic regulatory frameworks is highly dependent oncountries exhibiting “strong ownership and internalizationat all levels”.⁵ The same can be said for theimplementation of G20 post-crisis reforms.

Throughout the post-crisis reform process, domesticpolitics have often over-ruled international consensus.The continued weakness of the international regulatoryregime allows states to avoid responsibility for theirnon-compliance with international financial standards.Binding themselves to a hard law international regimewould provide states with the opportunity to resistdomestic political pressures and commit to the adoptionof best practice standards, as well as ensuring a levelplaying field between domestic financial systems. A coreconcern of states is that international financial standardsand associated review processes do not reflect the uniquestructure of domestic financial systems or legal traditionsof each jurisdiction. These are valid concerns that shouldbe addressed by the current international system. Doingso would make states more willing to accept a bindingcommitment to international financial standards. Thereremain a number of important and reasonable political

and regulatory barriers to the international systemcreating a binding commitment to the implementation offinancial standards. This is a long-term political projectthat is incredibly ambitious.

The FSB has maintained a strong commitment promotingcompliance with international financial standards. It istime for the FSB to recognize that national regulatorydifferences exist and that this has an impact on themanagement and governance of financial stability. TheFSB should dedicate a working group to determine theimpact of differences in national regulatory frameworkson the stability of the international financial system andto identify innovative mechanisms that recognize thesedifferences, manage their impact, and mitigate theirimpact on the resiliency of financial firms. The 2008 globalfinancial crisis revealed the impact of counterparty risksfor stability of individual financial firms and the financialsystems as a whole. Integrating the impact of divergingregulatory frameworks in the counterparty risk of foreignfinancial firms would provide an effective mechanism toreflect the risks of differences in regulation and promoteadherence to international financial standards and norms.However, this would require financial regulators,particularly prudential bank regulators, to strengthencooperation and information sharing mechanisms.Domestic legislative and judicial barriers to the effectivesharing of information on financial firms remain. In an eraof near unfettered financial globalization, this is a relic ofthe past and needs to be addressed.

Recommendation: During the FSB’s planned review ofits representation, the FSB should propose to the G20 toexpand the Plenary membership to include seats fornon-member co-chairs of the six RCGs. This would ensurea strong voice for regional representatives and increasethe overall effectiveness of financial regulatory reform.

¹ Alejandro Vanoli, “FSB: Current Structure and Proposals fora More Balanced Representation,” in The Financial StabilityBoard: An Effective Fourth Pillar of Global Economic


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Governance? edited by Stephany Griffith-Jones, Eric Helleiner,and Ngaire Woods. Waterloo, ON: Centre for InternationalGovernance Innovation, Waterloo, 2010: 23 – 27.² The IMF’s ROSC program was created after the Asian financialcrisis in response to the G7’s push to strengthen theimplementation of financial standards. The IMF assessescountries on their implementation of international financialstandards as defined by the FSF’s Twelve Key Standards forSound Financial Systems. These financial standards arepredominantly created within standard setting bodies in whichthe majority of input and power over decision making processesreside in the hands of the G10 (before the crisis) and the G20(after the crisis). The IMF’s ROSC program places pressure oncountries to implement financial standards that were createdwithout their participation.³ FSB key committees include: Steering Committee, theStanding Committee on Assessment of Vulnerabilities, theStanding Committee on Standards Implementation, theStanding Committee on Supervisory and Regulatory

Cooperation, and the Standing Committee on Budget andResources.⁴ Financial Stability Board, (2012). Report to the G20 Los CabosSummit on Strengthening FSB Capacity, Resources andGovernance.http://www.financialstabilityboard.org/publications/r_120619c.pdf⁵ Claudia A. Prado, (2014). 2011 Review of the Standards andCodes Initiative: ROSC Case Studies.http://www.imf.org/external/np/pp/eng/2011/021611b.pdf asof 7 August, 2014.

*

* Author recommended a score of 2. Editors adjusted to a 1.5 to maintain consistency of assessments across allinstitutions. Criteria for “Responsibility” was applied more consistently in the 2014 Report as compared to the 2013Report. This has led to a slight downgrade, as judged by the editors.


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FSB Impact

An inadequately governed financial system has severeconsequences for the real economy. The economic andsocial costs of the 2007-08 financial crisis were (andcontinue to be) enormous.¹ Since then, income inequalityhas intensified, unemployment has soared, and the gainsin global poverty alleviation have come under threat. Tomitigate, if not prevent, such consequences in the future,global efforts have focused on strengthening theoversight and resilience of the financial system. Thissection will assess the Financial Stability Board (FSB), theinstitution responsible for coordinating these globalefforts, and the impact of financial reform on the realeconomy. As Rupert Thorne, FSB Deputy SecretaryGeneral, said in a conversation with civil society in April2014:

“We should not think about‘stability’ as an end in itself, but on

what stability achieves.”

This assessment will focus largely on the level of “safetyand soundness” in the financial system for two reasons:First, a safe and sound financial system means less riskto the real economy and lower probability of futurefinancial crises. Second, the “safety and soundness” ofthe global financial system is an “essential pre-requisite”for long-term investment finance, according to a 2013FSB report.² Less risk and greater long-term investmentwould both help to increase employment, reduceinequality and achieve sustainable development goals.

To increase “safety and soundness,” the FSB hasidentified five vital reform areas: 1) Too-big-to-fail, 2)Cross-border Bank Resolution, 3) Over-the-counter (OTC)Derivatives, 4) Shadow Banking, and 5) the Global LegalEntity Identifier System (GLEIS).

Therefore, and for the purpose of this assessment,greater progress in these reforms will indicate greater“safety and soundness” in the financial system. Theultimate objective is to assess how “safety andsoundness” impacts the real economy.

In this assessment, each reform area is evaluated byseparate analysts who were asked to:

1) Assess the progress of each of these reformareas, according to three “progress criteria”(FSB Role, Status of Reform, and Substance ofReform); and

2) Assess how progress in reforms has affected“safety and soundness” and to identify how thislevel of risk impacts to the real economy, espe-cially for developing countries.

Risk or “safety and soundness” is assessed on a 4-pointscale: 1-Negative, 2-None or Limited, 3-Slightly Positiveand 4-Very Positive. When assessed to be in betweentwo scores, half-points are assigned.

NOTE: This year’s report does not assess the FSBon Trade in Financial Services, Sovereign Debt orTaxes, as it did in 2013. Although the FSB has themandate to address these issues through itsresponsibility for global financial stability, the 2014report only assesses the top five areas of workprioritized by the FSB. Authors are members of FSBWatch, a global coalition promoting the publicinterest in global financial rule-making, and haveprepared these assessments after face-to-faceconsultation with FSB Secretariat staff.


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Marcus Stanley, Americans for Financial ReformNavin Beekarry, George Washington Law School

The “too-big-to-fail” (TBTF) issue arises in the context ofthe failure and distress of large and complex financialinstitutions (LCFIs) - or “systemically important financialinstitutions” (SIFIs) - that, by virtue of their size, marketimportance, and interconnectedness could causesignificant dislocation within the global financial systemand economy. The economic impacts that their failurecould create would be so severe that they would putpressure on national authorities to bail them out in orderto avoid financial instability and economic chaos.

The large-scale bailouts using public funds that wereobserved in 2008-2010 presented serious problems ofmoral hazard. They created an implicit subsidy for thebank, as counterparties were willing to provide funds oneasier terms, and encourage excessive risk-taking bybanks. The downside of these risks was absorbed by thepublic.

Role of FSB: ModerateSince the G-20 Seoul Summit decision to adopt aframework to reduce the moral hazard of SIFIs (SIFIFramework), the FSB has made important contributionsto this effort.

A major contribution of the FSB has been designingmethodologies for assessing global systemically importantbanks (G-SIBs) and insurers (G-SIIs). To date, 28 G-SIBs and9 G-SIIs have been designated. Higher loss-absorptioncapacity, more intensive supervision, and resolutionplanning requirements will apply to all these institutions.

As of the end of 2013, the FSB had strengthenedcooperation on TBTF at the global policy developmentlevel – generating agreement on 33 per cent of proposedreforms. Another 50 per cent are near completion at thepolicy level. Much of this positive momentum can beattributed to the FSB. However,considerable gaps remainwith implementation at the domestic level. There also hasnot been adequate progress at the FSB to removeobstacles and generate cooperation on informationsharing agreements.

More broadly, the FSB has provided little guidance onwhether agreed-upon reforms are adequate to end TBTF.

The FSB also has not explored the possibility of morefar-reaching structural reforms³ which could help reducethe moral hazard of TBTF, despite important efforts at thenational level along these lines, including the US VolckerRule, the UK Vickers Commission reforms, and structuralreform efforts in the EU. The FSB could play a valuable rolein improving communication and consensus on thesereforms and integrating them into the internationalregulatory consensus.

Status of Reform: ModerateA newly strengthened capital regime requiring additional“going-concern loss absorption capacity” (GLAC) for G-SIBshas been finalized and in many cases the G-SIBs arebuilding the extra capital ahead of schedule.⁴

Many jurisdictions are implementing enhancedsupervision for risk management, risk aggregation, andrisk reporting. There has also been some progress inadvancing the FSB’s “Key Attributes of Effective ResolutionRegimes.” For example, the EU Bank Recovery andResolution Directive will soon be adopted. Whiledifferences between the EU and US approaches remain,both plan to require TBTF banks to hold enough lossabsorbency capacity to cover or “bail-in” their losses.

At the same time, there is evidence that banks have notyet made internal changes required to make resolutionfeasible. US financial regulators recently rejected theresolution plans of major US global banks on the groundsthat the plans were unrealistic and did not reflect the kindof structural changes necessary to make resolutionsuccessful. It seems likely that similar problems exist inother G-SIFIs as well.

Substance of Reform: LimitedAlthough some key reforms are progressing, there isconcern that these reforms are inadequate to end TBTF.While loss absorption has increased, it has done so froma low base and many economists believe that SIFI capitallevels remain well below optimal levels. Significant doubtsalso remain about capacities for cross-border resolution.Some regulators argue that more changes are necessaryto ensure that there is sufficient “bail in” debt held byglobal banks to facilitate a resolution while protectingtaxpayers. Others believe additional steps are necessaryto ensure that foreign subsidiaries can either remainoperational or be resolved without triggering conflictsbetween different national supervisors (see section belowon Cross-Border Resolution).


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Impact Assessment: 2 (Risks Remain the Same)

The most recent IMF Global Financial Stability Reportestimates that the total implicit subsidy for TBTF banksrun into the hundreds of billions of dollars - that is billionsof dollars committed to supporting the financial sector atthe expense of infrastructure, healthcare services,education programs or international aid.

In addition, based on BIS studies, another banking crisiscould cost the global economy around US $44 trillion.⁵This would be devastating to the real economy, where thepoorest people and countries would absorb adisproportionate amount of these costs. Until the FSB andnational regulators agree on a way to end TBTF, aninclusive and sustainable economic recovery from the lastfinancial crisis is severely threatened.

Recommendation: To reduce the probability and severityof another financial crisis, which would intensifyunemployment and income inequality, the FSB must holdnational regulators accountable for fully implementingTBTF reforms.

Katarzyna Hanula-Bobbit, Finance Watch

The recent financial crisis demonstrated that disorderlyfailure of systemically important financial institutions(SIFIs) has destabilizing effects on the economy as a whole.An insufficient resolution process for a SIFI can havesevere implications for the countries that host SIFIbranches and subsidiaries. The FSB is responsible forcoordinating global efforts to address the challenges ofcross-border resolution.

Role of FSB: ExcellentFSB has managed to draft new international standards foreffective resolution regimes aimed at providing robustalternatives to a zero-failure regime for SIFIs. The FSB’s“Key Attributes” provide guidelines for the basic elementsthat must be included in any effective resolutionframework that will both safeguard financial stability andminimize the use of public funds.⁶

FSB has also initiated a peer review process to assessimplementation of the Key Attributes. Together with themethodology assessment (yet to be developed), the FSB’s

Key Attributes play an important role in assessing thestability of the system.

Status of Reform: ModerateThe Key Attributes have not yet been fully implemented.FSB peer reviews in 2013 showed that implementationwithin FSB’s membership were still in the “early stage.”Until now some countries (e.g., US, EU, Switzerland, Japan)included Key Attributes while designing the resolutionframework for their jurisdictions, especially when decidingon a harmonized set of tools granted to the resolutionauthority, such as: resolvability assessment (RAP),coordination and cooperation in “resolution planning andresolution actions” (RRP), additional loss absorbingcapacity (bail-in), and burden-sharing and institution-specific “cooperation agreements” (COAG).

All FSB members have committed to full implementationof Key Attributes by end of 2015.

A positive aspect from the TBTF reform process is thecreation of a standard to address loss-absorbing capacity.This “bail-in” means TBTF bank failures can be resolvedwithout threatening public funds. During the G20 summitin St. Petersburg, leaders tasked the FSB with assessing“gone-concern loss absorbing capacity” (GLAC), for thepurpose of bailing-in TBTF banks. The FSB intends to makea formal proposal for GLAC along with minimumrequirements for SIFIs to the G20 during the BrisbaneSummit in November 2014.

Quality: Not AdequateThe Key Attributes represent a major step forward.Considering the international efforts, much has beenachieved, mainly by the creation of Crisis ManagementGroups (CMG) between home and host countries, andimplementation of institution-specific arrangementsbetween the home and host to govern preparation of RRP.However, it is probable that in a crisis situation authoritiesmay choose not to work together. In the absence ofbinding arrangements on burden sharing, disputeresolution and sanctions for non-compliance, agreementswill count for nothing.

Any cross-border resolution process requires extensivecooperation between national authorities. Majorproblems are likely to arise if host authorities, especiallyin jurisdictions where a SIFI has a systemic presence, arenot participating in the CMG for the SIFI. FSB KeyAttributes state that “host authorities should not pre-empt resolution actions by home authorities” meaning


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that the right for a host country to act on its own is limited.This is a particular concern for developing countries, whichwill have even less leverage in the resolution process.

Impact Assessment: 2 (Risks Remain the Same)

If host authorities have limited access to information andlittle voice in the resolution planning process it maycontribute to negative outcomes for that jurisdiction. Thisis of particular concern for developing countries wherethere is a significant presence of SIFIs and domesticfinancial systems are less resilient. If this issue isunaddressed, cross-border resolutions could lead todissolution of subsidiaries in other countries – at theexpense of economic stability, small businesses anddepositors in that host country. To prevent such losses,host countries may be forced to use limited public fundsto bailout SIFI subsidiaries. This, of course, threatensgovernment spending on education, healthcare,infrastructure and social programs.

Recommendation: As a safeguard for developingeconomies with fragile financial systems, the FSB shouldidentify which countries are most vulnerable to the failureof SIFIs and Regionally Important Financial Institutions(RIFIs) and facilitate stronger coordination between thesehost countries and SIFI home countries.

Steve Suppan, Institute for Agriculture and Trade Policy

Role of FSB: LimitedThe FSB has enhanced the dialogue between majorjurisdictions on OTC Derivatives reforms, but has been lesssuccessful in generating meaningful cooperation. Europeand the United States remain far apart on commonstandards for derivatives trading.

The FSB can agree on best practices and the infrastructurerequired to implement reforms, but if FSB membersattempt to seek a competitive advantage for the SIFIsheadquartered in their jurisdictions, reforms could unravel– at the cost of the safety and soundness of the entirefinancial system.

Status of Reforms: LimitedLegislation has been passed in most FSB member states,but regulations are far from implemented and resistanceto regulation remains intense. However, if normative and

data-based reforms are fully implemented, there is a goodchance that OTC derivatives markets can be effectivelyregulated.

The 7�� FSB report to the G-20 finance ministers on OTCderivatives reform characterizes progress on the 2009reform commitments as “uneven.” Reform has beenimpeded by legal and technical difficulties of agreeing onhow to coordinate the regulation of markets estimated totransact US $700 trillion of gross notional value (initial facevalue of contracts traded) annually. The difficulties are oftwo kinds, normative and data related.

The FSB reports on what its member governments aredoing to improve data aggregation, risk management andtransparency in the OTC derivatives market. However, theFSB does not report on the financial services industrylobbying that results in exemptions, waivers, exclusions,definitions, regulatory budget cuts, lawsuits againstregulators and other tactics that impede normative reformand the improved reporting of trade data. As a result,there has been limited progress in implementinglegislation mandating OTC derivative reforms. The FSBshould authorize the Secretariat to compile and evaluateFSB regulatory exemptions and litigation and the impactof both on implementation of G-20 reform commitments.

Quality: AdequateThe FSB Aggregation Feasibility Study Group (AFSG)produced a strong consultation paper on options to makeit possible for member country regulators to standardize,aggregate and analyze OTC trade data across borders. TheAFSG policy options for aggregation are technologicallyfeasible, and progress on the Legal Entity Identifier (LEI)suggests that the aggregation proposal is likewise legallyfeasible. However, FSB Watch anticipates that there willbe both industry and political resistance. The FSB shouldauthorize and agree how to finance and administer cross-border trade data aggregation.

Impact Assessment: 2.5 (Risks Remain the Same,Slight Positive Impact)

The financial risks of most, if not all, retail financialproducts are “securitized” in the derivatives market. Theseproducts, such as mortgages, credit cards, payday loansand others have visible and direct effects on the non-financial (“real”) economy, particularly on households andsmall businesses. Therefore, if derivatives data reportedby financial institutions to regulators is notcomprehensive, in near-real-time and uniform, regulatorscannot determine the drivers of price volatility. As a result,


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the real economy remains vulnerable to derivatives priceand interest rate moves.

Commodities derivatives comprise less than one per centof the value of the global OTC market, according to theBIS. However, the impact of commodity derivatives onthe real economy, including food and energy security, isfar larger than its very small fraction of the total OTCderivatives market. Even with the recent exit of severalSIFIs from the derivatives price-influential warehousingand trading of physical commodities, the real economyremains vulnerable to SIFI commodity derivatives trading,not just in FSB member jurisdictions, but wherever SIFIsoperate and food is sold across borders.

Market and regulatory failure in commodity derivativeshas a particularly severe impact for low-income countriesdependent on imports for a critical margin of foodsecurity. There are currently 55 low-income countriesdependent on food imports, according the Food andAgricultural Organization (FAO), and 1 of 9 people in theworld are still undernourished. Therefore, it is critical thatthe FSB contribute to safeguarding developing economiesfrom the unpredictability of commodity prices.

Recommendation: The FSB should establish and enforceeffective limits to SIFI and other large financial institutiondominance of commodity derivatives trading.

Markus Henn, World Economy, Ecology & Development

Regulation of shadow banking is rightfully seen asimportant though it is not even clear what it is exactly.The FSB has proposed a broad definition of shadowbanking as bank-like credit intermediation activity that isnot covered by banking regulation. This encompassesmany capital market activities, including hedge funds,private equity funds and sophisticated vehicles. Accordingto the FSB, shadow banking “can have importantadvantages and contributes to the financing of the realeconomy” but it “can also become a source of systemicrisk.”⁷ As in other areas of finance, this is not just aproblem for advanced economies.

Even though some types of shadow banking seem to havespecific importance in advanced economies⁸, some formshave also grown rapidly in emerging economies.⁹ Non-

bank lending practices are sometimes seen as ratherbeneficial as they provide financial services to morepeople than regulated banks do – boosting efforts toincrease financial inclusion. However, new householdsgaining access to finance are often unknowingly exposedto the high risks in shadow banking. A 2014 UN Reportnotes that stronger monitoring is needed to “ensureconsumer protection.”¹⁰

Role of FSB: LimitedThe FSB has done considerable work in mapping the issue,producing important analysis on the size and nature ofthe problem, and releasing some of the first policyframeworks. The FSB’s greatest achievement thus far hasbeen facilitating an agreement on an information-sharingprocess, but this does not include money market funds.The FSB’s work only started in 2011 and it is still workingon many frameworks such as for minimum haircuts. Atthis time, it seems that the FSB has no ambitious mandateor cannot itself put enough pressure on its members. Tostrengthen cooperation, the FSB should: Strengthen datagathering and monitoring; be more proactive inidentifying risks, and be vocal when risks emerge;improve quality of security financing rules and standards;and monitor interaction between shadow banks andoffshore affiliates.

Status of Reforms: LimitedGiven the FSB’s rather broad definition of shadowbanking, the reform landscape is not easily overseen.¹¹However, it can be said that the reforms that havespecific links to the financial crisis have only movedforward slightly. This includes:

· Limits to securitization, mainly by requiring reten-tion of capital in the balance sheet, e.g. 5 per centin the EU.

· Laws on hedge funds (alternative investmentfunds), such as those in the EU.¹²

· Laws on money market funds, such as a draft inthe EU, a new law in Chile, and a recent regulationin the United States.¹³

· Laws on security transaction financing, like repos,security lending or re-hypothecation (FSB callsthem “secured financing contracts”), e.g. a draftlaw in the EU¹⁴ and new regulations in Singaporeand Malaysia.

· Laws on some risky transactions by banks and therelation of banks to funds, for example in bankseparation laws which have been finalized in the


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US, Germany, France the UK and Belgium. The EUproposed a draft law.¹⁵ China regulated the off-bal-ance “wealth management products” of banks.

· Regulation of non-bank deposit-taking institutionsand finance companies.¹⁶

This progress is positive, but large gaps remain in shadowbanking oversight. For example, a comprehensiveframework for data collection from offshore financialcenters does not exist. ¹⁷

Quality: InadequateThe shadow baking reforms are the least successfulamongst the FSB’s range of reforms. Despite itsoutstanding role in the crisis, shadow banking still goesalmost untouched. And while the core of shadowbanking in the EU and the United States still exist, newactivities in emerging economies, especially China, addnew risks to the global financial system.¹⁸

· The EU hedge fund law is weak as it does not touchupon the funds’ business model, while the UnitedStates has not changed anything. Regulation of fi-nance companies in the Americas remains heteroge-neous.

· Securitization laws are insufficient, particularly due tolow balance sheet capital retention requirements.

· The risky ties of banks to investment funds are insuffi-ciently addressed in the bank separation laws and lawproposals due to many exemptions and incompletecoverage.

· The ties to special purpose vehicles are not clearly ad-dressed in the bank separation laws. Furthermore, theBasel III leverage ratio, actually intended to cover allrisks, was watered down in January 2014 and doesnow not comprehensively prohibit off-balance sheetvehicles.

· Money market funds remain lightly regulated in theUnited States, and in the EU the respective draft lawhas been stopped in the parliament in March 2014,and it is unclear if it will ever be finalized.

· The EU laws on security transaction financing mainlyintend to increase transparency but rules on haircutregimes are missing as there are no global standardsyet.

Impact Assessment: 2(Risks Remain the Same)

As the Deputy Governor of the Reserve Bank of India putit in a speech in June 2014, “When non – bank financialentities undertake bank-like functions, large risks arecreated which could potentially be destabilizing for theentire system.” There is little reason to believe that thereis more adequate regulation or monitoring of the shadowbanking system. At this time, the benefits from shadowbanking – whether it be financial inclusion or greaterfinancing of SMEs – appear to be outweighed andthreatened by the potential risks. Without greaterprogress in reform efforts, coordinated by the FSB, therisks concentrated in the shadow banking system continueto threaten the real economy in both developed anddeveloping countries.

Recommendation: To safeguard advances made infinancial inclusion, the FSB should document the degreeto which consumers and small businesses are exposed toshadow banking, especially in developing economies. Ifvulnerability is high, the FSB design targeted reforms thataddress these risks.

Navin Beekarry, George Washington Law School

The Global LEI System (GLEIS) will give every financialentity a unique identifier code (the LEI) that will containspecific information about that entity. The objective of theLEI is to ensure that there is greater transparency offinancial entities and to improve regulators’ ability tomonitor and mitigate systemic risks. An effective GLEISwill enhance transparency and accountability for allfinancial entities and transactions – whether related togovernment contractors, mining companies or criminalorganizations. It is estimated that developing countrieslose almost US $2 trillion annually due to the opacity offinancial entities and transactions, which facilitates illicitfinancial flows, money laundering and misallocation ofnatural resource revenues.¹⁹

Role of FSB: ExcellentThe FSB has been essential to the progress of the GLEIS.In its capacity as the GLEIS Secretariat, it facilitated theimplementation of the G20 decision to establish the GLEIS.Accordingly, it set up the GLEIS governance structures andsuccessfully moved the LEI process from the policy stage


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into operational readiness. As of June 2014, theinstitutional framework of the GLEIS was completed andownership and oversight of the GLEIS transitioned to theRegulatory Oversight Committee (ROC). Although the FSBwill no longer act as the Secretariat of the ROC, it willremain a full member of the ROC.

Status of Reform: ExcellentA significant indicator of progress is the development ofthe institutions responsible for the oversight andoperations of the GLEIS. The ROC, the Central OperatingUnit (also known as the GLEIS Foundation) and pre-LOUs(local operating units) have been established and areoperational. Within the ROC, a Committee on Evaluationsand Standards provides recommendations on technicalstandards. So far sixty countries are represented on theROC and COU.

The implementation phase adopted a collaborativeapproach and successfully integrated government, privatesector, NGO and academic participation pursuant to theG20 decision. Importantly, governments and the privatesector have been be fully participating in the GLEI process.

The Executive Committee of the ROC and the Board ofDirectors of the Foundation are operational, and pre-LOUshave started issuing pre-LEIs which means financial marketparticipants are registering. The establishment of 19pre-LOUs at country level in less than 2 years indicates ahigh level of interest and participation.²⁰ Twelve additionalpre-LOUs have already been granted prefixes to supportoperational platforms. So far, pre-LOUs have issued over300,000 pre-LEIs to entities from more than 150 countries.In addition, regulators such as the Commodities FuturesTrading Commission (CFTC), European Securities andMarkets Authority (ESMA), and European BankingAuthority (EBA) now mandate the LEI. This level of “buy-in”is essential for the GLEIS to be successful.

A key component of the GLEIS is, of course, the data. Onthis front, data standards have been adopted for the LOUsand the compilation of LEI data has already started. Datastandards and aggregation are not perfect, but it is verypositive that they being established.

Quality: Not AdequateAlthough the LEI process is moving forward quickly, thereare several important aspects that remain unaddressed –or not included at this time – which are necessary if theLEI is to achieve its ultimate goal of increasingtransparency in finance. These unattended aspects

include: 1) Reliability and accuracy of data still to betested; 2) Public use of data still to be ascertained; 3)Regulatory compulsion for other countries that are notwilling to cooperate still an open issue; 4) Privacy andsecrecy of financial data in some jurisdictions stillunresolved; 5) No development so far on LEI relationshipdata; and 6) Achieving public objectives such as systemicrisk monitoring, beneficial ownership assessments anddata aggregation still untested.

Without addressing these substantive issues, theexcellent progress in moving the LEI process forwardcould be jeopardized.

Impact Assessment: 2.5 (Risks Remain the Same,Slight Positive Impact)

With increasing activity in securitization, shadow bankingand OTC derivatives, the strong systemic risks are stillpresent. At this point, the LEI process is not ready nor ableto offset these risks. This means the real economy remainslargely exposed to the opacity and systemic risks in thefinancial sector, similar to those that culminated in 2008in severe economic loss and hardship for so many people– in developing and developed countries alike.

The GLEIS has the potential to address major challengesrelated to financial transparency, regulatory oversight andillicit financial flows. However, until the substantive issuesare addressed and the LEI is fully operational, there are anumber of ways the real economy remains at risk: secrecyand opacity persist; inability to determine and assess riskand exposures of transactions and counter parties; threatto credit flow; investors and businesses at risk with noprotection; regulators remain unable to monitor risks; and,illicit financial flows go undetected.

Recommendation: Given the economic and social costs ofopacity in finance, especially for developing countries, theG20 and FSB member countries should mandate that theROC address the issues of relationship data and beneficialownership before the GLEIS is fully operational.


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Other Relevant Issues for Financial Stability

Sovereign Debt, Trade in Financial Services and Taxes are not assessed in this year’s report. However, the FSBneeds to consider the influence of these issues on global financial stability and address them appropriately.

Sovereign Debt

Given the regulatory hole in sovereign debt markets and their role in triggering instability (as demonstratedby the EU periphery markets such as Greece and Cyprus), the FSB should incorporate sovereign debt in itswork and recommendations. In particular, the FSB should: address the classification of sovereign debt aszero-risk weighted assets; promote safer securitization of debt products and more transparent bond markets,especially secondary bond markets; and monitor Exchange Traded Funds that track sovereign debt.

Additionally, as part of its work on Credit Rating Agencies (CRAs), the FSB should consider the particularimplications and relationships between credit ratings and sovereign debt.

Trade in Finance Services:

Based on leaked documents of international trade agreements, it is clear that that the agenda being promotedin trade negotiations (i.e., “freeze” financial reform process) conflicts directly with the agenda being promotedby the FSB. Without a shift in trade negotiations regarding financial services, the authority of national financialregulators could be undermined. The FSB should designate staff to track ongoing trade negotiations and briefregulators from its member countries. Whenever a major conflict or concern arises, the FSB should issue apublic response.

Taxes

The FSB does not work directly on tax issues, but it should be reducing the complexity and opacity in financewhich directly contributes to tax evasion and illicit financial flows. The 2014 RCG Americas report* on shadowbanking notes: “a comprehensive framework for data collection from offshore financial centers does not exist.This creates an important gap in the FSB’s global shadow banking monitoring exercise.” The FSB should addressthis gap since it threatens both financial stability and the ability of countries to collect revenue.

*Report available here: http://www.financialstabilityboard.org/publications/r_140822b.pdf


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Overall Impact Assessment of the FSB

Greater “safety and soundness” in the financial systemmeans less risk to the real economy and a betterenvironment for long-term investment financing – both ofwhich are critical for achieving inclusive and sustainableeconomic growth. The FSB has accomplished much that isdeserving of praise, but has this been enough to create amore safe and sound financial system?

Unfortunately, this assessment finds that the overall impactof the FSB on the financial reform process and its outcomeshas remained limited. According to the most recent FSBstatus report, only 36 per cent of reforms have beencompletely agreed to at the policy development level andabout 25 per cent are either un-developed or under-developed.²¹ Differences in national interests and regulatoryregimes, as well as industry resistance, are noteworthybarriers.

The FSB’s limited success in advancing internationalcooperation on core reforms, and some inadequacies inquality, has possibly weakened the impetus for actionamong its member countries, which are ultimatelyresponsible. As a result, many of the risks that spawned therecent financial crisis still exist and the real economyremains vulnerable in many ways to the whims of thefinancial system. Developing countries, with little voice inthe reform process, remain disproportionately vulnerableto these enduring risks.

Recommendation: The FSB should request that the G20strengthen its institutional capacity and power to galvanizeagreement on and enforce a global “regulatory floor” (i.e.,minimum standards) that safeguards public interests,especially in countries with fragile or developing financialsystems.


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International Monetary Fund

IMF Governance

¹ Costs of the financial crisis, in the US alone, are estimated to be more than $12.8 trillion. Better Markets, Inc. 2013² FSB, (2013). Update on Financial Regulatory Factors Affecting the Supply of Long-term Investment Finance.http://www.financialstabilityboard.org/publications/r_130829g.pdf³ Structural banking reforms refer to separation or limitation of activities, intra-group exposure limits, and localsubsidiary capital requirements.⁴ Since the end of 2009, the G-SIBs have increased their common equity capital by about US$ 500 bn, amounting toclose to 3 per cent of their risk weighted assets.⁵ FSB, (2014). Update on Financial Regulatory Factors Affecting the Supply of Long-term Investment Finance.http://www.financialstabilityboard.org/publications/r_140916.pdf⁶ FSB, (2011). Key Attributes of Effective Resolution Regimes for Financial Institutions.http://www.financialstabilityboard.org/publications/r_111104cc.pdf⁷ FSB, (2013). Global Shadow Banking Monitoring Report 2013.http://www.financialstabilityboard.org/publications/r_131114.pdf⁸ See, for example, the views in the FSB RCG for Asia Report on Shadow Banking: FSB, (2014). RCG Asia – Report onShadow Banking in Asia. Available at http://www.financialstabilityboard.org/publications/r_140822c.htm⁹ United Nations General Assembly, (2014). International Financial System and Development: Report of the Secretary-General. http://www.un.org/esa/ffd/documents/69GA_SGR_IFSD_AUV_250714.pdf¹⁰ Ibid.¹¹ For a more extensive evaluation, see, for example, the FSB’s RCG reports on Asia and the Americas.¹² European Commission. Index on Alternative Investments.http://ec.europa.eu/internal_market/investment/alternative_investments/index_en.htm¹³ FSB RCG, (2014). Report on Shadow Banking in the Americas.http://www.financialstabilityboard.org/publications/r_140822b.pdf¹⁴ European Commission, (2014). Reporting and Transparency of Securities Financing Transactions – Frequently AskedQuestions. http://europa.eu/rapid/press-release_MEMO-14-64_en.htm¹⁵ European Commission, (2014). Banking Structural Reform (follow-up to the Liikanen Report.http://ec.europa.eu/internal_market/bank/structural-reform/index_en.htm¹⁶ See the RCG reports on Asia and the Americas.¹⁷ FSB RCG, (2014). Report on Shadow Banking in the Americas.http://www.financialstabilityboard.org/publications/r_140822b.pdf¹⁸ See, for example,The Economist, (2014). Battling the darkness. http://www.economist.com/news/finance-and-economics/21601872-every-time-regulators-curb-one-form-non-bank-lending-another-begins¹⁹ ONE report estimates that economic losses due to lack of transparency in taxes, natural resources, and moneylaundering at around US $2 trillion annually. ONE, (2014). Trillion Dollar Scandal. http://www.one.org/scandal/en/²⁰ Legal Entity Identifier Regulatory Oversight Committee, (2013). Endorsed Pre-LOUs of the Interim Global Legal EntityIdentifier System (GLEIS). http://www.leiroc.org/publications/gls/lou_20131003_2.pdf²¹ 2013 FSB report on Status of Implementing Reforms.


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International Monetary Fund

IMF Governance

The IMF’s highest governing body, the Board ofGovernors, meets annually, and the InternationalMonetary and Finance Committee of the Board holdsbiannual meetings. An Executive Board, comprised of 24resident Executive Directors (ED), at the IMF headquartersin Washington, DC, conducts most of the business of theFund, meeting several times each week, and largely onthe basis of papers prepared by IMF staff. The ManagingDirector (MD) is the Chair of the Board as well as its senioremployee - the Chief Executive Officer. The MD selectsthe Deputy Managing Directors, who chair the Boardwhen the MD is absent.

There has been no substantive change in IMFtransparency policy over the past year. The one brightspot is in the Fiscal Affairs Department new FiscalTransparency Code, whereby governments areencouraged to make both revenue and expenditurespublicly available in clear language and in a timely manner.This work will continue into 2015 focusing on extractiveindustries.

The two major black boxes remaining at the IMF are Boarddiscussions (verbatim transcripts) and within its CapacityDevelopment Institute (CDI). Minutes of Board meetingsare released after 5 years and are available through thearchives, but there are no verbatim transcripts.¹ Citizensof a member country still cannot know what theirExecutive Director has said on any issue, although someEDs release their formal prepared statements to national

audiences; there are no informal comment in the contextof actual Board discussions. The CDI encompasses bothtechnical assistance and training. When a country makesa specific request of the Fund for such assistance, nothingis public unless that country takes the initiative to makeit public; this is the inverse of other Fund documentswhere they are presumed public unless a countryintervenes

In 2013 the Board agreed that IMF publications should bereleased in a more timely way, and while it still allowscountries to exclude material, the newer standards seemto restrict such exclusions to genuinely “market sensitive”information². The bottom line is that material releasedby the IMF is sanitized, despite being characterized as apublic, intergovernmental institution, funded bygovernments and therefore by taxpayers.³

Recommendation: The IMF should publish all documents,including Board minutes and summaries, includingmonitoring and evaluation reports, of technical assistanceand capacity building programs, and missions.

The Board of Governors is fully representative in that it iscomprised of one representative from each member-country who is either a Finance Minister or head of theCentral Bank. The IMFC and the Executive Board representcountries through a “constituency system”. Under itscurrent rules, the five largest economies (and therefore

Jo Marie Griesgraber, New Rules for Global FinanceMatthew Martin, Development Finance International


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the 5 largest shareholders),⁴ each have one seat, as doChina, Russia and Saudi Arabia. The remaining 16 seatsare divided among 180 countries. Western Europe has 8chairs (9 when Spain is representing its constituency withMexico and Venezuela), while 46 Sub-Saharan countrieshave only 2. By including all member-states while retainingrelative efficiency, the IMF constituency model is onewhich should allow a reasonable degree of inclusivenessand participation.

However, its execution has many failings. The allocationof chairs, and the voting shares (and therefore voice) givento each chair, both derive from the measurement of acountry’s “economic size”, through a quota formula.These shares determine how much each countrycontributes to the common capital of the Fund and howmuch each country may borrow from the Fund. Ordinarilythe Board decides matters by consensus, but crucial issuessuch as quota increases, changes in shares, and changesto the IMF’s Articles need to be approved by an 85 percent majority, and the US is the only single country withsufficient votes to block such decisions.

For many years civil society and developing countries havecriticized the quota formulas for its “democratic deficit”,in terms of not giving enough voice to developingcountries, and to countries which are borrowing from theFund, because population is excluded from the formula.Given recent rapid growth in the share of major emergingmarket and developing countries (EMDCs) in the worldeconomy, and their increasing public criticism of the quotasystem, it became untenable by 2010. The Korean G-20Summit⁵ offered a two-step process to increase the shareof emerging economies in quotas and votes, reduceEuropean chairs by 2, and protect low income countries’tiny voting shares. However, despite leading the push forthese changes in Korea,⁶ the US Administration hassubsequently failed to secure Congressional approval forthese changes, thereby putting IMF governance in along-term stall.⁷ Emerging countries have therefore beenincreasingly harsh in their criticism of the institution, withthe most recent BRICS summit declaring themselves“disappointed and seriously concerned with the currentnon-implementation of the 2010 International MonetaryFund (IMF) reforms, which negatively impacts on the IMF’slegitimacy, credibility and effectiveness.” ⁸

Management and staff selection also underminesinclusiveness. In spite of repeated efforts to have a moretransparent selection process, in practice the IMFManaging Director is selected by the major WesternEuropean countries, approved by the United States, and

formally elected by the remainder of the Executive Board.The First Deputy MD is American, and other senior postsare shared out largely among other major shareholders.G24 and African Ministers have frequently complainedabout the under-representation of developing countriesin management and staffing. Efforts to encourage mid-level entry from developing country ministries and centralbanks has somewhat reduced this imbalance, but there isa long way to go. The concentration on recruitment directfrom orthodox economics courses also limits the diversityof thinking in Fund analysis, and even more so in Fundpractice.⁹

Finally, the most worrying recent development has beenthat the G20 has effectively become the de facto executivecommittee of the Governors, setting the agenda of theIMFC and the whole institution, and leading the IMFC towork mainly on the “how” of executing G20 decisions. Asdiscussed in the G20 section of this report, the G20 itselfis not remotely inclusive – and therefore neither are themost important decisions on the IMF.

A year ago the IMF seemed to be working to enhance andsystematize it relations with civil society organizations.The new handbook on IMF staff relations with CSOs, whichwas expected to be published this year, has not emerged.

Recommendation: The IMF should reform its quotasystem more fundamentally to take account of populationas well as economic size, increase the number of chairsallocated to emerging and developing countries, recruitits Managing Director competitively and transparently,and accelerate efforts to diversify staff recruitment.

In order to ensure that Board, Management and Staffadhere to the goals and best practices of the IMF, regularand reliable evaluations of performance must occur. Whilethere are routine evaluations of staff performance bymanagers, such accountability is largely absent at the topof the institution.

Once an Executive Director is selected (appointed by thelargest economies; elected within constituencies whichusually select the nominee of the largest member of theconstituency), the Articles of Agreement and By-Lawsprovide no means whereby that ED can be removed forhis/her two-year term, regardless of private or


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professional conduct. The EDs appointed by the 5 largestmember states can be removed rather simply by a politicaldecision, not necessarily the result of performanceevaluation. There is no job description for an ED, norcriteria for selection or for assessing the execution of theirtasks. The Board of Governors exercises little oversight ofthe Executive Board as a body.Since the selection of Dominique Strauss-Kahn in 2007,the Managing Director has an Executive Board-prepareddescription of the qualifications the person should bring,and a stipulation that the MD is bound by the rules ofethics for senior management and staff. There is noperiodic performance evaluation of the MD by theExecutive Board; the person remains MD so long as his/herpolitical sponsors are satisfied with the person’sperformance.

A positive aspect in IMF accountability is the IndependentEvaluation Office (IEO), which the Executive Boardestablished after the Asian Financial Crisis in 2001. TheIEO is genuinely independent of Management, reportsdirectly to the Executive Directors, and sets its ownagenda (though it is not allowed to review ongoing work).Regrettably, the Executive Board has not exercisedsufficient oversight over implementation of the IEOrecommendations – which are approved by the Boarditself. Management periodically reports generally that allBoard-approved recommendations have beenaccomplished or are on schedule for a timely completion,even when recommendations are repeated in subsequentevaluations.¹⁰

In sum, the Governors do not evaluate the IMF as a whole,nor does the Executive Board; the Executive Board doesnot evaluate the MD and ignores Management’sundercutting of the IEO, the single independent entity setup to evaluate programs and activities. Occasionalinternal self-evaluations by the Strategy, Planning, andReview Department are self-critical, but do not seem toresult in policy or behavior changes nor rarely inpunishment for any responsible individuals and never incompensation for those negatively impacted by wrongfulpolicies or actions.

Recommendations: The Board of Governors shouldestablish a committee responsible exclusively forperiodically overseeing a review of the performance ofthe Executive Board. The Executive Board should meetwith the committee to consider its reports andrecommendations.

The Executive Board should design a formal, periodicprocess of assessment of MD performance, includingthrough the use of expert outside advisors. Suchevaluation should include an assessment of the MD’smanagement skills. The MD should also solicit Board inputinto periodic evaluations of the performance of theDeputy Managing Directors.

Affected stakeholders should be able to hold the IMFresponsible for negative consequences of its policyrecommendations. The Fund maintains it is not possibleto determine any causal connection between the policyconditions associated with receiving IMF funds and anysubsequent pain or suffering endured by the residents ofthe country in question. This rationale rests first on theassertion that the chain of causality is too complex to bereliable. Second, the Fund cannot be held responsible forpolicies that are “formally” set by the government, intandem with the IMF. Third, countries approach the IMFwhen they are already in desperate economic straits, andare largely responsible for problems of their own making.

This is not a tenable position. The Fund makes strongpolicy recommendations and should be expected toconduct ex ante analysis of the impact of these onstakeholders, especially on inequality, especially given themany complaints over the years about its programs frompeople and countries living with them. In 2002 the Boardsof the IMF and World Bank jointly agreed to conductPoverty and Social Impact Assessments (PSIA).¹¹ However,the IMF Board allocated minimal funding for this purpose,and since then very little analysis has been conducted inthe context of policy advice and TA, except of individualtax and subsidy measures. The IMF Research Departmenthas conducted far more analysis of the poverty anddistributional consequences of policy programs andmeasures, but there is no systematic assessment of theimpact of the programs recommended on inclusivegrowth, poverty and inequality as part of programformulation. This assessment should also be consideredfor the overall impact of Fund advice on the globaleconomy.


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Finally, under current arrangement there is no option forindividuals, communities, or countries that may havesuffered harm from Fund promoted policies to register theircomplaints. Nor can they expect any compensation: as anintergovernmental body, the IMF and its staff enjoy full legalimmunity.

Recommendation: The IMF should conduct full PSIA of itsrecommendations (with a particular emphasis on fiscalmeasures related to tax, spending and subsidies) for allcountry programs, and establish a complaints mechanismsimilar to that of the multilateral development banks.


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¹ The 2013 IMF Transparency Review provided for the archives to be prepared for electronic sharing on the Fund’swebsite. The timeline for such disclosure was not provided.² International Monetary Fund, (2013). IMF Executive Board Reviews the IMF's Transparency Policy (No. 13/270).http://www.imf.org/external/np/sec/pr/2013/pr13270.htm³ Bradlow, D. G24 Technical Committee Singapore, (2006). The Governance of the IMF: The Need for ComprehensiveReform. http://www.g24.org/TGM/brad0906.pdf⁴ In order of voting shares held: the United States, Japan, Germany, France and the United Kingdom.⁵ “In some instances, the G20 acts like a caucus inside the IFIs – for instance, with regard to reform of the IMFgovernance and voting system.” By Nancy Alexander, “Governance of the G20,” in this publication, 2013.⁶ Bradford, C., Linn, J., & Bryant, R. (2008). Experts Critique Proposal for International Monetary Fund Quota Reform.Brookings Institution, Available at http://www.brookings.edu/research/opinions/2008/04/09-imf-linn⁷ New Rules for Global Finance, (2014). Press Release: US Congress Fails to Pass IMF Reforms, Again. http://www.new-rules.org/news/press-releases/525-press-release-us-congress-fails-to-pass-imf-reforms-again⁸ DNA India, (2014). BRICS Voices Disappointment with Non-Implementation of IMF Reforms.http://www.dnaindia.com/world/report-brics-voices-disappointment-with-non-implementation-of-imf-reforms-2002578⁹ Independent Evaluation Office of the International Monetary Fund, (2011). IMF Performance in the Run-Up to theFinancial and Economic Crisis - IMF Surveillance in 2004-07. http://www.ieo-imf.org/ieo/files/completedevaluations/crisis- main report (without moises signature).pdf¹⁰ Abrams, A., & Lamdany, R. (2011). Independent Evaluation at the IMF: Understanding the Evaluation Cycle. In R.Lamdany & H. Edison (Eds.), Independent Evaluation of the IMF: The First Decade. http://www.ieo-imf.org/ieo/files/books/Independent_Evaluation_IMF.pdf¹¹ In 2001, a framework operationalizing this [PSIA] vision was set out in a joint paper, “Strengthening IMF-World BankCollaboration on Country Programs and Conditionality,” together with a corresponding staff guidance note. The IMFBoard formally approved this work in 2002.


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IMF Impact

The IMF’s mandate is to promote internationalmonetary cooperation, relatively stable exchange rates,and balanced growth of international trade. Thecombined results are expected to be high levels ofemployment and real GDP growth. In recent years theFund has increasingly focused its mandate on reducingpoverty (in low income countries (LICs) since 1999);¹ andon generating more “inclusive” growth in high (HIC) andmiddle income countries (MIC).² The IMF ManagingDirector has explicitly said:

“I hear people say, ‘Why do you botherabout inequality? It is not the coremandate.’ Well, sorry, it is also part of themandate. Our mandate is financialstability. Anything that is likely to rock theboat financially and macroeconomically iswithin our mandate.” ³

To achieve this mandate, the IMF provides membercountries in balance of payments difficulties with loans(and a “seal of approval” for policies which are designedto have a catalytic effect on increasing funding fromdonors, lenders and investors). As of August 2014, theIMF had lending or policy support programs with 28 LICs,and 13 MICs/HICs, under which it agrees with countryauthorities on a set of “policy conditions” or“conditionalities” to improve economic policies in returnfor the loans. It also conducts economic surveillance, totrack the economic health of countries, alerting them torisks and providing policy advice, and technicalassistance, training and research to help improveeconomic management.⁴

In this light, and in line with this Report’s overall impactassessment criteria, we assess the Fund for its impact onpoverty and inequality through the types of policyrecommendations it makes which can reduce inequality(on employment, decent work and wage levels; onprogressive budget revenue; on pro-poor/anti-inequalityspending; and, on pro-poor financial systems), as well asits ability to mobilize low-conditionality money which canhelp to finance these interventions.⁵

The way the IMF helps countries design macroeconomicpolicy has a key impact on whether growth is inclusive,and on reducing poverty and inequality. The IMF setsspecific growth targets in its programs, based on what itregards as achievable given the level of financingavailable to the country, the potential impact of largegrowth-oriented projects, and possible trade-offsbetween growth and inflation: however, it does not settargets for poverty or inequality.

As discussed in this Report last year, independent andIMF analyses has shown reasonable real GDP growth,which has slowed since the global economic crisis andremains well below the 7 per cent levels needed to halvepoverty;⁶ and a sharp fall in poverty since the 1990s.However, independent analysis suggests that IMFprograms have managed to assist only marginally withinequality. Gini coefficients⁷ stayed high in IMF programand non-program countries, and rose in both groups in1990-2000. Although they fell slightly in programcountries after the Poverty Reduction and Growth Fund

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(PRGF) was introduced, the difference with other countrieswas marginal. Overall, IMF programs are not consistentlycorrelated with significantly higher growth, or (in the lastdecade) with faster falling inequality, than non-IMFprogram countries. IMF program countries do seem toshow faster poverty reduction, though this advantage hasdiminished in the last decade.

It is striking that, while insisting growing inequality is amajor risk for sustainability of growth and developmentworldwide, and greater equality leads to more sustainablegrowth, the IMF has not done any in-depth multi-countryanalysis of the impact of its programs on inequality, andhas acknowledged that its analysis of growth and anti-poverty/inequality strategies in LIC programs andsurveillance is insufficient.⁸ Much more needs to be doneto ensure IMF programs produce faster growth andreduced poverty and inequality. These efforts represent amajor challenge for the IMF in the post-2015 globaldevelopment agenda.

Recommendation: The IMF should conduct systematic exante analysis of its programs’ impact on poverty andinequality, and set targets for reducing poverty andinequality as part of each country program.

The IMF has also increasingly emphasized thatemployment, especially youth employment, with decentwages and conditions, are vital to reducing poverty andinequality and ensuring sustainable and acceleratedgrowth.⁹ However, the IMF continues to appear to lack aclear policy to promote employment, or to include cleartargets in its programs for increasing employment,balanced with the objective of reducing inflation. Critics(and the Fund itself) have noted the IMF’s past and currentpreference for labor market “structural reforms” andgreater flexibility, which is also reflected by its systematicuse of the controversial World Bank “Doing Business” laborpolicy index in its programs. Critics and the Fund itself havealso indicated that there is no evidence or consensus inanalysis that such reforms work to increase employmentor income of workers. On the other hand the Fund hasgiven no systematic attention to ensuring “decentemployment” by enhancing workers’ rights or payingreasonable minimum or “living” wages – although in somerecent advice to OECD countries such as the UK and US,the IMF has recommended substantial increases inminimum wages.

The most recent IMF analysis of these issues recommends“more systematic diagnostic analysis of growth andemployment challenges and identification of the most

binding constraints to inclusive growth and jobs, so as toprovide more tailored and relevant policy advice; moresystematic integration of policy advice on reforms of taxand expenditure to create conditions to encourage morelabor force participation, including by women, more robustjob creation, more equity in income distribution, andgreater protection for the most vulnerable; and enhancedadvice on labor market policies based on empiricalevidence and greater collaboration with the World Bank,OECD and ILO on the impact of these policies on growth,productivity, job creation, and inclusion.”¹⁰ However,though the Fund has prepared a “toolkit” for work ongrowth, labor and inclusion issues for country teams, it isnot clear that this leads to consistent policy suggestionsto authorities.

Recommendation: The IMF should work with the WorldBank, OECD and ILO to set standards for nationalemployment and minimum wage policies. It shouldsystematically assess the impact of proposed labor marketpolicies on inequality, poverty and decent work, as well ason employment creation, and set targets for employmentand minimum wage levels consistent with reducinginequality and poverty.

In the last two decades, most of the focus of IMF tax policyadvice and technical assistance has been on increasingrevenue collection levels as a proportion of gross domesticproduct (GDP). This has met with considerable success: forexample, in Sub-Saharan Africa (though by no means all ofthe increase can be attributed to the IMF), revenuecollection rose from 21 per cent of GDP in 2002 to 28 percent of GDP in 2008, before falling back to 25 per cent ofGDP in 2013 as a result of the economic crisis.

However, the IMF has been criticized for focusingexcessively on “efficiency” to mobilize maximum revenue,and not considering the “equity” of its policy advice (i.e.,whether the tax is progressive; or is a level playing field forforeign and domestic enterprises). The lack ofconsideration for equity was reflected in composition oftax collections in 1990-2010:

· There was a strong preference for reducing revenuesfrom trade taxes, in line with broader global trendstowards trade liberalization. These were usuallyprogressive due to higher consumption of importedgoods by wealthier citizens.


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· The IMF failed to resist a “race to the bottom” globallyin reducing “direct” (corporate and individual income)taxes, which are more progressive. Indeed in manycountries it suggested reducing tax rates to keepeconomies “competitive”.

· Little was done about widespread proliferation ofexemptions from paying taxes, due to tax incentives(especially for foreign investors), and bilateral tradeand investment treaties between OECD anddeveloping countries. Though the IMF sometimesspoke out against high exemptions, these were rarelyrationalized in IMF program conditions.

· Equally little was done to assist countries to combattax evasion and fraud, transfer pricing and profitshifting, which have resulted in a dramatic fall in theamounts of tax paid by major companies even withoutcuts in rates.

· As a result, there was an increase in governmentreliance on “indirect” taxes on consumption (salestaxes and value-added taxes), which were likely(unless goods consumed by the poor were exempted)to hit poorer citizens harder.

This trend has been moderating in more recent IMFprograms, with some countries being encouraged toincrease the share of revenue coming from direct taxes,¹¹especially from extractive industries, and others to reduceor eliminate corporate tax exemptions, or to introduceexemptions from consumption taxes for goods consumedby the poor. The IMF has also been providing moretechnical assistance to help collect higher tax amountsfrom major corporations; making speeches about makingincome tax systems more progressive and making greateruse of property taxes; and doing excellent research aboutthe negative impact of OECD tax policies on developingcountries.¹² However, there continues to be a lack ofsystematic analysis of the equity or “incidence” of taxeson different income groups, and focus on eliminating themajor tax gaps due to exemptions, treaties and evasion,as the basis for Fund policy suggestions.¹³

Recommendations: the IMF should conduct systematicanalysis of tax incidence, and focus country programs andTA on reducing inequality by making tax systems moreprogressive, combating tax evasion, and increasingproperty and wealth taxes. At a global level and in OECDcountry policy reviews, it should oppose cuts in corporateand income taxes, and oppose measures which result inreduced developing country revenues.

From a long-term perspective, there has been a marginalincrease in education and health spending under IMFprograms between 1985 and 2009: this reflected a fall inthe first decade, followed by a rise largely due to theFund’s requirement that debt relief funds be spent onthese sectors.¹⁴ Nevertheless, spending levels in mostcountries remain far short of those needed to attain theMillennium Development Goal.¹⁵ In addition, severalrecent independent reports¹⁶ have demonstrated thatsince the global economic crisis, spending on education,health and a broader range of MDG-related sectors(agriculture, social protection, water and sanitation) hasperformed less well for countries with IMF programs. Thisis partly due to the fact that after an initial stimulusresponse to the crisis in 2009-10, overall spending in IMFprograms stagnated or fell as a proportion of GDP, and isrecovering only slowly, in part due to IMF advice stressingthe need for fiscal consolidation to reduce budget deficitsand keep debt levels down.

Since 2000, the IMF has monitored levels of socialspending, partly in order to track how the proceeds ofdebt relief are being spent. Since 2009 it has graduallyextended this monitoring so that all Poverty Reductionand Growth Trust (PRGT) -eligible countries now committo “social spending floors”. However, there are majorproblems with the methods it uses, with dramaticallydifferent proportions and types of spending beingmonitored.¹⁷ In most cases this is limited to education andhealth, and pays little attention to three other types ofspending which are crucial to combating inequality andpoverty – smallholder agriculture, social protection, andwater and sanitation. In addition, the social spendingfloors are only indicative policy benchmarks, with noanalysis of performance in program reviews.

No such monitoring exists for higher-income countries –many of which have been suffering dramatic cuts in socialspending in the wake of the 2008 global economic crisis.Furthermore, the IMF does not publish any annualcomparative multi-country data or analysis which allowsit to assess current trends in social spending.

Another key spending issue has been the balance betweeninvestment and recurrent spending, and especially atendency by IMF missions to recommend reductions inrecurrent spending, through cuts in real wages, orreductions of staffing levels, including in the social sectors.


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The IMF made a specific undertaking not to include wagebill cuts as specific performance criteria in programsexcept in exceptional circumstances, yet continues tosuggest them as part of policy discussions in almost allcountries, resulting in a predominance of wage bill cuts inrecent programs.¹⁸

Recommendations: The IMF should analyze the incidenceof spending on inequality and poverty; recommendincreases in the spending which will most reduce povertyand inequality, with a particular focus on education,health, social protection and water and sanitation; andmonitor spending trends annually across all countries.

The IMF plays two roles in financial sector reform andstability. At the global level, it produces analysis (andprovides advice to the G20) on potential risks to globalmacroeconomic and financial stability from financialdevelopments – principally through the “Global FinancialStability Report” (GFSR). It was heavily criticized for itsfailure to foresee the global financial crisis and has sincebeefed up its analytical and surveillance capacities. Itsreports and speeches by the Managing Director regularlycriticize the slow pace of G20 agreement andimplementation on financial sector regulations, and placemore stress on potential downside risks – most recentlyon the risk of overdependence on pumping liquidity intofinancial sectors, rather than ensuring that they promotegrowth and are therefore more sustainable.¹⁹

At the national level, the IMF is the main organizationresponsible for assessing financial development andstability in LICs, through its Financial Sector AssessmentProgram (FSAP), and for seeing that Financial StabilityBoard (FSB) recommendations and global regulatorystandards and codes (such as Basel III) are implementedin LICs. However, as discussed in the chapter on the FSB,this agenda is set by developments emanating from theglobal level, leading to over-emphasis on banking sectorreform and concerns about access to banking services,and insufficient emphasis on other non-bank financialinstitutions with a longer-term and more stableinvestment perspective, such as insurance, pension funds,micro-finance, or community-based financial systems. TheFund’s work is also moving at the same slow speed as FSBglobal discussions in terms of adapting recommendationsto the post-crisis environment, especially in LICs.

Equally important, there is no consideration in IMF globalor national financial sector assessments of equity in accessto financial assets and saving/borrowing instruments, andcost of financial intermediation. Underlying IMF financialsector recommendations is an assumption that integratingpoorer citizens into the commercial banking system is themost efficient way to increase their access to financialproducts, in spite of widespread global evidence that suchsystems automatically discriminate against andmarginalize the poor.

Recommendation: The IMF should base its global andnational financial sector analysis on the impact of reformson inequality as well as stability. It should prioritizenational-level reforms which will enhance access tosavings and investment for the poorest citizens, such aslow-cost micro-finance and community-based financialsystems.

The other crucial role of the IMF in combating globalinequality is its role in mobilizing low-cost and low-conditionality financing to help countries offset andrecover from economic crises and instability (from whichpoorer citizens generally suffer more sharply). It wascreated to have a fundamental position in combatingglobal inequality between surplus and deficit countries byproviding financing to smooth adjustment in reducingdeficits.

However, one of the biggest problems for borrowingcountries is that the IMF has had increasingly (andwoefully) insufficient funds to help them combat balanceof payments difficulties. The problem for individualcountries remains that loans to them are limited to apercentage of their membership quotas in the IMF.Quotas have fallen increasingly behind growth in worldGDP, trade or capital flows, and are now only a very smallpart (often under 10 per cent) of the amount an individualcountry needs to combat a crisis, not at all commensuratewith the high influence the IMF has on country policies,since many donors (or in Europe other lenders such as theEC or EIB) make their flows dependent on an IMF “seal ofapproval”. IMF resources for low-income countries weredoubled by the G20 in 2009, allowing it to lend US$3.8billion a year during the crisis, but have now fallen backto the pre-crisis level of US$2 billion a year on the falseassumption that a smaller number of countries are


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content to borrow the very low levels of IMF fundingavailable. Quotas have been supposed to be increased oncemore as part of the deal linked to reforms in IMFgovernance, but have been stalled since 2010 by lack ofapproval from the US Congress.

In addition, over the last few decades, there has been anincreasing concentration of financing on facilities underwhich loans come with higher levels of conditionality. Theavailability of low-conditionality financing has dwindled tothe point where it offers virtually no relief from “exogenousshocks” which hit economies due to no faults in economicpolicy.

Alone among international organizations, the IMF also hasthe capacity to create global liquidity, by issuing SpecialDrawing Rights (SDRs), which are added to country reservesand protect the balance of payments and budget from

crises. They do not carry any policy conditions and thereforegive countries more scope to adjust to crises using their ownpolicy preferences. As with quotas, issuance of SDRs whichwas common and large-scale in the 1970s, disappearedduring 1981-2009. A large new issue in 2009 multiplied theamount of SDRs by four, and helped many countriesovercome the effects of the global financial crisis, but theystill remain a tiny fraction of global liquidity.

Recommendation: The IMF should increase its lending baseby implementing the 14th and 15th General Reviews ofQuotas by January 2015, and thereafter increase quotas andissue SDRs automatically in line with growth in world GDP,trade and capital flows. It should also dramatically increasethe proportion of its funds available without conditionalityto combat “exogenous shocks”, and thereby reduce thedegree to which countries are expected to react to theseshocks through anti-growth austerity measures.


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¹ IMF. Articles of Agreement, Article I, Purpose; InternationalMonetary Fund, (n.d.).http://www.imf.org/external/pubs/ft/aa/pdf/aa.pdf See alsonotes 5 and 6 below for the role of the IMF in reducing povertyand promoting growth. For a description of IMF lending andpolicy support relationships with low-income countries, see the2013 Report.² See the May 2014 speech by the Managing Director onEconomic Inclusion and Financial Integrity.https://www.imf.org/external/np/speeches/2014/052714.htm;and additional January 2014 interview with the New York Times,available athttp://www.nytimes.com/2014/04/09/business/economy/in-new-tack-imf-aims-at-income-inequality.html?_r=0# , fromwhich the quotation is taken.³ Ibid.⁴ For more details, see International Monetary Fund - Overview.(n.d.). http://www.imf.org/external/about/overview.htm⁵ The Report therefore does not assess IMF performance ondebt issues, on inflation and monetary policy issues, or onexternal sector issues – which were assessed in last year’sGFGIR. Though these policies can also have important impactson inequality, the focus here is on the policies with the clearestand most direct impact on inequality.⁶ United Nations. United Nations Millennium DevelopmentGoals - Goal 1: Eradicate Extreme Poverty & Hunger . (n.d.).http://www.un.org/millenniumgoals/poverty.shtml⁷ Gini coefficient is the statistical value that represents incomeinequality. Higher values are associated with higher levels ofincome inequality.⁸ Kochhar, K., Loungani, P., Salgado, R., & Clemens, B.International Monetary Fund, (2013). Jobs and Growth:Analytical and Operational Considerations for the Fund.http://www.imf.org/external/np/pp/eng/2013/031413.pdf⁹ See for example, Lagarde, Christine. (2014). Jobs and Growth:Supporting the European Recovery. Available at http://blog-imfdirect.imf.org/2014/01/28/jobs-and-growth-supporting-the-european-recovery/¹⁰ Kochhar, K., Loungani, P., Salgado, R., & Clemens, B.International Monetary Fund, (2013). Jobs and Growth:Analytical and Operational Considerations for the Fund.http://www.imf.org/external/np/pp/eng/2013/031413.pdf¹¹ See Action Aid, forthcoming, Reducing Aid Dependencethrough Revenue Mobilization.¹² On the former, see the May 2014 speech cited in footnote 2;on the latter, see Spillovers in International Corporate Taxation,IMF Policy Paper, (2014). Available athttp://www.imf.org/external/np/pp/eng/2014/050914.pdf¹³ Oxfam International, Development Finance International andNew Rules for Global Finance are currently cooperating on moredetailed research into IMF tax policy advice, due for publication

in Spring 2015.¹⁴ Clements, B., Gupta, S., & Nozaki, M. International MonetaryFund, Fiscal Affairs Department, (2011). What happens to socialspending in IMF-supported programs (SDN/11/15).http://www.imf.org/external/pubs/ft/sdn/2011/sdn1115.pdf¹⁵ See Putting Progress at Risk: MDG Spending in DevelopingCountries, Development Finance International and OxfamInternational, (2013). Available athttp://www.governmentspendingwatch.org/research-analysis/latest-analysis¹⁶ Kyrili, K., & Martin, M. Report for Oxfam by DevelopmentFinance International, (2010). The Impact of the GlobalEconomic Crisis on the Budgets of Low-Income Countries.http://www.governmentspendingwatch.org/research-analysis/overall-spending¹⁷ Martin, M., & Watts, R., Development Finance Internationalfor Save the Children Norway, Norwegian Church Aid and theNorwegian Forum for Environment and Development, (2012).Enhancing the IMF's Focus on Growth and Poverty Reduction inLow-Income Countries.http://www.governmentspendingwatch.org/research-analysis/health¹⁸ Save the Children, (2012). A Chance to Grow: How SocialProtection Can Tackle Child Malnutrition and Promote EconomicOpportunities.http://www.governmentspendingwatch.org/research-analysis/social-protection¹⁹ International Monetary Fund, World Economic and FinancialSurveys. (2014). Global Financial Stability Report: Moving fromLiquidity to Groweth-Driven Markets.http://www.imf.org/external/pubs/ft/gfsr/2014/01/index.htm


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World Bank

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World Bank Governance


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World Bank

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World Bank GovernanceTiago Stichelmans, Eurodad

This article assesses the quality of governance of theWorld Bank in light of changes in the past year.

In 2013, the World Bank Group committed to twin goals¹which guide the Group’s new strategy:² eliminatingextreme poverty by 2030 and boosting shared prosperity.The World Bank Group is composed of five organizations,each of them having a specific mission. This article focuseson the World Bank, i.e., the International Bank forReconstruction and Development (IBRD) and InternationalDevelopment Association (IDA).³

IBRD and IDA’s highest governing body, the Board ofGovernors, meets annually and its DevelopmentCommittee meets biannually. The resident ExecutiveBoard with 25 Executive Directors meets several timeseach week. The President chairs the Executive Board andleads Management.

The IBRD gets its capital base from its members and usesthis to borrow money on financial markets to on-lend tomiddle income countries. The profits on these loans andthe return from its equity largely fund the operations ofthe IBRD, including staff salaries.⁴ IDA provides grants andconcessional loans for low income countries and somelower middle income countries. IDA is funded through aportion of the profits from loans made by the IBRD andthe International Finance Corporation (IFC) and bycontributions from donor countries, which meet everythree years to approve new funding “replenishments” andnew priorities.

In 2009, the World Bank adopted a Policy on Access toInformation,⁵ which was revised in 2013. The policyincludes a process for making information publiclyavailable as well as an appeals process when someonechallenges a document’s inclusion on the exception list.The 2009 reform declassified some 17,000 documents andcreated a searchable database of more than 100,000documents.⁶ The Bank also agreed to release moreextensive summaries of Board meetings, with thecondition of approval by the Board. What the Bank sorelyneeds now is an adequate search engine to sort throughall these materials. Google is the better option for findinginformation on the Bank website.

Since the 2013 revision of the policy,⁷ verbatim transcriptsand statements of Executive Directors may be declassifiedif their content is not covered by the list of exceptions.Even then they can only be declassified 10 to 20 yearsafter the date of the record.

These reforms are only a small step towards the repeateddemands from CSO groups to make Board discussions fullytransparent. Citizens remain unable to track the opinionsexpressed at Board meetings by their own governments.⁸A policy of disclosure with a regime of exceptions is onlyhalf of an ideal transparency policy, which also requiresthat affected or interested peoples can access relevantinformation. It also requires proactive translation intorelevant languages throughout the decision processes.Now there is only access to final documents. Minimal


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information is available during the negotiation anddevelopment of loans. Although this is partly theresponsibility of member countries, the Bank should makesure this information is publicly available.

Recommendation: National Parliaments and CSOs musthave real time access to information regarding pendingloans, and Board meetings should be publicly broadcast,with documents released in advance.

Voting shares at the World Bank Group differ between itsconstituent parts. IBRD and IDA are basically linked to thecapital countries contribute, which in turn, has been theresult of a series of ad hoc agreements. At the IBRD eachmember has a voting power equal to the sum of its basicvotes plus share votes. Basic votes give each member anequal share of 5.5 per cent of the total voting power. Theshare votes therefore represent a full 94.45 per cent of allvotes. IDA does not have basic votes; all its voting sharesare distributed according to the subscriptions paid intothe Bank. Share votes were initially linked to IMF votingshares though this has not been maintained. Over theyears capital increases have created the opportunity forsome countries to increase their relative share of the Bankand therefore their voting power,⁹ the result of anegotiated process in the Board.¹⁰ Currently, reviews ofthe Bank’s shareholding and renegotiations of quotas takeplace every 5 years, rather than on an ad hoc basis.

In 2010, the members of the Bank decided to increase itscapital by US $86 billion. According to the Bank theobjective of this capital increase, the first for the pasttwenty years, was to increase the capacity for the IBRD toperform its operations. In addition, a selective capitalincrease of US $27.8 billion would also reform votingpower, with an increased weight for developingcountries.¹¹ The Bank claims that this reform brought a3.13 per cent increase in the voting power of Developingand Transition countries (DTCs), bringing them to acombined 47.19 per cent of voting power. However, theDTC category is itself an historical anomaly not based onany sensible definition of what a DTC is: it includes 16 highincome economies. In reality, the reform brings the totalvoting power of high income economies to almost 61 percent of the votes, while middle income economies remainunder 35 per cent, and low income economies have 4.46per cent.¹² It is also important to note that the 78countries eligible for IBRD loans have collectively 34.1 percent of the voting power of the Bank, while 24 European

Union member states, which are not eligible for IBRDloans, have collectively more than 25 per cent of thevoting power.¹³

Those voting shares in the Board of Governors are alsoreflected in the Executive Board. The five largestshareholders of the Bank – United States, Japan, Germany,France, and United Kingdom - appoint one executivedirector each. Three countries – China, Russia and SaudiArabia – elect their own executive director while othermember countries are represented in constituencies.Among the 25 directors, 15 come from high-incomeeconomies and 10 from middle-income economies.¹⁴ Inpractice low income countries are represented by EDsfrom either middle income or high income countries. Theconsequence is an important imbalance betweenborrowing and non-borrowing countries in the Board ofExecutive Directors, in favor of the latter.¹⁵

Civil society groups have also expressed theirdisappointment with the reform. A coalition of EuropeanNGOs has called for equal voting shares for non-borrowersand borrowers as the first stage of a broader reform. Theyconsider that future reforms should be designed toembrace democratic principles and implement the Bank’smandate.¹⁶

The World Bank Presidency remains a de facto Americanposition, even as the IMF Managing Director is a Europeanposition. Both positions should be open to all candidates,regardless of nationality and selected solely on merit.Similarly World Bank staff, especially senior staff, shouldbetter reflect the diversity of member countries and arange of training and background beyond graduatedegrees in economics from prestigious US and Europeanuniversities.

Recommendations: The voting power of borrowers andnon-borrowers should be equal as a first step towardsfurther reform; the President should be selected from allmeritorious candidates regardless of nationality; and Staffshould include diverse nationalities and professionalpreparations.

According to the World Bank Articles of Agreement, itspowers are vested in the Board of Governors. It meansthat World Bank’s staff and management are accountable

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*Author’s recommended score: 2

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to the member states through their boardrepresentatives, themselves accountable to their citizens.However, the fact that voting power is dependent oneconomic weight and financial contribution to IDA givesgreater accountability to those with greater financialinvestment in the Bank. This model creates a moral hazardproblem: since donor countries, holding most of thepower, do not borrow from the Bank, they are notaccountable to citizens affected by the lending decisions,living in borrowing countries.

Another problem lies in the lack of accountability towardsnational parliaments. Legislators have limited access todocuments regarding World Bank operations in theircountries. Requirement of approval of operations bynational parliaments and full access to information forlegislators would also improve the balance of powerbetween national governments and parliaments as well.¹⁷

While the Bank’s accountability continues to refer back toits member countries’ governments, a framework for CSOengagement exists in the Bank. Most World Bank countryoffices have staff dedicated to the relations with localCSOs. There are currently 120 World Bank CSO liaisonofficers around the world.¹⁸ Two units at headquarterssupport them: the Civil Society Team and the Participationand Civic Engagement Team. Although the Bank has madeefforts to improve its engagement with CSOs, many effortsare still needed. On the positive side, the Bank has showninterest to better organize its relations with CSOs throughreflection on how to improve those relations,¹⁹ regularreview of CSO engagement,²⁰ the development of generalguidelines for the consultations with civil societyorganisations,²¹ and a guidance note for engagement withstakeholders.²² Given the decentralisation of thisengagement, guidelines are not always followed and itsquality is inconsistent and should be considerablyimproved, especially in developing countries. During someconsultations, CSOs have complained that their concernsare not properly being considered during the process.²³Despite the existence of guidelines to conduct thoseconsultations, there are no rules that provide minimumprocedural guarantees or negotiated agreements onacceptable mechanisms. The creation of a new frameworkwith universal engagement guidelines, monitoringmechanisms and CSO-controlled funding to facilitate CSOengagement would improve the Bank’s engagement withCSOs.

Recommendation: A new CSO engagement frameworkwith universal engagement guidelines, monitoring

mechanisms and CSO controlled funding to facilitate CSOengagement.

The World Bank has created several mechanisms toimprove the accountability of its projects. Although thissection focuses on the safeguards policies, currently underreview, it is important to mention the existence of theInspection Panel. The Inspection Panel is an independentrecourse mechanism for people and communities whobelieve they have been, or are likely to be, adverselyaffected by a Bank-funded project. The World Banksafeguards and its Inspection Panel are the onlymechanisms that affected people can use to hold the Bankto account. The World Bank and the regionaldevelopment banks are the only inter-governmentalfinancial institutions with complaint mechanisms open toaffected people. They still fail to provide compensationto injured parties.

In order to appeal to the Inspection Panel, the WorldBank—at the insistence of CSO campaigners over theyears—has developed environmental and socialsafeguards policies, now the heart of the Bank’sresponsibility to affected people for the impact of itsprojects. According to the Bank, the objective of thosepolicies – currently under review - is to “prevent andmitigate undue harm to people and their environment inthe development process”.²⁴ They provide guidelines forthe Bank and borrower staff in the identification,preparation and implementation of programs andprojects, including impact assessment.

The current review process of the safeguards policies aimsat making them more efficient and effective in the waythey are applied and implemented.²⁵ During the reviewprocess, CSO groups have expressed their concernsregarding the safeguards policies and wishes for thereview’s outcome:

1. the necessity to include development policyloans in the safeguards application;

2. the importance of not weakening the frame-work (President Kim has committed to no dilu-tion of the safeguards as a result of the reviewprocess.);

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*Author’s recommended score: 1

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3. more country ownership should not underminehigh, common, minimum standards;

4. reinforcement of the impact assessment mecha-nisms; and

5. improvement of the safeguards policies on spe-cific topics: human rights, climate change, indige-nous peoples’ rights, rights of persons withdisabilities, rights of children and access to jus-tice.²⁶

The Bank has yet to adopt the reform of the safeguardspolicies. However, a draft proposal was recently presentedby the Bank to its Executive Board.²⁷ CSO groups believethat it considerably weakens the current policies, in anattempt to speed up lending approval.²⁸ The BankInformation Center has developed an analysis²⁹ of theproposal and points out the following:

1. The Bank is proposing a loophole allowing gov-ernments to “opt out” of previously guaranteedprotections for indigenous people, lowering theaccountability of the Bank towards local commu-nities;

2. Despite Bank promises that the reformed safe-guards policies would include stronger protec-tions for poor communities and those in“disadvantaged” or “vulnerable” groups, the pro-posal only contains general mentions of the needto consider impacts of projects on those who maybe “disadvantaged” due to age, disability, gender,and sexual orientation or gender identity;

3. Despite assurances made by the Bank that envi-ronmental challenges would be adequately ad-dressed in the policies, climate change is absentfrom the policies in term of impact assessment;

4. Policies protecting biodiversity have also beenweakened in the proposal; as well as

5. Proposals to weaken a key protection, the cur-rent right of communities to comment early inthe process on projects which, if adopted, wouldhave great potential to significantly affect theirlives and livelihoods.

Recommendation: The Safeguard Policies should bestrengthened in the areas highlighted above, with nodilution of standards.

Overall assessmentIn sum, the World Bank has improved on Transparency. ForInclusiveness, the Bank remains dominated by lendercountries to the detriment of borrowers. TheAccountability of the Bank suffers from the unbalancedvoting power at the Boards of Governors and Directors,and the manner of selecting the President. In addition,national parliaments are not adequately involved indecisions affecting their citizens. While the Bank has madeefforts to improve its engagement with CSOs, the qualityof engagement with CSOs varies considerably. OnResponsibility, the reform of the safeguards policies seemslikely to undermine the Bank’s framework that CSOsaround the world have worked for decades to construct toprotect the voice and livelihoods of the poorest whilesustaining the environment.


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¹ World Bank, (2013). End Extreme Poverty and PromoteShared Prosperity.http://www.worldbank.org/content/dam/Worldbank/document/WB-goals2013.pdf² World Bank, (2013). World Bank Group Strategy.https://openknowledge.worldbank.org/bitstream/handle/10986/16095/32824_ebook.pdf?sequence=5³ The new strategy requires the engagement of theInternational Finance Corporation (IFC) which lends to theprivate sector, in all country strategy documents. See theWorld Bank Impact section for discussion of IFC anddevelopment issues.⁴ World Bank. How IBRD is Financed.http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTIBRD/0,,contentMDK:21116541~menuPK:3126976~pagePK:64168445~piPK:64168309~theSitePK:3046012,00.html⁵ World Bank. Access to Information.http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTANDOPERATIONS/EXTINFODISCLOSURE/0,,menuPK:64864911~pagePK:4749265~piPK:4749256~theSitePK:5033734,00.html

⁶ Gartner, David, Brookings Institution, (2011).Transparency and the IMF.http://www.brookings.edu/blogs/up-front/posts/2011/09/23-transparency-imf-gartner⁷ World Bank, (2013). Changes to the World Bank Policyon Access to Information – Effective July 1, 2013.http://siteresources.worldbank.org/INFODISCLOSURE/Resources/AI_Policy_revisions_of_July1_2013.pdf⁸ European Network on Debt and Development, (2010).Public Control for the Public Interest: Assessing WorldBank Accountability in Richer Countries.http://www.eurodad.org/uploadedfiles/whats_new/reports/world%20bank%20accountability%20study.pdf⁹ World Bank, (2010). World Bank Group Voice Reform:Enhancing Voice and Participation of Developing andTransition Countries in 2010 and Beyond.http://siteresources.worldbank.org/DEVCOMMINT/Documentation/22553921/DC2010-006(E)Voice.pdf¹⁰ Ibid.¹¹ World Bank, (2010). World Bank Reforms Voting Power,Gets $86 Billion Boost.http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,c

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* Author recommended a lower score. Editors adjusted score slightly up in order to maintain consistency ofassessments across institutions. Criteria was applied more consistently in the 2014 Report as compared to the 2013Report. This has led to a slight upgrade, as judged by the editors.


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World Bank Impact

ontentMDK:22556045~pagePK:34370~piPK:34424~theSitePK:4607,00.html¹² World Bank, (2010). IBRD 2010 Voting PowerRealignment.http://siteresources.worldbank.org/NEWS/Resources/IBRD2010VotingPowerRealignmentFINAL.pdf¹³ Bretton Woods Project, (2010). Analysis of World BankVoting Reforms.http://www.brettonwoodsproject.org/2010/04/art-566281/¹⁴ World Bank, (2014). International Bank forReconstruction and Development, International FinanceCorporation, International Development Association:Executive Directors and Alternates.http://siteresources.worldbank.org/BODINT/Resources/278027-1215526322295/BankExecutiveDirectors.pdf¹⁵ United Nations, (2010). Position Paper of the Group of77 and China on the Reform of the International andFinancial Economic System.http://www.un.org/esa/ffd/events/2010GAWGFC/6/Stmt_G77.pdf¹⁶ Bretton Woods Project, (2010). Analysis of World BankVoting Reforms.http://www.brettonwoodsproject.org/2010/04/art-566281/¹⁷ Or, in congressional systems, improve the balancebetween the Executive and Legislative Branches.¹⁸ Ebrahim, A., & Herz, S., (2007). Accountability inComplex Organizations: World Bank Responses to CivilSociety.http://www.hbs.edu/faculty/Publication%20Files/08-027_18c99232-358f-456e-b619-3056cb59e915.pdf¹⁹ World Bank, (2005). Issues and Options for ImprovingEngagement between the World Bank and Civil SocietyOrganizations.http://siteresources.worldbank.org/CSO/Resources/Issues_and_Options_PUBLISHED_VERSION.pdf²⁰ World Bank, (2013). World Bank-Civil SocietyEngagement Review of Fiscal Years 2010-12.http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/CSO/0,,contentMDK:23459805~pagePK:220503~piPK:220476~theSitePK:228717,00.html²¹ World Bank, (2000). Consultations with Civil SocietyOrganizations.http://siteresources.worldbank.org/INTRANETSOCIALDEVELOPMENT/873204-1111663470099/20489515/ConsultationsWithCSOsGuidelines.pdf²² World Bank, (2009). Guidance Note on Bank Multi-Stakeholder Engagement. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/07/08/000333037_20090708235404/Rendered/PDF/492200BR0SecM2101Official0Use0Only1.pdf

²³ Scholte, J.A. Building Global Democracy? Cambridge:Cambridge University Press, 2011.²⁴ World Bank, (2012). Safeguard Policies.http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/EXTPOLICIES/EXTSAFEPOL/0,,contentMDK:20507440~pagePK:64168427~piPK:64168435~theSitePK:584435,00.html²⁵ World Bank, (2014). World Bank to Begin Discussions onProposal to Strengthen Social and EnvironmentalSafeguards. http://www.worldbank.org/en/news/press-release/2014/07/30/world-bank-begin-discussions-proposal-strengthen-social-environmental-safeguards²⁶ Bank Information Center. World Bank SafeguardsReview 2014.http://www.bicusa.org/issues/safeguards/#Concerns²⁷ World Bank, (2014). Environmental and SocialFramework: Setting Standards for SustainableDevelopment. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/07/30/000456286_20140730173436/Rendered/PDF/898130BR0CODE200Box385287B00PUBLIC0.pdf²⁸ Yukhananov, Anna, Reuters. World Bank Review ShowsFlaws in Social, Environment Safeguards Process.http://www.reuters.com/article/2014/07/15/worldbank-safeguards-idUSL2N0PP1LE20140715²⁹ Bank Information Center, (2014). Press Release: WorldBank Breaks its Promise Not to Weaken Protections for thePoor and Planet. http://www.bicusa.org/press-release-world-bank-breaks-its-promise-not-to-weaken-protections-for-the-poor-and-planet/


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World Bank ImpactJo Marie Griesgraber, New Rules for Global FinanceMatthew Martin, Development Finance International

The World Bank’s overarching mission is “a world freeof poverty”. In October 2013 its Board of Governorsapproved a new strategic agenda with two goals:

· Ending extreme poverty by reducing the percentageof people living on less than US $1.25 a day to 3 percent by 2030; and

· Promoting shared prosperity by fostering incomegrowth for the bottom 40 per cent of the populationin every country.

The Bank will fulfill these goals by providing: i) loans,interest-free credits, and grants to developing countriesto support a wide array of investments in education,health, public administration, infrastructure, financial andprivate sector development, agriculture, andenvironmental and natural resource management; and ii)policy advice, research and analysis, and technicalassistance/capacity-building to developing countries.¹ Thisassessment of World Bank impact places particularemphasis on low income countries (LICs) (though it alsolends to virtually all middle income countries).²

In what follows, the World Bank is assessed for the impacton poverty and inequality of its overall goals and theirintended monitoring; its resources and the way in whichthey are allocated and delivered; its policy assessmentsand policy-based lending; its policies on various sectorsand cross-cutting themes; and its private sector activities.

The strategic plan’s goals are to eliminate all but 3 percent of abject poverty (at or below US$ 1.25/day) within15 years, and to ensuring that the bottom 40 per cent ineach country will increase their income at a rate faster

than increases for the remaining 60 per cent of thepopulation. These commitments are welcome andadmirable, especially because they seem to emphasizedirectly combating poverty and inequality, rather than (astoo often in the past) assuming that income will “trickledown” to the poor via accelerated growth;³ and becausethey focus on outcomes instead of only equality ofopportunity. However, some doubt that the Bank hasreally understood how to achieve these goals, because itis ignoring a rights-based approach, and relying excessivelyon growth and private-sector led development.⁴

The goals also raise many questions. Why accept that 3per cent of poverty will be impossible to end - if morecould be done to provide immediate social protection tothose affected by wars, natural disasters and otherexogenous shocks? What will be done to tackle thegrowing bulge of “very but not extremely poor” earningbetween US$1.25 and US$2/day? Within the bottom 40per cent, how will the Bank ensure most benefits do notaccrue to those between the 35�� and 40�� percentiles?Above all, how much faster will the incomes of the bottom40 per cent rise and to what share of national income?Oxfam and other CSOs are suggesting a goal of their shareof national income matching that of the top 10 per centin each country.

To monitor implementation, beginning on July 1, 2014⁵the Bank has designed Corporate Scorecards: one for theWorld Bank Group (IBRD, IDA, IFC and MIGA) and one forthe World Bank (IBRD and IDA). Each Scorecard has 3 tiers:

· The Goals and Development Context: a state-ment of “what is” as of April 2014.

· The Results achieved by clients (borrowing gov-ernments) with the help of the World Bank.


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· The Performance of the World Bank Group as awhole and “World Bank” as IBRD and IDA in im-plementing the strategy, will “measure both op-erational and organizational effectiveness.”⁶

How helpful will these scorecards be to future assessmentsof its impact on poverty and inequality?

Within the World Bank Scorecard, there is need for muchgreater clarity about the targets set for the Bank and howthey will impact on poverty and inequality rather than justproducing “outputs”. For example, in the target for milesof roads built, will feeder roads bringing remote ruralpeople and goods to market, be differentiated fromtoll-motorways to which the poor have no access? Equally,how exactly will the Bank will assess results for genderequity, and for equity within access to and results fromeducation and health?

As discussed in more detail in this Report last year, theWorld Bank scores highly for the scale of its funding. WorldBank Group commitments rose from US$52.6 billion in FY2012/13 to US$61 billion in 2013/14, largely due to a majorincrease in infrastructure-related lending. Of this, IBRDrepresented US$18.6 billion, up from US$15.2 billion, IDAUS$22.2 billion (up from US$16.3 billion, continuing toexceed IBRD lending), and private sector US$20.2 billion(down from US$21.1 billion after a major recent increase).However, amounts available for commitment via IDA tolow income countries are only US$52 billion. While higherin nominal terms than ever before, this represents onlystagnation in real terms, and reflected only very marginalnominal increases in new donor funding.⁷

IDA remains a major actor in official developmentfinancing (20 per cent of multilateral and 10 per cent oftotal flows) and could therefore have a strong influenceon setting new rules for development finance. They alsoremain relatively cheap for countries and thereforeminimize the debt-creating impact of borrowing. However,there are three resource issues:

· Insufficient: given their massive MillenniumDevelopment Goal (MDG) funding needs andpreference for disbursements via multilateralinstitutions, LICs would have liked to see IDA fundinglevels rise much more. They also opposed thehardening of lending terms for IDA recipients, which

was agreed to provide more funds for future IDAlending. CSOs remain somewhat divided on whetherIDA should have more resources, with most preferringhigher funding for UN agencies and regionaldevelopment banks, especially in relation to climatechange.

· Poorly Allocated: as discussed in detail in the 2013Report, LICs and CSOs have major problems with thesystem through which resources are allocated, notablythe “performance” Country Policy and InstitutionalAssessment (CPIA). If the Bank is to allocate resourcesin ways which tackle “harder to reach” poverty, andreduce inequality, future allocations will have to bebased much more on needs in terms of poverty andinequality levels, and take more account of countryvulnerability to economic, climatic or conflict shocks,resulting in a far higher share of funds going to “fragilestates” (only marginal steps have been taken in thisdirection for IDA 17).⁸ The Independent EvaluationGroup (IEG) report on 2013 Bank performance showsthat IDA programs in Fragile and Conflict-affectedStates (FCS) out-performed regular IDA-borrowers andwere on par with performance of IBRD borrowers,which should encourage the Bank in the direction ofhigher lending to FCS.⁹ The same types of allocationcriteria will be needed to tackle the very high povertyand inequality in middle-income IBRD borrowingcountries. The CPIA criteria themselves will also needto change dramatically, to place top priority on policyaspects which have been proven to combat povertyand inequality, such as progressive taxation, anti-inequality spending, equality and rights legislation,and decent work objectives. In all these senses theyare less fit for purpose than they were last year.

· Effectiveness: according to LICs, IDA continues toperform well in terms of channeling its assistance viathe recipient government budget; aligning itsassistance with priority sectors in nationaldevelopment strategies; programming commitmentsand disbursements over a multiyear period; untyingits assistance from any link to exports of individualcountries; and being fully engaged in national andsectoral policy dialogue with countries. Yet theycontinue to criticize the low quality and capacity-building content of much of its technical assistance;complex and slow disbursement and procurementprocedures; failure to channel its support viagovernment public financial management andprocurement systems, or to use government-ledresults tracking systems; its high levels of policy and


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procedural conditionality which delay disbursements;and low flexibility to respond to shocks (with a CrisisResponse Window set at only 3 per cent of IDAresources). IDA continues to make efforts tostreamline procedures and reduce delay, throughgreater use of national procurement systems, anddecentralization; and to reduce conditionalities, butneither LICs nor CSOs see these as bringingfundamental change at country level.

Recommendation: the World Bank should aim for a realterms increase in the next IDA replenishment, in returnfor demonstrating that it can comprehensively revise itsallocation system to be based on anti-inequality/povertypolicies and needs, and dramatically improve effectivenessby using country systems and reducing conditionalitysharply.

It is extremely hard to assess World Bank impact onpoverty or inequality. Unlike the IMF, it has been very littleinvolved in designing the macroeconomic framework inLICs in recent years, and lends to virtually all LICs, so it ishard to ascribe major macroeconomic impacts to WorldBank projects or to compare countries with and withoutWorld Bank programs. The Bank has also conducted verylittle in-depth analysis of how its policy recommendations,programs and projects are impacting on these issues, andthe IEG does not conduct institution-wide assessments ofBank activities on poverty or inequality outcome.However, the Bank in common with the broader donorcommunity has seen acceleration of growth and reductionof poverty in most LICs, but much less progress oninequality.

The Bank has already indicated that for this to happen, itwill need to pay much more attention to the distributionalconsequences of tax and spending policies (in cooperationwith the IMF), as well as providing policy advice on socialprotection, job creation and financial inclusion to fightagainst inequality. However, in all of these areas itsprevious policies have been lacking in focus on tackling thekey problems facing the poorest, in terms of:

· assisting with comprehensive social protection floorsand investing in country systems and capacity, asopposed to topping-up targeted schemes for smallgroups (such as in-kind transfers, public works orschool feeding programs);¹⁰

· decent work and employment and promoting higherminimum and living wages, job security and unionrights; and

· ensuring that the poorest have equal access tofinancing rather than just being “included in” thefinancial sector.

An equally important issue is whether the Bank’s systemsfor assessing country policies, and the design of its policyconditions in its policy-based lending, are likely to achievethe goals of ending poverty and reducing inequality. Asalready analyzed above, the CPIA seems very inadequatefor this purpose.

The “Doing Business” assessment of the private sector“investment climate” is also a crucial system, used not onlyto design World Bank Country Policies and policy-basedlending conditions, but also by many other donororganizations in their policy and private sector work. It hasbeen highly criticized by civil society for its focus onreducing numbers or levels of corporate taxes, andpromoting “flexible” labor markets by minimizing laborprotection and abolishing or reducing minimum wages.More details of how Doing Business damages workerprotection are provided in Box 1. However, plans for afundamental review of the assessment system in 2013-14,including consultations with LICs and CSOs have not beenfully pursued, and the Doing Business 2014 reportcontinues to use the same criteria: the only change hasbeen that the Employing Workers indicator is no longerincluded in the aggregated summary index.¹¹ The focus onreducing corporate taxes also seems to be increasingly atodds with IMF recommendations in countries and itsSpillovers report¹² about the need to avoid a “race to thebottom” in corporate taxation.

Recommendation: the Bank should comprehensivelyrevise its policy assessment systems (CPIA and DoingBusiness), its Country Policies and its policy-based lendingconditions to prioritize policies which will reduce povertyand inequality, notably progressive taxation, anti-inequality public spending including comprehensive socialprotection floors, and enhanced labor rights and wages.

Education and Health: LIC governments and CSOswelcomed the renewed commitment to universaleducation and health care by the new Bank Presidentduring 2012-13, and some of the President’s own speechesin which he emphasized that user fees for such services


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should be eliminated or minimized to avoid excluding thepoor. Yet education and health user fees continue withinthe poorest countries, as evidenced by a 2014 IDAeducation loan document for Sierra Leone. While thegovernment abolished school fees, the costs of uniforms,books, supplies and “off the payroll” teacher fees continueto keep the poorest rural children from school.¹³ There isa need for an even stronger public commitment to freeuniversal education and health for all, with this beingprominent also in the assessment of country policies andcountry strategies: this would be a powerful influence onthe whole donor community, given that the Bank is theworld’s largest provider of “funds and expertise to

education.”¹⁴ The Bank needs also to be even clearer in itsviews on the relative desirability of public and privatesector provision: CSOs and education/health experts havebeen highly critical of some proposals made by the Bank(and actions taken by the IFC) for delivering these goalsthrough the private sector, on the grounds that they aretypically less cost-effective and exclude the poorest,undermining equity and rights to education and health.¹⁵

Agriculture. As is true of many other donors, it is not clearthat the World Bank is placing enough focus on promotingthe incomes on smallholders and poorer rural citizens,rather than enhancing production through larger farms.

The World Bank’s Doing Business report, an effort to rankcountries according to whether or not they have adoptedbusiness-friendly regulations, has been controversialsince its launch eleven years ago. It has been criticizedfor encouraging governments to compete in rolling backworker protections, while penalizing governments whoattempt to augment their taxes on business to pay forsocial protection and other needs. This is an especiallyalarming policy stance for the World Bank to take inlow-income countries, the majority of which struggle withinadequate de jure and de facto worker protections andlow tax collection rates.

In 2012, World Bank President Jim Kim appointed anexpert panel, headed by former South African ministerTrevor Manuel,* to review the appropriateness of thenormative standards by which the report’s indicatorsjudge countries as well as other aspects of itsmethodology. In the wake of an intensive public lobbyingcampaign by representatives of multinational businessinterests and proponents of free market ideology,President Kim adopted few of the recommendations forcomprehensive reform delivered by the panel in June2013.

Doing Business does not measure factors that might beparticularly important to combating poverty andinequality in a low-income country — the adherence tothe International Labor Organization’s core laborstandards including the effective recognition of the rightto collective bargaining, the elimination of forced labor,the abolition of child labor and the elimination ofdiscrimination in respect of employment and occupation.

The report also does not measure important minimumworker protections in the areas of maternity or personalneeds, access to social security, or occupational safetyand health.

Instead, Doing Business has focused governmentattention exclusively on the ease with which employeesmay be terminated, keeping minimum wages at a lowlevel, and ensuring that weekly rest, holiday with pay andlimits on hours of work are not “excessive.” The laborindicator was suspended in 2009 because of strongcriticism, but the report continues to publish data for theindicator in an annex. The Doing Business team claimsthat its normative standards in these areas do notpenalize a country that complies with minimum standardscontained in ILO conventions governing these areas, butthe ILO itself has never endorsed this interpretation ofits conventions.

Alarmingly, the Bank is moving to include the DoingBusiness indicators in its new Strategic Country Diagnosticprocess, thus setting the stage for them to be used as atemplate for setting Bank priorities when negotiating theCountry Partnership Frameworks. This will pressurecountries to adopt anti-labour regulations if they wish toborrow, and is a step in the wrong direction from theadvice given by the panel of experts in 2013.

Peter Bakvis and Pamela Gomez,International Trade Union Confederation (ITUC)

THE WORLD BANK’S DOING BUSINESS AND WORKER PROTECTION

*Trevor Manuel, Independent Panel: Reviewing the World Bank Group's Doing Business Report, June 2013. http://www.dbrpanel.org/


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This position is supported by the Bank’s own research,which argues against the Bank facilitating foreigninvestment in large tracts of farmland already in use bysmall farmers. ¹⁶ This issue has been particularlyconfronted in the last year by the issue of large farms“grabbing land” from smallholders.¹⁷ On this, the Bank haspublic restated its commitment to voluntary UNguidelines, but it is not clear this will be reflected inoperations by being adequately treated in revisedsafeguards, IFC supervision of the behavior of financialintermediaries, or in improved land acquisition contracttransparency.

Gender: There is generally seen to have been someprogress on “gender mainstreaming” and monitoringgender impact of Bank projects over the last decade.However, there is not nearly enough analysis of genderimpact of country strategies and operations, or emphasison measuring the achievement of project gender equalityobjectives and collecting gender disaggregated data. Inaddition, the Bank needs to do much more on maternalhealth care, on women’s economic empowerment, andon gender-based violence, and to make its policies,strategies and projects respond to women’s needs andrights, especially in providing high-quality jobs.¹⁸ Some ofthe current gender assessment tools are also seen to beinadequate, notably the self-assessment form for decidingwhether a project is “gender-informed”.¹⁹

Climate Change: The Bank has been seen by LICs and CSOsuntil recently as insufficiently committed to combatingclimate change in its actual lending policy, continuing tomake large investments in fossil fuels and not routinelyassessing its projects and programs in depth for theirpotential impact on climate change. However, thisappears to have been changing somewhat in 2013, withmuch greater focus on mainstreaming climate change,disaster risk management and low-carbon developmentin IDA countries, and an announcement that it will ingeneral avoid financing coal projects.²⁰

Recommendation: The “One Bank” should strengthen itseducation and health policies and operational guidelinesto ensure universal, free and publicly provided servicesare the priority for the World Bank and IFC. It shouldreorient its agriculture policy to focus on support forsmallholders and poorer rural citizens, dramaticallyreinforce its work on gender and ensure combatingclimate change is fully mainstreamed in all operations.

Our assessment of World Bank Group engagement withthe private sector, mainly via the International FinanceCorporation (IFC) has not changed since 2013. A primarygoal of IDA’s strategy for the next few years is to“leverage” greater private sector resources fordevelopment, given that its own funds will be stagnatingor falling in real terms, and therefore the Bank couldpotentially have a massive impact on encouraging theprivate sector to combat poverty and inequality.

Nevertheless, there is so far little sign of such a change.According to LIC governments, CSOs and the IEG, IFCfacilities remain too tailored to wealthier countries withbetter capacity to access funds, insufficientlydifferentiated according to country circumstances, over-concentrated on highly profitable sectors such as mining,petroleum, tourism and finance rather thanmanufacturing or agriculture,²¹ and too often partneringwith large transnational investors.²² The IEG, CSOs andindependent analysts have also pointed to its very limitedimpact on poverty,²³ and a “steep decline in performance”of its investments in the poorest countries. ²⁴

Indeed, many have suggested that “the IFC follows adifferent logic and procedures that make its work largelyincompatible with Bank operations. Though the IFC usespoverty alleviation rhetoric, its main driver is return oninvestments in private enterprises”²⁵ As discussed lastyear, IFC has also been criticized (including by IEG and theWorld Bank ombudsman) for its failure to track theenvironmental and social impact of its interventions,notably those which operate indirectly via financialintermediaries such as banks and investment funds. Thisis because it relies on client self-assessment and verylimited reporting, which has been repeatedly criticizedand downgraded by the IEG for being less reliable,accountable or transparent, for example on how neteffects on employment levels (including second orderimpacts) are assessed.²⁶ IFC has never assessed thedistributional impacts of its work.²⁷

Criticism has continued to grow from CSOs of the IFC’sgrowing move into public-private partnerships or privatefinancing for what have previously been mainly publicly-funded infrastructure and social sector investments.These types of projects have long been demonstrated tobe much more expensive and risky than public sectorfunding such as bonds, reducing revenue flows to


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government, and risking crowding out other essentialgovernment spending or increasing debt burdens. In thesocial sectors, they can easily undermine the impact onthe access of the poorest to services (education, health,low-cost housing, water and sanitation) and education –and IFC tracks only the overall impact of projects on accessto services, not their impact on the access of the poorest.²⁸The 2012 IEG report on the “Results and Performance ofthe World Bank Group,” showed that Bank effectivenesswas lowest in infrastructure and public-privatepartnerships.²⁹

To reverse this logic, it has been suggested that the IFCshould reform its business plan to set targets for fundingsmall, medium and micro-enterprises; businesses ownedby local entrepreneurs; businesses owned by women; andbusinesses in sectors which will have most impact on theemployment and incomes of the poor (such as smallholderagriculture, manufacturing); and its DevelopmentOutcomes Tracking System (DOTS) to focus less on financialreturns, and more on tax revenues generated and decentjobs created.

Two other areas in which the World Bank has not actedsignificantly to improve private sector behavior:

· Maximizing tax collection. It could for example insistthat it would not do business with corporations whichare based in tax havens, fail to report all their accountsdisaggregated by country, or fail to pay full tax in hostcountries on projects they are executing with IFCfunding.

· Maximizing decent job creation. It could set standardssuch as ensuring that all jobs in Bank-funded projectsmeet decent work criteria, including reasonable jobsecurity, living wages, and opportunity to join ororganize unions.

Overall, World Bank continues to be doing little to promotenew rules for private finance.

Recommendation: The World Bank should be a leadingactor encouraging the private sector to help combatpoverty and inequality. Its private sector operationsshould therefore focus on funding the businesses whichwill have the most impact on the lives of the poor, andbe judged for their success in generating decent workand tax revenue.


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¹ For more details,http://www.worldbank.org/en/about/what-we-do² Future editions of GFGIR may also examine World Banktechnical assistance, research and statistics.³ The Bank is about to announce a new strategy at theOctober 2014 Annual Meetings, and next year’s 2015Report will assess the adequacy of that strategy.⁴ http://www.brettonwoodsproject.org/art-572637⁵ The World Bank Group includes the International Bankfor Reconstruction and Development (IBRD), theInternational Development Association (IDA), theInternational Finance Corporation (IFC), and MultilateralInvestment Guarantee Agency (MIGA). World Bank refersjust to the first two: IBRD and IDA.⁶ World Bank Group, World Bank Group/W BankCorporate Scorecard, April 2014, p. 1. Staff working onthe Scorecard claim that the Scorecard is a managementtool, not appropriate for impact assessments. However,the IDA websites refers only to the Scorecard under a linkcalled “Measuring Results.”⁷ http://www.brettonwoodsproject.org/art-573343; andhttp://www.worldbank.org/en/news/press-release/2013/12/17/world-bank-fight-extreme-poverty-record-support⁸ For examples of such critiques, see Alexander, Nancy(2010), The Country Policy and Institutional Assessment(CPIA) and Allocation of IDA Resources: Suggestions forImprovements to Benefit African Countries, report to theAfrican Caucus of the IMF and World Bank, available at:file:///C:/Users/Owne/Downloads/Country%20Policy%20and%20Institutional%20Assessment%20(1).pdf ; Kanbur, Ravi (2005), Reforming the Formula: A ModestProposal for Introducing Development Outcomes in IDAAllocation Procedures, CEPR Discussion Paper 4971;Patrick Guillamont and Sylviane Gullaumont-Jeanneney(2009), Accounting for Vulnerability of African Countries inPerformance Based Aid Allocation,” African DevelopmentBank Group Working Paper 103; and Severion, Jean-Michel and Moss, Todd (2012), Soft Lending without PoorCountries: Recommendations for a New IDA, available atinternational.cgdev.org/sites/default/files/1426547_file_Moss_IDA_FINAL_web.pdf. The World Bank’s ownIndependent Evaluation Group also concluded in 2009that use of the CPIA for allocation of funds should beeliminated.⁹ Ibid.¹⁰ IEG Annual Report 2013, p. xv.¹¹ http://www.brettonwoodsproject.org/art-572701¹² Spillovers in International Corporate Taxation, atwww.imf.org/external/np/pp/eng/2014/050914.pdf

¹³ REVITALIZING EDUCATION DEVELOPMENT IN SIERRALEONE (P133070), Project Information Document, 24 July2014, page 2 of 6. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/AFR/2014/07/24/090224b0825b9b27/1_0/Rendered/PDF/Project0Inform0ERRA0LEONE000P133070.pdf¹⁴ Karen Mundy and Francine Menashy, “The World Bankand the Private Provision of K-12 Education: History,Policies, Practices.” ESP Working Paper Series, SpecialSeries, the Privatisation in Education Research Initiative,Education Support Program, Open Society Foundations.No. 40, 2012, p. 7.¹⁵ See http://www.brettonwoodsproject.org/art-572728on education andhttp://www.brettonwoodsproject.org/art-572644 onhealth.¹⁶ K. Deininger and D. Byerlee, “Rising Global Interest inFarmland: Can it Yield Sustainable and EquitableBenefits?”, Washington, D.C.: World Bank, 2011.¹⁷ Oxfam Great Britain, “Our Land, Our Lives: Time out onthe global land rush.” Oxfam briefing note, October 2012.file:///C:/Users/Owne/Downloads/bn-land-lives-freeze-041012-en%20(2).pdf¹⁸ Seewww.worldbank.org/ida/papers/IDA17_Replenishment/IDA17ManaguaSummary.pdf andhttp://www.genderaction.org/publications/assessingeffectiveness.pdf¹⁹ The most comprehensive and authoritative reportingon IFI gender issues is done by Gender Action, a civilsociety organization headed by Dr. Elaine Zuckerman.Gender equity is one of the key indicators in theCorporate Scorecard launched in April 2014 to monitorand evaluate both the World Bank Group and the WorldBank (IBRD + IDA). See for example: Claire Lauterbachand Elaine Zuckerman, “Assessing the effectiveness ofWorld Bank investments: The gender dimension.” WIDERWorking Paper No. 2013/017, March 2013. At p. 15 thereis a copy of the World Bank document used for scoringwhether or not a Bank Project is “gender informed.”Ticking one of three boxes makes it so.http://www.genderaction.org/publications/assessingeffectiveness.pdf²⁰ Seewww.worldbank.org/ida/papers/IDA17_Replenishment/IDA17ManaguaSummary.pdf²¹ Eurodad, “Fact Sheet: World Bank’s IFC and privatefinance for development”, athttp://www.eurodad.org/files/pdf/53be753ff1bc3.pdf²² For an example of this see the LIC communiqués citedin footnote 14 above.²³ http://www.brettonwoodsproject.org/art-572001


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Tax Rule-Making Bodies

Tax Governance

²⁴ IEG “World Bank Results and Performance 2012”²⁵ Mundy and Menashy, p. 33.²⁶ Ibid., footnote 17.²⁷ See also Mundy and Menashy at p. 29.²⁸ For more details on this, see Oxfam International, ADangerous Diversion, athttp://www.oxfam.org/en/research/dangerous-diversion;and²⁹ http://www.brettonwoodsproject.org/art-572003;Alexander, Nancy et al (2013), Responsible Investment inInfrastructure, Recommendations for the G20, HeinrichBoell Foundation North America, athttp://boell.org/downloads/Responsible_Investment_in_Infrastructure.pdf; and Hawkesworth, Ian (2012), “How toEnsure Value for Money from PPPs”, presentation toWorld Bank Debt Management Facility Stakeholders’Forum, Accra, June 25, available athttp://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1170954447788/3430000-1336681463114/DMF2012_06_Hawsworth.pdf


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Tax Rule-Making Bodies

Tax GovernanceJohn ChristensenTax Justice Network (TJN)

As discussed in last year’s report, three internationalorganizations--the OECD, the IMF, and the UN TaxCommittee—all claim leadership of the international tax“system” - and where everyone is in charge, no one is incharge. Last year we assessed all three organizations, andfound poor average results, especially for inclusion andresponsibility. This year we focus on the organization whichhas most recently been mandated to lead reforms oninternational tax issues (the OECD).¹ We then contrast thiswith governance by a much more desirable potential WorldTax Authority under UN auspices.

For decades international tax rule-making has beendominated by the Organization for Economic Cooperationand Development (OECD) member states, which haveshaped rules to suit their interests and those of thetransnational companies originating from OECD countries.In 1956 the Committee on Fiscal Affairs (CFA) of theOrganization for European Economic Cooperation (OEEC),forerunner to the OECD, took it upon itself to manage therule-making processes required for international taxcooperation. As cross-border investment increased in the1960s, the OECD took the lead in promoting a ‘soft law’approach based on its non-binding multilateral modelconvention and other policy advice. Almost every tax treatyin existence today is based on the OECD’s model convention.It has also been given responsibility since 2000 by the G8and more recently G20 for

strengthening implementation of global standards ontransparency and exchange of information for tax purposes(since 2009 through a Global Forum on Transparency andExchange of Information for Tax Purposes), and for

addressing tax avoidance through “Base Erosion and ProfitShifting” (BEPS) ² (2013). Despite the claims made for it (theOECD and G20 have described the Global Forum as “thepremier international body for ensuring the implementationof the internationally agreed standards of transparency andexchange of information in the tax area”) the Global Forumhas achieved only modest tangible success in a very smallpart of the global tax agenda.

In terms of its procedures, the OECD is relativelytransparent. Research and policy papers are generallyannounced ahead of time. However, non-member-governments and civil society seem to have only limitedopportunity to participate in the generation of papers; thefor-profit private sector seems to have greater access andinfluence. Draft documents are not public, nor are publiccomments solicited. In turn, the Global Forum itself seemsto be transparent in its agenda and meetingannouncements, as well as in annual reports and otherdocuments prepared for its meetings.In terms of the OECD’s success in promoting policies toencourage global tax transparency, until recently most ofits work has focused on promoting bilateral Tax InformationExchange Agreements (TIEAs) which provide information‘on request’, a model that has proved almost whollyimpracticable as a tool for detecting or deterring taxevasion. This is in part because they were designed withforthright participation by secrecy jurisdictions, andtherefore became non-binding instruments whereby


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governments can request information about their citizens,but must specify the name of the individual, the institutionwithin the tax haven, and the nature of the “offense.”Since tax havens cooperate in hiding the identity of the“beneficial owner”, such treaties rarely provideinformation leading to prosecutions. This is why since2013 the OECD has been charged by the G20 withdeveloping a new standard for automatic exchange ofinformation (see Box 2).

Formal membership of the OECD currently covers only 34countries. It engages with an addition 88 states³ throughthe Global Forum, and has striven to recruit more statesto counter claims that the UN’s universal membershipmakes it the only legitimate political forum for agreeinginternational tax standards. However, only 18 of thesestates are low- or lower-middle income developingcountries, and only two such countries are representedon the 18-member steering group of the Forum. Inaddition, the Forum is only consultative, and discussesonly a small part of the global taxation agenda. Decisionson new standards are taken only by the OECD members.As a result, it remains very poor in representing thesmaller and less wealthy global economies, though theOECD has announced that it has consulted 140 countriesso far and plans “an enhanced engagement strategy” withthese countries in finalizing and implementing the BEPSrecommendations.

In terms of staff diversity, the Global Forum’s Secretariatis staffed by both OECD and non-OECD personnel.However, it remains part of the OECD secretariat,answerable ultimately to the OECD Secretary-General.⁴ Inaddition, the agendas and papers for meetings of theOECD Committee on Fiscal Affairs, which takes decisions,are prepared by the OECD secretariat Centre on Tax Policyand Administration, staffed entirely by OECD memberstate personnel.

The OECD actively engages with civil society through itsTax and Development Taskforce,⁵ but – as was noted inour 2013 assessment – some participating not-for-profitorganizations continue to express frustration that theirinterventions are not heeded while those from the for-profit private sector, and from representatives of taxhavens that are, or are politically related to, OECDmember states strongly influence the eventual outcomes.The cost of participating in OECD events also inhibits civil

society representation, and some developing countrygovernments have also noted the high cost of engagementwith the many ongoing events and fora.

Given the decentralized, ad hoc nature of internationaltax rule-making and implementation, there is nooverarching mandate or firm accountability frameworkfor monitoring outcomes and results of tax-relatedundertakings, beyond delivery of reports to the G20 bythe OECD and other international organizations, andOECD-organized monitoring of adoption of model taxconventions and compliance with tax informationexchange and transparency standards.

Equally, there is no structure or regular processestablished for evaluating the impact of international taxrule-making policies and implementation on countryeconomies, either within the OECD or for a broader groupof countries. The nearest to performing this function is expost research by the IMF on tax policy impact, andevaluations by the IEO of fiscal adjustment policiesrecommended by the IMF.

The OECD has its own internal procedures for selectingthe Secretary-General – though this has producedreasonable diversity among member states, it is not apublic or fully transparent process. As with the BrettonWoods Institutions, there are no regular independentevaluations of the performance of the Secretary-General,or the Director of the Centre for Tax Policy andAdministration. There are in-depth evaluations ofcommittees, including the Fiscal Affairs Committee; but itis not clear how frequent these are, nor have they beenpublished. There is no publicly available evaluation of theperformance or impact of the Global Forum.

The OECD has no formal procedures for receiving andprocessing complaints from those affected by its taxpolicies or standards, nor for compensating those harmed.In addition, it very rarely assesses ex ante the implicationsof its recommendations, especially for low incomecountries and for inequality/poverty within thosecountries.⁶


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The UN Committee of Experts on InternationalCooperation in Tax Matters was given Committeestatus under the UN’s Economic and Social Council(ECOSOC) in 2003, following a recommendation ofthe UN International Conference on Financing forDevelopment (Monterrey, Mexico, 2002), andspringing from a longstanding UN Fiscal Committee.Committee members are nominated by UN memberstates to serve in a personal expert capacity for fiveyears, with the UN Secretary-General selecting 25experts from government nominations. For decadesthe experts have been disproportionately from OECDstates, and many independent observers have notedthat OECD experts tend to act as a bloc.

The Committee and its predecessor have sufferedfor decades from insufficient finance and personnel,and lack of political status. As a result, theCommittee meets only once a year for 5 days.Attempts in recent years to strengthen UN work byestablishing a standing inter-governmentalcommission on international tax cooperation havebeen considered by ECOSOC, but have not receivedsupport from the OECD countries. In practice, theUN’s most important contribution to internationaltax rule-making has been a UN model double taxagreement, which despite being largely based on theOECD standard, does allocate stronger taxing rightsto developing countries that receive foreigninvestment (“source countries”).

It has become evident that the lack of functional andjust rules on international tax, for taxing corporationsand tackling tax havens of globalized markets, hasdramatically diminished the power of electedgovernments to design equitable and progressive taxregimes, and seen a regressive shift of taxcontributions away from capital onto labor andconsumers, resulting in deeper inequality, erosionof social and political stability, and reducedemployment opportunities. In an era when nationaltax regimes are highly interdependent, meaning thatthe tax policies of one country have “spill over”impacts on policy choices of other countries, thereis an urgent need for a single rule-making body

dedicated to enhancing international taxcooperation, and with a mandate to tackleinternational tax evasion and avoidance, and preventtax wars. The organizations currently working oninternational tax policy lack a proper mandate, andeither are unaccountable to the rest of the world(OECD/Global Forum), or have insufficient politicalauthority to agree new rules (UN Tax Committee).The challenge facing the international system is todevise and implement an effective and legitimategovernance response

In the same way that the World Trade Organizationset the rules for international trade, a World TaxAuthority is needed to monitor the impacts of fiscalpolicies on trade and investment patterns, and toprotect national tax regimes from the harmfulpractices of tax evasion and avoidance, as well as taxwars, and promote efficient and effective taxadministration, and progressive tax policies. In 1999,former director of fiscal affairs at the IMF, Vito Tanzi,proposed that the prime function of such anorganization should be to ‘make tax systemsconsistent with the public interest of the whole worldrather than the public interest of specific countries.’The most appropriate body to take on the functionsof a WTA would be the United Nations, as anevolution of its Tax Committee. Among the prioritytasks for a WTA could be to:

· Work with international accounting bodies todefine a common basis for determining profitsand taxable income;

· Help set rules for unitary taxation and allocatingthe profit income of transnational companies;

· Assist international exchange of taxationinformation;

· Help to protect national tax regimes from taxwars between states and establish disputereconciliation procedures;

· Collate relevant statistics and act as a forum fordiscussion and sharing of best practices.

These tasks are essential in the interests of tax justiceand would reinforce the autonomy of sovereign

BOX 1: THE CASE FOR A WORLD TAX AUTHORITY


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states, which has been seriously eroded by the currentrules. A WTA could also carry out the task ofrecommending best practice standards in creating taxlaw, leaving the IMF and World Bank to disseminatebest practice. This would make possible theestablishment of an international benchmark for theachievement of tax justice against which progresscould be monitored.Finally, based on the GFGIR governance criteria, aUN-housed WTA would be clearly preferable tocurrent arrangements.

· The UN tax committee is already highlytransparent, with agendas, papers and decisionsavailable online. There is no reason to believe thistransparency would decline with theestablishment of a formal agency.

· A UN body would be highly inclusive and open toall countries of the world – though of course arepresentation system for different constituencieswould be needed to reduce the number of seatsat the table. Its staff would be highly diverse, andits proceedings (following best practice of someUN agencies) could be open to civil societyparticipation.

· Almost all UN bodies have accountabilityframeworks, as well as independent evaluationagencies.

· Most UN agencies have clear responsibilitystructures such as complaints procedures andcompensation arrangements, and the best alsoconduct extensive ex ante analysis of the potentialimpact of their policy recommendations.


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¹ This is because IMF governance has already been assessed in the IMF chapter, and the IMF’s role has largely beenlimited to advising individual countries on tax policies and administration, and providing research and statistics; andbecause the UN Tax Committee has little current influence and would not differ substantially in its governancearrangements from the proposed WTA.² For detailed information on BEPS see: http://www.oecd.org/tax/beps.htm.³ See http://www.oecd.org/tax/transparency/membersoftheglobalforum.htm for a list of the 122 forum members.⁴ John Christensen and Richard Murphy, “Tax Us If You Can,” 2nd Edition (Chesham, Buckinghamshire, UK: Tax JusticeNetwork).⁵ http://www.ictd.ac/en/third-plenary-meeting-oecd-task-force-tax-and-development⁶ The recent OECD reports to the G20 on the impact of BEPS in low-income countries represent a small step in thisdirection – a mid-course attempt to assess potential impact on low-income countries and how they can be assisted toimplement the BEPS action plan. They are available at http://www.oecd.org/ctp/oecd-and-g20-pursue-efforts-to-curb-multinational-tax-avoidance-and-offshore-tax-evasion-in-developing-countries.htm


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Tax ImpactJohn Christensen, Tax Justice Network

Because there is no organization clearly governinginternational tax policy, or attempting to coordinate andset standards for national tax policy, there is no clear“mandate” which can be quoted for tax rule-makingbodies and to which they can be held accountable. Wetherefore assess them on five criteria which developingcountries, independent analysts and civil societyorganizations see as essential to reducing inequality andpoverty: 1) fighting illicit flows and tax evasion; 2) reducingscope for legal tax avoidance; 3) combating tax wars; 4)effective and efficient tax collection; and, 4) progressivetax policy.

Official data on the scale of illicit financial flows are scarce,but one report by a New York-based economicinvestigation agency in 2012 estimated that private wealthof US $21-32 trillion is held offshore, escaping domestictaxes in the owner’s countries of residence.¹ The incometax losses from these sums are estimated at US $270billion annually, which would go a long way to pluggingthe budget deficits of many countries. But this figureunderestimates the gravity of the situation since it onlyapplies to income tax, and ignores evasion of capital gains,inheritance, and wealth taxes. Imposing wealth taxes onthis vast hoard, as proposed by economist ThomasPiketty,² would significantly reduce the extremes ofinequality that have built up over the past 35 years.

These kinds of sums do not easily fit in suitcases:³facilitating illicit flows of this scale involves a large andsophisticated financial infrastructure of compliant banks,law firms and other financial intermediaries. It alsorequires supportive offshore jurisdictions willing to furnishthe environment of permissive laws, lax regulations and

weak compliance practices that will shield the identity ofthe owners. Such places are known as secrecyjurisdictions: the relative scale of the abuses they permit(i.e., the degree of secrecy they allow) is assessed by theTax Justice Network’s Financial Secrecy Index.⁴

There is a lucrative global market in providing financialsecrecy, and a large private sector “pinstripeinfrastructure” of enablers and intermediaries -- banks,accountancy firms, boutique law practices, and trust andcompany administrators -- has embedded itself in secrecyjurisdictions to facilitate individual and corporate taxabuse. Contrary to popular perception, not all secrecyjurisdictions are politically isolated tiny islands in theCaribbean or Alpine principalities. According to IMF data,in 2012 Britain and its satellite jurisdictions⁵ controlled 24per cent of the global market of offshore financial services;the US (notably states like Delaware, Florida, Nevada andWyoming which have highly secretive legal structures) 23per cent; Luxembourg 12 per cent; and Switzerland, whichhas earned international notoriety for its banking secrecyand permissive tax regime, only 5 per cent.⁶ In otherwords a huge proportion of the global potentialdestinations for illicit financial flows, are controlled bypowerful countries that dominate the policy processes ofboth the IMF and OECD.

Secrecy enables concealment of a wide variety of corruptpractices, including fraud, embezzlement, illicit politicalfunding, insider dealing, market rigging and bribery – aswell as tax evasion and tax avoidance. It enables powerfulplayers to secure undisclosed special tax treatment, andcreates a criminogenic environment by blockinginvestigation, prosecution and recovery of stolen assets.⁷It distorts markets by shifting investment and financialflows away from where they will be most productivetowards whichever jurisdiction supports tax evasion, orhas the most lax regulation or criminal laws. It encourages


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rent-seeking behavior by allowing insiders to reap gainsfrom global markets while shifting costs and risks toothers. This creates a world of higher risk, rampant crimeand impunity, which means that secrecy jurisdictions playa key role in fostering and fuelling global financial crises,serving as cross-border transmission belts for shocks andcontagion.

The most effective ways to tackle illicit financial flowsinvolve requiring public disclosure of the ownership and

In February 2014, following a request from the G8 a yearearlier, the OECD presented its report andrecommendations for a new global standard for automatictax information exchange (ATIE). The very fact of thisreport being prepared represents progress away from theOECD’s previous attachment to bilateral Tax InformationExchange Agreements using the “on request” model (seetext for analysis of these). The content of the proposalalso provides potential for significant progress oninformation exchange and transparency.

The OECD’s proposal for ATIE defines a wide scope forsharing information. It covers individuals, entities(including foundations and trusts, with special reportingprovisions for all-important discretionary trusts ⁸) andpersons controlling passive non-financial entities.However, the effectiveness of this broader scope stillrelies on comprehensive beneficial ownership informationbeing collected and shared in registries of trusts and shellcompanies. If adopted, this measure will represent asignificant step forward towards greater transparency,though ownership information, including the identityof settlors and trustees of trusts, needs to be availableon public record to deter potential abuse of offshore trusts.

The OECD report proposes two main innovations:· a Competent Authority Agreement (a model

agreement to be signed by jurisdictions willing toimplement the ATIE standard together); and

· Common Reporting Standards providing minimalcommon rules to be followed on reporting content,and “due diligence” that certain financial institutionsmust conduct.

control of offshore legal structures (companies,foundations, trusts, etc.), full international cooperationon information exchange, and improved accounting rulesto require transnational companies to report on a country-by-country and project-by-project basis. The OECD hasrecently been given a lead role by G20 in trying to tackleillicit flows and tax evasion. Its proposals have gone partof the way to increasing disclosure by making country-by-country information exchange automatic among taxauthorities (see box 2 for details).

Both proposals could enhance transparency andcooperation between tax authorities, though concernshave been raised about the ease with which tax havenscould block developing countries from participating in amultilateral Competent Authority Agreement.⁹

Overall, the OECD’s proposals for a standard for amultilateral ATIE standard represent a positive steptowards improved transparency. However, the proposedATIE model is intended by the OECD only to complementrather than substitute for “on request” TIEAs. In addition,critics have expressed concerns that the OECD’s proposalsare designed in ways that will present barriers to effectiveparticipation by developing countries (requirements forreciprocity on information sharing, for example, couldimpose inhibitive costs on some countries). In addition,the proposal also leaves significant loopholes ripe forexploitation, such as the exclusion of a variety ofsecrecy facilities (e.g., safety deposit boxes, freeportfacilities, and related storage mechanisms) which couldencourage wealth hoarding of art objects, largedenomination bills and similar mobile assets. Finally, onthe negative side, the absence of provisions for sanctionsis unlikely to encourage secrecy jurisdictions fromcontinuing to block or hinder information exchangeprocesses.

BOX 2: LIMITED PROGRESS ON INFORMATION EXCHANGE: THE ATIE PROPOSAL


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Recommendations: The ATIE proposal should bestrengthened to make information public, be extremelyclear that offshore trusts will be included on publicregistries of ownership, close remaining loopholes,provide for sanctions against non-compliant jurisdictions,and include intensive measures to assist developingcountry implementation.

Tax rules in most countries are highly permissive of taxplanning that enables transnational corporations (TNCs)to shift profits from either the source countries wherethey extract most basic commodities and profits, or thehome countries where they are effectively taking theirdecisions, to offshore tax havens. The largestcorporations and wealthiest individuals have the wealthand will to hire armies of lawyers and accountants to hidetheir wealth from national tax collectors, and to providea patina of legality for their stratagems to avoid tax.Some corporations maintain it is their responsibility to“their shareholders” to minimize tax payments.¹⁰ In mostcountries, lobbyists are paid by interested parties to meetministers, parliamentarians and officials in order tosupport loopholes or tailored concessions for specificinterests, or to block the closure of such loopholes.

Much of the attention to this issue in past decadesfocused on the practice of “transfer pricing,” wherebymultinational corporations over- or under-chargeddifferent branches of their structures for goods orservices supplied, in order to shift profits to lower-taxjurisdictions. The UN and OECD both devoted muchattention to producing analysis and training materials tohelp developed and developing countries combat transferpricing, but the OECD used an “arm’s length” method forcalculating transfer prices which has proved impracticablein most circumstances. However, over time tax avoidancepractices have become much more complex andmultifaceted, including, for example, lending andrepaying large amounts within companies to reduce taxburdens; charging unjustified licensing or other fees toaffiliates; or claiming that internet-based sales took placein low-tax countries. In recent years pressure from civilsociety organizations and increased public awareness ofthe inadequacy of measures to overcome theseavoidance measures, has led the G20 to commission theOECD to re-write the rules to enhance internationalcooperation against “base erosion and profits-shifting”(BEPS).

The OECD has in September 2014 produced itsrecommendations on the first 7 of 15 elements it wasasked to tackle by the G20. They include action to avoidmultiple deductions for a single expense, prevent theabuse of tax treaties, address transfer pricing issues,tackle the challenges of the digital economy, counteringharmful tax practices, and developing a multilateralinstrument which can be used to amend bilateral taxtreaties. Its report on the impact of BEPS in low-incomecountries and the IMF report on tax spillovers haveidentified several areas which are not adequately coveredby the current process, notably tax incentives, bias in taxtreaties, and avoidance of tax on merger and acquisitionactivities. Some of these have been referred to theinternational organizations for further work, by the G20Finance Ministers meeting in Cairns, but it is not yet clearhow many of the OECD recommendations will commandpolitical consensus and be adopted by the G20.

However, it is hard to avoid the conclusion that muchmore fundamental measures will be needed to make aserious dent in corporate tax avoidance (let alone taxavoidance by high net worth individuals which has notbeen the subject of any significant work). These shouldideally include the adoption of general anti-avoidanceprinciples in national tax laws, making any transactioncarried out primarily for tax reduction purposes irrelevantin calculating a company’s tax burden; and ensuring muchgreater clarity on where taxes should be paid by usingunitary taxation calculations with taxes apportioned tocountries on the basis of a formula taking account ofemployment, physical assets and production, and sales,as is already used among states within the US.

Recommendation: The BEPS discussion should bebroadened to focus on reducing tax incentives sharply,ending bias in international tax treaties, and applyingtaxes to merger and acquisitions. Countries should beencouraged to introduce general anti-avoidanceprinciples in national tax laws, and to use unitary taxcalculation formulas.

The OECD and other international organizations havedone virtually nothing to stop competitive “tax wars”among OECD countries (or developing countries). Overthe 15-year period 1997-2012, corporate tax rates fell byalmost 10 per cent in the world’s most populatedcountries, and 8 per cent in smaller countries. Income tax


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rates also fell, as did the progressivity of different directtax bands requiring wealthier corporations and individualsto pay more. Countries also engaged in tax wars whichtried to minimize taxes on capital and wealth, and on themost profitable sectors such as natural resources, tourismand financial institutions (including through the provisionof massive tax holidays or exemptions). All of these trendsplaced more strain on public finances in terms ofbalancing budgets, as well as transferring tax burdenswithin countries increasingly onto direct taxation of theless wealthy, and regressive consumption taxes. To aconsiderable degree these trends have been produced bya belief that “tax competitiveness” enhances foreign anddomestic investment, even though there is precious littleevidence to support this. Some of these trends may bebeginning to moderate, with some OECD and developingcountry governments recently coming to power pledgedto increase direct taxes, and some advice being given bythe IMF and others to regional bodies to resist tax warsamong their members. Yet too often the advice given tocountries by international organizations remains that theyshould make high tax rates closer to the average of somecomparable group of countries, and less attention is paidto excessively low rates.

Another form of tax war has been waged through bilateraltax and investment treaties. The rising economicdominance of transnational companies during thetwentieth century drove countries around the world toconclude bilateral double tax agreements (DTAs),primarily for the purpose of avoiding taxing corporationstwice and deterring investment flows. However, asalready discussed, the typical bilateral treaty, based onthe OECD model, gives preference to taxation in theheadquarters country of the company rather than in thecountries where it sources most of its raw materials, laborand profits. Bilateral treaties have been used as a keymechanism to deprive low-income countries of taxrevenues. Worse still, in extremis due to failure of treatiesto tackle risks of double non-taxation, and “treaty-shopping” – corporations looking for the worstcombination of treaty rules, low tax rates and taxhavens/secrecy increasing numbers of corporations aremanaging to declare their headquarters as being in (orearn most of their taxable income in) countries wherethey pay little or no tax. As an example of this, the DutchCentre for Research on Multinational Corporations(SOMO) said in 2013 that “the use of the Dutch tax systemby multinational companies had cost €771 m in annuallost tax revenue for 28 developing countries.”¹¹ Thisevidence was used for a successful campaign to convince

the Dutch government to revise its treaties, but treatiesare not changing dramatically in other countries – eventhough developing countries have repeatedly highlightedthis as a crucial priority if they are to increase revenuecollection. The OECD has included in its BEPS packagesome measures to avoid corporations escaping taxobligations entirely due to treaties, or engaging inexcessive “treaty-shopping.” And, G20 countries need togo a great deal further in fundamentally revising treatymodels, and in discouraging member states from exertingpolitical pressure on poorer countries to provide taxexemptions for their TNCs.

Recommendation: There is need for urgent action tocombat tax wars, by providing a stronger analysis andglobal consensus agreement on equitable and efficienttax levels. The OECD and home countries of TNCs need torevise their treaty models to favor taxation in “source”countries, and end political pressure for tax exemptions.

In terms of developing country tax collection systems, ithas been the IMF and aid for technical assistance support,and more recently information-sharing and regionalcooperation efforts organized among developingcountries such as the African Tax Administrators Forum(ATAF) and the Inter-American Center of TaxAdministrators (CIAT) (rather than the OECD), which haveshaped efforts. As discussed elsewhere in this report (seeIMF impact chapter), there has wrongly been perceivedto be a tradeoff between effective and efficient taxcollection/administration, and equitable/progressive taxpolicies. This stemmed partly from an ideological view insome quarters that high corporate and personal incometax rates encouraged tax avoidance and evasion, and soshould be reduced (rather than increasing measures tocombat avoidance and evasion); and partly from a correctbelief that some types of rather regressive indirectconsumption taxes (sales taxes and VAT) were much lesseasy to avoid and easier to collect, and therefore shouldbe the prime focus for improving tax administration indeveloping countries which did not have comprehensiveconsumption taxes.

Nevertheless, there is no doubt that tax measuresintroduced by developing countries with the support ofinternational organizations (or sometimes without theirsupport) have succeeded in increasing tax collection rates


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dramatically. For example, between 2002 and 2012,average revenue/GDP ratios rose in low-income Africafrom 13 per cent to 18 per cent, and the number oflow-income African countries collecting less than 15 percent of GDP fell from 20 to only 9.¹² This has happenedeven in a broader context of reduction in revenues fromcustoms duties, due to liberalization agreed ininternational trade negotiations. It reflects not just theintroduction of regressive taxes: in some countries the IFIshelped to set high thresholds for paying VAT whichexempted most micro-traders and businesses; in othersthey helped to increase taxation of extractives, andcollection of progressive direct taxes. In addition,countries have taken many practical administrative stepswhich have certainly improved tax collection – includingthe use of independent revenue authorities, TaxIdentification Numbers, strengthened large taxpayer units,and increased training, staffing and pay for tax offices, andgreater emphasis on systematic enforcement of collection,as well as public information campaigns on why paying taxis vital.

Not nearly enough has been done, and it is easy to arguethat the focus has been misdirected – that much largerincreases in tax revenue could have been achieved bytaxing large (especially extractives) corporations andindividual taxpayers more effectively in terms of policyand enforcement, and combating tax evasion andavoidance. For these reasons, the score given in this areais of only mitigated improvement.

Recommendation: In pursuing future tax collectionefficiency increases, emphasis should be placed on thelargest potential sources of extra tax – large corporationsand high net worth individuals, and tax evasion andavoidance – and efficiency concerns more carefullybalanced with equity in order to fight inequality.

As discussed in the IMF and World Bank chapters,progressive taxation can be one of the most powerfulpolicy levers to fight against inequality and reducepoverty, both directly by reducing post-tax incomedisparities, and by funding anti-inequality/povertyspending. The IMF and the World Bank have been thedominant global institutions in influencing developingcountry tax policies over the last 2-3 decades. They havespent several decades focusing on tax efficiency at theexpense of tax equity, therefore encouraging increases inindirect consumption taxes; and (especially by the WorldBank) encouraging reductions in corporate tax onmistaken grounds that this will encourage private sectorgrowth and investment.

However, the prevailing wind appears to be changing. TheIMF has made clear in its research and public statementsthat progressive taxation is an important tool for reducinginequality. It is now beginning tentatively to analyzeprogressivity of tax systems and to advise countries onmaking systems more equitable where they request suchsupport, focusing especially on increasing returns fromcorporate and personal direct taxes for “large taxpayers”and natural resources extractive companies. The IMF isalso strongly questioning corporate tax exemptions, andeven the World Bank and IFC have toned down theirearlier global and country advocacy of corporate taxreductions. These changes have yet to bear any major fruitor to offset a two-decade trend away from progressivity,but deserve some credit for starting to move in the rightdirection.

Recommendation: As raised in the IMF chapter, allgovernments should review their tax policies for theirequity and progressivity, and resulting contribution toreducing inequality. Policy advice, technical assistance andresearch conducted by the international organizationsshould focus on this issue to support the post-2015framework.


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¹ Henry, J.S., (2012) The Price of Offshore Revisited, TaxJustice Network, London² Piketty, T. (2014). Capital in the Twenty-First Century,The Belknap Press of Harvard University Press, pp. 515-539³ Relatively little wealth is held in cash, though oneestimate suggests that about US $1.7 trillion of hiddenoffshore wealth takes the form of high denomination“strong currency” banknotes, i.e., big bills such as the1,000 Swiss franc note, the 500 Euro note, the US andCanadian $100 notes. See Henry, J. (2014) Big Bills, TheAmerican Interest, Volume IX, July/August 2014,Washington⁴ Available at http://www.financialsecrecyindex.com/⁵ These include Bermuda, the British Virgin Islands, theCayman Islands, the British Channel Islands, Gibraltar, theIsle of Man, the Turks & Caicos Islands⁶http://www.financialsecrecyindex.com/introduction/fsi-2013-results accessed 21 August 2014⁷ Christensen. J.E. (2012). ‘The Hidden Trillions: Secrecy,corruption, and the offshore interface’, Crime Law andSocial Change, volume 57, pp325-343⁸ For background information about trusts, including

discretionary trusts, see here:http://taxjustice.blogspot.de/2009/07/in-trusts-we-trust.html Accessed 21 August 2014⁹ See comments from Markus Meinzer and Andres Knobelhere: http://www.taxjustice.net/wp-content/uploads/2014/07/TJN2014_OECD-AIE-ObservationsCRSCommentaries1.pdf¹⁰ The UK law office of Farrer & Co was asked by TaxJustice Network “to advise whether a person may be saidto be under a ‘fiduciary duty’ to avoid tax.” Their opinion,written by David Quentin and delivered July 5, 2013 at aconference at the City University of London, was aresounding “No.” The opinion is available upon requestfrom John Christensen of Tax Justice Network.¹¹ Javier Blas, “Offshore centres race to set up tax deals forinvestors in Africa, Financial Times, August 20, 2013, p.3.¹² On this, see the Mutual Review of DevelopmentEffectiveness report by the UNECA and OECD, available athttp://www.africapartnershipforum.org/mrde/MRDE%202013_English%20version.pdf , page 35, and the latest IMFstatistics on Sub-Saharan African revenue to GDP availablein the Africa Regional Economic Outlook, April 2014, athttp://www.imf.org/external/pubs/ft/reo/2014/afr/eng/sreo0414.htm


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Genuine transparency can breed strong accountability. With strongaccountability, there is greater responsibility. And when individuals orinstitutions become responsible, they begin to think seriously abouttheir impact.