Developing countries as a group are headed for net creditor status next year. Ample reserves, low inflation, and current account and fiscal surpluses are now the norm. Though still in the early growth stages, and with plenty more to come, the well-established trend of pension fund investing into emerging market debt is probably irreversible, bar major disruptions to the global economy entailing a reversal of globalisation. With the distinction between developed and developing countries increasingly being one of prejudice, not sovereign risk, one definition of emerging markets is as follows: all countries are risky – but the emerging markets are those where this risk is priced in. The next major disruption in global markets is much more likely to come from the developed than the developing world.
If so, the IMF’s current resources may be inadequate. Then again the improvement in the balance sheets of developing countries has substantially reduced the demand for traditional IMF balance-of-payments support for these countries. Argentina, Brazil, and a number of other Latin American countries have recently made early repayments to the IMF, some of them in full. It is in this context that the income of the IMF may no longer meet administrative expenses, hence renewed debate over IMF reform.
The IMF has also been accused of mission creep, trying to achieve too much. Institutional momentum, given a loss of core business, is such that we are likely to see a lot of ideas aired about what the IMF could or should do, and if the IMF lacks clear signals from its shareholders about direction it could easily dilute its focus much more. In this context five broad options are to carry on as at present, possibly with cost reduction as income ceases to covers staff outlays; to expand the income stream by diversifying function without adding to capital; adding to the capital and moving the geographical focus back to where major structural imbalances exist – the developed rather than developing world; closure; or merger with the Bank for International Settlements (BIS), the central banks’ central bank.
The first option is the easiest and most likely and the initial cost reduction exercise includes the Governor of the Bank of England’s recent proposal to scrap the permanent resident board of executive directors. This certainly has positive aspects if replaced by a more periodic and non-resident board with real decision taking ability – i.e., a board of high-ranking, highly competent government officials, not pedestrian political appointees, so that this body can retain a strong level of commitment to the Fund and can take decisions without constant referral to capitals. The alternative may jeopardise accountability. Again on the issue of accountability, and whether the resident board is scrapped or not, another reform is also overdue - stopping the board gravy train. No executive director of an International Financial Institution (IFI) should be eligible for employment at an IFI for at the very least five years after leaving the board.
Expanding the income stream of the IMF is fully to embrace mission creep, and may be the result of greater than normal levels of hubris. The proposal that the IMF should help central banks manage reserves is, for example, risible given the lack of relevant expertise, though it becomes slightly less ridiculous in an advisory capacity with the fifth option: merger with the BIS. Two negative aspects of mission creep are worth highlighting. Firstly, the IMF has started playing at being a development institution when development objectives, particularly in a number of the poorest African countries, may be in direct conflict with its shorter term balance-of-payment mandate. The convenient whitewashing of this difference and its institutional form of cross-conditionality has been particularly damaging in a number of cases in the past. The IMF is not a development institution and should not even attempt to become one. Secondly, the tendency to second guess governments is having a seriously negative impact on building local governance and policy ownership. The IMF should stick to what they clearly are good at – avoidance of balance-of-payments crises and crisis management when that avoidance fails.
Problems at the World Bank are arguably more deeply entrenched and difficult to reform than at the IMF. Most of the problems the IMF has, the World Bank has too, only worse. Moreover, the World Bank has no clear objective, unlike the Fund, and has been virtually impossible to reform, despite the impression of constant movement since McNamara left in 1981. Every few years brings a new President, new optimism, ostensibly new simple solutions to the world’s problems, but the World Bank has five well-established interest groups that do not interact well: the non-borrowing countries; the bond markets, which fund the organisation; the borrowing countries; NGOs; and the staff. Technical expertise is no longer the binding constraint it used to be and global politics frankly gets in the way of getting the development job done. Development banking, insofar as it has a future, should be massively de-centralised with much more focus on basic infrastructure than at present; and the best way to finance this is through the regional and sub-regional development banks, not through a world bank.