The World Bank and the International Monetary Fund Should Do Less to Achieve More
Created in the aftermath of World War II, the World Bank and the International Monetary Fund (IMF)—referred to here as the Bretton Woods institutions—have played an important role in the international financial architecture of the modern era. Because they sit at the heart of that system, these institutions have been constantly buffeted by the cross-cutting forces of geopolitics, economic policy aims, and financial markets. Predictably, no one is happy. It is time to get back to basics.
A growing chorus of Western international development experts and their governments have been arguing for abandoning the institutions’ traditional mission of poverty elimination, economic development, and financial stability to mainly focus instead on addressing climate change. In the United States, the administration under President Biden has repeatedly emphasized its support for a so-called evolution, including an expansion of lending capacity and reshuffling of priorities, especially to emphasize climate change.
At the recently concluded 2023 Annual Meetings of the World Bank Group and the IMF in Marrakech, stakeholders focused on expanding the Bretton Woods institutions’ focus on climate change rather than optimizing the effectiveness of existing operations. World Bank president Ajay Banga argued for “widening the aperture of the World Bank,” and IMF director Kristalina Georgieva principally focused on increasing IMF resources so the IMF could take a larger, more active role in the global economy. The talk is now openly of a future capital increase for the World Bank from some countries, and the United States seems to be moving toward supporting one for the IMF (along with some calls for reform). This approach leads to a common trap for good-faith actors who aim to solve all of the world’s problems but end up solving none. Ambitious proposals like former Treasury secretary Larry Summers’ call for a new triple mandate of crisis response, post-conflict reconstruction, and sustainable development will most likely result in even greater institutional drift, an erosion of the Bretton Woods institutions’ unique value proposition, reduced impact, and continued frustration.
Rather than conclude the World Bank and the IMF must do more to meet today’s challenges, the Bretton Woods institutions should instead ask more fundamental questions about what they seek to achieve, how to prioritize and focus their efforts, and how to establish accountability mechanisms that incentivize achievement of those goals.
Institutional Growth at Any Cost
The original design of the Bretton Woods institutions creates unique challenges to achieving their long-term goals. Although the World Bank and the IMF are ostensibly structured as financial institutions with shareholders and clients, they are unlike private corporations in that they lack the natural governance mechanism of the profit motive. Their shareholders—sovereign governments—are motivated not by pecuniary gain but by a complex set of geopolitical considerations. Moreover, these shareholders have different visions of success—a dynamic exacerbated by the rise of China as a global economic power pursuing its own goal of creating an alternative economic system. These competing demands create significant problems at all levels of the Bretton Woods institutions.
At the operational level, the World Bank and the IMF suffer from an inability to maintain strong accountability standards on core activities that would incentivize impact. The World Bank’s own Independent Evaluation Group acknowledges that the World Bank has “too many priorities” and that accountability for results is weak. As a result, the World Bank is primarily interested in making new loans, with few consequences in terms of missing development targets. Most research and after-action reports are not typically considered when new projects are being designed. Borrower oversight and enforcement of contractual obligations are lacking. For years, the IMF’s largest borrower, Argentina, repeatedly fell short of its commitments, yet the IMF board continually rolled over loans to defer the necessary hard choices on sovereign restructuring. Fortunately, the Milei administration’s promising economic reforms may place Argentina’s IMF program back on track if the program is implemented effectively and politically sustainable.
The same underlying issues from the lack of objective project-level standards have created a culture of impunity at the management level. Recent years have seen a series of scandals undermining credibility. For example, large shareholders allowed Director Georgieva to retain her position despite public disclosure of her manipulation of World Bank data on behalf of China—which, ironically, she claimed was in service of “multilateralism.” Similarly, corruption has long plagued IMF loan programs: available audits of emergency Covid-19 pandemic relief show that recipient governments embezzled a large proportion of the funds.
The large bureaucracies—and the legal immunities that both institutions enjoy—contribute to a culture that can lack accountability. Many staff members are focused on the status of their U.S. visas, which are tied to their continued employment at these institutions. At best, this dynamic contributes to a culture of conformity. At worst, it creates fear of coming forward, enabling a sometimes hostile work environment where, among other issues, sexual harassment can be rampant, affecting one in four women at the World Bank. In one case, senior official Rodrigo Chaves, now the president of Costa Rica, engaged in a long-standing pattern of sexual harassment while he was repeatedly promoted during more than two decades of service at the World Bank. Eventually addressing the overall problem, the World Bank appointed a sexual harassment coordinator to help improve the working environment. In another recent case, senior managers at the World Bank are reported to have obstructed an internal investigation of child sexual abuse at schools the World Bank was funding in Kenya.
The World Bank also lacks accountability for projects gone wrong. Despite internal safeguards, it has a track record of occasionally, and unfortunately, supporting projects that end up being harmful to the very people they are meant to help. Absent effective internal accountability for these project impacts, affected people from India and Honduras, for example, have been forced to turn to U.S. courts. The India case went to the U.S. Supreme Court and cost the World Bank over $8 million in legal fees. It recently settled the Honduras case, paying $5 million in compensation to farmers who allege that their villages were attacked by “paramilitary death squads” employed to guard the World Bank project. And despite pledging to learn lessons, more cases keep coming. In the next few months, the World Bank’s board will be asked to consider investigations of human rights abuses connected to its projects in Tanzania, Liberia, and Kenya. At the same time, reports of cultural genocide connected to World Bank projects in Western China among the Uyghurs appear to be still uninvestigated.
Problematic governance, lack of accountability in assessing performance, and changing shareholder priorities have led to mission creep that is endemic to all international institutions. At the 2023 Annual Meetings last fall, President Banga articulated the mission in terms of five verticals, or categories, with 18 subcategories; an overlay of gender equality, jobs, and climate; and eight global challenges. The tension between shareholders’ agendas-du-jour and clients’ needs, expectations, and priorities places management and staff in a vise. As with any bureaucracy operating without a clear mandate, management will prioritize major donors to ensure funding and their own self-preservation at the expense of clients’ needs and priorities but also at the expense of their distinctive value proposition.
The IMF, created to address balance-of-payments needs under the fixed exchange rates of the gold standard, now has 13 lending facilities financed by three different trust funds funded by member contributions. In recent years, the IMF has consistently expanded beyond its critically important core mission of lending to governments facing financial distress—for example, by repeatedly pushing for large general allocations of special drawing rights (SDRs), a poorly targeted policy tool, as the authors warned in 2021. Similarly, the IMF’s surveillance and capacity development missions suffer from a mushrooming of priorities that has resulted in the IMF devoting resources to weigh in on a wide range of trendy topics from cryptocurrency to climate change to artificial intelligence. It is unclear what unique expertise the IMF brings to these issues.
The World Bank employs nearly 20,000 staff in more than 130 offices around the globe, working on a wide range of priorities that may be linked to the nebulous concept of “development.” It, too, has hundreds of trust funds. Similarly, the World Bank seems to lack the discipline to hew to its mandate of encouraging economic development in poor countries, instead succumbing to both mandate expansion and inertia. For example, China has met the criteria for graduation from World Bank borrowing, and it claims to have eliminated poverty. Yet the World Bank continues to lend roughly $2 billion per year to the Chinese government and its firms. Funds on that scale could make a meaningful difference in Africa or the Pacific Islands.
This omnipresent approach undermines these institutions’ impact by compromising their comparative advantage. When embarking on any project in a world of scarce resources, there are trade-offs that make optimizing difficult. Even with the current plan to expand lending and the push for private capital mobilization, it will be difficult to achieve meaningful impact given the spreading of resources across so many areas. Furthermore, many of these institutions’ articulated aims lie beyond their competencies. This dynamic perhaps explains why the goals and indicia of success are often unclear. In the absence of renewed accountability, however, serious prioritization will likely continue to be absent.
Institutional reforms centered on accountability are a predicate for ensuring the Bretton Woods institutions have a durable impact. The IMF should rationalize and streamline its lending programs by abandoning the new Resilience and Sustainability Trust (RST), which has attracted significant criticism in the U.S. Congress, and instead channel all concessional financing through the popular Poverty Reduction and Growth Trust (PGRT) programs. Indeed, the development of the RST demonstrates how the IMF continues to expand its mission with little concern for how to optimize its effectiveness. In order to increase efficacy on matters within its existing mandate, the IMF must rechannel existing resources rather than add new appendages that will eventually develop the same problems as their existing programs.
The IMF should also significantly curtail the use of the SDR as anything other than a unit of account. The design of the SDR was arguably sensible when it was created in 1969 to assist in managing international balance of payments under the gold standard. But rather than accept the SDR’s obsolescence under the system of flexible exchange rates that has prevailed since the 1970s, the IMF has sought to rebrand the SDR as a tool to respond to macroeconomic shocks, a task for which it is supremely unsuited. The IMF is required to distribute SDRs to all IMF members in proportion to their shareholding. As a result, SDR allocations end up primarily providing rich countries with liquidity they do not need, and they are misleadingly justified by creating a small increase in reserves for poor countries—all in order to maintain the appearance that the IMF is relevant and responsive. Shockingly, of the $100 billion that rich countries pledged to rechannel to poor countries as part of the justification for the 2021 SDR allocation, less than 1 percent of the amount pledged appears to have actually been provided. The U.S. Congress should amend the Special Drawing Rights Act to require formal congressional assent for any allocations. (It is currently required only for allocations of more than $650 billion—an extremely high threshold for democratic oversight.)
The World Bank needs to make meaningful improvements to the project process, which is essential given the effect of its policies and processes across its high transaction volume. President Banga’s calls to streamline and speed up the loan and grant process are long overdue. But, crucially, the World Bank board also needs to have more of a say to ensure oversight and accountability from shareholders. At the planning level, much of the programming stems from the five-year Country Partnership Frameworks (CPFs), which are negotiated between staff and sovereigns. CPFs guide all project finance but are not subject to a vote of the board. China’s last CPF made little mention of much-needed state-owned enterprise (SOE) reform and included comments like “China wants state-owned enterprises (SOEs) to retain an important role in China’s economy,” which sends a clear message that certain sovereigns need not agree to necessary economic reforms to secure World Bank support.
Earlier board involvement can also play a productive role in improving already strong projects. Generally, a lack of investment in the developing world is driven by a lack of suitable investment projects, not by a lack of capital. That is why the World Bank is so important: it can offer technical assistance such as project planning and governance enhancements that can de-risk projects to the appropriate hurdle rate. Moreover, much of the project preparation happens in the two-year run-up to board approval. If the board is engaged earlier, it can target these services to a more promising set of projects. However, once the project development process is underway, years may pass before board involvement, and the board must essentially approve every project, which defeats the purpose of holding a vote and provides little oversight. Furthermore, many developing countries are afraid to vote against projects for fear that the countries’ representatives will then vote against their own projects or that speaking up could affect their bilateral relationships with donor countries. More transparency on board meetings and votes would also go a long way in terms of accountability, as would recorded voting based on majority shareholding, not simply consensus, which can lead to least common denominator governance.
The World Bank and the IMF should also restructure their internal justice, accountability, and oversight functions, given that they currently involve multiple, weak, under-resourced, and only quasi-independent functions that are subject to interference from management. In addition, the World Bank should commit to a new framework for the remediation of project-related harms as well as strengthening staff whistleblower protections so they align with international best practices. Finally, the United States should amend the International Organizations Immunities Act to clarify the limits of the immunities held by the Bretton Woods institutions with a focus on cases where they mistakenly end up funding human rights abuses abroad.
China’s Alternative Economic System
Increased oversight from shareholders would also allow these institutions to act more strategically to address China’s ongoing attempt to construct an alternative international economic system. Such oversight is particularly necessary given that the current World Bank and IMF approach to China continues the policy of accommodation that has failed for the last 30 years. President Banga recently said he does not think China is a rival to the World Bank and does not want to take sides. Director Georgieva is continuing the pattern of catering to Chinese interests by calling for increasing China’s IMF shareholding. This approach fundamentally misdiagnoses China’s approach to the Bretton Woods institutions. China’s record demonstrates that giving it more responsibility at the World Bank and the IMF will not cause the country to be a responsible actor; it will merely provide China with greater ability to use the Bretton Woods institutions to achieve its own aims as it pursues its international economic interests, which clash with the mission of the World Bank and the IMF.
President Banga’s calls for reducing the project review and approval time by one-third is a critical start. Many projects that do not fit neatly into the World Bank’s existing standards are funded by a competitor institution like the China-headed Asian Infrastructure Investment Bank (AIIB), the Export-Import Bank of China, China Development Bank, or the BRICS New Development Bank (NDB), which ask few questions and work at lightning speed. In other words, these projects are funded and executed regardless of the World Bank’s concerns, usually with much worse results while adding to unsustainable (and often opaque) debt. The World Bank should work harder to improve its internal bureaucratic timelines and collaborate with sovereigns to find a middle-ground solution. The World Bank is fortunate that, in general, countries still prefer to work with legacy global institutions—for now.
Similarly, the World Bank’s continued lending to China is an inexcusable drain on resources, an unnecessary distraction, and emblematic of its foundational failing: the inability to prioritize. China is a developed country by all measures and should no longer receive loans. Indeed, the Japan-headed Asian Development Bank is already moving toward ending all new loans to China, and the Biden administration has publicly criticized the slow pace of the cessation of lending to China. At a minimum, the World Bank should suspend its lending to China until the country stops building new coal plants, as, ironically, it is lending to the world’s largest and fastest-growing source of carbon emissions. Additionally, the World Bank should seek not to empower AIIB but should stop all cooperation and cofinancing.
Similarly, bilateral Chinese lending to countries dealing with macroeconomic crises makes the IMF’s job much more difficult, but its institutional response has too often been to needlessly kowtow to China or suggest lowering the IMF’s standards. The IMF’s promising focus on its surveillance mission through long-standing debt sustainability and transparency initiatives is essential to continue to expose predatory Chinese lending practices. Transparency, not facsimile, is the appropriate means to counter strategic Chinese lending, recognizing there are limits to the IMF’s ability to dissuade poor, desperate countries from turning to China for financing. Such financing typically serves the interests of China and the borrowing government’s political leaders rather than the long-term economic interests of citizens.
Back to Basics
Enhanced accountability should allow the Bretton Woods institutions to function more effectively. But to what end? Ultimately, results and impact are the key metrics for assessing these institutions to ensure their continued relevance. Given economic crosscurrents and the broad range of constituencies the World Bank and the IMF must satisfy, the goal should be prioritizing a narrower set of economic aims.
In theory, addressing climate change could be a narrowly tailored, singular objective. Pollution and its consequences, including human-caused climate change, are serious issues with immediate and long-term economic impacts. President Banga has made clear that climate change is his top priority—presumably as a condition of his appointment.
However, the nature of the climate change problem set makes it uniquely unsuited as a focus of action for the Bretton Woods institutions given the inherent trade-offs between carbon reduction and economic growth, limited resources, human rights, and the realities of international financial institution governance. The World Bank procures the vast majority of its green technology from China, where much of it is produced using Uyghur slave labor (and coal power). Tracing supply chains is difficult without a willing partner. Additionally, increased reliance on green technology means more reliance on imported Chinese technology rather than on domestic or regional energy sources, with pernicious economic, balance-of-payments, and geostrategic consequences for developing countries.
Climate change mitigation also presents a multifaceted series of economic trade-offs, such as between the long-term environmental benefits of carbon reduction and the near-term benefits of baseload power. An honest balancing of these priorities would deprioritize carbon reduction, given the near-term development needs and the high discount rate that should be applied to the long-term benefits of marginal carbon reductions. Furthermore, any carbon reduction supported by the Bretton Woods institutions will be dwarfed by increasing emissions from China, which is permitting two new coal plants every week, or six times more coal construction than the rest of the world combined. A focus on climate adaptation rather than mitigation could improve benefits for clients and respond to client demand, as African leaders have called for.
Most concerningly, the climate agenda is creating a schism between large shareholders and clients who are focused on poverty reduction today. The rich world’s singular focus on climate change harkens back to the days when the developed world told the developing world what would be in its best interest. Experts have highlighted this “green colonialism,” which is echoed by the African leaders who have called out the hypocrisy of the developed world’s voracity to secure Africa’s fossil fuel sources for themselves while discouraging Africa from using them.
This mismatch is not just a mere disagreement over economic policy; it also presents a fundamental challenge to the raison d'être of the Bretton Woods institutions. If the IMF and the World Bank are not responsive to clients, their entire rationale disappears. China has made significant inroads in the development of infrastructure and energy resources in the Global South precisely because poor countries want to develop their resources and improve their standards of living—particularly for the 600 million Africans who have no access to electricity and are responsible for less than 3 percent of the world’s energy-related CO2 emissions. The Bretton Woods institutions should not reverse efforts in recent decades to rebalance their shareholdings and governance by decreasing U.S. and European authority in order to give the developing world a stronger voice and vote.
Directing 90 percent of all World Bank funds to climate change, as some advocates have suggested, would solve the prioritization problem but at the expense of the World Bank’s immediate impact on human flourishing. Given the vast scale of financing required for meaningful progress toward net-zero emissions, the World Bank would not make a dent in global carbon emissions, particularly since it, bizarrely, has refused to finance nuclear projects (although recently, the United States, the United Kingdom, France, Sweden, Finland and South Korea took strong and decisive leadership on this key issue ahead of the most recent UN Climate Change Conference, pushing for a tripling of nuclear power globally by 2050, and calling on the World Bank to end its ban on nuclear finance).
While the developing world wants to address the impacts of climate change, maintaining consensus between donors and clients suggests that climate should be one factor deserving of consideration rather than the dominant priority. For example, analysis of recent client surveys shows education as the top priority for sovereigns, followed by public sector reform and jobs. Only one country in the 43 surveyed placed climate change in its top two. A concrete, achievable goal could be to focus on global safe water: at 1.2 million deaths per year, more die from unsafe water than all wars and violence, according to the United Nations. Yet over the last five years, the World Bank has spent only about 3 to 7 percent of its funds on water and sanitation projects.
The Right Way to Amplify Impact
The Bretton Woods institutions need to define a more focused set of priorities and then actively maximize their impact on those priorities using the resources currently available given post–Covid-19 pandemic donor fatigue. The current proposals to increase World Bank and IMF resources by expanding sovereign guarantees, issuing hybrid capital, leveraging callable capital, or issuing SDRs are largely unworkable. These proposals are essentially financial engineering that would increase the risks to existing shareholders’ capital in ways that sovereigns did not anticipate. Furthermore, these accounting gimmicks are undemocratic since they seek to increase sovereign exposure without appropriately engaging their national budgets and political processes. This is the fatal flaw in a provocative proposal to finance World Bank lending with SDRs, since it would effectively obligate shareholders to provide real resources without going through sovereigns’ budget processes.
The World Bank’s focus on private capital mobilization is encouraging, but how to accomplish this is less obvious. It depends on how one defines private capital, which should not include state-owned banks or bilateral aid agencies. Bank components that have an important role to play but need reform include the International Finance Corporation (IFC), which loans directly to the private sector, helping to seed capital and crowd in other firms to follow, and the Multilateral Investment Guarantee Agency (MIGA), which promotes foreign direct investment by providing political risk insurance (PRI) and reinsurance.
MIGA could play a larger role given increasing risks globally. The most recent political risk survey showed that in 2022, 92 percent of all companies that participated in the survey reported experiencing political risk loss, which is almost triple the rate in 2020. As a result, demand for PRI is strong and likely to increase. MIGA has the capacity to do more; it just needs better projects and better marketing. Sovereigns may not understand how to navigate it and would benefit from technical assistance from the World Bank to better utilize the suite of options. Likewise, World Bank staff on the ground could benefit from training to help guide clients not just on macroeconomic issues and specific projects but also on how to mitigate financial risk.
Do Better by Doing Less
Finance ministers, central bank governors, and staff may chafe at the suggestion that the World Bank and the IMF should pursue fewer but deeper objectives, fearing that such a course could reduce these institutions’ prominence. But the key indicators of success should be the impact on the ground of the global economic system. They might be surprised at how a narrower but deeper impact could lead to more influence and standing.
A more focused mission for the Bretton Woods institutions would also recognize the reality of post–Covid-19 pandemic sovereign donor fatigue, and the authors of the recent Group of 20 road map for the World Bank should be supported in their calls for increased focus on private capital mobilization and stretching of the balance sheet without undue risk—but only so long as the money is deployed according to the World Bank’s core competencies.
Even if prioritization and crowding in of private capital succeed, the accountability issues and tensions within these institutions remain impediments to sustained success. Over time, only increased transparency and accountability can ensure these institutions deliver for the people who live within the global economy.
Most fundamentally, despite all the challenges and frustrations, it would be a grave mistake for the United States to abandon the Bretton Woods institutions. Not only would such action weaken a system that continues to do much good for the world’s people—poor and rich alike—but retrenchment would also open the door for China to increase its influence both for commercial advantage and to further weaponize these institutions against democracy and rule of law. The sweat and treasure the United States has invested in these organizations over many decades has advanced U.S. interests by helping the world’s poorest and supporting global economic growth and stability. But securing the Bretton Woods institutions’ continued contribution requires ignoring the siren song of the issue du jour and instead rediscovering their fundamental purpose.
Jennifer DJ Nordquist is the former U.S. executive director of the World Bank (2019–21) and a senior adviser (non-resident) at the Center for Strategic and International Studies in Washington, D.C. Dan Katz served as a senior adviser at the U.S. Department of the Treasury from 2019 to 2021.
This report is made possible by general support to CSIS. No direct sponsorship contributed to this report.