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Time for WB, IMF to Manage Their Own Crises
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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)

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