February 2005

Nancy Alexander

THE FUTURE OF THE IMF AND WORLD BANK

Overview

A. World Bank (IBRD) as a Dying Institution
In article #1, Jessica Einhorn, former Managing Director of the World Bank, writes in “Foreign Affairs” (January/February 2006) that the World Bank’s window for middle-income countries, the International Bank for Reconstruction and Development (IBRD), “seems to be a dying institution.” She proposes ways that the institution might be phased out.

In article #2, Nancy Birdsall and Kermal Dervis (writing for the Center for Global Development) propose a new facility at the IMF or World Bank that might better serve middle-income countries, or more specifically, highly indebted emerging market countries, by reducing their debt without sacrificing their growth or social development.

B. IMF as Irrelevant
In article #3, Martin Wolf of the “Financial Times” states, “Let us be brutal: the IMF is on the brink not just of ‘obscurity,’ as Mr. King [Governor, Bank of England] suggests, but of irrelevance.” Mr. King believes that the IMF should be an authoritative economic colossus which, among other things, would drive the trade talks.

In article #4, S. Radelet (writing for the Center for Global Development) suggests that, when the IMF deals with low-income countries with a record of good macroeconomic policies (“mature post-stabilizers”), it should focus on strong surveillance and signaling. When the IMF sends “green” or “red” light signals to the financial community about the quality of a government’s policies, it can start or stop financial flows to a government. In other words, the IMF heads a creditor/donor cartel

In article #5, Y. Akyuz (writing for Third World Network) holds out a positive vision for the IMF and then states the unlikelihood that the governance reforms needed to achieve such a vision will be carried out.

In article #6, Fritz Fischer, Former Executive Director at the World Bank calls for amalgamating the IMF and World Bank.

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A. World Bank (IBRD) as a Dying Institution

1.“Reforming the World Bank: Creative Destruction,” by Jessica Einhorn in “Foreign Affairs,” January/February 2006. In this article, Einhorn says that, although the IBRD seems to be a dying institution that has lost relevance to its borrowers, reform cannot be expected to come from within.

She states that the executive board of the Bank and its share structure is at odds with the distribution of power and influence in the global economy. In addition, “The whole concept of a lending institution with a big balance sheet tied up in long-term loans has been overtaken by securitization, in which loans are just the starting point for packaging together securities that can be sold and traded in the marketplace…Looking ahead…credit to middle-income countries will be just another derivative financial instrument to be bought, sold and managed in private portfolios.”

Einhorn suggests that the Group of 20 (G-20) should convene a group of eminent persons to consider ways to meet the needs of middle-income countries as well as schemes to shut down the institution. Einhorn suggests that the institution’s usable capital (presently more than $32 billion) might endow a new financial structure ? perhaps one that could promote private sector development in tandem with its affiliate institutions (the IFC and MIGA).
2. “A Stability and Growth Facility” by Nancy Birdsall and Kemal Dervis, Center for Global Development, January 2006.
How might the World Bank or IMF serve needs of middle-income countries? This paper proposes the creation of a "Stability and Growth Facility" (SGF) to be housed either at either institution, which could provide long-term financing and strong policy signals to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, the authors estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SGF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending.
The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SGF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.
See: http://www.cgdev.org/content/publications/detail/5853

B. IMF as Irrelevant?

3. IMF Needs Radical Overhaul according to the Governor of the Bank of England, Mervyn King (as recounted in the “Financial Times” and the UK “Sunday Telegraph”)

An op ed in the February 26, 2006 “Sunday Telegraph” reported that, speaking in India last Monday, the usually taciturn Governor [Mervyn King] delivered broadside after broadside against the
IMF, a pillar of the world`s economic architecture. King suggests that the IMF should be independent of the governments that fund it and raise its power to that of an ‘umpire’ for the way countries behave in the world economy.

King believes that the IMF, as an authoritative economic colossus, could reinvigorate the turgid Doha Round of trade talks, which could help raise living standards and help to eliminate poverty. Crucially too, he sees the IMF, as a transparent forum and powerful regulator that could bring clarity and stability that could help to ward off the shocks that plunged the world`s economies into recessions and depression during the last century.

In “The world needs a tough and independent monetary fund” by Martin Wolf responds to King (See: “Financial Times,” on February 22, 2006 or report by the IMF Morning Press on the same day)

Martin Wolf states, “Let us be brutal: the IMF is on the brink not just of ‘obscurity,’ as Mr. King [Governor, Bank of England] suggests, but of irrelevance.” He claims that King focuses only on the IMF’s roles as they pertain to provision of the information, analysis and advice needed for international co-operation, whereas the IMF is also crucial to dealing with insolvency and illiquidity and guidance with regard to burden-sharing in the event of a default. Wolf states that if the IMF is to deliver, “it must become credibly independent. (...) The constant interference by the present resident board subverts independence. With today`s transport and communications technology, a non-resident Board could do the job. In addition, I suggest, the managing director should be selected from a global pool of candidates for a non-renewable term of at least six years. (…) Reform of the IMF does not exhaust the agenda for international monetary stability. (...) The highest priority is to widen the G-7 meetings of finance ministers and central bankers to include other systemically important countries, particularly China. The Fund staff also needs to be allowed to provide fully independent advice and analysis to such a reformed G-7.”

4. “The Role of the IMF in Well-Performing Low-Income Countries” by Steven Radelet, Center for Global Development, February 2006
This working paper discusses how the IMF can respond to the changing economic and political priorities in many low-income countries, particularly within the current lending environment. Today, the IMF faces challenges as the borrowers that faced financial crises in the 1970s and 1980s are achieving macroeconomic stability and no longer need IMF financing. In cases where IMF financing is no longer needed, especially in “mature post-stabilizer” countries, the author suggests that the IMF may still play several important roles, including providing technical advice on a range of issues, including fiscal policy, a sensible envelope for total social spending, aid absorption, financial sector development, and minimizing risks of shocks. The author urges the IMF to maintain engagement with mature stabilizers through activities such as non-funded formal programs (e.g., the Policy Support Instrument (PSI)) with upper credit tranche conditionality,
The author also recommends that the Fund should provide public ratings on macroeconomic policy, ideally fully incorporated into the World Bank’s CPIA (“Country Policy and Institutional Assessement”) rating system. Ratings by the IMF as well as World Bank should continue to provide useful signals to government officials, donors and the private sector.
The author fails to address the fact that two of his primary recommendations are mutually contradictory. That is, in general, improved surveillance with the goal of fostering greater government ownership cannot be achieved while the IMF holds the power (through its signaling) to shut off external financing to a government. Threats by external financiers undercut a government’s accountability to domestic constituencies.
See: http://www.cgdev.org/content/publications/detail/6350/
5. “REFORMING THE IMF: BACK TO THE DRAWING BOARD” By YILMAZ AKYUZ, Third World Network, November 2005

The paper recommends that the IMF should focus on short-term counter-cyclical current account financing and policy surveillance and withdraw from its involvement in development and trade policy as well as bail-out operations in emerging markets. Rather, it suggests that the IMF should help preclude the need for bailouts by working with emerging markets to manage unsustainable capital inflows by promoting appropriate measures, including direct and indirect controls. Finally, the paper urges the IMF to pay greater attention to destabilizing impulses originating from macroeconomic and financial policies in major industrial countries.

While the paper calls for changes in IMF policies and modalities, it concedes that any reform designed to bring greater legitimacy would need to address shortcomings in the institution’s governance structure. It holds out little hope for change in this regard. The paper contends that governance reform would require that the IMF end its dependence on a few countries for resources and that its engagement with countries be independent of bilateral arrangements.

To view the full paper, click on the webpage below:
http://www.twnside.org.sg/title2/par/IMFREFORM_word_with_cover_for_website_nov05.doc

6. Amalgamating the IMF and World Bank

In a 2/23/06 letter to the “Financial Times,” Fritz Fischer, Former Executive Director at the World Bank called for creating single board for IMF and World Bank, saying that “Such a pooling would not only cut costs at a time when their traditional revenues from interests to loans are shrinking. It would also reduce duplication and - above all - guarantee consistent advice for the clients. At the same time, one single board for both the IMF and the World Bank, staffed with high level representatives from shareholders and, hopefully, reduced in size from now 24 to about 16, would constitute an appropriate umbrella. It would allow political and strategic oversight by the member countries and give the two organizations enough flexibility and independence to work within their newly defined mandates with surveillance for the Fund and poverty alleviation for the Bank remaining basic pillars for their future activities.(...)

“It appears that the EU (...) would be well advised to take the lead in initiating much needed governance and political reforms. By reducing their untenable over-representation in the boards, the Europeans would demonstrate that they are serious. Such a move would also enhance their goodwill among the under-represented member countries and - last but not least - strengthen their own position in these organizations.(...). Equally, the European Investment Bank as the largest financial body in the world not only serves as the ‘house bank’ for its members but also engages in assistance to developing and transition countries. Mr. King has started the ball rolling, and the entire EU should kick it further. This would greatly enhance the chances of getting a modern IMF and World Bank, hopefully amalgamated under one roof.”