The World Bank and IMF Are Drifting
THE World Bank and the International Monetary Fund (IMF) - multilateral financial organizations once seen as cornerstones of the world economy - today appear to be adrift, groping for tasks that might justify their existence. By their quest for new mandates, these agencies demonstrate that they have outlasted the problems they were created to address. Most recently, the World Bank and the IMF have seized upon a US proposal for dealing with the third-world debt problem (the ``Brady Plan''). The plan suggests that these two public lending agencies take the lead in engineering ``debt reduction'' for overextended, third-world governments. The bank and the IMF quickly and enthusiastically accepted the assignment. Unfortunately, it is not clear that they can contribute to the world economy in such a role - or by many of their newer activities.
Established in 1944, the IMF and the World Bank were designed to cope with imminent risks to the world economy in the immediate postwar era. Before World War II, the world economy had been sunk in depression. The international trade system had broken down; trading partners had become fearful of accepting payment in one another's currency. The IMF was erected to firm up the trading system by organizing an arrangement of fixed exchange rates for member states - thereby assuring that currencies were truly ``convertible.'' The World Bank, for its part, was to address the problem of capital flows. It was to assist in attracting private investment to regions devastated by war or embarking on decolonization - where business confidence might be unreasonably low.
In the quarter century following World War II, the world economy performed remarkably well. Europe and Japan not only recovered, but prospered; ``economic development'' was vigorous in low-income areas; the international market for goods and services expanded and deepened. Ironically, however, the IMF and the World Bank were victims of these great successes. In the early 1970s, the world's major currencies moved to a ``floating'' arrangement: Exchange rates now adjust spontaneously, in accordance with market forces, and without external supervision. It also became apparent that inadequate capital flows were no longer a structural risk to the world economy. (Indeed, the very magnitude of the current third-world debt problem should attest that capital transfers to low-income countries have been considerable.)
In effect, the evolution of the world economy stripped the IMF and the World Bank of their constituting rationale. Hence, their search for a new mission. This has led them into areas where they may deploy their vast resources - irrespective of the actual impact on the world economy.
Over the past decade, for example, the World Bank has involved itself heavily in lending to promote policy reform in the third world (``structural adjustment loans''). Unlike a loan for a dam or a road, a loan to a government for ``policy reform'' produces nothing tangible. It is therefore impossible to demonstrate that a policy reform loan has failed. By their very nature, however, such loans, insofar as they transfer resources to local treasuries, permit local rulers to pursue their own intentions with less restraint.
Very often, the intentions of third-world rulers are themselves an economic problem; their tastes may be wasteful, or even destructive. Policy reform loans may therefore actually degrade the economic environment, and the quality of lending, in a recipient country. By virtue of its ``preferred creditor'' status (it jumps to the head of the repayments in line), the World Bank is protected from the consequences of its economically imprudent actions in such cases.
As for the IMF, it has been increasingly engaged in managing the third-world debt problem. The merit of its management techniques, however, is often far from obvious. In June, for example, the IMF's managing director warned commercial banks that they should settle with delinquent third-world governments - not for full repayment, but for something like the ``market value'' of their outstanding loans.
But the low, current value of these loans - as assessed in ``secondary market'' - suggests that buyers doubt the willingness of delinquent governments to honor their debts. (After all, most of the governments in question have plenty of salable assets if they wished to make good on their debts; think of their nationalized industries.) In this instance, far from serving as an honest broker, the IMF is rewarding adverse behavior - exacerbating, not reducing, ``moral hazard'' in the world's financial system.
There are many things that organizations like the IMF and the World Bank could do today to strengthen the world economy. Accurate assessments of the quality of existing international debt, and of the risks in additional lending to various governments, would be of real value. Coinsuring private loans (for profit) to third-world countries could strengthen the sinews of the world economy. Neither the IMF, the World Bank, nor their member governments, unfortunately, seem interested in applying the organizations to such ``value adding'' services. Unless and until productive economic purpose is reinstilled, these two institutions' aimless and increasingly costly wanderings will continue.