Not Bretton Woods II

Fund and Bank strike incrementalist note at Istanbul

Compared with the media focus on the G-20 summit that took place a couple of weeks ago, the semi-annual meetings of the International Monetary Fund (IMF) and the World Bank (WB), which were held in Istanbul this week, seem to have attracted little attention. This may be surprising, given that the multilateral institutional framework, of which these two organisations are such a significant part, has been seen by the G-20 as being an integral part of the solution to the global economic crisis and the means by which future crises can be prevented. The speeches of both Robert Zoellick, president of the Bank, and Dominique Strauss-Kahn, managing director of the Fund, certainly emphasised the re-orientation of the role that both institutions would play in the future and the organisational changes that were needed. Significant among these is the slight shift in voting rights from affluent to developing members—a 5 percentage point change in the case of the IMF and an increase to 44 per cent in the case of the Bank. But the tone and content of both speeches failed to match the backdrop provided by the global crisis and the generally perceived need for radical changes in economic governance and regulatory structures.

This is ironic, since it is the world crisis that has given these two institutions, particularly the IMF, a fresh lease of life. For several years, both institutions have been criticised for their growing irrelevance amidst two significant global trends. The significance of private capital flows into a number of activities/sectors that were previously funded by the Bank has allowed developing countries to exercise choice when it comes to financing sources. And some economies, particularly but not wholly in Asia, have built up enormous foreign exchange reserves, protecting them from virtually any conceivable external shock, as the past few months have amply demonstrated. The perception of obsolescence has been reinforced by the association of both institutions with an intellectual tradition that many now hold responsible as being among the factors that contributed to the crisis.

While both institutions have been softening their ideologically-influenced positions, and giving more space to alternative viewpoints, a comprehensive transition in ownership as well as intellectual approach may well be too much for these complex organisations to handle. However, that raises the fundamental question: are these institutions going to be able to rise up to the ambitious goals set for them by the G-20 with a strategy of gradual, incremental change? To many people, the answer to that would be a categorical “no”. Messrs Zoellick and Strauss-Kahn sounded all the right notes on their new agendas and approaches to dealing with a different global environment, in which the old challenges of poverty and destitution not only persist but may have intensified. But, the proof of the pudding will only be in the eating. Rapid and drastic change may, of course, render the organisations dysfunctional. But being too slow and too cautious will simply hasten their decline into irrelevance.