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International Financial Institutions and Financial Accountability

Published online by Cambridge University Press:  28 September 2012

Kunibert Raffer
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Abstract

While useful proposals to reform International Financial Institutions (IFIs) have been widely discussed, the lack of meaningful financial accountability has received little attention. Considering the substantial damage done by IFIs, this is surprising both from an ethical and an economist's point of view. In a market economy anyone must face the economic consequences of their actions and decisions. If consultants give advice negligently or without obeying minimal professional standards, they have to pay compensation for the damage they have caused. National liability and tort laws serve the purpose of compensating those suffering unlawful damages and of deterring such behavior. By contrast, tortious damage caused by IFIs must be paid by IFIs' borrowers, including many of the world's poorest people. IFIs may even gain financially from their own negligence by extending new loans necessary to repair damages done by their prior loans. One failed adjustment program calls for the next. This mechanism makes IFI-flops generate IFI-jobs and additional income. This perverted incentive system rewarding errors, negligence, and even violations of the very constitutions of IFIs is absolutely at odds with the principles on which Western market economies rest. It must be brought to an end. This essay presents the idea of financial accountability, showing how easily reforms making IFIs financially accountable could be implemented. Moreover, embracing financial accountability would bring IFI operations closer to the intentions of their founders, who wanted IFIs subject to the basic legal and economic concepts of financial accountability not exempt from it. The market mechanism and its beneficial incentive system must finally be brought to IFIs.

Type
Articles
Information
Ethics & International Affairs , Volume 18 , Issue 2 , September 2004 , pp. 61 - 77
Copyright
Copyright © Carnegie Council for Ethics in International Affairs 2004

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References

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2 Ngaire Woods, in “The Challenges of Good Governance for the IMF and the World Bank Themselves,” World Development 28, no. 5 (2000), pp. 823–41, has proposed special majorities or double majorities differentiating between the stakes countries hold in IFIs. More recently, in “Holding Intergovernmental Institutions to Account,” Ethics & International Affairs 17, no. 1 (2003), pp. 69–80, she has advocated greater constitutional, internal, and political accountability of IFIs.Google Scholar

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30 See Agreement Establishing the Inter-American Development Bank; available at http://www.iadb.org/leg/Documents/Pdf7Convenio-Eng.pdf.

31 See Agreement Establishing the Asian Development Bank; available at http://www.adb.org/Documents/Reports/Charter/charter.pdf.

32 An e-mail to the AfDB (April 7, 2004, 14:20:06) describing the problem and asking for the legal text was received according to the Bank's computer but has remained unanswered.

33 International Development Association, “Background”; available at http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/0.,contenMDK:20051270~menuPK:83991~pagePK:83988~piPK:84004~theSitePK:73154,00.html.

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41 I first proposed the idea of a court of arbitration to ensure financial accountability for projects in 1993. See Raffer, “International Financial Institutions and Accountability.”Google Scholar

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49 Designing a fair and humane solution to the sovereign debt crisis in the late 1980s, I proposed this easy way to hold IFIs financially accountable. To the best of my knowledge it was the first time financial accountability of IFIs was brought up. This equal treatment provision has remained a fundamental feature of my sovereign insolvency model. See Raffer, “Applying Chapter 9 Insolvency to International Debts,” pp. 30/ff.; and Raffer, Kunibert, “The IMF's SDRM: Another Form of Simply Disastrous Rescheduling Management?” in Jochnick, Chris and Preston, Fraser, eds., Sovereign Debt at the Crossroads (Oxford: Oxford University Press, forthcoming).Google Scholar

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58 Compared with 1999 this is a steep increase: on April 30 the three largest users “only” accounted for 49 percent, the “big five” for 69 percent . See International Monetary Fund, “Financial Statements, Quarter Ended April 30,1999,” p. 10; available at http://www.imf.org/external/pubs/ft/quart/1999fy/043099.pdfGoogle Scholar.

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60 Rafter, “The IMF's SDRM.”Google Scholar