By: Sakib Sherani
THE world appears to be engulfed by the politics — and economics — of anger. Much of the ire stems from the ‘fallout’ of globalisation — freer trade and large-scale migration of people — and is concentrated in the advanced economies. Results from a 2014 survey by Pew Research Centre are illustrative. Fifty per cent of respondents in the US believed trade destroys jobs; 59pc of Italians and 49pc of the French held the same view, compared with a global median of 19pc.
With the world in flux, and the tectonic plates of multilateralism holding the world order in its place since the Second World War shifting so dramatically, one would expect the IMF and World Bank to be spending more intellectual capital on analysing the historic undercurrents. And yet, at the annual meeting(s) of the IMF and World Bank which concluded last week, the emergent threat to the Western-crafted multilateralism put in place since the Second World War only came up as a sub-text to the main theme of how to revive global growth and generate jobs.
While only one session was explicitly devoted to a shifting world order and its associated uncertainties, tucked away on the last day of the programme, the undercurrent of inherent global unease and instability was unmistakable. A near-unipolar world with its constructed global financial, economic and political architecture that has held sway for 72 years, is facing the threat of being deconstructed and replaced with multipolar geopolitical challengers and, potentially, a parallel international economic system.
The global economic system needs reform.
Given the changes under way in the global economic system, how relevant are the IMF and World Bank in the emerging scheme of things, and for how long will they continue to remain so? There is little doubt that given the size of their balance sheet, their near-universal shareholding and global buy-in to their mission, and the depth of their collective knowledge and expertise garnered from decades of experience in virtually all parts of the world, it is unlikely that any set of parallel global or regional financial institutions — such as China’s newly created Asian Infrastructure Investment Bank, will be able to fully replace the two Bretton Woods Institutions (BWIs) in the immediate future.
However, irrespective of the seismic global changes under way in the international economic order, the IMF and the World Bank have, for a long time, been in need of an overhaul and fundamental reform to better deliver on their founding promise: stability in the global financial and monetary system, and a world free of poverty.
Decades of experience of poor developing countries, and through numerous large-scale crises such as the debt crisis in Latin America in the 1980s and the East Asian crisis in the 1990s, have time and again revealed the shortcomings in approach and advice of the IMF and World Bank. The peddling of a rigid neo-liberal orthodoxy, unnecessary and excessive conditionality, undermining national sovereignty of borrowing countries, marginalising the poor, non-engagement with civil society, premature liberalisation of the financial system or capital account etc. are some of the graver charges that have been laid at the door of the two BWIs.
Perhaps the single allegation that has most undermined the credibility of the two institutions is that they have acted, on many occasions in the past, in concert with US foreign policy — in effect, as a veritable instrument or extension of US policy objectives. Evidence for this charge comes from two eminent sources: the Meltzer Commission report of 2000, commissioned by the US Congress, and the IMF Independent Evaluation Office’s first report released in 2001 (which found Pakistan’s programmes to be ‘geo-political’ in nature).
To their credit, both the IMF and the World Bank have responded to these criticisms over a period of time with far-reaching reform. In the wake of the East Asian crisis, the IMF began mandating minimum public expenditure under social safety nets as part of conditionality (largely under Dominique Strauss-Kahn’s leadership). Perhaps most fundamentally, the Fund sought to become more open and representative by aligning its archaic governance structure more closely with the changing share of developing countries in the world economy. Hence, China, India, Brazil and a handful of other large developing economies from the G-20 now have significantly higher voting rights than in the past.
Another welcome change that has been effected over the past few years is a deeper engagement by both the institutions with civil society. At the annual as well as spring meetings, civil society from around the world is represented, both in the form of civil society organisations as well as media and observers. The World Bank conducts a civil society policy forum during the meetings and arranges interface of senior management of both IMF as well as the Bank with representatives from civil society. This interface is usually replicated at the country office or mission level.
Both the institutions have responded, albeit slowly, to ‘newer’ challenges facing the world economy: governance, corruption, and above all, climate change. However welcome these reforms have been, there is much that is being missed and much more that needs to be done. Engagement with civil society needs to be broader and deeper and a more formalised structure to achieve this enacted. The duopoly of the US and Europe on the leadership of the IMF and World Bank needs to be dispensed with, with developing countries getting a shot at the top slots.
More resources need to be devoted to analysing and responding to the ‘non-traditional’ areas of work. Design of Fund programmes needs to improve with a greater emphasis on institutional reform features. IMF programmes need to be underpinned by more rigorous — and mandatory — ‘burden of adjustment’ studies that better model the distributional effects of conditionality, especially on the middle class. Finally, the incentives framework under which staff and management of the two institutions operate, which is currently less than optimally designed, needs to be evaluated and remodelled.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, October 14th, 2016