Cutting the IMF and World Bank Down to Size

CAMBRIDGE: In recent weeks, debates over the future of the International Monetary Fund and the World Bank have grabbed headlines. A US Congressional Commission of experts, on which I served, issued a report, dubbed the Meltzer Report (after the Commission’s Chairman, economist Allan Meltzer), calling for dramatic reforms of both institutions. Then, Trans-Atlantic bickering over the selection of a new IMF Managing Director broke out. The selection process was unpleasant (for example, developing countries had no real say), but in the end, the excellent choice of German Finance official Horst Kohler emerged. As another important factor in the debate, US Treasury Secretary Lawrence Summers issued his own calls for modest World Bank reforms, following proposals that he made earlier for modest IMF reforms.

The real debate is about the scope of the two institutions. During the past 20 years, the IMF and the World Bank played a large role in developing countries and in the postcommunist transition. Rich countries, especially the US, used the IMF and World Bank as instruments of financial diplomacy. Both institutions have been used by the US and Europe to get money to favored countries – Mexico, Russia, or East Asia – in times of crisis. Both the IMF and World Bank have also been empowered to impose strong conditions on the economic programs of countries that turn to it for help.

IMF and World Bank critics, including members of the Meltzer Commission, think that the two institutions are too big, too powerful, and too over-extended. The IMF tries to manage the economic operations of more than 50 countries. In many cases, the IMF imposes its programs for years or even decades, far after an economic emergency ends. It maintains its influence because the US insists that poorer countries should have IMF programs if they are to receive relief on their debt or receive other kinds of financial help from outside the IMF.

The World Bank lends money to dozens of countries in hundreds of programs. Many World Bank’s recipients, ironically, have normal access to private capital markets, so that World Bank lending is a small part of what those countries can borrow from the rest of the world through normal market mechanisms.