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The World Bank and IMF Need Reform

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“The international financial institutions created at the Bretton Woods conference in 1944 are showing their age,” lamented CAP Senior Fellow Daniel Tarullo, testifying last week before the Senate Banking Committee on the state of the World Bank and the International Monetary Fund.

Inefficiency and corruption now plague the IMF and World Bank, and many experts are therefore calling for substantial reform, reduction, or even elimination of the institutions. Tarullo, however, explained that greater openness and accountability can keep both the IMF and World Bank relevant and even useful.

According to Tarullo, we should begin by reevaluating the institutions’ 21st-century role. The economic landscape is very different than it was in 1944. Capital flows in amounts and at a pace that is staggeringly greater than during the mid-20th century, the number of member countries in both the IMF and the World Bank has quadrupled to 185, and the world’s economic weight is shifting toward Asia.

These changes and more have substantially changed the international financial system, but the Bretton Woods institutions have not kept up the pace, argued Tarullo. To keep up, they have fundamentally changed their prerogatives. The Bank went from its initial goal of post-WWII reconstruction to third-world development, and the IMF transitioned from exchange rate supervision to financial crisis management. Even with those changes, the institutions remain flawed. Shoddy management, corrupt governance, and minimal accountability have sapped the institutions’ credibility and effectiveness.

Each witness saw these problems—and more—but they also agreed that reform is possible. Tarullo pointed out that without the Bretton Woods institutions there is a great chance that regionalism would grow, especially in Asia. This regionalism would detract from the global economy and reduce America’s economic potential and influence around the globe. The United States should lead the call for substantial reform rather than allow these multinational bodies to disintegrate, he argued.

Tarullo’s submitted testimony outlined distinct reform agendas for each institution, each with the same overall theme: increased oversight.

World Bank

  • Change the size, mix, and incentives of the Bank’s staff. Reduce the staff size, emphasize practical skills of the experts, and incentivize effectiveness of loans rather than loan size.
  • Increase oversight and evaluation tools. Incorporate more performance and outcome measures into projects at the design stage, set up independent reviewing bodies, and reward practical results (i.e. number of people a project helped).
  • Shift priorities for Bank governance. Transfer day-to-day decision-making authority to managerial staff and allow the Board of Directors to focus on oversight and strategic direction.

International Monetary Fund

  • Toughen exchange rate surveillance policy. Modernize standards and penalize countries with policies that negatively effect international financial stability.
  • Create a multinational surveillance process. Engage in G-7-like processes with actual enforcement capability to complement bilateral surveillance.
  • Reallocate quotas. Raises quotas—maximum financial commitment and voting power—for fast-growing emerging market countries.
  • Create a new selection process for managing director. Increase openness and deliberation in the selection process.
  • Link reform to additional funding.

Tarullo’s points all came with a disclaimer that progress is not guaranteed. These institutions have shoddy records for reform, so pressure and hard work are necessary. He called on the federal government to take up the charge in terms of instigating reform and increasing communication and oversight of the institutions. “Talking makes a difference,” he said, and, “The successful adaptation of both of these institutions is very much in the interest of the United States.”

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