Dismantling the IMF and the World Bank?

The International Monetary Fund and the World Bank have survived questioning from governments of donor countries, governments of the recipients and civil society organisations in all parts of the world. They have managed to lumber on for more than 50 years, staving off every major external attempt to overhaul and redefine them. But have they finally come face to face with their nemesis in the form of the report of a committee set up by the International Financial Advisory Commission of the Treasury Department of the U.S. Government?

The U.S. is the biggest shareholder in both organisations (in the IMF it has veto power) but in spite of repeated questioning in the U.S. Congress the Bretton Wood twins have for the larger part of their existence done what they have wanted to. However, this time things could be different.

In 1998, as a price for contributing $18 billion to the IMF's capital increase the U.S. Congress had a committee of economists constituted to look into reform of the two organisations as also the regional development banks and even the World Trade Organisation. That committee of U.S. economists, headed by Prof. Allan Meltzer of Carnegie Mellon University, has come up with recommendations which if implemented will reduce the two organisations to shells of their present size and structure.

The committee has suggested that the IMF should end all its so- called 'structural adjustment loans,' including those given to the world's poorest countries under the former Enhanced Structural Adjustment Facility (now renamed as the Poverty Reduction and Growth Facility). No, the Meltzer report does not suggest that the IMF should be generous with its loans. On the contrary, its recommendation is that the IMF should restrict itself to providing short-term loans at penal interest rates to countries facing liquidity problems. There will not be numerous conditionalities but there will be five 'pre-conditions'. Important among them are freedom of entry to global financial institutions, commitment to fiscal prudence and capitalisation of banks according to international standards - all within five years.

If the IMF were to be made to provide only liquidity, it would, to be sure, be left to deal with a much smaller volume of lending. From the borrower's point of view, however, the loans will come with much tougher terms and conditions. If such conditions had applied in 1991, for instance, India would have had to pay a heavy price for its loan to meet its then BoP crisis - both in terms of interest rates and what it would have had to agree to.

The proposals for the World Bank are even more radical. On the ground that private capital is available to the larger developing countries, that the success rate of World Bank projects is very low and that there is a considerable amount of duplication between the World Bank's activities and that of regional development banks (such as the Asian Development Bank), the Meltzer committee suggests that countries with a per capita income of more than $4,000 be kept out of World Bank lending and those with incomes of more than $2,500 should obtain only limited loans. Moreover, the World Bank itself should stick to providing loans for 'global public goods' - like for AIDS treatment and global environmental programmes. Lending functions will be taken over by the regional development banks. (Specific social sector loans will be provided directly to the service provider - bypassing the Government (that is, cutting down on corruption) and only institutional support loans will go to governments.) In other words, the World Bank with its current staff strength of 17,000 will be emptied out of its programmes.

What chance is there of such major recommendations ever being implemented? The IMF, in particular, is now at the ebb of its popularity among the donor countries (one doubts if there ever was a high tide in its popularity among either the donor or recipient countries). It has failed to prevent regional crises, it has often worsened them with its programmes and it has just gone through a bitter and opaque process of selection for its managing director. The U.S. Secretary for the Treasury, Mr. Lawrence Summers, has also suggested that the IMF should stick to liquidity loans.

But much as there is a great deal of clamour within the U.S. Government and Congress for fashioning the two organisations in their own eyes, there is something else that the agenda for change has to contend with. The Bretton Wood organisations are massive bureaucracies, with representatives from all donor and recipient countries, and wield considerable power in their own right. These bureaucracies with a natural interest in self- preservation are not going to easily accept a re-restructuring that will for the larger part end their existence.

CRR

The Meltzer committee report can be read at:

http://phantom-x.gsia.cmu.edu/IFIAC/USMRPTDV.html

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