EconoMatters, Rethinking America

Liberating the World Bank (From the US)

Reforms to make the World Bank less dependent on the United States would enable them to be more effective

Credit: World Bank Photo Collection www.flickr.com

Takeaways


  • Trump's strategy for the IMF and the World Bank is to refocus their agendas on the goal of a world that serves America’s interests.
  • Lesser dependence of IMF and the World Bank on the US would make them more effective in building a peaceful world.
  • Th co-location of IMF and the World Bank, making them operate like conjoined twins, is a function of the Bretton Woods Agreement Act of 1945.

We know that President Trump is no fan of multilateral institutions. For all his outspokenness to date, he has said almost nothing about his vision for the International Monetary Fund and the World Bank.

However, numbers can do the (missing) talking much more conclusively. The Trump Administration recently produced a budget outline that sharply cuts back funding for the World Bank.

A dark shadow

This puts a dark shadow over this week’s IMF-World Bank Spring Meetings in Washington, D.C. Looking ahead, the key question is whether this indisputably dark shadow can be turned into an opportunity for the future.

While the U.S. Congress may opt for a smaller cut, its support for the World Bank has been lukewarm compared to the support from other countries.

The sentiment in the U.S. Congress is a reflection of the skeptical sentiment among voters toward globalization revealed in the 2016 election campaign.

In the case of the IMF and World Bank, much of the U.S. electorate’s skepticism can be traced to confusion about their roles, illustrated by an old quip that the IMF is more like a bank and the World Bank is more like a fund.

This confusion is also related to the fact that the headquarters of both institutions are in Washington, D.C., literally across the street from each other. Their co-location, making them look and operate like conjoined twins, is a function of the Bretton Woods Agreement Act of 1945.

Toward win-win?

Separating these conjoined twins would make each of them more effective in a manner consistent with the emerging foreign economic policies of the Trump Administration.

The Trump Administration’s likely strategy for the two institutions is to refocus their agendas on the broad global goal of a world that serves America’s interests, of an “America First” world. There are going to be few, if any “buyers” for that approach.

At the same time, the United States has been a major constraint on the operations of the World Bank for more than a decade. Thankfully, this is an era when the world is no longer as dependent on U.S. funding as before.

Moving the World Bank out of the US

If the United States relaxes its grip, including its veto, increased support from other countries would almost certainly offset any reduction in U.S. funding, especially if the headquarters moved out of Washington, D.C.

With more resources, the World Bank could more actively meet global challenges such as infections disease and food security.

Reforms that make these two institutions more separate and less dependent on the United States would enable them to be more effective in building a more peaceful and prosperous world.

Moving the World Bank out of Washington, D.C. would require amending the Bretton Woods Agreement Act of 1945. Rather than a simple amendment to enable the move, however, it would be smart to establish a new legislative framework for U.S. participation in both the IMF and World Bank.

Their missions are quite different, which suggests that U.S. support could be enhanced by enacting separate laws for each one — as the Congress has done for the regional development banks established in Latin America, Asia, Africa and Europe.

Realignment of responsibilities

One improvement that could be incorporated in new legislation would be a realignment of departmental responsibilities.

Under the Bretton Woods legislation, the Treasury Department is responsible for formulating and implementing U.S. policy toward all of the international financial institutions.

It makes eminent sense for Treasury to be responsible for the IMF, but the international development banks are foreign aid agencies and Treasury has no inherent competence in the area of foreign aid.

New authorizing legislation could give policy responsibility for the development banks to the State Department.

The killer argument against bold steps of this kind is that they will open up a Pandora’s box of radical proposals from members of Congress to micromanage the IMF and the multilateral development banks, making them more responsive to partisan politics and consequently less effective.

This argument should not be dismissed lightly, but it should not be an excuse for missing this opportunity to revitalize them.

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About Lex Rieffel

Lex Rieffel is a Nonresident Senior Fellow at Brookings Institution in Washington, D.C.

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