Against a backdrop of change at the top of both the World Bank and the IMF, Jane Monahan reports on how the two institutions are responding to changing demands in a global economy and their efforts to remain relevant.
The World Bank and the IMF, two of the world’s leading multilateral organisations, are struggling with issues of credibility and relevance and adapting to a global economy, by the admission of top officials in both organisations. The two institutions, founded after the Second World War, have started tackling these various challenges. But if anyone supposes they are in a hurry to introduce change, they would be mistaken.
Take the way 53-year-old Robert Zoellick became the new president of the World Bank on July 1. The former trade representative and deputy secretary of state of president George W Bush, who was most recently an investment banker at Goldman Sachs, Mr Zoellick had the unanimous support of the World Bank’s board, which praised his “proven track record in international affairs”; he also received endorsements in Europe, Africa and Latin America during a trip he made in June. But his appointment to head the World Bank was not the outcome of an open selection.
At the helm...
The World Bank’s new president, Robert Zoellick, helped to hand out new land titles to villagers in Cambodia in August on behalf of the World Bank-financed Land Management and Administration Project.
Mr Zoellick was selected according to a tradition that has been in force for the past 62 years, under which the US government, the two institutions’ biggest shareholder, chooses the president of the World Bank, and the Europeans, the second biggest shareholders, name the head of the IMF. Yet each institution has 185 member countries and the vast majority of them are developing countries.
Governance crisis
The scandal led to a virtual campaign against Mr Wolfowitz by the bank’s 13,000 staff and management; deep internal divisions; difficulties in the bank’s external work, especially in connection with its governance and anti-corruption work with governments, which Mr Wolfowitz had championed; and, ultimately, to Mr Wolfowitz’s forced resignation on June 30, two years before his term was due to end.
Going and gone...
Paul Wolfowitz (left) was forced to resign from the World Bank presidency; Rodrigo Rato has announced that he will step down from the IMF in October.
“A new leadership was essential because of the crisis. If the cost of that was not moving forward on a broader agenda for the selection process, the board accepted that. [But] next time it will be different,” says Mr Adams.
Because the US swiftly invoked its ‘right’ to name Mr Zoellick as World Bank president, the Europeans reacted equally rapidly when Rodrigo Rato, a former Spanish finance minister, unexpectedly announced in June that he would step down as IMF managing director in October for personal reasons. On July 10, the Europeans (with the exception of the UK) rallied round Dominique Strauss-Kahn, a 58-year-old, suave and charismatic senior figure in the French Socialist Party to be their candidate as the next IMF head. He had gained international recognition as France’s finance minister between 1997 and 1999, when he oversaw several privatisations to reduce the country’s debt.
The IMF board scrambled to announce that the time for candidates, which could be of any nationality, to apply would be extended to September 1, and also outlined what professional experience was needed, marking a departure from previous selection processes.
Waiting in the wings...
Dominique Strauss-Kahn, a senior figure in the French Socialist Party, is the Europeans’ preferred candidate for the post of IMF managing director and in July received formal endorsement of the Bush administration.
In a move that appeared to pre-empt the possibility of a candidate from a developing country being in the running, Mr Strauss-Kahn received the formal endorsement of the Bush administration during a fleeting visit to Washington at the end of July – before a trip to major developing countries to galvanize support for his candidacy, imitating Mr Zoellick’s whirlwind tour before taking up his new job. This almost guarantees that he will be the next IMF managing director. The combined US and European shareholdings (and votes) on the IMF board (as it is currently constituted) are dominant.
Policy continuity
Mr Rato’s surprise resignation from the IMF, half way through his term, prompted many at the institution to accuse him of leaving the Fund in the lurch, before the completion of a 2005-2008/9 IMF Medium-Term Strategy that he had helped to formulate and implement. However, according to Mark Allen, a long-time director of the IMF policy development and review department, which oversees the consistency of the Fund’s policies in member states, the Fund’s strategy would not change much under a new managing director.
The IMF’s main reforms, on its shareholding structure (quota and votes), on the way it is financed, and on the modernisation of its international and bilateral financial and monetary (and banking system) surveillance work are here to stay, Mr Allen told The Banker. The strategy has “broad support from the board and the membership” and “a lot of momentum”, he says. “It isn’t easy to turn an oil tanker around fast.”
The most urgent reform is changing the shareholding structure of the IMF and the votes of both IMF and World Bank boards. The IMF has made more progress on the matter than the World Bank: last year it approved ad hoc increases in the quotas of four under-represented emerging economies – China, South Korea, Mexico and Turkey – that had not kept track with the countries’ economic growth in the past 15 years.
Further steps are now needed, both to develop a formula for a second round of quota adjustments that takes into account the economic weight of other emerging economies, especially in Asia, and to increase the number of basic votes at the institution.
The latter is aimed at correcting the second major regional imbalance in the IMF’s representation, in Africa, which has the greatest poverty in the world, and where 45% of the Fund’s operations and much of the bank’s anti-poverty work are focused. Nevertheless, 47 African countries now have only two directors (and hence just two votes) on both institutions’ boards.
Although the deadline agreed by the board for completing the quota and votes reform is spring 2008, Mr Allen does not rule out the possibility of an agreement being reached before the two institutions’ annual meetings in Washington next month (October 17-21), which is also what Mr Rato has expressed a preference for.
Bilateral surveillance mandate
Mr Allen bases his optimism, in part, on the speed of the IMF board’s approval on June 21 of a new mandate on bilateral surveillance, which addresses the sensitive – and topical – issue of members’ exchange rate policies and how they affect international stability.
The new framework replaces old 1977 rules that needed modernisation. But, in the present political context, it was adopted in the face of outright opposition from China. And former IMF officials told The Banker it could reinforce the Fund’s role as an umpire rather than as an adviser to governments (a US demand), and runs the risk of giving the impression that the IMF is “simply doing the US’s bidding” and that it is being “anti-Asian” and “anti-emerging markets”.
IMF officials insist, however, that the new recommendations will be applied even-handedly, and to industrial countries as well as to developing ones. “There are issues about a lot of other countries’ exchange rates such as, for example, the Japanese exchange rate or, for that matter, the US exchange rate,” says Mr Allen.
The Fund is on the final stretch of its strategic reforms adapting to the 21st century but across the street at the equally new, shiny Washington headquarters of the World Bank, a review of a long-term strategy that was set in place in 2001, when James Wolfensohn was bank president, is getting under way with a summary of various subjects due to be discussed at the October meetings.
One question that reflects changing demands in a global economy is what role the bank should play in delivering and co-ordinating global public goods. These are goods that are universally necessary and beneficial but which no country can provide alone. The bank has been doing some work in this area in a haphazard way. For instance, it worked with the UN to limit the spread of Avian flu; and it launched a plan this spring – albeit belatedly, according to many western European governments and most environmental non-governmental organisations (NGOs) – to help developing countries combat climate change by moving towards using ‘clean’ energy and low carbon energy solutions.
Alan Gelb, the World Bank’s director of development policy, told The Banker: “What we need now is a framework for this work. What will be the criteria for World Bank involvement in global goods? Will we charge a fee? What will be the staff implications?”
Another critical change in a more networked world is the proliferation of players involved in aid: private foundations, specialist vertical funds, NGOs, regional banks, the private sector (private capital flows to developing countries amounted to $647bn in 2006), south-south aid and, most recently, the Bank of the South. The Bank of the South’s first tier of shareholders – Venezuela, Brazil, Argentina, Paraguay, Ecuador and Bolivia – have equal votes irrespective of the differences in country size and level of financial contribution. “The question is: what is our comparative advantage and where can we contribute?” in this new international aid architecture, says Mr Gelb.
With its emphasis on “a country-owned” approach to development and on “aid allocation based on results that can be monitored”, the IDA provides “an example to other donors” on aid effectiveness, and “fosters coherence in development assistance – no small thing, given that the number of donors per country has increased from 12 in the 1960s to 33 currently”, he said. However, paradoxically, when reviewing the bank’s work in low-income countries, World Bank officials found that the aid community ignored 35 fragile states – post-conflict or war-torn states, or those frequently associated with weak institutions and governance. Yet those states account for 27% of the 985 million people still living in extreme poverty, according to the bank. The challenge, according to the bank’s review, is how the bank can stay engaged with those countries, even though they have high levels of corruption or other governance problems (see table, below).
One example is provided by what the bank did in Ethiopia, a country with serious human rights issues. Sangay Pradhan, director of the bank’s public sector governance, told The Banker: “We provided education, health, water and agricultural services to the poor by funnelling aid to local governments and making local NGOs responsible for oversight.”
Fundraising challenge
The most immediate challenge that the bank’s new president faces, however, is raising almost $40bn in funds to finance the IDA’s concessional lending to the world’s poorest countries from 2008 to 2011, which are critical years for the achievement of the UN’s 2015 Millennium Development Goals.
“One of the strengths Mr Zoellick brings is a long-standing experience with the US Congress [he served in three Republican administrations],” says Mr Adams. “He has also worked with the Europeans and, by reputation, pretty constructively.” For instance, he worked as a top aide to US secretary of state James Baker, helping to negotiate Germany’s reunification after the fall of the Berlin Wall. “So that’s an advantage.”
However, during a visit to Tokyo in August, Mr Zoellick admitted to journalists that the bank had “an uphill task” persuading donor countries to meet the IDA’s fundraising target (which ends in December) due to factors that range from budget constraints to a weak dollar and yen, and opposition from taxpayers. Critics of the bank blame the latter, in part, on the damaging upheavals during Mr Wolfowitz’s tenure.
The current round of IDA fundraising is also harder than usual because of a March 2006 agreement on an aid package by the World Bank and the IMF for the Multilateral Debt Relief Initiative, which included cancelling $37bn in IDA debt with some of the world’s poorest countries over a period of 40 years. Consequently, in the current IDA round, donors are obliged to include “a dollar-for-dollar replenishment of lost credit” over four decades to ensure that the cost of debt forgiveness does not undermine the IDA’s integrity or its ability to provide further financing.
Despite the changed environment, the World Bank considers it important to continue providing long-term finance, and technical support and advice, to middle-income and emerging economies, including to countries such as China ($1.6bn in loans in 2007) and India ($3.8bn in loans in 2007) that now have billions of dollars in foreign reserves and regular access to private capital. In the process, the bank hopes to develop partnerships, to encourage these countries to help in the delivery of global and regional public goods (such as halting climate change), and to improve the co-ordination of aid work and aid policies in third-world countries – for instance, with China in Africa.
Bank officials acknowledge that there is a need to improve the responsiveness of the institution to middle-income countries and to tailor support to specific country conditions. For instance, the World Bank has started unbundling its loans and technical support, and it now offers countries technical support on its own, for a fee.
Irrelevancy in Latin America
However, for all the adjustments, World Bank lending in Latin America has been flat since 2001, although it still amounted to $5.9bn in 2006 out of total World Bank lending that year of $14.1bn.
Development experts and NGOs, such as the Washington-based Bank Information Centre, which monitors the bank, blame the “growing irrelevancy” of the World Bank in Latin America on the bank’s insistence on private sector development at a time when many governments in the region are not particularly interested in it; and also on the lengthy time it takes to approve infrastructure loans, due to complicated environmental and social safeguards.
The World Bank, nevertheless, has had more success than the IMF recently in renewing its lending in emerging economies, such as Argentina ($1bn in loans in 2007) and Indonesia, which went through massive financial and economic meltdowns in 2001 and 1998 respectively. Both countries still have their doors closed to the IMF. And both (along with many other Asian and Latin American nations) have been building up huge foreign reserves so that they may not have to borrow from the IMF again. This could be interpreted as a reaction to the tough and, some say, wrongheaded economic policy demands attached to the Fund’s bail-outs to Indonesia and other Asian nations when they were in a crisis in the late 1990s; and the Fund’s sudden decision to reverse its policies in Argentina in December 2001 and seal the loan pipeline.
Simultaneously, a total of 35 countries, including Asian tigers, several Latin American nations, Russia and six African countries, have paid down all their debts to the IMF between June 2003 and June 2007.
Mr Allen says that the world has been awash with liquidity and countries have not had balance of payments problems, so there has been little demand for IMF resources. “Even low-income countries [have not had] problems with their financing. That’s a positive thing,” he says.
Revenue reforms
However, during the past few years’ decline in international financial and monetary crises, the IMF’s loan portfolio collapsed to $14.7bn at end-December 2006 compared with $86bn at end-December 2004; and along with it, the IMF’s traditional way of mainly paying for its costs with the margins on its loans went by the board. Consequently, as part of its mid-term strategy, the IMF has started to consider ways of reforming its revenue arrangements, to put them on a more sustainable footing. A committee chaired by Andrew Crockett, president of JPMorgan Chase, has made various suggestions.
Mr Allen does not believe that the worldwide situation of high liquidity will last, however. “I think we have been in a very unusual situation in the world as far as liquidity is concerned. But I don’t see in any sense that the purposes for which the Fund was set up [oversight of the macroeconomic policy nexus of exchange rates, fiscal and monetary policies, and financial systems] have disappeared. I think a lot of countries will have used the benign situation well, but not all of them, and that the situation might change.”
