ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Reshaping IMF and World Bank

The report of the US Congress-appointed International Financial Institutions Advisory Commission is a well-considered critique of how the IMF and the World Bank have operated over the last half a century and the commission's recommendations are far-reaching and, if implemented, could radically transform the international financial system.

The debate on the future of the IMF and the World Bank has been given a fillip by the report by the International Financial Institutions Advisory Commission appointed by the US Congress.  The commission included, among others, Allan Meltzer, a well known but orthodox economist, after whom the commission’s report has now come to be known, and the reformist but maverick Jeffrey Sachs.  The commission was the handiwork of the Republican majority in the US Congress, but its report is not to be brushed aside as a shrill, political document. It contains a serious critique of how the two institutions have operated over the last half a century –  with ‘mission creep’ and their entrenched bureaucracies taking them beyond their original mandates, their insidious politicisation by the industrial countries with the US as the ringleader and widespread criticism of how they have not lived up to expectations in achieving their assigned goals.  The recommendations of the commission are far-reaching and, if implemented, would transform radically the international financial system.<P>
The report has a broad remit, extending, besides the IMF and the World Bank to the regional development banks, the Bank for International Settlements (BIS) and the World Trade Organisation.  But the last two are peripheral to the main thrust of the report.  The focus of the report is on the IMF and the World Bank.  The commission has tried to reassess their role in the new economic environment which has changed the conditions governing their functioning.  The initial aim of the  IMF was to smoothen balance of payments adjustment of fixed and adjustable exchange rates.  But the fixed exchange rate regime unravelled in 1971 and the Fund began to seek a new identity as “manager of financial crises in emerging markets, as a long-term lender to developing countries and the one-time communist countries in transition, as a source of advice and counsel to many nations and as collector of economic data”.  A founding premise of the World Bank was that “the private sector would not furnish an adequate supply of capital to developing countries”.  However, this presumption has been rendered obsolete by the development and expansion of global financial markets which has resulted in private capital flows dwarfing the volume of lending by all the development banks, which now account for hardly 2 per cent of all capital flows to the developing world.<P>
These are external factors, but even more importantly, the internal dynamics of the two institutions’ operations and policies diminished their usefulness and relevance because of their manifestly limited and at times even adverse impact on the economic well-being of the client countries.  The IMF’s conditionalities, careful research has shown, have little predictable effect on borrowing countries and in fact often worked perversely by “restricting the role of national institutions and the development of responsible democratic institutions”.  The World Bank, likewise, has become “so large and has taken so many different tasks that effectiveness has been sacrificed”.  Its frequent reorganisation and changes of mission have reduced efficiency and wasted resources.  Its programmes which overlap those of the IMF and the regional development banks have led to conflict, turf battles and failure to achieve agreed goals.<P>
During the 1980s as a result of the Latin American debt crisis and later the Asian financial meltdown, the tasks the IMF undertook transformed it from a short-term lender to support efforts to overcome balance of payments difficulties to a source of long-term conditional lending.  One telling fact which the report has spotlighted is that four developing countries have been indebted to the Fund for 40-49 years, 20 countries for 30-39 years, 46 for 20-29 years and 25 for 10-19 years.  The long tenure of the loans shows that the Fund’s policies associated with its lending hardly helped the countries’ development.  Even the justifiable function of the Fund as a crisis manager was flawed.  Both during the Mexican crisis of 1995 and the later east Asian one, the way the Fund dealt with the situation served essentially to prevent or reduce  losses to private international lenders, signalling that the Fund would go to their rescue if local banks and private corporates incurred large foreign liabilities and government-guaranteed private debt.  This was moral hazard at its worst.  Added to these was the politicisation of the Fund which was dramatised first by the Mexican bail-out in 1995 and later by the Fund forking out large dollops of finance to Russia in 1998, almost without any conditionality, thereby subserving the foreign policy goals of the US and western Europe.  <P>
Leaving aside the Fund’s dysfunctional lending operations, the lack of transparency in its financial position and accounts also comes in for sharp strictures. The financial picture leaves member countries, creditors and borrowers alike, in the dark as to the availability and adequacy of the Fund’s resources.  The commission quotes a former economic counsellor to the Fund as saying, “The cumulative weight of the Fund’s jerry-boat structure of financial provision has meant that almost nobody outside, and indeed few inside the Fund understand how the organisation works because relatively simple economic relations are blurred under increasingly opaque layers of language as, for example, the Fund’s balance sheet contains no information whatever on the magnitude of its outstanding credit or its liquid liabilities.”  <P>
It has been the World Bank’s rhetoric that it does not mimic the private sector in lending to the developing countries. Reality has been very different.  The report dramatically points out that “of the Bank’s non-aid resources, 33 countries commanded 70 per cent of the total over the last seven years, while the other 145 developing World Bank members were left to divide the remaining 30 per cent.  The share of the favoured group grew from 63 per cent to 74 per cent between 1993 and 1999".  The Bank has also been faulted for its ill-conceived evaluation methods as also its hasty and ill-advised intervention during financial crises to provide emergency loans to Brazil, South Korea and Thailand, which sort of action should have fallen more appropriately in the Fund’s domain.  There is, besides, much wasteful duplication of operations between the World Bank and the regional banks.  <P>

<B>Reform Agenda</B><P>

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