The Hindu Business Line : Pedro Malan Committee Report — Counselling the Bretton Woods twins

The Malan Committee, set up to evaluate the relationship between the IMF and the World Bank, wants the Fund to stay away from the Bank's turf and get rid of the one-size-fits-all approach to stabilisation or growth. It also calls for exchange of staff between the institutions. But the US, which has the veto right, is unlikely to go along with them, says K. SUBRAMANIAN.

In March 2006, the senior management of the International Monetary Fund and the World Bank appointed an External Review Committee, headed by the former Brazilian Finance Minister, Mr Pedro Malan, to evaluate the relationship between the two institutions. Other members included eminent central bankers or Ministers who had interacted with the Washington Twins in their earlier avatars. The initiative to undertake the review was a response to the growing resentment voiced by developing countries and civil activists over the functioning of the Bretton Woods institutions.

The Committee gave in its report on February 27. Though Mr Rodrigo de Rato, Managing Director of IMF, and Mr Paul Wolfowitz, President of the World Bank, formally welcomed it, they would have good reason to be troubled over the recommendations.

For some years, these institutions have been accusing developing countries of "failing in governance". They have been imposing "good governance" as a sine qua non for providing loans. If the Malan Committee has any clear message to these institutions, it is this: Physician, heal thyself!

Under attack

In recent years, the Washington Twins have come under attack and concerns have been raised over their designing and enforcing conditionalities in areas outside their core competence. Attention was invited to the `democratic deficit' attached to their own governance, especially in the sharing of seats and votes.

Since their inception, it was understood that the institutions would have separate and distinct roles: The Fund would provide short-term, or bridge, finance to tide over temporary balance of payment difficulties; and the Bank would extend long-term loans to facilitate development. Sadly, this well-defined demarcation, described in college textbooks, has been botched.

The Fund turned more dominant and began to call the tune for the Bank. These were subsumed under the Washington Consensus, the magic wand that was to ward off all evil. The ultimate erosion of the border between the two was the emergence of "cross-conditionality."

As a Fund/Bank document on `Strengthening IMF-World Bank Collaboration on Country Programmes and Conditionality' describes: "Close collaboration between the Fund and the World Bank is indispensable for providing effective support to member-countries, and is a pillar for global efforts on development through the promotion of financial stability, sustainable growth and poverty reduction"

Sadly, it was not conceded that `conditionality' focussed too much on stabilisation and too little on longer-term growth. This hiatus widened over time and reduced the credibility of the institutions. Further, acceptance of the Fund/Bank programmes became politically untenable as the conditions proved too onerous without any significant welfare or growth gains. .

Exiting the fund

The result was that developing countries began to exit from the Fund. The story of the Fund's marginalisation has been narrated often. It started in 2003, with Brazil and Argentina setting the trend. Others trooped out and returned loans ahead of schedule. By 2005, just six countries had Stand-by Arrangements — the lowest since 1975. This has created a situation where the Fund, dependent solely on interest differentials to finance its operations, is left facing a budgetary crisis.

At another level, the US Treasury blamed the Fund for "sleeping at the wheel" and failing to play an effective surveillance role. The Fund had failed to spot the growing financial imbalances and continued with its game of structural adjustments.

Around September 2004, it woke up to the "tectonic shifts in the ground the IMF is directed to tend" and acknowledged, "in some important measures, the Fund has lagged rather than led" (`The Fund's Strategic Direction', September 30, 2004). The Fund then decided to reassess its role for the future and could not have done better than to entrust it to an external committee.

Though the Malan Report has received wide publicity in the financial press, it appears that some of the far-reaching recommendations have not received the attention they deserve.

Most papers have highlighted its recommendation that the IMF should stay away from World Bank's turf and stop lending to developing countries. The report adds: "The fund's financing activities in low-income countries is an area where it has moved beyond its core responsibilities and into activities that increase its overlap with the world of the Bank."

The more important criticism is: "The criteria for fund-financing in low-income countries, based on the concept of `protracted balance of payments' need, is so vague as to be difficult to distinguish from development finance in practice." Unfortunately, this was the outcome of cross-conditionality, where the Fund had the upper hand and the Bank had to subserve the former's precepts. The report elaborates on the idea.

New ground rules

The Report wants the Concordat of 1989 between the Fund and the Bank, leading to cross-conditionality, to be replaced by a new "Understanding on Collaboration." It will define the respective roles of the two institutions. It goes on to describe vividly the new ground rules.

It explains that the new responsibilities of the institutions should be based on issues rather than countries. Gone would be the earlier categorisation of the world into low- or middle-income countries. "The involvement of the Bank or the Fund in a country should depend on a country's views of its needs and circumstances and the relative expertise of the institutions." The thrust is to get rid the `one-size-fits-all' approach to stabilisation or growth.

The Report indeed tries to tilt the balance in favour of the Bank in development finance. It recommends that the Fund should stop meddling in the micro-economic policies of poor countries, where the Bank has specialist knowledge. "The Fund should rely on the Bank for sectoral assessments."

What should surprise many s the observation of the Committee that: "There is currently no robust dialogue between the Bank and the Fund, as they consider their future strategies and the implications this may have for how they work together."

It also refers to the "tensions" between the two institutions at the staff level. It recommends the need for a stronger culture of collaboration to achieve shared objectives. These clearly come under the nomenclature of "governance", found to be lacking in the institutions themselves.

The Report recommends the need for exchange of staff between the two institutions, even at the board level. It wants Executive Directors to be common as nearly as possible.

Refreshing document

The report is indeed a refreshing document and throws much light on the working of the two institutions and their shortcomings. However, its recommendation or the proposal of a new `Understanding on Collaboration' is too broad and imprecise, and borders on the Utopian. It may be difficult to fit the new approach or philosophy on to these rusty institutions, which have constituencies and vested interests of their own. Though the two institutions are located a block from each other, it is well nigh impossible to bridge the distance between them.

Developing countries may welcome the Report's recommendations, even if they are implemented in a diluted form and the ghost of cross-conditionality is kept at bay. However, the US, which has the veto right, is unlikely to go along with the recommendations.

The US Government and its Congress look upon the Fund as an instrument to promote market-oriented reforms such as trade liberalisation, economic growth, privatisation, etc. This is evident from the successive Reports to the Congress made by the US Treasury on the continued support to international institutions.

Moreover, whatever their present deficiencies, the US is able to use these multilateral bodies to serve, broadly, its foreign policy objectives. Given this background, it is unlikely that they would support progressive measures, such as the ones suggested in the Malan Committee Report, to take the institutions forward.

(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)

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