The world has changed remarkably since the Bretton Woods institutions were established at the end of the Second World War. Now, with a new president at the World Bank – one associated with the Trump administration – and a pending new face at the IMF, what direction will they take? Silvia Pavoni investigates.

Ice cream

When Eugene Meyer became the World Bank’s first president in June 1946, he may not have expected the job would last only six months. With no guidance from the administration of then US president Harry Truman, he clashed with the existing executive directors over what the bank should become. Failing to define the authority of the institution’s president, he abruptly left, commenting privately, according to the bank’s archives, that it was a fight he could have won, but was too old for. 

About three-quarters of a century later, abrupt departures at both the World Bank and its sister organisation, the International Monetary Fund (IMF), have invited as much reflection as they have criticism over the ability of the Bretton Woods Institutions to lead the world through new global challenges and resurfacing threats.

The then-World Bank president Jim Yong Kim announced his surprise resignation in January 2019, three years before the end of his second term. He later revealed that he was joining private equity fund Global Infrastructure Partners, where he felt he could achieve more to tackle global issues, such as climate change and infrastructure development, than at the 10,000-strong international organisation.

The US nomination to replace him was unchallenged and David Malpass, former US Treasury undersecretary for international affairs, took over in April. In July, Christine Lagarde relinquished her responsibilities as the IMF’s managing director following her nomination as the next president of the European Central Bank, which was recently confirmed. Kristalina Georgieva, the World Bank’s CEO, became Europe’s candidate and the only official nominee to fill the vacancy; confirmation was expected shortly after The Banker went to press.

Threats ahead

How will the institutions fare under new leadership in these increasingly complex geopolitical times? Their largest member, the US, is embarking upon a trade war with the world’s fastest rising economic power, China, which itself has channelled funds towards new and fast-growing multilateral lending institutes the Asian Infrastructure Investment Bank and the New Development Bank, which some view as Beijing’s safety nets if it feels its voice is not adequately heard at the established forums.

Furthermore, under the presidency of Donald Trump, the US is disputing the reality of climate change, an area in which both the World Bank and the IMF have been dedicating copious products and policy action. There is also a looming global economic downturn, which countries around the world will likely struggle to contain as monetary and fiscal measures have already been exhausted.

Arguably most threatening of all is the rise of protectionism and nationalism – the very practices that the Bretton Woods Institutions were created to suppress – which risk politicising decisions within the multilateral system.

The Malpass effect

“In today’s environment of nationalism you are more likely to see attempts by the Trump administration and various national governments in Europe to try to extract something at every step,” says Adam Posen, president of the Peterson Institute for International Economics (PIIE). 

Even before Mr Malpass took over at the World Bank, certain subjects are believed to have become more sensitive, in line with the US administration’s position on them. One World Bank insider notes a request to replace the term ‘climate change’ with ‘extreme weather events’ in a report earlier in 2019, before Mr Malpass took over – which, he concluded, must have been second-guessing the views of the new boss.

Another inside source recounts a very senior manager at the World Bank’s private sector arm, the International Finance Corporation (IFC), giving a not particularly subtle warning to a group of staff about the difficulties of working with China because of the current geopolitical climate. Shortly after Mr Malpass joined the bank, another person was caught up in the confusion of whether a climate-related project should proceed because of the sensitivity around publicly engaging and providing solutions to an issue disputed by the Trump administration.

An IFC insider says: “These institutions [the IMF and World Bank] are minority owned by the US government, and are physically located in the US, so one could expect that the management of the relationship with this shareholder has to be done very carefully.”

Green commitment

Since his appointment, Mr Malpass has kept a low profile. Indeed, the World Bank declined The Banker’s request to interview him. But since his first official speech at the World Bank and IMF Spring Meetings in April 2019, to his talk at the PIIE in mid-September, Mr Malpass has maintained a restrained line on both China and climate change.

The World Bank Group has already raised more than $13bn through almost 150 green bonds, according to a March report marking the organisation’s decade-long presence in this market. Four years ago, it pledged that climate financing would rise from 21% to 28% of the total by 2020. Backtracking from such commitments would cause upheaval, say experts, and no one is expecting the World Bank to do so in any significant way.

But other types of changes may unsettle the organisation. A person familiar with Mr Malpass’s work at the US Treasury says he “has had a remarkably facile view that the international financial institutions focus on the wrong thing and [that] they really should focus on private sector growth”. 

The World Bank Group’s tool kit might be adapted accordingly, with less intervention in certain areas. Some say this is already happening.

Private sector focus

“In very recent years, leveraging the private sector has very much been the zeitgeist [of] the development agenda,” says Scott Morris, senior fellow at think-tank the Centre for Global Development, and director of its US development policy initiative.

He says there “has been too much hype around what a private sector agenda can do, particularly in areas that we understand through basic economics to be public goods, [such as] physical infrastructure”. Mr Morris adds: “I’m quite sceptical [about] the idea that simply because there is a lot of private capital sloshing around in the world, somehow that is going to be neatly deployed to address a lot of these pressing needs [including climate change].”

Although not the only solution, development banks’ work with private sector companies is meant to attract private sector capital. Their crowd-in potential, particularly in capital markets, is something that organisations such as the IFC have long promoted. Just how this should be achieved, however, may be under reconsideration.

The IFC’s long-term finance is a mix of loans, guarantees, client risk management and equity investments. In the 2019 fiscal year, which ends on June 30, long-term finance and core mobilisation activities, which include specific investment funds and public-private partnerships, totalled more than $19bn. Another IFC insider says direct equity investments and equity managed by the IFC Asset Management Company represents 30% of the IFC’s total activity, and that it has been an important source of revenue.

According to the second IFC insider, as well as a former IFC official, this may be about to change, as they believe management wants to shrink equity investments because of a conviction that these investments would ultimately crowd out the private sector and end up being too risky for the organisation. “[IFC CEO Philippe] Le Houréou thinks that by doing equity investments the IFC is crowding out the private sector,” says the former official. He adds that he believes the IFC equity strategy will be to only do “successful” equity investments, saying: “[This] shows a fundamental lack of understanding of how [equity] works, and what it does.” 

In terms of evaluating the success of an equity investment, the first official adds that the IFC’s historical internal rate of return (IRR) for such investments has been 13%, and “you can’t compare it with a private equity firm’s 20% IRR”. 

The IFC failed to arrange an interview with Mr Le Houérou, and in response to requests for comment on its equity investment policy stated that “profitable, well-structured equity investments are paramount to IFC’s long-term financial sustainability” and that “while recent commitment levels have been lower than historic averages, we remain committed to equity and efforts to ramp up our pipeline”.

A question of legitimacy

If potential internal change is unsettling some, a lack of change elsewhere is causing a degree of consternation. The unwritten agreement in which an American would lead the World Bank and a European the IMF stands, despite widespread recognition that the practice erodes the legitimacy of the organisations, according to Michael Shifter, president of think-tank the Inter-American Dialogue and adjunct professor of Latin American studies at Georgetown University’s School of Foreign Service. 

“[It] is woefully outdated,” adds Mark Sobel, US chairman at the Official Monetary and Financial Institutions Forum and US representative to the IMF between 2015 and early 2018. “I don’t think it provides great benefits to Europe or the US. It should be abolished.”

Commentators agree that other parts of the world also have a responsibility to ensure this happens and the latest leadership contest was poorly attended by emerging markets. (The surprise and speed at which candidates had to be fielded did not help. Arguably, the most forceful fight was put up at the time of Ms Lagarde’s appointment in 2011, when then-governor of Mexico’s central bank, Agustín Carstens, entered the race. An internationally respected economist, Mr Carstens now heads the Bank of International Settlements.)

Mr Sobel says: “I thought [Indonesian finance minister] Sri Mulyani [Indrawati] would have been fantastic for the World Bank. If [emerging markets] are not prepared to put up a fight, whether they win or lose, I don’t think that you can expect the US and the Europeans to hand it over.”

Experienced choice

IMF acting managing director David Lipton accepts criticism of this duopoly up to a point. Things are naturally evolving, he says, and Europe’s choice, Ms Georgieva, a Bulgarian national, is not only from an emerging market, “[she] is someone whose entire career has been spent in emerging markets and developing countries. She knows them and they view her very sympathetically. So in that sense, the world is already changing,” he says, adding that Ms Georgieva “has a breadth of experience across a broader range of countries than any previous managing director at the point at which they began their term”.

Mr Posen agrees. “Ms Georgieva is genuinely from an emerging market, [she] has seen what non-market approaches were like, and grew up under that – and knows what international organisations, including the IMF and the World Bank and the EU, mean to a developing country,” he says. “Despite the problems we all agree on the cross-selection process, I think that it does matter to have a genuine former eastern European official at the head of the fund.”

Ms Georgieva also has an excellent track record at the World Bank. “She’s not charismatic like Ms Lagarde but is a very effective manager; she has laser focus,” says one World Bank official. “You may not agree with the thinking behind her decisions but you know she’ll deliver. She’s respected because when she commits to something, it will get done.” He also notes her political skills and ability to form the right alliances, saying: “It’s that former-Soviet style mentality.” 

A former World Bank Group official, however, wonders whether Ms Georgieva is a natural fit for the high-profile IMF role, which demands skills beyond competent management abilities. “She’s a solid bureaucrat, but can she lead?” he says. “Managers ask for permission, leaders ask for forgiveness – is she more likely to seek permission or forgiveness? And from whom will she ask permission?”

Then and now

What the IMF and World Bank stand for now is different from what they set out to achieve 75 years ago. The institutions were conceived over three weeks between July 1 and July 22, 1944, when 44 countries formulated the articles of agreements for their creation during the International Monetary and Financial Conference held in Bretton Woods, New Hampshire, in the north-east US.

They came to life at the end of the following year, when those articles of agreements were signed by 29 governments, representing 80% of the original quotas. The first IMF managing director was Camille Gutt, a Belgian, who served for a five-year term. At the World Bank, Mr Meyer was followed by John Jay McCloy, who developed the president role further but left after only two years. Terms served at the bank have since lengthened.

The Bretton Woods Institutions were fuelled by the principles of international co-operation. Their ultimate goal was to avoid repeating the horrors of the Second World War, which ended the year after their creation, and the economic disasters of the Great Depression of the 1930s. The IMF would focus on the stability of the monetary system, supporting trade and economic growth; while the World Bank was initially dedicated to helping rebuild war-torn Europe. 

Seventy-five years later, they have to deal with new nationalistic threats while their role in the modern world is challenged. Much of their success will depend upon where their future leadership will take them; whether they’ll prefer a traditional ‘vanilla’ suite of tools to tackle new problems (as one development finance professional put it), or whether they will promptly and aptly adapt to new global threats.

Many agree that the IMF challenges are far greater. Ranging from its ability to anticipate and respond to crises, to provide guidance through new, key issues, from climate change to financial technology, its most immediate headache might come from an old, recurring problem. 

IMF issues

A year after the IMF launched its largest ever rescue package in late 2018 for Argentina – reaching a total of $57bn, of which $44bn has already been disbursed – the Latin American country once again faces the prospect of default. President Mauricio Macri, who secured the IMF deal, looks likely to be replaced by his Perónist opponent Alberto Fernández, whose party has had a fraught relationship with its Washington-based rescuer.

Argentina’s unresolved issues have generated new waves of criticism at the way the IMF manages its interventions. Not everyone agrees with the general disapproval, however.

“I’ve been a bit unhappy with some of the negative commentary that I see in the press, because I don’t think that some of the commentators have adequately put themselves in the shoes of the IMF in the middle of 2018 and the decisions that it had to make on the spot,” says Mr Sobel. “The IMF is the first responder when a country is in crisis. [It] is the one that has the deep pockets and has the ability to put together a macroeconomic adjustment programme. The World Bank doesn’t do that, the Inter-American Development Bank doesn’t do that, the African Development Bank doesn’t do that – it’s just the IMF.”

The IMF’s Mr Lipton adds: “Argentina’s hardship would have been far worse without the $44bn from the IMF. I think it makes sense, always, to self-evaluate and criticise but I think it’s important also to understand how much more difficult this situation would have been had Argentina not had the programme.”

Fundamentals persist

On a different scale, there are some concerns bubbling under the World Bank Group’s new focus on certain countries. The bank secured shareholder approval on $13bn of paid-in capital in 2018, $5.5bn of which is reserved for the IFC on the condition that it should spike its investments in low-income, fragile and conflict-affected countries, something that challenges the organisation’s ability to efficiently deliver small, riskier projects, according to experts.  

There are also wider, global concerns – climate change above all – for which a closer relationship between multilaterals could help. Despite sitting next to each other just off Pennsylvania Avenue in Washington, coordination has not necessarily been an obvious course of action for the World Bank and the IMF, not least because they were born to accomplish distinct goals. Their relationship might now need to evolve.

“A really important issue is coordination between the World Bank and the IMF, in particular on climate change, but also on the issues of [international] taxation and capital flows,” says the PIIE’s Mr Posen. “There, their responses are going to have to overlap. And they’re in a position where they really should provide leadership to the rest of the world, [particularly] since the US seems to be deadlocked.” 

Many wonder where national politics might hijack multilateral pacts, and if the organisations built on those pacts have enough gravitas and independent authority to lead the world to a safer, more prosperous space. “We’re at a crossroads: [do] we want these organisations as [a means to engage in] competition or as safe spaces?” asks Masood Ahmed, president of the Centre for Global Development. “Remember that during the Cold War, one of the things that worked well was the Universal Postal Union because we realised that we all needed it to work well.”

There may be a need for extra layers of expertise and sensible thinking to confront today’s global threats – but the fundamental principles that led the world’s countries to co-operate still stand. 


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