The recent IMF-World Bank Spring Meetings took place at a time when both institutions’ position in the World Economy is in danger. IMF reform which was decided upon in 2010 and consisted of an increase in its financial means, a shifting in voting power to emerging countries and a transfer of two executive board seats from Europe to emerging countries, still has not taken effect, as a result of US Congress’ refusal to ratify the agreement. Even a recent effort by President Obama to link the Ukraine sanctions imposition with IMF reform was thwarted by the Republican-dominated House of Representatives. Thus, no IMF reform, even though the anachronistic US veto power in qualified majority voting matters (all important ones) would be maintained.
This situation weakens the IMF. Of course, so far reform has been discussed only in terms of finances and representation, not in terms of direction and substance. The present communiqué, while talking about inclusive and job-rich growth, still relies mainly on orthodox, “structural reform” advice when discussing the dangerously high youth unemployment. But some slight changes in IMF positions have been initiated by the two French managing directors, Strauss-Kahn and Lagarde. They now do see space for “rebalancing” economies, also requiring surplus countries to stimulate domestic demand, instead of the previous mantra which put the whole burden on deficit countries. But this does not go far enough.
If and when IMF reform occurs and gives more weight to emerging and developing countries, this could also lead to a broader discussion of what economic policy should mean in today’s globalized world, that the (previous) IMF and (present) EU priority of budget consolidation cum structural reform prescription has led to mass unemployment, widening income inequality, low growth and threat of a further domination of economies by financial markets. Thus, reform of the IMF must proceed, both in substance and in governance.
(Recently, the voices of critics of this stillstand, both within the US and outside, have become louder, demanding the “rest” of the world to proceed without the US, in effect kicking them out of the IMF, if they do not play along. While this position is understandable, it would weaken global development if the largest economy in the world did not cooperate. We have seen a similar situation with the second-largest economy, which however now seems more willing to engage with global governance).
The World Bank is plagued by different problems. Its President of 2 years has initiated a seemingly never-ending internal restructuring process which has devastating effects on World Bank staff, fearing for their jobs, insecure of what their future role will be, etc. While the basic idea of President Kim to break open the regional and thematic silos, in order to make their know-how available to the whole Bank clientele, is to the point, the duration, the process of going about it have already caused significant damage. At the same time, the low interest-rate environment have created significant competition for the World Bank emerging countries by commercial banks, whose loans come faster, require less bureaucracy, and have by far fewer conditionality attached to them. This makes the new focus area of the World Bank’s poverty programs, the emerging countries in which the majority of very poor people live, much harder to reach – especially with a demotivated staff.
Governance reform in the World Bank is less urgent than in the IMF, since a number of smaller steps have already been taken. Still, more voting rights and chairs will need to be shifted towards the recipient countries / and away from the donor countries. In addition, the perversely “non-gentlemen agreement” in IMF and World Bank, where the Managing Director of the IMF is a European, the World Bank President a US American, needs to be abandoned. Clinging to vested power and representational positions and not recruiting world-wide destroys the legitimacy of these venerable institutions and makes them irrelevant to those parts of the world which these institutions, created in 1944, are supposed to serve.
Both IMF and World Bank need urgent reform, if they should maintain their positions within the global governance. They need to accept that since Bretton Woods the world has changed significantly and that relying on ossification will only further diminish their influence. No replacement is in sight. The 2009 effort by the G-20 to establish themselves as the primary global governance institution has petered out. This could have been a model in which a modernized IMF and World Bank would have had their respective places, along a number of other institutions dealing with cross-border investment, the financial markets, international crime, labor and social affairs and global environmental issues.