There was a downer vibe at the IMF/World Bank meetings this week. The World Bank Group told the international community to brace for low growth and the possibility of a lost decade. The International Monetary Fund warned of low growth and considerable downside financial risks on top of it. Yet part of the reason we should be pessimistic about future growth stems from both institutions falling short of their missions to promote economic cooperation, trade and pro-growth policies like market-based investment. The economic slowdown shows why the original mission is exactly what the world needs most now, but instead they’re shifting focus and risk becoming even less relevant in the future.
The IMF and World Bank were created in 1944 at the Bretton Woods Conference, which aimed to remake the world economic order and avoid mistakes from the past. In the aftermath of the Great Depression, and with then-ongoing World War II, there was a recognition that short-sighted nationalist economic policy restricting trade and other beggar-thy-neighbor policies would harm growth and undermine financial stability for everyone. Countries overwhelmed by debt also needed assistance, or their problems could become the world’s problem. The global economy would be best served by better coordination and cooperation among nations.
The IMF and World Bank, across the street from each other in Washington, have complementary jobs. The IMF monitors financial conditions, offering economic policy advice and, notably, making conditional loans when countries run into financial trouble. The World Bank does development projects and provides aid and loans to foster growth in mostly poorer countries.
For the last several decades, the institutions were mostly successful, even if they made some mistakes. Trade had expanded, so did international capital flows and there was a historic decline in global poverty.
Today, they’re navigating through growing skepticism of the benefits of an economically integrated world. Many richer countries, notably the US, are turning back to economic nationalism. They are wary of immigration, foreign capital and trade, while pursuing industrial policy to build their own home-grown industries. Meanwhile, in the years leading to the pandemic, poorer countries turned to China instead of Washington institutions for development projects and even loans when they faced a balance-of-payment crisis.
That’s why this moment is so critical. The low-growth future the World Bank and IMF predict will to some extent be the result of less trade, more restrictions on global capital and industrial policies that divert capital to less productive uses. Financial stability is also threatened by central banks pursuing policies to fight inflation at home that may harm countries abroad.
More economic coordination and a renewed commitment to trade and markets is exactly what we need today. We need it even more than before. Technology increases the scope for more growth through trade because goods and capital can more easily cross borders. New technology like artificial intelligence may bring profound change that may deliver more prosperity, but also risks economic disruption and misinformation. Better coordination across borders is critical to managing these challenges, unlocking growth and smoothing the resulting volatility.
Meanwhile, global inequality is still far too large. We’ve made progress, but poorer countries still have the potential to grow and offer better lives to their citizens. More technology and economic integration can also help them. If they are left out, they’ll only fall further behind.
But rather than finding a voice and purpose in their founding values, the World Bank and IMF are focusing on other goals like climate and gender equality. The IMF pledged to add climate-risk assessments to its financial and economic risk assessments — and to put climate at the “heart” of its work.
The World Bank is pledging 35% of its budget to climate and Janet Yellen wants economic resilience (climate) added to the bank’s mission statement. That might sound smart, but there’s still a lot of poverty and financial instability to contend with. Putting more resources into climate means less money and staff available for development and monitoring other economic risks.
Yellen claims the new focus on climate won’t take away from that work, but resources are finite. The risk here is not only fewer resources tackling poverty, but leaving a vacuum for China to fill — and China’s commitment and ability to fund development is not only less certain but creates new layers of political risks.
It’s true that climate needs to be more of a priority and that over the long run climate and economic growth are connected. Our climate objectives certainly require more international cooperation the same way trade and monetary policy do. But this challenge is better met by new institutions tasked with climate as their explicit mission, with their own budgets and staff. The IMF and World Bank should stay in their lane.
Shifting focus just involves the institutions in more politically contentious issues. Even populist governments can support institutions that are pro-growth. Tackling climate, gender and equality mean grappling with political whims and backlash, and they’re issues that feel less urgent to developing countries.
Since the IMF’s and World Bank’s founding it has never been harder to promote economic cooperation to balance growth and stability. The low growth now forecasted represents a failure of member countries to honor the original mission. If these institutions want to remain relevant, they need to remind the world why they exist in the first place — and why those original priorities are more critical to the future than ever — rather than pivot to more fashionable goals.
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