Catalog

Background

The terrorist attacks on the United States (US) have changed the world dramatically. Reacting to the infamous assault on its territory and its people, the US is striking back by building a broad global alliance to fight terrorism with military action. This, however, comes at a price—also for international financial institutions (IFIs).

For multilateral institutions—in particular the International Monetary Fund (IMF) and the World Bank—the implications of the horrific events of September 11 are sweeping. The regional development banks are also feeling the pinch. This year’s IMF-World Bank annual meetings were canceled.

The Group of Seven meeting of finance ministers and central bankers on 6 October in Washington—understandably—was focused on the Action Plan to Combat the Financing of Terrorism. And as expected, the joint meetings of the International Monetary and Financial Committee and the Development Committee in Ottawa in November, which were combined with the G20 meeting of finance ministers and central banks, were dominated by the effort to broaden the fight against terrorism.

No doubt, IFIs are entering a phase where lending again is driven by the political and geopolitical considerations of their major shareholders. In a world where more than one billion people—around 20 percent of the population of this planet—live on less than $1 a day, this new development could be bad news for many poor countries and regions at a time when the global economy is slowing.

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Politics Make the World Go Round

But to put things into proper perspective, IFIs are no strangers to lending that was driven by political considerations. When the world was divided by the Cold War, a good part of lending went to regimes in the Third World with the not-so-hidden agenda to strengthen their anticommunist stance. As the Economist points out correctly, “The history of such lending is dismal.” Think of Mobutu’s Zaire, for instance.

When the Soviet empire broke down, the task of financing the difficult transition to democracy and market economy gained the highest priority. When financial turbulence broke out in Asia, Latin America, Russia, and Turkey, major IMF-led rescue financings were mobilized with political and geopolitical considerations. In many instances, the US’s geopolitical interests led the way in lending decisions, sometimes backed up by the larger Group of Seven.

Sure, the multilateral institutions have been getting a lift from the new spirit of international collaboration in fighting terrorism, increasing security, and averting global recession. Horst Koehler, IMF Managing Director, called for “a coordinated international response to deal with weaknesses in the world economy and the new risks in the outlook.”

At the same time, the Bretton Woods institutions have been increasingly instrumental in the global effort to root out terrorism. They find themselves as the US’s arsenal in the antiterrorist war. They are faced with drastically changed lending priorities. Overnight some countries have gained new geopolitical importance in the US-led fight against terrorism.

With financial and human resources limited, the financial institutions are running the risk that many countries and regions of lesser strategic importance to the antiterrorist effort are neglected.

As World Bank President James D. Wolfensohn reminded policymakers in an exclusive editorial for Handelsblatt, Germany’s financial and economic daily: “In the wake of the tragedy of September 11, facing these challenges, and taking multilateral action to meet them, are more important than ever. First, scale up foreign aid. Second, reduce trade barriers. Third, focus on development assistance to ensure good results. And fourth, act internationally on global issues.”

He refers to the problems of Africa, arguing: “Aid to Africa fell from $36 per person in 1990 to $20 today...We cannot let Africa fall off the map as we turn our attention elsewhere.” He continues: “The greatest long-term challenge for the world community in building a better world is that of fighting poverty and promoting inclusion worldwide. Poverty and exclusion can breed violent conflict, [and] conflict-ridden countries in turn become safe havens for terrorists.”

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Challenging Times

Both Mr. Wolfensohn and Mr. Koehler are having a hard time these days preserving the thrust of their institutions’ reform and development programs. Mr. Koehler, for instance, wanted to refocus the Fund on its monetary role, improve the IMF’s crisis prevention capabilities, broaden the institution’s role in modernizing the capital markets of emerging economies, strengthen the inclusion of the private sector, and intensify the Fund’s involvement in poor regions like Africa.

But much of his agenda has been put on the shelf. Instead, since September 11, Mr. Koehler has been busy speeding up new loans to those countries that are considered the US’s “new friends” in the campaign to root out terrorism.

“Black Tuesday” has brought about a radical shift in the Bush Administration’s international financial diplomacy that, until then, has had a distinct unilateralist and isolationist flavor. Under pressure of conservative lobby groups like the Center for Freedom and Prosperity, US Treasury Secretary Paul O’Neill blocked part of the Organisation for Economic Co-operation and Development cleanup campaign for offshore centers.

He sharply criticized the IMF, causing moral hazard problems by resorting to big lending programs, but he supported huge rescue operations for Argentina and Turkey because they were—after all—in the US’s national interest. He also questioned the wisdom of poverty reduction programs of multilateral banks, arguing that he has trouble justifying them to the average overburdened US taxpayer.

September 11 changed everything. The Bush Administration has lost no time in making sure that the US’s new strategic allies obtained the needed economic and financial incentives in the antiterrorist alliance. On the bilateral side, sanctions against India and Pakistan were lifted in a matter of days. Pakistan’s bilateral debts were rescheduled. Trade preferences to Indonesia and Jordan were granted.

On the multilateral trail, the US is mobilizing the huge resources of the IMF and World Bank in the global war against terrorism. The US’s “new friends,” like Pakistan, Indonesia, Uzbekistan, maybe even Sudan, can count on generous new loans. Pakistan may get more relief on its high external debt from the Paris Club, where Afghanistan’s bordering state owes $13 billion to rich-world governments. Old strategic partners of the US—like Egypt—may count on further generous bilateral and multilateral aid.

And there is Afghanistan, with which the IMF has had no dealings since 1991. IFIs will be mobilized to help the United Nations and nongovernment organizations cope with the wave of refugees. Then, after the Taliban regime is gone, they could have a critical role in the daunting task of rebuilding the war-torn country.

All things considered: there is still time to make sure that IFIs—as they are getting involved in supporting the global antiterrorist campaign—avoid neglecting urgent projects and programs in the poorest countries and regions of the world.

* Viewpoint is a regular feature of ADB Review. Prepared by a senior journalist, academic, or analyst, the articles are meant to provide fresh perspectives and stimulate debate on development issues. The material in this article does not necessarily reflect the official views of ADB.

** The author is an international correspondent for Handelsblatt, Germany’s business and financial daily.