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May 29, 2007

US Sanctions on Sudan over Darfur.

The humanitarian emergency on the Darfur region of Sudan continues. Instability in Darfur (in the eastern part of Sudan) increases the violence in Chad and in the Central African Republic. Displaced and brutalized people, links between rebels and governments and divided opposition groups add to the complexity. What has President Bush proposed? Will the proposals work?

On Tuesday 29th May President Bush announced the imposition of economic sanctions on Sudan in an effort to gain the cooperation of the Sudanese Government with international efforts to halt the violence in Darfur and neighboring states. Sudan has had pressure applied before and the pressure worked, in particular with respect to the problems in southern Sudan where peace was restored as the result of an agreement brokered in 2005. The current issue is the full deployment of a United Nations Peacekeeping Force in Darfur. President Bush made it clear that he is going ahead with the sanctions because ‘President Bashir’s actions over the past few weeks follow a long pattern of promising cooperation while finding new methods of obstruction’. The United States first talked of ‘genocide’ in Darfur some three years ago.

The new United States actions, set out by Bush, are to be three-fold. First ‘the United States will more aggressively enforce existing sanctions’ whilst adding new Sudanese companies to the list of those excluded 'from the United States financial system’. Second, individuals known to be active in the pursuit of violence in Darfur will be debarred ‘from the U.S. financial system’ and this will prevent them from doing business with American citizens. Third, the President directed ‘the Secretary of State to consult with the United Kingdom and other allies on a new United Nations Security Council resolution’ that will provide the possibility of further economic sanctions against Sudan. Efforts—such as the diplomatic efforts of Ban Ki-Moon and the cooperation between the UN and the African Union— already being pursued by the United Nations will continue to be supported. Bush made it clear that the United States was strengthening the multilateral approach and hence recognizing the need for a broad range of additional diplomatic initiatives.

What seems to be happening with respect to Darfur is the search for a series of coordinated diplomatic actions that will attempt to deal with the complexities of the problem. Securing the active cooperation of Khartoum, rather than the passive resistance that has been in evidence to date, is clearly of key significance. In addition, the actions proposed will attempt to directly shame and punish (economically at least) those who are primarily responsible for organizing the violence. Promoting peace means that accompanying diplomatic initiatives will need to: prevent further Sudanese government action; unite the rebel opposition into one negotiating body; bring the links between governments and rebels to an end and tackle the issues of poverty and wealth-sharing. The complex situation in southern Sudan proved to be amenable to a settlement. The process there could serve as a recent historical model for resolving the situation in Darfur. Such a process needs close supervision and the consistent application of, and careful coordination of, negotiating expertise. Critics of US policy have called for a sustained multilateral engagement with the Darfur issue. This now seems to be a possibility.

May 18, 2007

Wolfowitz and the World Bank

After toughing it out for way too long, Wolfowitz resigned as President of the World Bank on Thursday. He will continue in office until 30th June. There have been many calls for reform of the World Bank and of the IMF (its sister Bretton Woods Institution). Is reform likely?

He had been backed by President Bush who effectively appointed him and helped him out in office as long as he could. With an irritated Board, with European politicians calling for him to go, he was clearly on the slippery slope. The news of Wolfowitz’s resignation was greeted with jubilation on the part of staff of the World Bank. The institution has been in a state of demoralization and dismay over the period in which Wolfowitz was in charge. Wolfowitz it seemed preferred the advice of his appointed staff rather than of senior World Bank officials. This would have been just about tolerable had Wolfowitz acted with judgment and consistency but he did not. According to the BBC, Bank staff felt that Wolfowitz was running the Bank ‘as an adjunct of the Bush administration’. He treated Bank staff as if they were ‘the enemy’ and it due course this is what they became. However before agreeing to go, Wolfowitz demanded that the Bank accept that there were faults in the system and that the Bank’s approach to ethical issues needed to be reconsidered, as predicted by an early web-log on this site. This is a victory of sorts for Wolfowitz though the fact that he is going after such a short time in office says so much more than the face-saving words from the Board. If you wish to reform an institution and also tackle the issue of corruption on the part of debtor governments who misallocate funds, you need to gain the support and trust of staff. The broader issue was one of leadership.

The question of reform is in the air. The World Bank was founded with the IMF and the GATT as part of the outcomes of the Bretton Woods conference held by the allies before the end of the Second World War. The world has changed dramatically over the past sixty years and many have called for reform (even abolition or merger with a fundamentally reformed IMF). The Bank’s Presidency is effectively in the gift of the President of the United States, by convention rather than by the Bank’s rules. Bush’s support for Wolfowitz is another political misjudgment on the part of the administration that further undermines the capacity of the United States to be seen to be giving effective leadership on significant global issues (in this case world poverty). This is more bad news for Bush.

European governments came out against Wolfowitz. The White House then supported the idea of Wolfowitz remaining in office until the end of June, a move which is vehemently opposed by Bank Staff. This prevents an interim appointment from within the Bank and preserves the President’s patronage. The time is coming when such patronage even for the Bank’s biggest financial backer will not be acceptable. If the United States wishes to redeem itself it should opt now for the office to be open to the best international talent. This may be an imaginative step way too far for the Bush administration. The Office of President of the World Bank (and the equivalent office at the IMF, an issue that the Europeans would need to address) should be open to international competition and subject to the rules of transparency. Such a step would not be enough of a reform (financial restructuring in line with current global realities would also need to be considered) but it would be a start. Issues of ‘governance’ , 'democratization' and of ‘transparency’ (part of the Bank's own international agenda) need to start at home.

May 14, 2007

The New Regionalization of Global Finance

JoJo Jacob writes on new issues in global finance in this guest web log. In February Venezuelan president Hugo Chávez and Argentine president Nestor Kirchner announced the launching of the Bank of the South (Banco del Sur) –a “socialist? alternative in Latin America to the International Monetary Fund (IMF) and the World Bank. Is this development a rational response of sovereign states to the realities of global finance or is it motivated solely by ideology and anti-Americanism?

The Bank of the South is quickly gaining acceptance. Among the founding members will be Brazil, Bolivia, Ecuador and Paraguay, with Nicaragua, several Caribbean countries and even some Asian countries reportedly expressing an interest. The formation of the Bank of the South reflects the region’s deep sense of disenchantment with the lending practices of the International Financial Institutions (IFIs). The IFIs, from the IMF to the Inter-American Development Bank (IDB), have for long been blamed for the region’s lackluster economic performance, indebtedness, and growing levels of poverty and income inequality during the last two decades.

In recent years, however, many countries in the region have experienced an economic turn-around. This new-found financial muscle, coupled with the region’s tilt toward the left (left-wing candidates won in six of the twelve Latin American countries where presidential elections were held last year), has many countries on the verge of ending ties with their multilateral donors. The opening salvo was fired by Venezuela when president Chávez declared in April that his country was withdrawing its membership in the World Bank and the IMF. Earlier that month Venezuela had announced that it was paying off all its outstanding debt with the World Bank (totaling $3.3 billion) five years ahead of schedule. Argentina, Brazil and Ecuador have paid off their debts too and others are expected to follow suit.

Although the emerging regional financial alliance in Latin America may have taken on an anti-American flavor, similar developments are taking place in Asia, sans rhetoric. In response to the East Asian financial crisis of 1997, a regional financial cooperation initiative, known as the Chiang Mai Initiative (CMI), was launched in May, 2000, by the ten members of the Association of South East Nations (ASEAN) along with Japan, South Korea and China (the so called ASEAN +3). The CMI consists of a number of Bilateral Swap Agreements (BSA) aimed at supporting member countries that encounter short run balance of payment deficits. In the event of a country experiencing a rapid and massive outflow of short term capital, the country’s CMI credit line would help it avert any extreme devaluation of its currency and its debilitating consequences. Lacking a surveillance/monitoring system and an institutional framework for policy dialogue, the CMI requires countries drawing more than ten percent of the maximum drawable amount to accept an IMF program of macroeconomic and structural adjustments. While no country has utilized BSA yet, many countries, in particular Malaysia, resent the IMF control over the CMI.

Earlier this month, the CMI reached a milestone when finance ministers of ASEAN+3 agreed to pool their foreign reserves. This would transform the bilateral swap arrangements of the seven-year old body into a multilateral scheme, based on a “self-managed reserve pooling arrangement governed by a single contractual agreement?. The principle of self-managed pooling arrangement would mean that external agencies, such as the IMF or the Asian Development Bank (ADB), would play little role in managing the reserves. With a combined foreign exchange reserve of around $ 1.3 trillion, the region accounts for about two-thirds of the world’s total. Pooling reserves will also help the countries release more funds for investment in social and economic development. The agreement further envisages the strengthening of local bond markets; strong local bond markets can raise more funds in local currencies and keep Asia’s savings in the region.

Such regional arrangements are capable of undermining the existence of the IMF and the World Bank—at some point, few counties in Asia and Latin America will require financial assistance from these agencies. The governance issues with the IFIs, from the asymmetry in the distribution of the voting power across member countries to the conditionality on loans, have made them few friends in the developing world. Command over development issues or experience working in developing countries is seldom a criterion in choosing the heads of the IFIs, as headships are split among the major shareholding countries. Thus, “traditionally? the United States chooses the president of the World Bank, Europe the Managing Director of the IMF, and Japan the president of the ADB. The rise of the new regional blocks in the global financial landscape, then, is a good omen to those hoping to see greater transparency, accountability and democratization within the world of international finance.

May 7, 2007

France has a new President and the promise of a new direction.

Nicolas Sarkozy, as many had predicted, has gained a significant electoral victory to become the President of France. He takes office on the 16th May. Given the intense and even exciting competition between Sarkozy and Ségolène Royal, the participation rate was unusually high. The margin in favor of Sarkozy was significant, giving him a very clear mandate for change. What does this mean for Sarkozy’s presidency and for France?

The high electoral turnout and the significant margin Sarkozy gained over Royal suggests that the public have understood that if France is to restore economic growth and lower its high rate of unemployment, change is necessary. Youth unemployment is as much as 25% in some places. The election was not about change as such, for all of the main contenders called for reform, but about the type of change needed to cure France’s social ills. Royal’s proposal was socially focused and welfare oriented. Sarkozy pushed for what can be called ‘market-friendly reforms’ that suggested to his opponents the ‘Anglo-Saxon’ (an easy term of abuse in left-wing and nationalist circles in France) policies of Margaret Thatcher and her successors. With a majority of French voters putting unemployment at the top of their concerns, Sarkozy has been given electoral backing for his ideas of structural reform, increased labor market flexibility and reduced taxation. The moral crisis in France according to Sarkozy ‘is a crisis of work’.

Can he deliver? Sarkozy is a man who has long been driven by the desire to be President of France. He is known to be focused, abrasive and capable of tremendous stamina in pursuit of his objectives. Though young by the standards of the French Presidency, Sarkozy is hugely experienced. He entered politics at the age of twenty-two and soon became mayor of a significant Parisian suburb. His tough language as Interior Minister upset many but seems to have added to his reputation as someone willing to take unpopular decisions. Of his energy and focus there is no doubt. His message is simple: reduce the number of bureaucrats; restore the links between incentives and work; attract foreign investment; increase social mobility and help minorities into the labor market. With the plus of a significant victory and a clear set of objectives, Sarkozy will attempt to do just as he has said.

France is fickle. Many on the left see Sarkozy as power-hungry and even talk of him as an ‘American neo-con’. Royal, rather than mentioning him by name, repeatedly called him ‘the candidate of the right’ during her final electioneering drive and called him ‘dangerous’. The Trade Union movement is strong in France and militant. Sarkozy will need to find a way to initiative his reforms whilst keeping the country with him. Sarkozy’s objectives are clear and simple but social resistance is likely to be high as any reforms bite in. The objectives are simple but the politics will be turbulent. Think of the short-term consequences of Thatcherism in the United Kingdom. What will be required is drive and energy — Sarkozy has these in abundance— but also consummate political skill.

May 2, 2007

Does Wolfowitz need to go?

The World Bank, under two successive leaders, has made the fight against global corruption a significant issue. The former President, Jim Wolfensohn, in the mid-1990s referred to corruption in governments in the developing world as ‘the cancer of development’ and challenged the political taboo that prevented the topic being openly discussed. Paul Wolfowitz followed Wolfensohn’s lead and continued the anti-corruption stance. Has Wolfowitz, by seemingly engaging in favoritism and abuse of the privileges of office, shot himself in the foot? Does he need to go?

What are the issues? With respect to calls for his resignation, there seems to be two issues. One is World Bank procedure and the other is failure of judgment.

Wolfowitz argues that he was delegated by the Board to deal with the issue of his relationship with a Bank employee. He asked to be excused from this task and this was refused. If this is the case then this shows a lack of judgment on the part of the Board. The World Bank has an ethics committee and has clearly thought about issues that such a committee normally deals with. Normally, the Bank has strict rules. There is a gap in the system but ‘good governance’, a cause preached by the Bank and other developmental agencies, requires that the appropriateness of actions should be considered and that decision-making should be transparent. It was only with the adverse publicity in the New Yorker and the Financial Times (London) that what was rumored within the Bank came into public view. In not having a proper and de-personalized and transparent system in place, the Bank failed itself.

Does this absolve Wolfowitz from responsibility? The case against him seems to have more than one strand. Any organization that preaches against moral failure must be very certain of the ground on which it stands. This is simply political common-sense. Any failure needs to be addressed and addressed quickly. Rumor circulated for a year within the Bank. Wolfowitz himself has said in the past that no standard can be high enough. In his own terms, then, there is a failure here. But this is not all. Wolfowitz’s judgment has been at fault several times over this episode. In the first instance he seems to have resisted the idea that his friend should leave the bank in order to avoid preferential treatment. Acting on instructions, he then proceeded to give her preferential treatment, the action that transfer was supposed to avoid, before she left the Bank. Fine, if the move was essentially involuntary on the part of his friend then some compensation may be justly called for, but any such settlement ought to have been handled neutrally. The final failure of judgment is that for a whole year he denied any involvement in the process.

There are other failures of judgment too. His approach to fighting corruption has been seen to be erratic. His critics would argue that an anti-corruption policy has to be tough, consistent and fair. Wolfowitz has wobbled over Chad (first cutting off aid and then backing down), helped Kenya, punished Indian education and ignored the issues of corruption in China. No doubt the political issues are complex and no doubt that the role of the President of the World Bank is a political role. Attributes required in this role and in the context of anti-corruption practices are transparency, personal integrity, clear rules and procedures and consistent and considered judgment.

Wolfowitz’s internal credibility and his external credibility have been damaged. Those who argue for reform of World Bank governance have been given a golden opportunity. It probably would be best for the Bank that Wolfowitz resigns though it is clear that dismissal would be difficult. He is appointed by the President of the United States and Bush has given his public backing (‘full confidence’). No Board has ever fired a Bank President though it has technically the authority to do so but it would be politically difficult given Bush’s support. It is high time that the position be based on merit and not on political patronage and hence open to international competition. There are some interesting potential candidates out there: Tony Blair is one and Ngozi Okonjo-Iweala (the anti-corruption former Federal Finance Minister of Nigeria), is another.