Next week, when the two most important international financial
institutions, the World Bank and the International Monetary Fund
(IMF), meet in Singapore, they will have to face two key questions.
The IMF must ask what it can do to make itself relevant in a
crisis-free world. The World Bank must ask how it can deliver
foreign aid more effectively.
Can the IMF reform?
During the past couple of years, critics and supporters alike
have questioned IMF's relevance in today's world. The IMF was last
involved in a major, high-profile crisis scenario in December 2001,
after Argentina defaulted on $81 billion of sovereign debt. Today,
the unusual abundance of liquidity throughout the world has
afforded emerging economies easier access to private capital. As a
result, there is far less need for IMF funds. In fact, some major
IMF debtors, such as Argentina and Brazil, have paid off their
Despite questions regarding the Fund's relevance, its supporters
are working hard to come up with new ideas. The most popular idea
is that the IMF should focus on "surveillance" and anticipate when
countries are about to hit a financial crisis. This surveillance
would be conducted mostly through the IMF article IV consultations,
the annual review done by IMF economists that assesses the
country's exchange rate, monetary and fiscal policies; financial
sector issues; risks and vulnerabilities; and institutional and
structural issues. Accordingly, the IMF supposedly would be able to
detect potential risks that could lead to a crisis and help
countries modify their policies to avoid a crisis. The surveillance
policy assumes, however, that the IMF would have leverage in
forcing countries to adopt the right policies. The IMF's history of
working with countries suggests that such leverage is improbable.
Moreover, countries now have easier access to more significant
funds in the private sector.
Economists Charles Calomiris and Alan Meltzer of Columbia
University and Carnegie Mellon University, respectively, have
proposed an IMF reform plan based on Meltzer's commission report in
2000. In their view, the IMF would act as a quasi-lender of last
resort, lending only to countries that qualify according to a set
of pre-conditions. These pre-conditions include a sound fiscal
policy; freedom of entry and operation for foreign financial
institutions; and adequately capitalized commercial banks.
Additionally, a recipient must regularly publish the maturity
structure of its outstanding sovereign and guaranteed debt and
The Bush Administration should work with the U.S.
representatives to the IMF board to propose a reform of the IMF
lending practice so that it can effectively act as a lender of last
resort. By lending to countries that pre-qualify, there will be no
need to attach conditions, which are rarely met, to the loans, and
lending to countries that pre-qualify will remove incentives for
irresponsible behavior on the part of the borrowing
Unfortunately, the debate over the IMF lending practice seems to
take place mostly in academic and think tank circuits. Fund members
are more concerned with their share of power within the
organization, most generally in the number of votes they can cast.
Under the leadership of Rodrigo de Rato, the IMF's managing
director, the Fund is now proposing a reform in the voting system
over the next two years. The reform entails increasing quotas for
members that look underrepresented-most immediately for China,
South Korea, Mexico and Turkey. It also will look at broadening the
allocation of votes and designing a new formula to calculate voting
Giving greater voting power to members who have a strong role in
the world economy and politics makes sense, and the Bush
Administration should support that reform. However, it is important
that the United States, since it has the biggest financial stake in
the organization, retain its veto power to changes to the Articles
The World Bank's Dilemma
The World Bank faces the question of how to make aid more
effective. The most difficult challenge for the Bank is the issue
of corruption, the main reason that aid money never reaches the
Corruption is sometimes a moral problem, but more often,
particularly when it takes the form of bribery, it is the response
to high taxes, cumbersome regulations, unpredictable changes in
business rules, and lack of rule of law. Corruption is especially
prevalent in poor countries, where most people cannot afford to
abide by the rules and the political leadership squanders funds
regularly without punishment.
Foreign assistance has the potential to help poor countries
achieve specific goals, but it cannot replace the political will to
implement policy change. Developing countries must make their own
internal reforms. However, the World Bank can place incentives for
the governments of poor countries to adopt policies that promote
economic freedom and strengthen the rule of law. It could emulate
the Millennium Challenge Account (MCA), a new U.S. government
approach that makes assistance available only to countries that
govern justly, invest in their people, and encourage economic
freedom. In other words, only countries with relatively good
policies receive aid.
The Bush Administration should work with the U.S.
representatives to the World Bank to propose a reform of its
programs so that aid is delivered to countries with sound policies
in place and a record of good governance.
Eiras is Senior Policy Analyst for International Economics in
the Center for International Trade and Economics at The Heritage