By Jiang Yong
The Paul Wolfowitz scandal may have suddenly drawn public
attention to the World Bank. But even without the media feeding
frenzy, both the World Bank (WB) and the International Monetary
Fund (IMF) are institutions in need of major attention as they face
the crisis of aging in a world very different from the world they
were created for.
?
The International Monetary Fund and World Bank, both founded more
than 60 years ago, are now struggling to find ways out of a slew of
major problems.
The first is lack of confidence. Since their establishment, the
IMF and World Bank have served largely as political tools of the
United States, following Washington's orders almost to the
letter.
In the 1980s-90s, the US used international institutions such as
the IMF and World Bank to force developing countries, particularly
emerging economies, to further open up till they fit into the
US-centered global capitalist system. The superpower cracked the
whip of so-called "Washington consensus", characterized by
transparency, privatization and liberalization.
Ironically, more than a dozen countries, including Argentina,
Indonesia, some Eastern European nations and former Soviet
republics, found their economies all but destroyed under the
"Washington consensus".
Take Argentina, which the IMF once promoted as a model country.
In 2001, when this model country was again thrown into financial
crisis, a growing number of observers concluded the main culprits
were budgetary squeeze and key resource development projects
advocated by IMF. Budget tightening weakened the government's
ability to maintain infrastructure development, welfare and
education services.
Argentina's financial crisis brought more resentment toward the
IMF from South American nations, which blamed it for economic woes
in the region. The impact of Argentina's financial crisis also
triggered the center-left movement of South American governments.
The "Washington consensus" fell from it pedestal, bringing the
motives and capabilities of IMF and World Bank under widespread
suspicion.
The second problem is the illusive customer. Also known as the
International Bank for Reconstruction and Development, the World
Bank's early mission was to help Western European countries and
Japan rebuild after World War II.
After 1948, the bank turned to providing worldwide economic
assistance. It offered long-term loans to member countries for
capital infusion in production. It also solicited funding for
member nations unable to find private investment to finance their
reconstruction.
Today the World Bank is mainly engaged in helping developing
countries build educational, agricultural and industrial
facilities.
While many poor countries throughout the world look forward to
receiving World Bank help for development plans, the bank tends to
attach certain conditions for low-interest loans, such as adopting
democracy.
The practice made many needy nations feel their sovereignty was
threatened and the functioning of their governments curtailed. More
often than not, they chose to look elsewhere for funding.
The IMF was created to maintain the stability of fixed exchange
rates worldwide. After the collapse of the Bretton Woods system of
international monetary management, it worked hard on its role as
the "ultimate money lender of the world" to help debtor countries
balance their foreign earnings and spending and prevent regional or
even global financial turbulence.
In recent years worldwide economic development has maintained
its strong momentum with annual growth.
The emerging markets that had been the main recipients of
assistance found their economic conditions markedly improved and
their foreign currency reserves accounted for three-fourths of the
world total.
As a result, crises that needed IMF help dropped sharply in
number and so did the number of countries willing to accept the IMF
conditions attached to loans.
The third issue is problematic finance. The World Bank Group,
formed with four other institutions, is a non-profit international
organization. Among the four affiliated institutions, the
International Development Association (IDA) is of most interest to
developing countries, because it provides the poorest countries
(average annual income below US$500) with interest-free loans for
up to 30 years.
The IDA funds come from member nations' donations, but some of
the major donor countries have been reducing their contributions.
The US contribution to IDA, once accounting for 20 percent, has
dropped to 13 percent of the total. Other donor countries followed
suit, putting the IDA's operations under increasing restraint.
Shrinking demand has severely undercut IMF and World Bank
ability to influence global economic policies. As a result their
earnings have dropped drastically, even causing the IMF to fall
into financial difficulties.
The total value of IMF loans plummeted from US$30 billion in
2002-03 to US$4 billion in 2005, the lowest since the 1980s. More
than a dozen debtor nations, including Russia, Brazil and Paraguay,
eager to regain control over their own economic decision-making
process, paid back their debts ahead of schedule in recent years as
their finance improved. As a result, the IMF lost major earnings
from interest.
Meanwhile, the IMF's spending kept mounting due to added
functions such as monitoring international money laundering. It
increased its work force from 1,800 employees in 1990 to the
current 2,700. This caused its budget to double in the past year to
US$980 million.
All these factors have driven the IMF into unprecedented
financial trouble. Next year's deficit is expected to total US$87.5
million and US$280 million the following year, according to its own
estimate.
The fourth problem is organizational. Both the IMF and World
Bank suffer from worsening osteoporosis.
The World Bank, increasingly encumbered by non-government
organizations and creditors, sees large amounts of time and money
wasted as efficiency keeps declining.
It is now spending between US$2-3 million a year just on
preparations for various projects. Because of its rising deficit,
the IMF is under greater pressure to reform than the World
Bank.
But many key member countries have their own agenda for reform.
The United States wants IMF to play a more active role in resolving
world trade imbalances and other problems that threaten the global
economy. Great Britain and Canada have urged IMF to assume the role
of global referee. They want to strengthen IMF supervision of
economic policies and the financial health of industrialized as
well as developing countries.
Asian countries such as Japan hope for a realignment of member
states' voting rights reflecting current economic strength. Some
European countries, worried they might lose voting power, insist on
maintaining the status quo.
IMF economists have called on the institution to provide some
kind of security for developing countries. They want developing
countries facing financial emergencies to obtain IMF loans more
easily if their economic policies meet the organization's
standards.
IMF Managing Director Rodrigo de Rato has gone so far as to find
ways to monitor the US fiscal and trade deficit as well as Europe's
flagging economy. But some analysts have pointed out that the IMF
is not only on the verge of losing its way but also close to
becoming irrelevant.
Pushed by the US, IMF has undertaken the most significant reform
in its 60-year history. It has agreed to give China, the Republic
of Korea and other rising countries more power on deciding loans to
countries in financial distress.
But the IMF continues to face a host of other challenges: how to
overcome its identity crisis and win back the confidence of
developing countries; how to push member countries to make
adjustments in a bid to address the global economic imbalance; how
to assume the role of "the world's ultimate money lender" with an
inadequate cash pool.
Meanwhile, what the IMF has to do immediately is to break free
of its own financial crisis. At the same time, it needs to work out
a set of rules for adjusting voting power according to such
changing factors as economic strength, trade openness and total
value of foreign currency reserve before the IMF itself needs a
mammoth monetary bailout in 2008.
The author is director of the Research Center for Economic
Security at China Institutes of Contemporary International
Relations.
(China Daily via agencies April 17, 2007)
