Trump Must Distinguish Between the World Bank and the IMF
In his seeming eagerness to rein in the world’s multilateral lending agencies, one has to hope that President Trump has the wisdom to distinguish between the World Bank and the International Monetary Fund (IMF). Failing to do so could be a very costly mistake for both the United States and the world economy.
The World Bank has become a bloated development agency that has largely outlived its primary purpose. By contrast, the IMF is an agency whose importance in resolving global financial crises has only increased over the years as the global capital market has been liberalized. As such, the IMF could prove to be critically important to the Trump Administration since a global economic crisis seems all too likely to occur before the current Administration ends.
Initially, the main purpose of the World Bank, which was set up in 1944 towards the end of the Second World War, was to help rebuild the war-torn European economy. Subsequently, the Bank’s primary purpose shifted to helping provide much needed long-term development financing to those countries in the developing world, which did not have ready access to the world’s capital market.
Like all too many bureaucracies, it would seem that the Bank is an organization that has largely outlived its usefulness but is always coming up with new reasons to justify its existence. The European economy has long since got back onto its feet and is hardly in need of subsidized development financing. Meanwhile, well over 60 percent of the World Bank’s lending goes to middle-income emerging market countries like Brazil, China, India, and Mexico, that today enjoy the easiest of access to the world’s capital market. Indeed, these countries have long since had no difficulty in borrowing in the market on favorable terms as much money as they might need for their development needs.
It is against this background that the Trump Administration would seem to be totally justified in demanding that the World Bank take a close look at its own balance sheet before asking for additional US contributions for yet another capital increase.
Does China really still need World Bank financing when it has more than US$3 trillion in international reserves? Might the same not be said of the Bank’s other major emerging market economy clients, which long since have had no difficulty in tapping the global financial market? Should the World Bank’s primary focus today now not be on helping the poorest of its member countries that do not enjoy access to the world capital market rather than lending large amounts to middle-income countries that do enjoy such access?
While the liberalization of capital markets across the globe might have reduced the need for a World Bank by increasing the availability of market financing to the emerging market countries, it has increased the need for a well-funded IMF. It has done so by substantially increasing the amount of money that can and does flow across international borders in times of economic crisis. That in turn has required an ever-larger amount of financing to stabilize the economies of countries faced with balance of payments crises as was recently demonstrated during the Great Economic Recession of 2008-2009.
The reason that the Trump Administration would be particularly ill- advised to think of scaling back the IMF at this particular juncture, is that it is all too likely that it will need the help of the IMF in resolving a global economic crisis before the Administration ends. This is not simply because global debt levels are currently at all-time highs and because there are currently indications of asset price bubbles and of serious mispricing in many global credit markets. It is also because there appear to be fault lines in a number of systemically important economies like Brazil, China, and Italy, which suffer from large economic imbalances and political risks.
To be sure, President Trump is under pressure from his political base to deliver red meat on his America First and anti-globalization agenda. However, mercifully to date, he has displayed welcome restraint in doing so. One must hope that he continues to do so particularly in regard to the IMF. To do otherwise would not be in the long run interest of our country.
