South Africa’s Relations with Development Finance Institutions

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Finance Standing Committee

21 August 2000
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Meeting report

finance Portfolio Committee
22 August 2000
SOUTH AFRICA’S RELATIONS WITH DEVELOPMENT FINANCE INSTITUTIONS

Documents handed out:
Minister’s presentation notes
[text outline of power point presentation]
”What is the IMF” brochure

International Monetary Fund and the World Bank websites

SUMMARY
The Minister of Finance gave a presentation on South Africa’s commitments to international finance institutions, particularly the International Monetary Fund and the World Bank. He also discussed the challenges facing these organisations and their member countries. The Minister highlighted the current global economic conditions and outlined the Bretton Woods’ Institutions (BWI’s) and their roles in the contemporary global realities. The presentation then shifted its focus to Africa and how development is financed on the continent, South Africa’s relations with the BWI’s and a critique of the same institutions. A discussion of the G20 and South Africa’s place within it followed. The presentation concluded with a look at the African Development Bank (AFDB) and South Africa’s domestic development finance institutions. Discussion followed the presentation with members commenting on the current situation and the future direction that should be taken by the Minister in upcoming deliberations of the international development finance institutions.

MINUTES
Presentation by Minister of Finance, Mr Trevor Manuel

The Minister began the presentation by contextualising his comments: he said that he wished that his talk would engage discussion on what South Africa’s role should be in the international development finance institutions.

His presentation covered the following items:
South Africa’s Relations with Multilateral Development Finance Institutions
Current International Economic Conditions
The Bretton Woods Institutions
Financing Development in Africa
Multilateral Development Finance and South Africa
SA relations with the Bretton Woods Institutions
A critique of the Bretton Woods Institutions
SA and the G20
SA relations with the African Development Bank
SA’s domestic development finance institutions

Mr Manuel concluded his comments by stating that South Africa (SA) has a role to play in these international institutions and a responsibility as a non-debtor African nation to promote the African cause. He pointed to the Development Bank of South Africa (DBSA) as an example of the role SA must play within Southern Africa. The DBSA now allocates one third of its resources outside of South Africa.

The logic the Minister pointed to was that of the inherent imperfectability of the market and the commitment the current government has made to addressing issues relating to market failures. In a world as flawed, what approach should the government take in addressing domestic and global inequality?

Discussion
Prof B Turok (ANC) said that without hesitation he would support active participation by South Africa in these international organisations. Prof Turok commented on the IMF brochure handed out to members which stated that the IMF is not a coercive organisation. He noted that this was in fact not the case, that the experience in Africa has been the contrary. The representation flaws in the organisation lead to a situation where the United States and the European Union have a virtual veto over organisational actions. The professor concluded by saying that South Africa should set their own goals irrespective of IMF goals, directives and structures.

Dr R Davies (ANC) asked the Minister if he sees the debate and concern about global poverty as simply a trend for developed countries? He asked the Minister to comment on the effect the departure of the IMF’s chief economist, Joseph Stiglitz, would have on the organisation? Dr Davies also noted that the mass protest movements that have been campaigning against these organisations should not be discounted as the mobilisation of civil society will certainly have an effect on the future of these finance institutions.

The Minister of Finance began his response by noting that while the system in place is not ideal, no one has been able to come up with an alternative to global intermediation. Is there a route other than ‘thou shalt’ as conditional agreements of tenure? Mr Manuel moved on to the departure of Joseph Stiglitz, saying that it was a shame – but that there is a segment of the World Bank that will continue to fight for the viewpoint espoused by Mr Stiglitz. The new chief economist, Nick Stern, may be more orthodox but may also be more effective – the world needs someone who can help them understand the benefits of economic intermediation.

The Minister stated that as a platform to raise critical issues, the United Nations Millennium Summit might afford the opportunity to raise questions about funding development. The Minister commented that poverty alleviation starts with good governance at a national level. At the international level there seems to be a lack of urgency surrounding the issue. One of the problems in the IMF is that the executive directors who represent regions or countries are a dominant force in the organisation but that there is an ongoing conflict between the executive directors and the organisation itself. The organisational goals often seem at odds with the objectives espoused by the member states.
           
Mr Manuel noted that the mass movements, from what he has seen, are slightly unfocused. Everybody knows what they are against, but nobody knows what they are for. So at one end of the spectrum there are groups calling for the abolishment of the international funding organisations and at the other end of the spectrum there are groups also calling for abolishment but for different reasons. The Minister feels that a different voice is needed between these two perspectives.

Ms R Taljaard (DP) asked how the Development Committee, the Regional Development Bank and the G20 could bring the debates forward.

The Minister responded by noting that South Africa is currently the chair of the Development Committee but that they are highly structured meetings and there is little room for philosophical debates and substantial changes to the programme. An institutional change is therefore necessary. Once again there is the clash between the goals of the member states and the objectives of the permanent organisational staff. One can see the need for organisational change when the IMF regional chair is analysed. With 22 countries represented in Africa 1 (see presentation notes), South Africa will regain the chair (currently held by Lesotho) in the year 2048. The rules should be changed, says the Minister, giving South Africa and Nigeria permanent seats and rotating among the other members. SA needs a consistent voice at these deliberations. As well, Africa 1 is the only region that rotates its chair every 2 years. This does not allow the chair to develop knowledge required to perform at maximum effectiveness. Yet South Africa cannot complain as they chose to be in Africa 1. It is a voluntary association and SA was offered a spot in a group with Switzerland in 1992.

With respect to the African Development Bank (ADB), the Minister considers this an underutilised forum – that there are too many institutions on the continent, muddying the waters. ADB meetings are also hurried affairs, without adequate time for substantive discussion. The G20, says the Minister, could become a viable arena for debate if certain members let go of their other interests (particularly the G7 members). The G20 meetings are also far too infrequent to accomplish their objectives.
           
South Africa, states the Minister, considers every possible forum an opportunity to disseminate their views. The President has also been very strong in pushing the South African agenda on the world front. These international discussions are part of a larger plan to construct a broad platform in order to deliver a strong, consistent message.

Mr K Andrew (DP) commented that conceptually there is confusion surrounding the roles of the international finance institutions. Are they banks, charities or development agencies? He noted that we must be aware of current realities in the global world, of power imbalances and the like, but that we must not be constricted by these constructed realities as they can change. The saying that ‘beggars can’t be choosers’ restricts developing nations to a role of subservience. In terms of the arguments surrounding conditionality (pre-conditions set by donor country/organisation that the receiving country must adhere to in order to receive funding), Mr Andrew stated that it is an appropriate and necessary part of intermediary funding.  It is not conditionality that is inappropriate, but the negotiated terms of the specific agreements that are unacceptable.

Mr A Feinstein (ANC) asked the Minister what the timeline was on the G20 work on financial architecture. The Minister responded that as far as he knew the report had been completed by the old G24 which had dissolved and that the new G20 had other issues on its agenda.

Minister Manuel began his statement on the topic of conditionality, noting that it is desirable for receiving countries to play an active role in the development of the conditions of agreement, and for the countries to make them achievable. Conditionality is a necessary part of intermediary funding. In terms of a broader debate concerning structural adjustment, macro stability is important but not an end in itself. Structural adjustment, said the Minister, often misses the detail and as a result, the importance of micro changes within a macro foundation is not emphasised.

One of the committee members raised the issue of cooperation between countries. The Minister replied that it is not only the developing countries that sing the same tune with respect to the faults of international financing. A number of developed nations are very vociferous in terms of the faults of the G7 and the financing organisations. The key is to find the commonalities and put heads together in fighting power imbalances and systemic problems in these organisations. There is not enough talking at the present time and the power relations present hamper any effort at constructive change. In these types of organisations the ‘payer of the piper picks the tune’ and because of this power structure some of the politics are actually removed from the process leading to incremental debate and little change. In the opinion of the Minister, not even the United Nations has power imbalances like those present in the international finance institutions.

Mr M Ramgobin (ANC) commented that debt is a systemic crisis in developing countries. He asked the Minister to what extent cross-conditionality played a role in the financial interventions in Mexico and South Korea.

The Minister responded by using the example of the $80 million (US) support package Zimbabwe received last year. Zimbabwe in this case set goals that were unrealistic, especially in terms of inflationary predictions. Yet countries often do this, sign agreements they know they cannot reach simply to get some amount of funding. What this has a tendency of doing is making future negotiations much more difficult. So often when these organisations set tough conditions for funding, one often fails to realise the history of countries not reaching goals as well as financial mismanagement.

Mr B Nair (ANC) gave a forceful statement on what direction SA should be taking within these organisations. He argued that the strictures imposed by the IMF and the World Bank actually exacerbate poverty and he disagrees with the notion that beggars cannot be choosers, and that conditionality is inevitable. The time has come, said Mr Nair, for developing countries to band together and as a common front battle the so-called inevitabilities of the payer of the piper choosing the tune.

Mr M Booi (ANC) asked the Minister what SA gains by being in Africa 1? And if the relationship with the IMF does not improve, what are the options available?

The Minister, responding to Mr Nair’s comments stated that the G77, a UN block of developing countries, gives very strong declarations and speeches on the political front. Unfortunately, the same block in the World Bank would have very different outcomes as the power balances are completely different. In terms of conditionality, in some cases they may actually have positive effects, such as those that create conditions of good governance. The key is that countries negotiate the conditions from a position of strength, giving themselves ownership of the results.
           
In terms of the South African reality, to answer Mr Booi’s question, one must realise that SA is a developing nation and that her fortunes are directly tied to the success or failure of the other nations in Southern Africa. The Minister stated that SA cannot live in a vacuum - believing, for example, that poverty in Mozambique will not have an effect on South Africa. Yet as the strongest African economy, SA has a role to play in international organisations on behalf of those less powerful.

Dr P Rabie (NNP) asked if there had been a plan developed for those countries who mismanage funds.

The Minister replied that within South Africa, in terms of national funding to the provinces, there are mechanisms for dealing with mismanaged funds (Section 101 of the Constitution). At the international level there are no such mechanisms and little enforcement capacity other than withholding funds. The Minister stated that there needs to be significant caution taken in reaching a balance between the multiple challenges of trying to provide for citizens while knowing governments are corrupt or inept.

The Minister briefly commented on the Article IV Missions that are sent to gauge the success of the South African economy by the IMF. While many of their comments are accurate, many are not, often simply because there is no in-country representation on the committee. One of the problems, said Mr Manuel is that these reports often adopt a ‘one size fits all approach’ which glosses over the subtleties of the various economies. Unfortunately, South Africa ends up with a ‘one size fits all approach’ because we lack the capacity to make the shoes.

The Chair, Ms B Hogan, concluded the meeting by noting that the International Agreements sector of the Finance Ministry was under inordinate pressure and could use more support. The United States has a staff of 180 compared with the 5 staff members working in South Africa on the same issues. More capacity is needed for this sector due to its importance.

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