US President Donald Trump’s nominee as the World Bank president, David Malpass, is to step down, nearly a year before his five-year term expires. There is some interest in the financial press of the rich world in speculating whom President Biden would nominate as his replacement. What is taken for granted is that the next World Bank president would, indeed, be nominated by the president of the US. There is nothing in the laws of nature that dictate such a US prerogative. It is time the World Bank president came from India or another large developing country.
To the victor, the spoils, goes the saying. At the end of World War II, there was little confusion as to the identity of the winners and the losers. So, at the United Nations, defeated Germany and Japan found no place in the P5, the permanent five members of the security council with veto powers. The Bretton Woods agreement of 1944, reached by the UN Monetary and Financial Committee, set up the International Monetary Fund and the International Bank for Reconstruction and Development, later dubbed the World Bank, apart from creating a system of stable exchange rates that ruled out competitive devaluation of their currencies by countries that wanted to grow their exports. These two agencies also saw the same dominance of the trans-Atlantic alliance, in the allocation of shareholding and associated voting rights. Further, it was informally agreed that the United States would nominate the head of the World Bank, while the French would nominate the head of the IMF, although the US has the largest bloc of votes in both the IMF and the World Bank.
The US is the largest, dominant shareholder in both institutions. The shareholding has evolved at both institutions (there have been 14 quota overhauls at the IMF), but a US veto can block any resolution being passed. The world economy has evolved significantly, with the rise of China as the second-largest economy, and India as the fifth-largest. Voting rights and shareholding in the Bretton Woods twins still reflect the power balance of the past, rather than of the present, although World War losers Japan and Germany have been allowed to come out of the doghouse and significantly expanded their voting rights, and China has the third largest quota behind the US and Japan. India comes in at 8th place, with 2.75% of quotas and voting rights, trailing Germany, Britain, France and Italy. At the World Bank, Italy does not figure among the 8 largest shareholders, and India is placed at the 7th rank.
The system of fixed exchange rates decided upon at Bretton Woods — the US dollar exchangeable for gold at the rate of $35 per ounce of gold, and other currencies pegged to the dollar — collapsed in the early 1970s, when the Nixon administration saw there could be a run on US gold reserves, as the world was awash in American dollars used for Marshall Plan assistance for European recovery, and the general leveraging by American economic agents of the global acceptance of the dollar to buy up companies, natural resources and other assets. Nixon suspended and then ended the conversion of dollars for gold. Currencies ceased to be pegged to the dollar, some floated freely, and others pegged themselves to a basket of currencies, eventually letting the demand for and supply of currencies in the market for foreign exchange to take the lead in setting the value of currencies. The IMF became vital as the lender of last resort when countries ran out of foreign exchange reserves and gave its loans conditional on sound policy changes. The Fund’s idea of what constituted sound policy also evolved, we should note. The World Bank chipped in with adjustment programmes for the real economy, to complement the macroeconomic policy advice from the IMF.
As the world’s capital markets evolved, and cross-border flows became relatively easy since the fall of the Soviet Union, developing countries could tap global bond markets on their own – in theory. But the World Bank could raise and lend funds at cheaper rates, and back the funds up with sound policy advice for their sensible utilization. Over the seven decades of its existence and operations, the Bank has accumulated diverse development lessons, revised and refined them and is a useful repository of development tools and policies that have worked and have failed.
It has extended its functions to create five support systems: it gives zero-cost loans or grants to the poorest countries, it lends money at market-efficient rates to middle-income countries like India, it co-invests in private sector companies, it guarantees loans to viable projects in poor countries, lowering the cost of capital, and provides an arbitration and dispute settlement service for investment disputes. All these functions are aimed at removing poverty and enhancing human capability while drawing the right lessons from the development experience of countries around the world and passing them around.
It is an extremely useful body, particularly for developing countries. The insistence on keeping a rich world nominee as its head, instead of allowing a representative of the developing world to take on its leadership, reeks of paternalism. Keeping that role for an American smacks squarely of a desire to maintain an outdated balance of global economic power.
It is time for the IMF and the World Bank to come out of the past and boldly embrace the reality of the present. New groupings such as the G20 have emerged, to better reflect the current distribution of global economic power and their recommendation to reform the voting rights in the Bretton Woods twins must be honoured.