Africa: The World Bank and the International Monetary Fund Must Continue Reforming for Enhanced Effectiveness
The World Bank and the International Monetary Fund (IMF) are facing calls for significant reforms in order to adapt to the needs of the 21st century. Some argue that they should be shut down, while others, like myself, believe that effective international financial institutions are essential. Without them, we would need to create new ones. Therefore, it is important to enhance their credibility, legitimacy, inclusivity, responsibility, and effectiveness. However, these reforms must be undertaken within the limitations set by their founding treaties.
This article, based on my book “The Law of International Financial Institutions,” provides an overview of these institutions and discusses the challenges they are currently facing as well as their potential for reform.
Historically, the 1944 Bretton Woods conference aimed to establish a new international monetary order. However, it was an exclusive event, with only 44 out of the 99 officially recognized countries represented. Many countries were still under colonial rule and were not involved in the negotiations.
There are four key aspects worth noting about this new international order. Firstly, it introduced the first rules-based international monetary system, with the IMF overseeing its implementation. In return, the IMF and World Bank provided financial assistance to member states, holding them accountable for complying with the agreed terms and conditions.
Secondly, the institutions’ governance was based on weighted voting, where member states received a vote proportionate to their economic size and financial contributions. This altered the principle of sovereign equality that underpins the international legal order, allowing states to be outvoted and obliged to abide by policies they opposed.
Thirdly, the legal status and powers of these institutions were gradually clarified over time. Notably, they were granted immunity to prevent member states from interfering with their operations through lawsuits.
Lastly, the treaties did not address environmental and social responsibilities.
By the mid-1970s, the world had changed significantly, with many African and Asian states gaining independence and joining the institutions. However, their differing needs and priorities were not adequately represented due to their limited voting power.
Additionally, the collapse of the Bretton Woods system in 1973 led to a market-driven approach to determining currency values and individual states’ monetary policies.
Moreover, concerns about the environmental and social impacts of economic activities started to emerge. Controversies arose regarding World Bank-funded projects and IMF-funded programs.
Civil society organizations gained prominence as they advocated for the institutions to be more transparent and accountable, citing harm caused to local communities and the environment.
In response to these developments, the institutions made some efforts to address the issues.
Regarding governance, the number of member states has increased significantly, while the size of the institutions’ boards of executive directors has only doubled. Thus, smaller and poorer member states may find it challenging to raise their concerns at the board level, making the institutions less responsive to their needs compared to wealthier member states.
Furthermore, the institutions’ financial capacity has declined. When the IMF commenced operations, its total resources were equivalent to 3% of the global GDP at the time. Today, their resources represent around 1% of a much larger global GDP.
The institutions have acknowledged their responsibility for environmental and social impacts and recognized the relevance of human rights issues. However, they have struggled to establish a consistent approach due to the absence of agreed-upon standards.
Additionally, addressing these issues requires impact assessments and consultations with affected stakeholders, which was not initially envisioned. It may also involve engaging with opposition groups, which poses further challenges.
The World Bank has developed operational policies and procedures for its staff to address environmental and social issues, but this is not universally accepted by member states.
The IMF has now acknowledged that these issues can have significant macroeconomic implications but has yet to outline a clear strategy for addressing them.
Moreover, accountability is a complex issue for the expanding role and responsibilities of the institutions. Mistakes may lead to some stakeholders bearing an unfair burden of project or policy costs.
In 1993, the World Bank established an independent accountability mechanism called the Inspection Panel, which, despite its limitations, was a significant development in international law.
The IMF, however, has not established a similar mechanism, leaving external stakeholders with no means of holding it accountable.
Looking ahead, the World Bank and IMF must continue to evolve to remain relevant in the 21st century. They should develop governance arrangements and operational policies aligned with international norms and standards, as well as implement accountability structures that effectively address challenges related to climate change, poverty, inequality, and discrimination. Adequate resources must also be provided by wealthier member states to fulfill their mission.
Overall, the reform of these institutions is vital to ensure their effectiveness and legitimacy in the modern era.