Three global institutions develop cracks in foundations

Three global institutions develop cracks in foundations
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First Published: Wed, May 23 2007. 11 49 PM IST
Updated: Wed, May 23 2007. 11 49 PM IST
Washington: The crisis has ended over Paul D. Wolfowitz, the president of the World Bank who resigned last week. But the bank's identity crisis has just begun.
Indeed, the entire international economic architecture established after World War II—the World Bank, the International Monetary Fund and what is now called the World Trade Organization (WTO)—is buckling under the weight of globalization, trade disputes and the ambitions of rising economic powers in Asia and elsewhere, experts and policymakers said.
The World Bank and its sister institution, the monetary fund, were established in 1944 at Bretton Woods to secure the international economy. The bank was supposed to rebuild Europe and reduce poverty elsewhere with grants and loans. The monetary fund tries to avert financial meltdowns by monitoring countries’ economic policies. The trade organization, which grew out of the General Agreement on Tariffs and Trade (Gatt) of 1947, seeks to ensure the smooth flow of goods and services that keeps the world economy growing.
Today, however, all three institutions are facing questions about their relevance in a global economy. The current round of trade talks by WTO could fail—in what would be the first such failure in 60 years. The bank and the fund have made billions of dollars in loans to scores of exporting countries in Latin America, Asia and West Asia, but some of the recipients are awash in trillions of dollars in reserves.
The World Bank's cumulative lending to China, for example, is $40 billion (Rs1.6 lakh crore) for 274 projects. But China is now an export superpower, sitting on more than $1 trillion in reserves, and is so wealthy that it recently announced its own $20 billion programme of loans and credits to Africa. Many question whether the bank should be lending to China at all.
“The Bretton Woods system has become outmoded,” said the former treasury secretary, Robert E. Rubin, chairman of the executive committee at Citigroup. “It has served us very well for a long time, but these institutions haven’t changed with the times. They need to be rethought and restructured.”
Eckhard Deutscher, a German development official who serves as the dean of the World Bank's directors, called for a re-examination of the role of all the institutions.
“The biggest challenge of the World Bank is to restore its credibility,” Deutscher said. “But the international community also needs to look at the whole system. There are governance problems across the board.”
The most immediate issue the bank and the fund must face, experts said, is who governs them. The recent bank crisis erupted over a narrow dispute over charges of favouritism against Wolfowitz. But it exposed a larger fissure over whether the US can retain its role of picking the bank president at a time when American contributions to the pool of grants and loans to the poorest have fallen in relation to what other countries do.
Bush’s appointment of Wolfowitz, an architect of the Iraq war, as World Bank president in 2005 was not popular with the Europeans, but they went along with it. Now the administration wants to retain the power to pick the bank president, and Europe wants to continue picking the head of the monetary fund. But there is a growing consensus that this dual tradition is outdated.
“The Wolfowitz situation exposed what an antediluvian system the bank has,” said Kenneth S. Rogoff, professor of public policy and economics at Harvard, referring to how the head of the organization is chosen. “But I'm worried that this crisis is going to set back the reform process.”
Some vested interests within the bank, Rogoff said, do not want to admit that its role in lending—the total was $23 billion last year—has become less relevant to current realities.
Last year, more than $14 billion of the bank's lending went to so-called middle-income countries such as China and India. The bank borrows the money at low cost because of its peerless credit rating, then lends it at slightly above that rate. The money it makes on the loans helps pay the bank's overhead, including the salaries of its 13,000 employees.
Some bank officials acknowledge that one reason for continuing loans to middle-income countries is that their repayments keep the bank staff large enough to provide technical assistance and analysis needed the world over by donors and recipients alike.
In 2000, an advisory commission created by Congress and headed by Allan H. Meltzer, professor of political economy and public policy at Carnegie Mellon, recommended stopping loans to middle-income countries and converting loans to the poorest countries to grants.
“The basic problem for the bank is that it's hard to see what good it has done anywhere,” Meltzer said. “The big gains in poverty reduction have come from opening markets, not from bank loans. The bank does not push programmes enough for that.”
In the months before his resignation, Wolfowitz defended the lending to middle-income countries as a necessary part of providing technical assistance to help them alleviate poverty. That approach heartened many at the bank who argue that it cannot walk away from the poor of China and India, who outnumber the poor in sub-Saharan Africa.
“The bank cannot afford to withdraw from the middle-income countries, which face tremendous inequalities in their societies,” said Mark Malloch Brown, a former head of the UN Development Programme who was chief of staff to the former UN secretary-general, Kofi Annan. “The bank must continue to be involved.”
Another problem for the bank, however, is that while it lends and makes grants to the world’s poorest countries—$9.5 billion last year—the bank itself has become marginalized in the overall global effort for the poor.
World Bank figures show, for example, that the bank's own contribution to the poorest countries amounts to only about 7% of the government-backed aid they get from 230 international aid agencies, including regional development banks and special funds in Europe for disease, education, maternal health and other programmes. Large sums are also going to poor countries through private foundations.
During the crisis surrounding Wolfowitz, European countries threatened to channel money for the poorest countries through other agencies. Now that he is leaving, many experts said, that is bound to happen anyway.
The US, moreover, is certain to step up its campaign to reduce corruption among recipient countries, continuing a policy that led to fights between Wolfowitz and the bank board. That demand could also cause European donors to turn away from the bank.
But if the bank becomes even more of a minor player in terms of money for the poorest, many experts said it was bound to remain important. The next bank president, they said, must champion the role of the bank more than ever.
While the bank faces power struggles over who gets to pick its president, a similar power struggle over voting rights is under way at the monetary fund.
Last year, the US won approval for giving slightly more voting shares to China, Turkey, Brazil and other fast-growing export-driven countries. But in the next year, as still more power goes to growing countries, it will come at the expense of smaller European countries.
Like the World Bank, the fund is becoming more marginal. The world economy has been so successful that the fund, which helped bail out Mexico, other Latin American countries and several Asian countries in the 1990s, is now underemployed. So many countries have paid off their loans that interest income is down and the fund is in a budget squeeze, looking at whether to sell gold bullion to meet expenses.
Its search for a new role has emboldened its critics, especially those who feel that its bailouts of the 1990s were ill advised on the grounds that they made countries complacent about their bad policies.
Criticism of the monetary fund has also erupted from leaders in Asia and Latin America, whose countries staggered under austerity programmes imposed by the fund in return for the bailouts of the 1990s. These leaders have begun discussing plans for regional funds to compete with IMF.
But many economists say that the fund will be needed when, inevitably, the next crisis occurs.
WTO, established in 1995 as the successor to the General Agreement on Tariffs and Trade, is struggling mightily to salvage the current round of trade talks that started five years ago at Doha, Qatar.
Many trade experts fear that if the talks fail, it could lead to a reversal of 60 years of opening the trading system to more goods and services.
The Doha talks are at an impasse because the US and Europe are refusing to lower barriers on farm goods, and both are demanding that India and other exporting countries lower barriers of their own.
A crisis mood has descended over the talks, with treasury secretary Henry M. Paulson Jr. warning that if they fail, a new era of protectionism could be ushered in. The fear is that WTO, which is supposed to promote trade, would become a vehicle for lawsuits and protectionist actions threatening higher barriers, leading to a slowdown in the global economy.
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First Published: Wed, May 23 2007. 11 49 PM IST