By Gordon Brown and Mohamed A El-Erian,
The Bretton Woods institutions — the International Monetary Fund (IMF) and World Bank — are now 80 years old. But they are as under-resourced and poorly supported by national governments as at any time in history. Their predicament is perhaps the clearest sign that economic and financial multilateralism is fragmenting along with the global economy.
The resources available to the IMF represent less than 1% of the global economy. Yet, as the lender of last resort and a financial safety net, it is expected to deal with the problems of 191 member countries, as well as joining the global response to issues like climate change and inequality.
The Fund’s most recent quota review failed to produce a net increase in its lending capacity. In fact, between March 2020 and March 2023, the IMF committed $191 billion (and disbursed less than $75 billion) of its trillion-dollar resource base.
The Fund’s surveillance role also faces major challenges. Framed as a crisis-prevention tool for countries and the overall system, it has failed to predict and correctly frame economic shocks. Admittedly, national policymakers have failed, too. Some failures are understandable, as in the case of Covid-19. But others, including the supply-chain disruptions and subsequent surge in inflation, could have been foreseen. Such slippages support the case for a more effective system of surveillance.
The World Bank is even less adequately resourced for the added climate responsibilities it has been given. Allocations to lower- and middle-income countries in 2023 equalled 0.07% of global GDP. The $73 billion earmarked in the 2023 fiscal year represented the smallest-ever commitment to development in its existence.
What ails the IMF and the World Bank is not limited to the two. We are witnessing a broader and increasingly worrisome breakdown in multilateralism at a time when the world’s common problems can be solved only through common action.
But a sweeping approach to reforming the world’s multilateral institutions — often presented under the banner of “Bretton Woods 2.0” — is unlikely. Still, incremental progress is possible.
The World Trade Organization, for example, should focus on leveraging the skills of its director-general, Ngozi Okonjo-Iweala, to solve trade disputes through conciliation, arbitration, and negotiation. That would mark a move away from its overly legalistic, and now broken, judge-based appeal system. Similarly, the IMF, led by an equally charismatic managing director, can enhance its contributions to crisis prevention and resolution by leaning into its role as an early-warning system. That also means responding to any future crisis with more financial firepower and by mobilising lending capacity to enhance resilience against economic shocks.
While high-income countries have borrowing capacity and reserves to weather most shocks, some emerging markets don’t, and low-income nations are even more exposed, given their limited reserves and vulnerability to losing access to financial markets. Faced with the threat of sovereign defaults, too many indebted countries have reallocated their health and education spending. Tragically, 3.3 billion people now live in countries that spend more on interest payments than on these basic services.
The Bretton Woods institutions also need to support developing countries’ urgent climate-mitigation and adaptation needs. Failure to do so would jeopardise millions of people’s well-being and also have negative cross-border spillovers.
To be sure, the World Bank now directs 41% of its lending to climate-related projects, and its new mission statement refers to “a livable planet”. But without a significant increase in its overall resources, this new focus on climate change could come at the expense of investments in human capital and traditional development work.
The key to revitalising the multilateral institutions is to reform their governance to reflect the enormous shifts in the global economy. The shareholding structure of the IMF and the World Bank, and the outmoded process of allocating top jobs according to nationality, are no longer in step with current realities. Even today, 59.1% of voting shares in the IMF are held by countries representing just 13.7% of the world’s population. India and China are the two most systemically important and influential emerging economies, yet their combined share is only 9%.
Inadequate governance is not the only legacy issue frustrating progress. More needs to be done to deal with excessive debt and debt-service costs in the 79 low- and middle-income nations deemed to be in debt distress or at risk of it. It demands a plan for sweeping, sustainable, and incentive-aligned debt relief.
Here, IMF member states should strengthen its capacity to provide otherwise well-managed debt-distressed countries annual allocations of its “in-house” financial instrument. Although $650 billion in special drawing rights (SDRs) were allocated in 2021, only $21 billion went to the lowest-income countries. The rules for SDR allocations need to be revised.
Second, making the Common Framework for Debt Treatments work better will require closer cooperation with China’s government and private creditors. Both carrots and sticks need to be revamped. The alternative of protracted negotiations, side deals, and incomplete restructuring often produces only limited benefits.
Third, the IMF needs to address the perceived lack of fairness in the conditions that it requires poorer countries to meet when seeking relief. Fortunately, the managing director is clearly aware of the need to lower the punitive interest rates charged to middle-income countries. The IMF’s recently launched review of its surcharge policy now provides a platform for changes that would not undermine its preferred-creditor status. As a preventive measure, governments need to establish an equitable global financial safety net.
As for the World Bank, its president is determined to reform and is on the right track in launching a Livable Planet Fund focused on human capital and green stewardship. But the initiative needs resources. Given the rising number of global poor (at 700 million) we cannot settle for less.
Finally, given that the G7 cannot be a steering committee for a world economy in which its members have a minority share, the G20 should become what it was intended to be: the premier forum for global economic cooperation, including reform of multilateral institutions. But that will require a more representative system to offer smaller countries a role in a constituency-based framework, as well as a professional secretariat to ensure continuity.
Massive revisions to the international system and its institutions generally come about only after a breakdown of the current order. Hence, the post-1814 balance of power emerged after Napoleon’s defeat; the post-1918 Versailles system arose after five dynastic empires collapsed; the post-1945 architecture followed the defeat of Germany, Italy, and Japan; and what US President George HW Bush called a liberal “new world order” appeared with the Soviet Union’s collapse and Warsaw Pact.
The urgent challenge today is to achieve the transition to a fifth world order without weathering a damaging breakdown. One path leads toward ever more global fragmentation and deepening crises, while the other offers a chance to pursue both individual and shared prosperity through joint solutions to common problems. The choice seems clear.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
Authors Gordon Brown and Mohamed A El-Erian are respectively former UK PM and UN Special Envoy for Global Education, and president, Queens’ College, University of Cambridge, and professor, Wharton School, University of Pennsylvania.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.