World Bank and IMF adapt to world in transition

The grand poobahs of finance practiced their secret handshakes in İstanbul this week, nervous whether they could adapt to the new rituals being forced on them by an economic crisis and shifting balance of power among the top global economies.

Demonstrators protested against what they perceive to be the destructive lending policies of the International Monetary Fund (IMF) and World Bank, while economists and policy analysts wondered about the changing global financial landscape and the need for collaboration among the masters of old money and new.

Meanwhile the so-called Bretton Woods institutions, the World Bank and all its affiliated organizations, had ordinary business to attend to, the most urgent being accommodating powerful emerging markets like China, India, Brazil and yes, Turkey, into the new world order.

World Bank President Robert Zoellick said that he met with the bank's Development Committee and discussed ways to change with the times. “The agenda included ensuring that developing countries will get a bigger say in how the institution is run,” he said. “This meeting committed to reaching an agreement by the World Bank spring meetings next year on shifting at least 3 percentage points of voting power to developing countries. That would give them 47 percent in total, at least. It also supported moving towards an equitable voting power to developing countries over time.”

Zoellick said the agenda also included making sure that the World Bank Group has enough resources, creating a new facility to rapidly disburse grants and no-interest loans to the world's 79 poorest countries and putting into effect the G-20's call for a $20 billion food security facility. The latter was really a call on the G-8 to fulfill the pledges made in July to invest $20 billion in agricultural development and food aid over the coming three years.

Serving both rich and poor

Jim O'Neill, chief economist at Goldman Sachs, worried that the IMF might miss an historic opportunity to position itself to be a key player in preventing future crises. “The IMF has been given loads of opportunities here and needs to seize the moment,” O'Neill said in a Bloomberg interview. “I'm not convinced they will. [Dominique] Strauss-Kahn [the IMF director] is doing a good job, but they should be bolder. They are still beholden to those who own them.”

Yet one might ask the investment banker: who is not beholden to those who own them or employ them? Dominique Strauss-Kahn, managing director of the IMF, is like the factory manager whose corporate owner is being taken over by a leveraged buyout firm. He's not sure who to listen to anymore. Is the US Treasury secretary more important than the president of China? But Strauss-Kahn has his heart in the right place, thinking of the world's poorest people. Answering a reporter's question Tuesday on economic recovery, he noted that whereas “a couple of points of purchasing power, a couple of points of unemployment” would be minor in developed countries, they would be entirely different in low-income countries, “where it goes to a question of life and death and starvation.” Indeed, it is almost intellectually impossible to conceive of people that poor while living the gravy train life. Your bank is paying 1,200 euros for your hotel room, 700 euros a day for your car and driver and you think the room rate did include that nice breakfast buffet. And the bacon was really crispy. One banker stayed on the Asian side to save money; he found a hotel charging only 320 euros a night, no breakfast and the price did not include VAT. Obviously the Dutchman was not a master of the universe, and he felt like a second-class citizen at the annual meetings, balancing the money he had to spend on taxis versus the theoretical value of his time. Moral hazard There is a disconnect between saying you want to help the world's poor people, billions of them, and spending a few thousand euros a day talking about it. Of course 1,000 euros here or there is nothing in the larger scheme of things. Bundesbank President Axel Weber had his eye on the big picture when he remarked on the moral hazard inherent in the half a trillion dollars thrown at the IMF last spring, when the G-8 agreed to triple the Fund's capital base, up to $750 billion. The real moral hazard lies in forgetting the huge gap in incomes between the world's richest and poorest. And the poor, they're not all in Bangladesh or Africa. The Washington Post last week reported that more than one in four children in America's capital were living in poverty in 2008, according to new census data. But those Washington, D.C., kids are better off than their counterparts in Malawi, for example, where many children die in infancy or at birth. The UN Development Program on Monday released its human development index for 2009, a survey that aims to get beyond mere dollar measures and account for other quality of life factors, such as life expectancy and access to health care. The headlines on the report said life is better in Norway than in Niger, which is hardly news, but since we're dealing with bankers let's follow the money again. The index showed that Liechtenstein has the richest people, with per-capita income of $85,382, while people were poorest in the Democratic Republic of Congo, where average income per person was $298 per year, or about 200 euros. This means that the banker who paid 1,200 euros for a hotel room burned up the average annual income of six Congolese each night. Strauss-Kahn said that “some countries will recover earlier, some it will take more time, but in each case it will at least take from now on eight to 10 months before unemployment will decrease. … The problems we're going to face in the coming year may be much more important, much more difficult to solve in low-income countries and some emerging countries than in advanced economies.”

08 October 2009, Thursday

MICHAEL KUSER İSTANBUL