Thinking the unthinkable: combining the IMF and World Bank?

International Economy, The, Fall, 2004 by Fritz Fischer

Changes in the two Bretton Woods institutions since their inception sixty years ago have led to various calls for reforms meant to reconfirm the basic mandates of the International Monetary Fund and the World Bank and to eliminate duplication of effort. But during the recent anniversary celebrations, the idea of merging the two organizations--suggested occasionally in the past (1)--was not mentioned. Yet upon closer reflection, a number of arguments can be made in favor of a reorganization that is less than a full-fledged merger and instead combines the two administrations and Boards under one roof.

Serious reform discussions should focus on governance issues, particularly the composition of the decision-making bodies. The present sixty-year-old system is outdated, giving too much representation to the industrialized country donors and not enough to the developing country recipients. Remedying these shortcomings could well increase the support for reform from the under-represented shareholders. The general climate for a proactive long-term reform approach should be favorable, as there is presently no sign of an immediate or looming financial crisis according to U.S. Treasury Undersecretary for International Affairs John Taylor. (2)

SEA CHANGE SINCE THE POSTWAR ERA

The laudable intentions of the founders at the 1944 Bretton Woods conference were directed toward avoiding the tremendous shortcomings in the international system in the post-World War I period when the lack of effective multilateral mechanisms allowed governments to practice beggar-thy-neighbor policies, resulting in declining world trade hurting employment and living standards in many countries.

As World War II drew to a close, the United States led an effort to effectively organize the peace process. On the political side, the United Nations in New York was created. For monetary and economic issues, the Bretton Woods institutions were founded. The International Bank for Reconstruction and Development (more commonly known as the World Bank) was to assist in the rebuilding of war-torn Europe and Asia. The International Monetary Fund was meant to oversee the world's monetary system, promote stable exchange rates, provide balance-of-payments support, and assist in eliminating trade restrictions in goods and services which were still very much regulated in the immediate post-war period. At the time, the World Bank was considered more important and hence its president was supposed to always be a U.S. national, while--reflecting the dominance of Western Europe--the managing director of the IMF was traditionally a European. (3) Given their complementarity, the two new institutions were headquartered next to each other in Washington, D.C.

The forty-four founding countries--only three from the African continent--were represented on the decision-making boards by twelve executive directors. The independence of former colonial territories and the collapse of the Soviet Union have since raised membership in the IMF and World Bank to 184 states. The boards now have twice as many members. Yet one-third of the twenty-four executive directors (of both IMF and World Bank) still come from Western Europe, while the forty-seven sub-Saharan African countries share two seats and thus have limited influence in shaping the various assistance programs affecting the lives of their citizens. The emerging countries in Asia and Latin America are also under-represented.

The involvement of the World Bank in the reconstruction of Western Europe and Japan was of short duration, given their fast recovery and the boost by the Marshall Plan in Europe. At the same time, trade was increasingly liberalized and monetary controls lifted. As a result, the World Bank directed its attention toward developing and, since 1990, transition countries. The Fund for a while still loaned extensively to industrialized countries (nearly 50 percent in 1977 (4)), but for the past twenty years has lent exclusively to the same countries the World Bank serves.

At the same time, the importance of the Bretton Woods institutions and their resources has been affected by dramatic changes in the international environment. As a result of increasing economic globalization, international trade has doubled since 1970 and the stock of global financial assets has quintupled. (5) In short, the world has witnessed a sea change, and both the Bank and the Fund--often actively encouraged by major member countries--have engaged in constant reforms to adapt to the new circumstances and to maintain their relevance as leading institutions. Certain overlaps have been unavoidable as their activities have become more interwoven.

EXISTING COMMONALITIES BETWEEN THE BANK AND THE FUND

Against this background, combining the administrations of the IMF and World Bank would not appear too revolutionary. The two institutions are neighbors with the same working language, in contrast to corporate mergers that often span continents. Because of geographic vicinity they hold joint annual meetings prepared by a joint conference secretariat, and select a joint chairman. Nonetheless--and this appears as an illustrative example of unnecessary duplication--each institution publishes a separate "Summary Proceedings." In the Bank's edition the opening speech and the concluding remarks of the Fund's managing director are left out, whereas the Fund includes the speeches of the Bank president. It also should be noted that the two Annual Reports--the most authoritative documents operate on two different time frames: The Bank's fiscal years spans July 1 to June 30, the Fund's May 1 to April 30.