Can the IMF and World Bank Rise to Meet New Challenges?
The International Monetary Fund (IMF) and World Bank were launched in 1944 at the Bretton Woods conference as central components of a new multilateral framework for countries to work together to build global prosperity after the devastation of the Second World War. Both institutions have contributed significantly to postwar economic growth and poverty reduction, but there are rising questions about their ability to address challenges posed by the need for more inclusive development to benefit the poorest populations and the existential threat of climate change. These challenges have been amplified by the increasingly fragmented geopolitical environment and a reduced willingness across many countries to go along with the lead of the wealthiest nations. Accordingly, there has been a surge in interest in recent years in major reforms of these two Bretton Woods Institutions and the multilateral system more broadly. But agreeing on what needs to be done and pushing it through will not be easy.
The challenges posed by climate change and global poverty reduction have been amplified by the increasingly fragmented geopolitical environment.
- The IMF and World Bank are central components of an increasingly complex global network of international financial institutions (IFIs) dedicated to collective action to raising global prosperity through commitment to open and stable trade and financial flows and support for development. The Fund and Bank were initially given complementary roles. The Fund was tasked with overseeing a stable international currency system at a time when countries pegged the value of their currencies to the US dollar. It provided short-term financing to countries running into serious balance of payments difficulties. The World Bank was established to help finance postwar reconstruction and to help poor countries (many only recently gaining independence from colonial powers) finance development. Over time, a string of regional development banks (RDBs) were set up to help meet the particular development needs of different parts of the world.
- The work of the institutions has evolved over time to meet their members’ needs. The IMF has played a key firefighting role helping countries overcome major global shocks, including the 1980s debt crisis, the Asia crisis in the late 1990s, the global financial crisis, and the COVID pandemic. During these crises, the IMF provided external funding to governments that had few other options for financial support. The World Bank and the RDBs have provided longer term financing for infrastructure investment (for example, roads, ports and power systems) and also increasingly for sectoral reforms such as in health, education, and agriculture.
- The IMF and the World Bank have also faced criticism about their activities. The IMF’s stabilization programs have been viewed as focusing too much on short-term efforts to stabilize government finances while not taking sufficient account of the costs of government budget cuts on the most vulnerable and of deeper reforms needed to boost longer term growth (one quip is that IMF stands for “It’s Mostly Fiscal”). Some of the World Bank’s infrastructure projects have been seen as supporting “white elephants” whose expenses far exceed their benefits. More generally, civil society has seen the IFIs as overly dominated by their largest wealthy shareholders and lacking in transparency and accountability to ensure that they respond effectively to the needs of poor and vulnerable groups.
- The IMF and the World Bank have responded to these critiques as well as adapting to new challenges. The IMF has given greater attention to financial stability concerns and managing volatile international capital flows. Emphasis has shifted from short-run financing in the face of balance-of-payments crises to longer-term financing to help sustain policy reforms, which is made available on concessional terms for low-income countries as well as non-concessional terms for middle and high income countries. The IMF has also increasingly devoted resources to building national capacity to follow through on policy advice, such as how to build a fair and effective tax system. Its work has evolved from a “one size fits all” approach to one that recognizes the special needs of particular groups of countries like fragile and conflict-affected states or small and remote islands.
- Likewise, the World Bank has shifted its undertakings in response to critiques. From its original mission, of rebuilding war-torn Europe and aiding newly independent countries, the World Bank moved increasingly to working with the world’s poorest countries, providing concessional financing to help the most vulnerable and also looking for ways to catalyze private sector investments. Its focus has shifted from countries like China and India that have been able to grow rapidly to countries that have not enjoyed sustained growth. Increasing attention has been paid to using lending to ensure that policies are sustainable and do more to benefit vulnerable groups like women and children. Both the Fund and the Bank have also ramped up attention to help mitigate and adapt to climate change.
- The Fund, the Bank and the other IFIs have also pushed through governance reforms, aimed at increasing transparency, accountability and the voice of smaller and poorer countries. All the IFIs have created independent evaluation offices to more systematically assess the impact of their policy advice and of their lending (see here for example). The reform process has benefitted from the increased role of the G20 — which brings together the largest rich and middle-income countries — to provide strategic direction. This was particularly the case after the Global Financial Crisis that began in 2008, when a “leaders track” was introduced for the first time to provide the highest-level political impetus to efforts to raise needed funding for multilateral support and to ensure robust attention to financial risks.
- Notwithstanding these efforts, there are increasing concerns about whether the IMF, the World Bank and the multilateral system in general is well-positioned to face the multiple challenges now facing the world economy. Perhaps the biggest challenge is how the IFIs can help address climate change and its attendant economic problems. Collective action to mitigate climate change is falling far short of goals set in the Paris Agreement in 2015. The IFIs are stepping up their lending and policy advice to help countries mitigate emissions and increase resilience to more severe climates, but this journey is just beginning.
- At the same time, progress in meeting the sustainable development goals for 2030 agreed by all UN member states in 2015 is falling short. Billions of people are still facing dire poverty and deprivation, particularly in the poorest countries. This lack of progress fuels political instability, crime and migration pressures that spill across borders, including onto the wealthier countries.
- Compared to the enormous financing needs, concessional financing available through official sources, both multilateral and bilateral, is increasingly limited by tight national budgets. In principle, private capital could help fill the gap but is expensive and sometimes non-transparent, risking a buildup in debt that can lead to debilitating sovereign debt crises. The IFIs thus need to do more to leverage their capital positions both to increase their own lending capacity and to catalyze private investment. The IMF will also need to work with sovereign lenders to find more effective ways to resolve sovereign debt crises involving multiple creditor groups with often conflicting interests.
- The International monetary and financial system faces rising strains from rapid technological innovation. Such innovation offers large potential benefits. But it has also challenged the ability of national supervisors and international oversight bodies to anticipate and mitigate the resulting risks, including both stability risks and risks from illicit flows such as terrorist financing and money laundering. The situation is further complicated by the gradual trend away from a unipolar dollar-based currency system to a more fragmented multipolar system as China’s RMB has played a rising role in international payments.
- Unfortunately, there are obstacles that will make it more difficult for the IMF and the World Bank to address these new challenges. Increasing geopolitical stresses and strategic competition between rich countries and some rapidly growing countries such as China have contributed to fragmentation of trade and financial flows and made consensus on reform initiatives hard to reach. China’s vision of what reforms are needed is quite different from that of Western nations. Russia’s invasion of Ukraine has further rocked the multilateral system and complicated the task of reaching broad consensus. Furthermore, vested interests in preserving the current governance frameworks of the multilateral institutions, which are still dominated by the largest rich economies despite some modest reforms, also weigh against agreement on reforms. Reflecting these factors, the G20 has lost momentum as it has become harder to reach agreement on concrete initiatives and concerns remain on how well it reflects the interest of countries outside its limited perimeter.
- Since the Global Financial Crisis, there have been multiple initiatives to design and implement reforms to strengthen the multilateral system in the face of these challenges. Examples within the past year alone include the Summit for a New Global Financing Pact, and the High-level Advisory Group on Effective Multilateralism, as well as proposals from the United States (here and here) and from independent observers. In broad terms, there is quite a lot of overlap on recommendations for reforms to the IMF and the World Bank: governance reforms to strengthen inclusion, accountability and partnership within and across the multilateral system; initiatives to pay greater attention to education, healthcare and social support, as well as climate resilience; and actions to more effectively leverage official development funds to mobilize private financing.
What this Means:
While worthy efforts to promote grand reforms for the overall system can be applauded, prospects for meaningful success in the short term seem quite bleak in the current environment of geopolitical stress and strategic competition. Perhaps at this juncture the best strategy is to press ahead with pragmatic if more limited reforms that ensure that the Fund, the Bank and other multilateral agencies are nimble, responsive to the needs of the full membership, offer cutting edge expertise in new areas of concern as well as core activities, and work effectively with each other. Progress will require strong strategic leadership, which could benefit from truly selecting the senior leaders of the Bretton Woods institutions on the basis of merit rather than geographic representation and modernizing the G20 by introducing a more representative constituency system for its membership and setting up a secretariat.