Essay on "Future of IMF/World Bank the World's Two"

Essay 8 pages (2692 words) Sources: 8 Style: Harvard

[EXCERPT] . . . .

Future of IMF/World Bank

The world's two leading international financial institutions, the International Monetary Fund (IMF) and the World Bank arose from the Bretton Woods conference. Bretton Woods was essentially the founding of the modern economic system, and the two financial institutions were created to play essential roles in the stabilization and propagation of the system around the world. The IMF was created with the following set of goals:

"To promote international monetary cooperation; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members." (CFTech, 2004)

The World Bank was created to facilitate economic development. It was owned by governments and its customers were governments. One of the initial mandates was post-war reconstruction, but soon the Bank became focused on its other mandate of development. The bank expanded on this mandate considerably over the next few decades. When the World Bank was created, the United States was the dominant economic power in the world, and therefore it gained significant control over World Bank policy. As the decades progressed, the U.S. has scaled back its financial input into the Bank while retaining control over policy (Kapur et al., 1997). The Bank, however, was not as important to the United States as it was to other stakeholders, and as a consequence the U.S. did not always use the Bank to the benefit of all constituents. The Bank therefore became underutilized because the nation which wielded control over the Bank did not particularly need it. This dilemma characterized the first five decades of the Bank's existence.

As the World Bank has moved towards development issues in search of greater relevance, its relationship with the IMF, and the roles that the two play in international policy, have shifted. The IMF has always stuck to its original mandate. It is an institution focused on hard numbers, economics and trade. The World Bank, by contrast, has moved further into areas of social development, equality, environmental considerations and other soft areas. On the surface, these two objectives are complementary. The IMF appears to operate on the principal the social justice flows from economic development; the World Bank appears to operate on the belief that economic development flows from social justice. Yet, there is significant overlap between the two institutions. The Bank is forced to contribute to the IMF's financial rescue missions; the IMF wants to involve itself in monetary issues that the World Bank is better equipped to deal with (The Economist, 2007).

Present Situation

That the IMF and World Bank step on each other's toes as much as they do given their different mandates and perspectives highlights the need for discussion about the future of the two institutions. First, however, it is important to understand the precise roles each plays in today's economic system.

The IMF has maintained its role as an institution primarily focused on economic issues. This has often come in the form of loans to alleviate financial crises. As developing economies around the world struggle with the growing pains on industrialization, they require IMF loans to stabilize their currencies and their economies. In return for these loans, the IMF subjects these economies to a series of conditions, typically involving a move towards free market principles. However, in recent years the IMF has had fewer such crises to deal with. Countries that have generated repeated crises over the years such as Turkey and Argentina have finally been able to stabilize and repay their IMF loans (Swann, 2006). This has left the IMF in a position of decreasing relevance, and decreasing size.

With increasing deregulation of global trade and the move towards modernization of dozens of formerly undeveloped economies, the IMF is simply running out of potential customers. In light of the original mandate of the IMF, the need for some of those mandates has diminished. Currency exchange is relatively stable, and an increasing amount of currencies are floating freely. The Euro is rising to provide an alternative to the U.S. dollar as the world's reserve currency. A multilateral system of payments is emerging as the private sector begins to take over lending roles formerly performed by the IMF and the World Bank. Trade agreements have proliferated, and now encompass a wide range of emerging economies. This has resulted in unprecedented global trade. It is easy to see why the IMF has seen diminished relevance, as many of its original mandates have been met.

The one mandate that can never truly be met is that of providing funding to members having difficulty with their balance of payments. However, many formerly volatile economies have strengthened and stabilized, which had led to questions regarding the future of the IMF. These questions are compounded when it is considered that having an IMF loan carries a stigma. The conditions attached to such loan are considered harsh so nations only approach the IMF in times of true crisis. This too has limited the number of potential customers for the IMF (Diokno, 2009). The current financial crisis, however, has shown that need for this aspect of the IMF's role has not entirely disappeared.

The World Bank is in a better situation than the IMF. Because of its mandate to assist in development, the World Bank has essentially positioned itself for long-term survival. Middle income countries, with increased access to world financial markets, have only curtailed their use of World Bank development loans slightly (Swann, 2006). Moreover, there remains no shortage of countries in need of development assistance. That said, the World Bank's role in development is decreasing as more countries gain access to global financial markets. The need remains, but as with the IMF there is significant risk of the World Bank shrinking in the coming years.

The Future

The IMF has traditionally derived relevance from its role as a facilitator of economic progress. The loans that it made to countries allowed it the leverage to enact economic change. Over time, the loans and series of progressive legislative changes that came as conditions to those loans have reduced the number of countries required IMF aid. Many of the countries that currently could benefit from such aid do not have the governance structure to meet the aid conditions. However, the ongoing global financial crisis has highlighted the need for the institution of the IMF and afforded world leaders an opportunity to make changes to its role.

As a result of the G20 meeting in April of 2009, the IMF will receive more financing from its donors and has been handed new responsibilities as well. The G20 leaders pledged to increase IMF resources from $250 billion to $750 billion, to issue $250 billion in new Special Drawing Rights and to permit the IMF to borrow in capital markets if necessary (Diokno, 2009).

The G20 meeting not only expanded the financial capabilities in the IMF, but expanded its role as well. The IMF is now expected to play a role as the regulator of the world's financial markets. A significant expansion will be made of the IMF's regulatory powers. In addition, governance influence of the IMF has been expanded to include nations such as China and Russia (Jasper, 2009). The view of this G20 meeting, as expressed by leaders such as the UK's Gordon Brown, is that the new responsibilities reflect a move towards a new world order (Ibid). A Financial Stability Board (FSB) will be established to work with the IMF on providing early warnings of impending crises and developing new rules for the governance of banks. The G20 summit, however, did not go as far as giving the IMF the power to enforce rules across international borders (Raum, 2009).

This new mandate -- as regulator of the global financial system -- marks a significant shift in the role of the IMF. The institution, with demand for its traditional services drying up and subject to widespread dissatisfaction with its performance, seemed in danger of losing all relevance just a few years ago (Fitzpatrick, 2007). The move by the G20 restores a traditional role of the IMF as guardian of the world's financial system. The precise role that the IMF can play in this regard is as yet undetermined. Financial system policy is typically left to individual nation, for better (Canada) or worse (the United States). It appears as though the new role of the IMF will be to police individual nations, and take into consideration the impacts of those nations' action on other nations (Diokno, 2009). This represents an advancement in the governance function of the IMF to a level that the world has not previously experienced. It will take several more years and dozens of more rounds of negotiations to see exactly how this role will manifest, but clearly the… READ MORE

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