TCS Daily


The World Has Changed, Why Won't the Fund and the Bank?

By Desmond Lachman - July 13, 2007 12:00 AM

In recent years, both the IMF and the World Bank have become remarkably free in urging their member countries to improve their governance and to downsize their bloated public sectors. Yet both Bretton Woods institutions have consistently opposed any serious external evaluation of either their own governance structures or of the continued relevance of their operations in today's very changed world of global finance. This has to raise anew Plato's age-old question as to whom, if anyone, might be guarding the guardians of the global economy.

The need for a serious external evaluation of the IMF and the World Bank would appear all the more pressing now at a time that both of these institutions need to restore their tattered credibility. The IMF is yet to shake off its many missteps during the Asian and Latin American currency crises some ten years ago, while the World Bank is presently reeling from its two years of mismanagement under Paul Wolfowitz' leadership. And the continued practice of dividing the leadership of the World Bank and the IMF between the Americans and the Europeans has hardly done anything to restore the legitimacy of those institutions, especially among the Asian emerging market economies, whose weight continues to increase in the global economy.

How timely it would be to have an external evaluation of these institutions now on the eve of new management taking charge, when serious questions should be asked as to the correct long-term course that these institutions should be charting.

Among the more fundamental changes in the global economy over the past sixty years that has undermined the continued relevance of the Bretton Woods institutions has been the increasingly free flow of private capital across international borders. At the time that the Bretton Woods institutions were set up in 1946, highly restrictive capital controls were the norm with even Western European countries being starved of private capital inflows. By contrast, today most countries, including those emerging market economies in Asia, Eastern Europe, and Latin America, all have access to a vast pool of private international capital. And they can access this capital at interest rates not much higher than those offered by the official lenders.

The freer flow of private capital across international borders has rendered redundant the large IMF lending programs that characterized the Asian, Latin American, and Russian currency crises of the late 1990s. Indeed, almost all of the IMF's erstwhile large borrowers—Argentina, Brazil, Indonesia, and Russia—have fully prepaid their IMF obligations, while at the same time building an arsenal of international reserves that will enable them to weather well any future crisis without having to request large-scale IMF assistance. As a result, the IMF's outstanding loan book, which exceeded US $100 billion, as recently as end-2003 is now down to a mere US$15 billion.

The ready flow of private international capital has also rendered redundant a large part of the World Bank's lending activities. The World Bank's large middle-income emerging market member countries like Brazil, China, India, Russia, South Africa, and Turkey can all now more than meet their external financing requirements by accessing the global capital market. Yet World Bank lending to these countries still accounts for over one third of the World Bank's overall lending operations.

The easier access to private international capital flows has certainly diminished the role of both the IMF and the World Bank as lenders to the middle-income emerging market economies. However, this has not stopped both of these institutions from continuing to engage in bureaucratic overreaching and from substantially adding to their staffs. Between 1995 and 2006, at a time when there was virtually no increase in their membership, both Bretton Woods institutions expanded their staffs by 50 percent to 2,700 full time employees in the case of the IMF and to 8,700 employees in case of the World Bank.

The diminished relevance of the IMF and the World Bank for the middle-income emerging market economies does not mean that those institutions no longer have a useful to role to play in today's global economy. In a world characterized by very large global payment imbalances, an IMF is still needed to exercise firm surveillance over the international exchange system, reluctant as the IMF might have been of late to effectively exercise that role. For its part, the World Bank is still very much needed to pursue its original mandate of alleviating poverty, especially in Africa, notwithstanding its rather poor record on that score in recent years.

What the diminished relevance of these institutions does imply is that they need to be adapted to the new realities of the global economy in the twenty first century. It is in that context that a serious external evaluation of their operations would seem to be of the essence as a counterweight for the new management of those institutions to their powerful staffs, who are sadly all too much in favor of maintaining the status quo.

The author is resident fellow at the American Enterprise Institute.
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