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Merging the World Bank and IMF

Is a merger the right move to meet future development challenges?

January 12, 2005

Is a merger the right move to meet future development challenges?

Let's start with some basic observations. Both the International Monetary Fund and the World Bank now often assist the same clients. In both institutions, two different boards with 24 executive directors on each side deal with the same borrowing countries.

As a result, certain duplications and overlaps cannot be avoided. In the present structure, both institutions have separate country departments, statistical and other data collections, commodity and trade experts, training centers, and so on.

Many Fund and Bank publications cover similar subjects. The IMF has its World Economic Outlook, and the Bank produces World Economic Indicators.

While such duplication mainly challenges the coordination abilities of donor countries, the implications are more serious for the client countries as far as their often limited administrative capacity to deal with all these processes is concerned.

Both institutions now have resident representatives in most of the client countries. While the Fund's offices are very small, the Bank in recent years has systematically increased its operational presence in the field — so that 30% of its staff is now based in country offices.

While that actually represents progress, the reality on the ground often feels different. For starters, high-level missions often come at times of crisis. This puts a great strain on the client countries — especially the smaller ones.

These countries — often poor and with weak administrative infrastructures — also must accommodate visits from a plethora of other institutions. These include bilateral donors, regional development banks, UN organizations and non-governmental organizations.

Given the paramount importance of the Bretton Woods institutions, their high-level missions and the attention they deserve — and expect — totally occupy the political life in the country for the time of such visits.

And if the Fund and the Bank do not manage to send joint missions, these countries often must go through this exercise twice within a short period of time. Moreover, client countries are forced to deal with different procedures, institutional cultures and advice that is not always consistent.

Originally, IMF assistance from its rotating fund was supposed to be short-term in nature. But it became evident that many developing and transition countries were witnessing external payments difficulties arising from structural problems, which by definition are longer term.

In order to assist these countries effectively, the Fund over time developed an Extended Fund Facility, which became more important in the 1990s.

In addition, a Structural Adjustment Facility was created, which in 1987 was incorporated into the Enhanced Structural Adjustment Facility.

In 1999, this instrument was renamed the Poverty Reduction and Growth Facility (PRGF) and it provides "concessional loans."

True, the volume of these operations — with a total of some $3.7 billion in fiscal 2003 — is only a fraction of the Fund's traditional stand-by lending operations, which amounted to $40.6 billion in fiscal 2003, of which some $31.5 billion was for Brazil alone.

One also has to acknowledge the importance of the Fund's regulatory functions and its Article 4 consultations, which include industrialized countries as well.

Still, the IMF has at least partially moved into the mid and longer-term development business — which is traditionally the domain of the World Bank.

Conversely, the structural circumstances in borrowing countries also induced the World Bank to extend the instruments for their operations. This applies in particular to the use of adjustment loans on a large scale in the 1990s.

Adjustment loans — recently replaced by Development Policy Lending — were not earmarked for specific projects and were often hard to distinguish from the balance-of-payments assistance which the Fund provides.

In all fairness, one must recognize that the constant adaptation of instruments is not always initiated by the institutions alone. Often, major shareholders exert pressure on the Bank and the Fund to shoulder new tasks.

At times, this appeared an easy path for policymakers since no additional taxpayer money was necessary from the shareholder country. Such requests, however, do not keep these governments from criticizing the institutions for not sticking to their original mandate.

Of course, the client countries themselves often welcomed these modifications — since they represented additional assistance.

Under these circumstances, it cannot come as a surprise that all of this fueled media headlines such as: "The twins are too alike. It no longer makes sense for the IMF and the World Bank to be separate entities."

A respected voice from Asia, former Japanese finance official Toyoo Gyohten, deplores the "blurring of the demarcation lines," urges putting "a lid on the expansion," and hopes "to stop the turf war between them."

In response to these statements, the two Washington-based institutions have been mindful of such criticism and have redoubled their coordination efforts.

The Fund's recent Annual Reports devoted specific sections to "Strengthening IMF-World Bank Collaboration" (FY03) and "Review of Bank-Fund Collaboration in Program Design and Conditionality" (FY04).

For FY03 it was stated: "A number of factors were impeding fully effective cooperation, such as differences in working structures, time frames for achieving goals and lending arrangements and instruments." The last report notes that "there is scope for improvement" and "no room for complacency."

Against this background, the prospects of combining the two administrations and their boards merit serious consideration.

Past calls for a merger have been made without specifying the necessary details, but the basic approach was a complete fusion of the Bretton Woods institutions under new Articles of Agreement.

These articles would take into account the dramatic changes in the economic and financial environment in the past 60 years. This would be an optimal solution.

To be sure, carrying it through would constitute a Herculean task of unprecedented dimensions. It does not help that there is presently no "champion of change" who could generate the necessary political momentum to effect such a change.

Evidently, such a full-fledged merger would also run the risk of largely paralyzing the Bank and Fund during the transition period. The outside world, with its ongoing monetary and development problems, could ill afford this.

Therefore, it appears less contentious and disruptive to consider the possible benefits of a joint administration — and one board of directors, while leaving the present instruments in place for the time being.

This would not be as revolutionary as it appears. The two institutions are already at the same location in downtown Washington, D.C. — and have the same working language.

Also, their membership is identical and the World Bank Group — as the name indicates — is already a multifunctional organization with four different institutions under one roof.

They are the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA).

But even such modest reforms as outlined here would require tremendous determination and careful diplomacy, given the strong vested interests, bureaucratic inertia — and different institutional cultures.

Still, it is safe to assume that the "founding fathers" of the Bretton Woods institutions would expect no less. If they were asked to review the tremendous changes in the international environment since they originally structured the two institutions, they would come to an obvious conclusion.

There really is no longer a need for two separate institutions, since both of them now provide financial resources only to one set of clients — developing and transition countries.

Combining the two administrations would obviously save costs and guarantee consistent advice to the clients.
We should act to overcome what has fast become a historic anachronism.

Adapted from the Fall 2004 issue of The International Economy.