The World Bank has long proclaimed its dream of "a world free from poverty" and the IMF may arguably desire "a world free from financial crisis." These are crucial and daunting objectives, but they are too narrow for the 21st century.
To remain relevant, the institutions must fully adapt to the needs of the world's rapidly emerging countries, and they can begin that process at this spring's IMF-World Bank meetings in Washington.
As many now acknowledge, the fund should look beyond managing financial crises and start addressing non-cooperative economic behaviors -- notably in the monetary field. The international community would gain from the IMF's becoming a center of joint-monitoring and permanent dialogue among the world's rich, poor and emerging nations. But for that to happen, the latter two need a greater say.
Fortunately, such reform is at last on the agenda. Last autumn's IMF-World Bank meetings approved an increase in voting quotas for some of the most under-represented emerging economies: China, Mexico, South Korea, and Turkey.
A second round of adjustment will need to involve other fast-paced economies without crushing the voice of the poorest.
As for the World Bank, it does not need to "reposition" itself so much as to root itself in emerging countries, as does the development aid industry in general. The international community must resist shortsighted calls to withdraw from middle-income nations on the ground that they can now "go it alone."
When it comes to global governance, communicable diseases, climate change or threats to biodiversity, these countries are very important. They account for 44 percent of people living with HIV/AIDS, 47 percent of global carbon dioxide emissions and 52 percent of the planet's protected natural areas. The international community simply cannot leave them to their own devices on such crucial issues without jeopardizing its own future.
Fighting poverty is a non-negotiable objective, but it cannot be the sole purpose of international aid, nor of the World Bank. In fact, a genuine commitment to poverty reduction implies working with the middle-income countries. They are home to 70 percent of the world's population that live on less than US$2 a day and face massive unemployment, gross inequalities, lack of infrastructure, regional imbalances and a litany of other challenges.
Some critics argue that lending public money to middle-income countries is no longer necessary because of their access to financial markets. True, private capital flows have surged in the wake of global liberalization and national privatization schemes. But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990s and more recently as investors pulled out from infrastructure sectors.
Another line of suspicion against public lending is that it crowds out private investment. However, an increasing body of evidence documents the positive impact of public investment on productivity and economic growth. It suggests that public lending compliments private lending, rather than substitutes for it.
Detractors ultimately fall back on the argument that multilateral lending to middle-income countries is waning along with demand. But, while loan volumes have decreased by a third since the last financial crisis, this is only a return to normalcy.
After an all-time high because of emergency aid to countries like South Korea or Argentina, lending is back to its normal volume of around US$25 billion a year. While lending by the World Bank did fall below its mid-1990s level, it is growing again, reflecting the expansion of regional multilateral banks and a policy pendulum that is swinging back to publicly financed infrastructure projects.
This does not mean that business as usual should be good enough for the World Bank. Its products need to be adapted. With decentralization taking place in many emerging economies, sub-national authorities are taking on more responsibilities. The bank should be able to work with them in the absence of sovereign guarantees and increase its loan offerings in local currencies, since these partners cannot afford currency risk.
To further boost the private sector, insurance and guarantees can help. Beyond this, more financial engineering is needed to draw upon the creativity of financial markets.
Finally, as David de Ferranti -- a former World Bank vice-president -- has pointed out, the bank should expand its intellectual partnerships and engage with the highly trained professionals, consulting firms and research institutions that emerging countries now boast. The bank must be open to local invention if it is to be accepted by and relevant to middle-income nations.
In terms of purchasing power parity, per capita income in middle-income countries is still about 15 percent of that of developed nations. The time has not yet come for global financial organizations to shake hands and part company with these countries.
Convergence is on the way, but minimizing its global costs requires redesigning the IMF and World Bank to meet the mounting challenges faced by emerging countries.
Jean-Michel Severino is a former World Bank vice president and the head of France's international development agency.
Copyright: Project Syndicate
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