THIS MONTH’S ANNUAL MEETINGS RAISE AN AWKWARD QUESTION.

Finance ministers and central bankers flew into Washington DC in October 2010 for the annual meetings of the International Monetary Fund and the World Bank. It’s not clear why they even bothered.

Behind the doors on 19th Street, they almost certainly got bogged down in an endless list of housekeeping items: Which countries should get more board seats? Which European country should give up its seat on the board to make way for which emerging economic power? Who — the Americans or the Europeans — will balk first at the idea of appointing someone other than an American or European to head the institutions? The deepest question they might address: Should countries’ contributions to the two institutions reflect the size of their populations or the relative value of their currencies?

The same questions come up every year, and remain unanswered. Behind them all looms a bigger question for the global system: What happens when a multilateral institution can’t cope with truly important questions, and yet refuses to die?

For a while, the global economic crises of 2008 and 2009 seemed to rejuvenate the IMF and the World Bank. Governments around the world poured money back into both institutions and thrust them into the spotlight to help fix the global financial system. But the higher profile also put their dysfunction on a pedestal. Neither seems able to make even the smallest reforms that would keep pace with the world’s changing economic realities. That leaves policymakers looking for places to cooperate. Why try to work through the IMF/World Bank – where Belgium, Denmark, and the Netherlands still hold three of only 24 Executive Board seats- when you can talk with truly important economic players at the G20 and elsewhere?

Two weeks after the IMF/World Bank Annual Meetings, many of the same finance ministers and central bankers will meet again in the coastal town of Gyeongju in South Korea for a G20 finance ministers meeting. There, they’ll start talking about real business: how to ignite a world economy recovery, how to promote employment, how to reduce poverty and country debt, how to strengthen financial regulation, and how to stem capital volatility. The Belgians, the Dutch, and the Danes won’t be there. But Turkey, Indonesia, and South Africa will.

If policymakers bypass the IMF and World Bank, what is the future of International Financial Institutions altogether? The truth is, international organizations rarely die. International relations theory would tell us that international organizations are so expensive to set up that ineffective organizations remain alive. After all, NATO survived the end of the Cold War, lay dormant for a decade, and is now undertaking one of the largest foreign military campaigns of its organizational history.  So if the IMF and World Bank are not going anywhere, their staffs on 19th Street in Washington will likely become the G20s’ number-crunchers. And if they ever wonder how they lost their economic heft, they might ask the Belgians, the Dutch and the Danes.....

By Bessma Momani
Associate Professor
University of Waterloo

 

RELATED MATERIAL FOR THE WEEK OF OCTOBER 4

BACKGROUND

International Financial Institutions (IFIs) are financial institutions with full legal charters and country membership and are subject to international law. The most widely recognized IFIs are the organizations, which were created at the 1944 Bretton Woods Conference, including the International Monetary Fund (IMF), the General Agreements on Tariff and Trade – which in the 1990s morphed into the World Trade Organization (WTO) – and the International Bank for Reconstruction and Development, better known today as the World Bank. There are however a wide diversity of other IFIs, including regional development banks and bilateral development banks.  And now less formal institutions have emerged into the global spotlight with the recent global financial crisis, including the Financial Stability Board (formerly the Financial Stability Forum) and the Basel Committee for Banking Supervision (BCBS).

IFIs have featured prominently recently in global discussions on international economic development, particularly in light of the recent global financial crisis and its negative repercussions on development financing. Development banks, including the World Bank and regional ones, have been called upon by the G20 to fill the widening gap between state-based official development assistance (ODA) and private-sector investment, and to minimize private sector risk by guaranteeing longer-term loans. Moreover, the IMF and the WTO have worked to ensure that the free flow of goods and capital between established, emerging market and developing countries unhindered by the risk of protectionism in the face of the global financial crisis.

The IMF assumed several responsibilities and tasks in the Pittsburgh G20 Summit’s Framework for Strong, Sustainable, and Balanced Growth.  Among the IMFs assigned tasks were monitoring state frameworks to ensure that they are globally compatible, assisting Finance Ministers and Central Bankers with mutual assessment strategies, and working with Finance Ministers to devise exit strategies from deficit-spending plans.

IFIs have also attracted the spotlight due to recent, pointed criticism of their representativeness by emerging and developing economies, whose voices in global economic institutions are underrepresented in comparison to their relative economic weight. Though this criticism is hardly new – emerging and developing economies have been criticizing the IFIs’ post-WWII era quota and voice proportions for decades – it reached a crescendo as these economies gained political influence in other organizations, most especially the G20. The most recent G20 communiqué reflected these critiques by calling on the IMF to accelerate the implementation of quota and voice reforms, and by endorsing voice reform measures approved by the World Bank.

RELATED MATERIALS

  • The Center for Global Development’s website on IFIs holds a collection of working papersthat discuss how they can be more responsive to the needs of developing nations.
  • The Carnegie Endowment for International Peace has a websitededicated to analyzing IFIs and the role they play in preserving economic stability. The website features videos, articles, speeches and papers on the topic.
  • Oxfam recently released a short series of blogs on the role of IFIs in the fight against poverty. The first blog of the series can be accessed here.
  • IFI.Choike.orgis a portal that monitors the actions of IFIs in South America.
  • The Bank Information Centre and freedominfo.org have collaborated to create the IFI Transparency Resource, which documents access to information of ten IFIs in an effort to identify best practice and develop a comprehensive vision for transparency reforms.
  • In his featureon the Financial Times’ Economics Forum, Nicholas Stern writes that the global economic crisis as a short-term crisis that calls for long-term reform of existing international structures, including the structure of IFIs.
  • In Structural Adjustment-a Major Cause of Poverty, Anup Shah posits a causal relationship between the policies of IFIs and debt in developing nations.
  • Published by the Centre for International Governance Innovation in Waterloo, The Financial Stability Board: An Effective Fourth Pillar of Global Economic Governance discusses the creation of the FSB and how effective it will be as a so-called “fourth pillar” in the structure of global economic governance alongside other IFIs.
  • The Basel Committee on Banking Supervision is a forum for cooperation on banking supervisory matters, with an objective to enhance understanding of key supervisory issues and improving the quality of global banking supervision.