April 2005
John M. Fitzgerald
Attorney
USA

Dear All,

I have enjoyed very much the recent paper and discussion and have at this point only two points to add, the first being that all of the MDBs are now too ill as institutions to hold out as possible regional lenders of last resort. The other point is to suggest a way toward a more democratic alternative that may actually be coalescing on its own now.

1) We must be very careful about recommending that we use the regional development banks for any new important initiative, at least until they are dramatically changed for a substantial period of time. In their report of December 2001 the General Accounting Office, now Government Accountability Office, confirmed our impressions that the regional development banks have by even fewer internal control mechanisms and none which could be audited to demonstrate their effectiveness. Last year, the IADB posted on its website an evaluation by its own internal evaluations office which found that the IADB did not yet have modern (COSO-compliant) accounting and control standards. In general, the regional banks’ safeguard policies and whistleblower protections are also weaker than the still substandard versions at the World Bank. Now we see the World Bank trying to capture both new climate change business while highly conflicted in that area, and to condition debt relief further, or so it seems. It is unlikely that the IFIs will be able to reform themselves well enough and soon enough to be trusted with the role of Lender of Last Resort.

2) While nevertheless working toward reform of the IFIs, might it not be possible to by-pass these existing institutions and use the momentum toward foreign direct investment and web-based commerce to create a transnational bank or lending pool, drawing from pension funds, union-owned banks, progressive national and state treasuries, socially responsible mutual funds, hedge funds, and other institutional investors in order to create an alternative to the IMF and MDBs? In the US alone, just a handful of progressive state treasurers, pension funds and SRI’s hold many trillions of dollars, with the self-described SRIs alone holding $2 trillion as of 2004, which represents 2 percent (and growing) of the US mutual fund market. This new transnational lender could not only function as a lender of last resort, but a more open development bank. It could include contract clauses specifying measures of damages, courts of jurisdiction, or other dispute resolution choices, and guaranteeing that it and its borrowers operate more transparently and accountably than the MDBs, honor international labor and environmental treaties, and local laws. The bank could also prioritize lending according to such principles as “green economics or regenerative investing” (that is, investments that yield returns while building or not depleting natural and human capital), and the international development goals that Bolton is trying to eliminate on the run up to NY this week, by assisting in the implementation of the treaties and goals where nations or locales have yet to do so and charge a slightly higher rate as insurance against claims for damages against those not yet meeting international standards but on track to do so, denying loans for those in flagrant violation of them. In fact the UN has published a “Global Compact” of nine such basic standards for investment.

This transnational bank could be an relatively unorganized or decentralized network facilitated by brokers, or it could be a federation with a bicameral board, for example, with one committee based on one dollar of equity investment for one vote; the other based perhaps on the number of persons represented by a given lender or debtor who are doing business with the bank or pool multiplied times their amount of loan or debt per capita to the pool.

The same directors and bank could also provide insurance and be linked to a fair trade network of wholesale and retail suppliers and buyers who track their compliance with law and best practices so as to make insurance less expensive for them. They could then challenge competitors who fail to comply in the market and in other arenas, such as the SEC risk-disclosure requirements under Sarbanes-Oxley and similar requirements in Europe. It is there and in court that we see many of the current big accountants, brokers and banks confessing that they have also been corrupt which leads one to search for new options rather than rely on the interplay of these existing entities to provide fair financing to countries or others in need of loans of last resort when the borrower is most susceptible to pressure to cut corners.

Finally, the US Congress is now more upset with the IFIs than they have been in some time and appear to be willing to cut back on their funding somewhat while demanding more transparency and accountability.

Perhaps unless the UNEP finance initiative can handle it, an interested group might ask a foundation (e.g., Heinrich Bolle Foundation, Wallace Global ?) to fund a meeting or two and a few papers to lay out options in order to fruitfully discuss progressive alternatives to at first augment, and then replace, the IMF/MDBs. Invitees could be a very few leaders from each of the following: union leaders, progressive independent or think-tank economists and lawyers, state and national governments’ or parties’ finance ministers or leading legislators, (Nordics, South America, etc.) and SRI’s.

Thanks again for your good work.

John Fitzgerald