Articles:
Merge the IMF and the World Bank

Dominique Strauss-Kahn is a fine choice as the new head of the International Monetary Fund, and the job he will take up formally on November 1^st is a fine-sounding job, full of prestige. A skilled and very internationally minded former finance minister of France, Mr Strauss-Kahn will be clever, diplomatic and politically shrewd. It is far from clear, however, that to be managing director of the IMF is a good job for anyone actually to do. That may be why his two predecessors, Rodrigo Rato and Horst Kohler, both left the job early. Here is what he should do to make the job more relevant and important.

            The IMF faces two problems, one temporary and one permanent. The temporary problem is that this institution is really only needed in bad times, and the past few years have been good. It was set up in 1944 to help countries meet their international payments when they run out of money. But there have been no big financial crises which have required the IMF to ride to the rescue since the East Asian and Russian crisis of 1997-98. That also means that countries that have borrowed money from the IMF have been repaying it, and few new borrowers have come along, so that its income has fallen and its budget has had to be cut. This will eventually change, however: sad to say, there will always be new financial crises.

            The permanent problem is that the IMF has become less likely to play a central role the next time a crisis occurs. This is because the big developing countries, such as China, South Korea, Taiwan, Russia, Saudi Arabia and the other Gulf States, have built up huge foreign-exchange reserves. They will not need the IMF’s help, and if other countries hit trouble they may choose to go directly to those capital-rich emerging markets for assistance, as a country like China may impose fewer conditions. Decision-making in the IMF is dominated by the United States and the European Union countries, but in today’s world the capital resources are dominated by Asia and the oil producers.

            To deal with this growing irrelevance, Mr Strauss-Kahn can and should do three things. The first is that he needs to persuade the IMF’s 185 member countries to change the institution’s voting rights to give more power to the emerging capital-rich nations, including China. He needs to get those countries more deeply involved in the IMF, so that when a crisis comes they will want to work with it, rather than in competition with it. To do this, he needs to persuade EU countries and the United States to accept reductions in their votes.

            The second action he can do at the same time. This is to tour the world’s major financial capitals calling on the governments of the EU, Japan, China, Brazil, Russia and the United States, among others, to start preparing a plan, now, for how they will act together when the next crisis hits. The financial turmoil during this summer should have shown everyone that a crisis can arise suddenly and ferociously. In the past, the American Treasury took the lead in responding, together with the IMF. Now, that will not be enough. America’s credibility has been damaged, its economy looks headed for its own recession, and domestic American politics might block a big American involvement. So Mr Strauss-Kahn needs to prepare an alternative.

            The third action is more drastic. He should probably wait until he has established himself in office before proposing it. But he should not lose too much time. This third action is that Mr Strauss-Kahn should propose a merger between the IMF and its neighbour in Washington, DC, the World Bank. Both are struggling to remain relevant. Both have been damaged by changes in their top management. Both have been looking for new roles, with the result that their operations overlap. A merger could lead to much-needed rationalisation of costs and roles, to a review of the institutions’ true purpose, and to an end to the outdated convention that a European should always head the IMF while an American must head the World Bank.

The World Bank’s head, Robert Zoellick, is also new in his job, and so could be persuaded to do some fresh thinking. In 2009 both institutions will be 65 years old. Nowadays, 65 is considered the right time to retire—and then be reborn as a single new global fund.