Sat, Apr 14, 2007 - Page 9 News List

Making the IMF and World Bank work for the poor

To remain relevant, global financial institutions should look beyond crises and better adapt to the needs of rapidly emerging countries

By Jean-Michel Severino

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.

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