Article

Reforming the World Bank and IMF

Senior Fellow Dan Tarullo testifies to Congress about ways to reform these key international financial institutions for the 21st century.

The following is an excerpt of the testimony of Daniel K. Tarullo, Senior Fellow at the Center for American Progress and Professor of Law at Georgetown University Law Center, to the Subcommittee on Security and International Trade and Finance of the Senate Committee on Banking, Housing, and Urban Affairs. To download a PDF of his full testimony, please click here.

Mr. Chairman, Senator Martinez, Members of the subcommittee, thank you for your invitation to testify this afternoon. I am a Professor of Law at Georgetown University Law Center and a non-resident senior fellow at the Center for American Progress. I testify today in my individual capacity as an academic, with no client interests or representation.

As the title of this hearing suggests, the international financial institutions created at the Bretton Woods conference in 1944 are showing their age. The world around them has changed dramatically: Capital now flows in amounts and at a pace undreamed of in the mid-twentieth century. The number of member countries has increased by a factor of greater than four, to the present level of 185 in both the International Monetary Fund and the World Bank. The world’s economic weight is shifting toward Asia.

Over the years, the Fund and the Bank have made many policy mistakes of both commission and omission (though one hastens to add that these policies were usually agreed to, and often encouraged, by the institutions’ largest members, beginning with the United States). And, like most organizations more than 60 years old, the Fund and the Bank have taken on certain internal features and practices that are not advantageous for responding to these new conditions.

Many commentators have concluded that, for both the external and internal reasons just mentioned, far-reaching changes are needed in both institutions. Indeed, in the past decade, some on both the left and right ends of the political spectrum have suggested that one or both institutions have outlived their usefulness. As my testimony this afternoon will demonstrate, I agree that extensive change is needed. However, my call for change rests squarely on the belief that it is very much in the interest of the United States that these two institutions successfully adapt so that they can more effectively confront the new challenges and take advantage of new opportunities. Thus, as we call for reform, it is important that these calls be cast less as threats to the Fund and the Bank than as the kinds of demands we would place on any organization that has a vital role to fill but is not currently up to the task.

In the balance of my statement I will try to place in context the current calls for reform by identifying both the similarities and the differences in the situations of the two institutions and thus the right agendas for reform. Though the two institutions are closely tied in many ways, they are faced with quite different challenges today. In some sense, the problems of the Bank are fundamentally management problems—extensive, to be sure, but largely within the capacity of the Bank’s senior management to address, assuming even moderate levels of cooperation from major countries.

The Fund, on the other hand, truly faces an identity crisis. It has fallen rapidly from perhaps the most influential international institution (though not a beloved one) a decade ago to the point where its very relevance to contemporary problems has been called into question. Although not without its own shortcomings, the Fund management has tried to address this situation by proposing changes in Fund structure and practice. But management cannot on its own overcome the resistance and disagreement among some of its most important members.

In the last half of my statement, I will suggest some specific changes that could be part of, though by no means comprehensive, reform agendas for both institutions. The changes I identify are built on the different nature of the challenges confronting the two institutions.

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