Not only are there moves afoot to review the regional imbalances in the IMF’s and World Bank’s funding programmes but also calls to review the way the institutions’ leaders are chosen.
Recent changes in the leadership at the IMF and the World Bank have revived the debate on change at the institutions and on what they need to do to adapt to the challenges of a global economy in the 21st century. Take the proposal (supported by many of the two institutions’ 184 country members) to make the selection of the leaders more transparent and change the time-weary tradition, since the institutions’ founding in 1944, to have the US choose the head of the World Bank and Europeans select the head of the IMF.
Raghuram Rajan, the IMF’s chief economist – the first from a developing country and the youngest ever to hold the post – told The Banker that the independence of key personnel at the fund, including the managing director and his own economic counsellor job, is important. “It is very important [for these key personnel], in a situation where we believe what we are saying is right, that we must resist pressures and be able to speak our mind. That gives us (and the IMF) some credibility,” he says.
Limited independence
But Mr Rajan – co-author of the independent-sounding book Saving Capitalism from the Capitalists when he was professor at Chicago University – adds: “You have to remember that the managing director and the deputy managing directors [of the IMF] have to [also] in a sense be able to carry the large shareholders [the US and the Europeans] with them. They can’t be at war with the large shareholders.”
In this respect, when Rodrigo Rato was selected to be the fund’s managing director in mid-2004, he was amply qualified. He was Spain’s economy minister and a member of the conservative, pro-US government of José Maria Aznar, which supported the Iraq war. His appointment indicated a certain flexibility, says Mr Rajan, because Mr Rato is not a native of Italy, France, Germany or the UK, the big four European countries.
By contrast, when Paul Wolfowitz was appointed president of the World Bank just over a year ago, the institution’s credibility was on the line. Not only did Mr Wolfowitz have no evident qualifications for the job (he had no background in economics or development), but also his appointment was very divisive in view of the bank’s varied country membership and his role, as US deputy secretary of defence, as the architect of the Iraq war.
Transparency worries
Furthermore, shortly after becoming the bank’s president, Mr Wolfowitz appointed several similar-minded conservative officials with close connections to the US Republican Party to be his immediate advisers and to key positions in the institution, which resulted in the bank’s 24-member executive board and its 10,000-member staff expressing concerns about the transparency of the appointments.
However, Carl Jackson, one of the advisers (on the bank’s strategic direction and policy), says he thinks too much has been made of the appointments. His career crossed with Mr Wolfowitz’s in the 1980s, when they both worked for the Ronald Reagan administration and then again in 1993, when Mr Jackson became a professor at Johns Hopkins University while Mr Wolfowitz was dean. “I think it’s natural when anyone comes into a large organisation that they bring a small number of people they have known before,” says Mr Jackson.
He says that the World Bank is not only the largest organisation that he has ever worked for but also the most complex. “This makes the Pentagon look easy to understand,” he says.
James Adams, who has been a bank official for many years and is now a senior vice-president, says that during Mr Wolfowitz’s tenure, there have been two “subtle but important changes”. First, “there’s been a scaling-up of the [bank’s] governance and anti-corruption agenda. Mr Wolfowitz wants to see it driven much more consistently across country programmes,” he says. And second, the World Bank’s new president has been emphasising the links between economic growth, infrastructure investment and the importance of the private sector in poverty reduction, he says. “He’s been more comfortable talking about that hard side of the envelope.”
Such assertions notwithstanding, critics say that Mr Wolfowitz has yet to establish a clear course in his tenure.
Clear leadership
“He has not only pushed it [the agenda] to a clear product [the managing director’s report on the fund’s medium-term strategy, issued in September 2005], he has also been very effective in persuading the board and the [country] membership that this is precisely the right agenda for the institution,” Mr Allen says, in an interview with The Banker.
A key priority in the review is the “surveillance” (oversight) of members’ economic policies and financial market risks, where Mr Rato has made two innovations. First, he has introduced a programme of multilateral consultations, in which the IMF and small ad hoc groups of countries look at the way problems in the world’s most important countries, such as China and the US, affect each other and the world’s financial system.
“Yes, there are other clubs – the G8, the G20, the Organisation for Economic Co-operation and Development – that can do some of the same work we do,” says Mr Rajan. “But the IMF includes large and small countries. It includes emerging countries and the poor and the developed. So, in a sense, it is in the best position to undertake this [type of] surveillance.”
Second, Mr Rato is ratcheting up the scope and the quality of the IMF’s financial sector surveillance. This is being done at two levels: at the level of individual member countries, where financial sector surveillance has been uneven, according to Mr Rajan; and at the level of cross-border and multilateral surveillance, where much more work is needed than when the fund was created, because of greater trade and financial market integration, the existence of mainly floating exchange rates in the world, apart from Asia, and far bigger private capital flows. (For instance, net private capital flows to developing countries in 2005 amounted to $491bn.)
A major training programme is under way at the IMF to change the structural mix of the fund’s 2700 traditionally macroeconomist staff, so that in future there will be more people with both a macroeconomist (or generalist) expertise and a specialist, or financial, or banking sector, expertise.
A new department has been launched, the result of a merger between the fund’s international capital markets department and its monetary and financial systems department. It will look at both members’ financial sectors and capital markets and be one of the biggest departments at the institution. Jaime Caruana, the former governor of the Bank of Spain, has been named as its head.
More surveillance
Mr Allen, whose staff also contributed to the fund’s strategic review, says that the need to scale up financial sector surveillance “goes back to the [financial] crises of the 1990s, starting with the Mexican crisis, then the Asian crises”. He says: “There was a lack of a [relevant] knowledge base [at the fund]. We were looking under the lamp-post, when in fact the key was somewhere else.”
Partly as a result, and in what could be interpreted as a reaction to the tough conditions attached to the fund’s assistance during their countries’ crises, Asian nations have since been building up huge foreign exchange reserves so that they may not have to borrow from the fund again.
The World Bank, unlike the IMF, has reversed a decline in loans to middle-income countries recently, mainly because of a decision to renew its long-term lending to governments, for large-scale, export-oriented, infrastructure and energy projects – for instance for hydroelectric dams, oil and gas pipelines and, most recently, ‘clean’ coal technologies. The action followed pressure from major clients, such as China and India, and came after private investment in infrastructure in emerging economies failed to materialise to the extent expected. Private sector infrastructure investment in developing countries, which amounted to $128bn in 1997, fell to $58bn in 2002.
Environmental critics
However, environmental advocates at campaign groups such as Friends of the Earth, International Rivers Network, Environmental Defense and Bank Information Centre are deeply critical of the bank’s reorientation. They say that it should invest much more in environmentally benign, small-scale, decentralised infrastructure and energy projects, such as small-scale hydro and solar systems, wells and piped water systems, which directly benefit the poor, especially in rural areas.
Against this background, another major challenge facing the fund and the bank is the matter of how much quotas at the IMF and the votes of both boards – which were first established after World War Two – need to change to be representative of their shareholders. Mr Rato, taking the initiative, highlighted the importance of good governance in the institutions in his strategic review and singled out two regions where imbalances in representation need to be addressed.
One of those regions is Africa, which has the greatest poverty in the world, where 45% of the fund’s operations and much of the bank’s anti-poverty work are focused, but where 47 countries now have just two directors (and hence two votes) on both institutions’ boards.
The other region with major imbalances is Asia, where several large and medium-sized emerging economies, such as China, India and South Korea, are under-represented and low quotas have not kept track of their unprecedented economic growth in the past 15 years.
Zero sum game
Mr Allen, who describes the quotas and votes issue as “one of the tricky things to get through”, says: “Everyone is looking at it in terms of winners and losers. You have to persuade people that this is not a zero-sum game. The institution serves the entire membership. We all need the institution to be considered legitimate.”
Meanwhile, Mr Wolfowitz – who might have undercut some of the criticism he has faced that he is an agent of the Bush administration at the bank, if he had taken a lead on the issue – has stayed quiet on the matter.
