The future of the IMF and World Bank: roles and relationships

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.

Conclusion

The World Bank and IMF were created in the wake of World War Two and the economic chaos of the between-war period. They were among a series of institutions (the WTO and the partial demise of the gold standard among them) that were initiated in order to stabilize the global economic system. Since that time, the world has changed significantly and the roles of the IMF and World Bank have changed as well. The two institutions are designed to complement one other, but goal confusion at times led them to duplicate services and objectives. As the world's poorest economies began to develop, the number of potential customers for IMF and World Bank services decreased significantly. Significant criticism has been leveled at the institutions for the terms demanded in exchange for emergency loans or development funds. As a result, the two institutions have spent the better part of this decade searching for a restoration of relevance.

The global financial crisis appears to have been the catalyst for this change. Not only has the crisis increased the need for IMF assistance, something that had been declining during the boom years in the middle of this decade, but the crisis has pushed the world's leaders into action. In a repudiation of the trend towards deregulation in the banking industry, the G20 leaders have created new roles for the IMF in terms of global financial governance. As a result, the IMF is poised for revitalization. Moribund just a few months ago, the IMF is now set to receive $750 billion in new funding and a broad change in mandate. Once given the task of facilitating economic development, the IMF is now charged with the stability of the world's financial system.

The role of the World Bank going forward has seen a less dramatic shift. This is due in part to the fact that the World Bank's traditional role as a source of development aid has positioned it for steady demand for the next several decades, thus the World Bank entered this year with more relevance than did the IMF. As a result, the World Bank is going to receive more funding but its role will not change substantially.

These two institutions once again complement one another. The trend towards irrelevance for these institutions was born in large part due to goal drift. The world's leadership appears to have given these two institutions are renewed sense of focus. They have recognized that the talent and infrastructure of the IMF and World Bank was not being used to its fullest and found new roles. The IMF will continue to encourage free trade but is now responsible for banking governance. This change expands the IMF role beyond what it had before, and fits with the G20's move towards greater economic integration. The World Bank will continue to offer development assistance, a continuation of its previous role.

Within the framework of an emerging system of global government, the IMF is clearly being positioned as a supreme regulator. The World Bank's role as yet is less well-defined. The new system is emergent, and it may yet fade from prominence in international discourse as the financial crisis fades but for now it appears to be the start of a greater trend. The World Bank is expected to receive a greater role in the coming years. This will be especially evident if its current mandate declines in importance the way that many of the IMF's original mandates have. There is certainly room for an expanded World Bank within an overarching global governance framework. How that manifests in policy remains to be seen, but it is clear that these formerly moribund entities have now been handed the relevance for which they have spent the past several years searching.

Works Cited:

Reform of the IMF and World Bank: Where do Things Stand-Anthony Elson. World Economics. Henley-on-Thames: Apr-Jun 2007. Vol. 8, Iss. 2; pg. 65

No author. (2004). International Monetary Fund: The Role of the IMF and IMF History. CFTech. Retrieved April 17, 2009 from http://www.cftech.com/BrainBank/FINANCE/IMFHistory.html

Kapur, Davesh; Lewis, John Prior; Webb, Richard Charles. (1997). The World Bank: History. Retrieved April 17, 2009 from http://books.google.com/books?id=mtBFK_ACbv8C&printsec=frontcover

No author. (2007). Finance and Economics: Sister-Talk; the World Bank and the IMF. The Economist. Mar 3, 2007. Vol. 382, Iss. 8518; pg. 87

Geopolitics and International Organizations: an Empirical Study on IMF Facilities. Julien Reynaud, Julien Vauday. Journal of Development Economics. Amsterdam: May 2009. Vol. 89, Iss. 1; pg. 139

Identity Crisis. Chris Swann. Financial World. Canterbury: Sep 2006. pg. 12

Core. Benjamin E. Diokno. BusinessWorld. Manila: Apr 16, 2009.

Jasper, William F. (2009). Global Fusion: The G20, IMF and World Government. New American. Retrieved April 17, 2009 from http://www.thenewamerican.com/economy/commentary-mainmenu-43/1004

Fitzpatrick, Colleen. (2007). Experts Warn IMF Might be "Slipping into Obscurity," Offer Options for Reform. Centre for Global Governance Innovation. Retrieved April 17, 2009 from http://www.igloo.org/community.igloo?r0=community&r0_script=/scripts/announcement/view.script&r0_pathinfo=%2F{7caf3d23-023d-494b-865b-84d143de9968}%2FAnnouncements%2Fpressrel%2Fexpertsw&r0_output=xml

Miller, Rich & Kennedy, Simon. (2009). G-20 Shapes New World Order with Lesser Role for U.S., Markets. Bloomberg. Retrieved April 17, 2009 from http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=axEnb_LXw5yc

Raum, Tom. (2009). G-20 Leaders to give $1 Trillion to IMF, World Bank. Huffington Post. Retrieved April 17, 2009 from http://www.huffingtonpost.com/2009/04/02/g20-leaders-to-give-1-tri_n_182303.html

Take Heed from the G20's Emerging Focus John Authers. Financial Times. London (UK): Apr 4, 2009. pg. 16