Founded in 1944, the World Bank Group (WBG, or Bank) and the International Monetary Fund (IMF, or Fund) are twin intergovernmental institutions that are influential in shaping the structure of the world’s development and financial order. Also known as the Bretton Woods Institutions (BWIs), they were initially created with the intention of rebuilding the international economic system following World War II (WWII).

In the 1980s and 1990s, the policies championed by the BWIs were inspired in principle by the so-called ‘Washington Consensus’, which focused ideologically on promoting free-market economic policies such as deregulation, privatisation and trade liberalisation, as well as targeting unlimited economic growth, and were implemented primarily through Structural Adjustment Programmes (SAPs).

Thew BWIs have historically been seen as an instrument of United States and other Western countries’ political and economic power.

Criticisms against the IMF

IMF’s role as a crisis lender is becoming both smaller and less effective.

• Many large emerging markets have built up significant foreign exchange reserves to protect themselves against currency crises.
• The IMF is no longer the sole provider of emergency loans in times of crisis. Gulf countries like Saudi Arabia have started offering emergency cash, sometimes through unconventional means such as depositing money directly into the borrower’s central bank.
• China has become a major creditor to poor countries with urgent financial needs. Many of these countries are now defaulting on their debts or seeking restructuring due to rising interest rates and the pandemic. But China is reluctant to participate in debt write-downs because it believes that the IMF should bear its share of losses as a lender of last resort. Without debt write-downs, many of these countries may struggle to maintain sustainable finances, while creditors are bailed out.
• Although many loans have been approved by the IMF, most are conditional on restructuring the loan, which has not been agreed upon by China. And hence these countries in distress are not able to receive financial aid from the IMF. For example, much of the money intended for Suriname has been in limbo for over a year, as China has not been cooperating. And as the IMF struggles, China has increased its own emergency lending. These trends could make the IMF irrelevant.

Criticisms against the WB 

• Power Distribution: There has been inequitable distribution of voting power ever since the inception of the World Bank. The World Bank system amounts to $1 = 1 vote. Therefore, richer countries often tend to decide how the developing nations carry out their developmental process, while they only contribute 14% to the world’s population.
• Sovereign Immunity: The World Bank faces has sovereign immunity from all member countries. This leads to moral injustice as it is not accountable to its members and does not have a binding obligation to work in their best interests.
• Planning and Implementation: The World Bank has a very poor implementation record in terms of helping developing countries and has in fact been criticized of extending funds and support with the motive of simply extending its geopolitical presence in these regions.

Measures Required

The 3 pillars reforming the global monetary and financial governance include the following: -

1. Fairness: Making the system equitable should be the first pillar of any real reform. Thus, reviews of IMF quotas should ensure a much more effective representation of each member country, corresponding closely with its actual economic importance today.
2. Mandate: The IMF’s mandate should explicitly include effective surveillance of capital flows, which, in a highly financialized world, has much greater influence on exchange rates and countries’ macroeconomic situations than fluctuations in current account balances. Towards this, the IMF, together with the Bank for International Settlements (BIS) and leading central banks, should establish a framework for the management of global liquidity, with the objective of preventing financial crises and fragmentation of the global financial system.

• • SDRs could become an essential tool in this context. By issuing SDRs in the event of a shortage of liquidity or withdrawing them from circulation in the event of an over-abundance, the IMF could better play the role of a global central bank. To allow SDRs to fully play an effective role in the management of global liquidity, steps to broaden the SDR market and develop its role as a global currency need to be taken.
  • The IMF role of lender-of-last-resort should also be more explicitly recognized in its Articles of Agreement and its resources should be increased significantly. This recognition would assure countries exposed to aberrant capital-flow fluctuations of protection without their having to accumulate excessive and poorly productive reserves.

3. Governance: To endow the IMF with greater democratic accountability and legitimacy, the decision-making role of the International Monetary and Financial Committee (IMFC)—composed of the finance ministers and central bank governors of the 24 countries with seats at its Executive Board—should be enhanced, while its executive directors, who have a more administrative profile, should prepare the agenda.

• • Given that re-orienting global financial institutions is now effectively viewed as a G20 mandate, it’s desirable to review the G20’s composition for truly universal and equitable representation of all countries in the design and implementation of global strategies. This can be done via a system of regional constituencies that has served the Bretton Woods institutions well, and steps were taken in this direction under India’s G20 presidency.

These measures would amount to reforming the international financial system.