Why the G-20 had an asymmetric impact on the Bretton Woods twins
April is the best time to see Washington D.C., when the cherry blossom herald the blooming spring and the weather is perfect for strolls along the Potomac river. Wait a few weeks, and the scorching heat and swampy humidity will suffocate you. Thankfully, the International Monetary Fund (IMF) and the World Bank hold their spring meetings in April. Since Turkey holds the G-20 presidency this year, the B-20 and T-20 activities are also being held at this time. While watching the show, I am beginning to think that the G-20 has become a handy tool for the Bretton Woods institutions to reinvent themselves.
But the impact has been asymmetric, to say the least, in that the IMF has been using the opportunity much better than her sister institution. How can I tell? On a very fundamental level, the IMF looks very busy while the Bank is still looking for a purpose. So the question becomes, why did the G-20 have this asymmetric impact on the Bretton Woods twins?
It is not only about the leadership of the institutions that makes the difference. Leadership is definitely important, but there are important structural elements, too. The fact that the IMF looks busier than the World Bank is very much related to the G-20’s focus on finance. Think of the G-20’s history. It was first established in 1998, not yet a leaders’ summit, but an annual gathering of the finance ministers and central bank governors of the 20 countries. Why 20? Because by the late 1990s, the G-7 already looked like too small a group to run the world economy. Why finance ministers and central bank governors? Because it was assembled amidst the 1997 Asian financial crisis, which transformed economists’ thinking about financial liberalization.
Remember the year that we all learned that Thailand’s currency was called the “baht” and Korea’s currency was called the “won”? That was the year of the Asian financial crisis, and it is where the G-20 has its roots. That was commensurate with the change in the literature on currency crises, if you ask me. Remember the early literature on currency crises? It basically saw the problems as being in recipient countries. Latinos at the time, and Turkey, as countries with domestic savings deficiencies, were examples of crisis-prone structures. Populist politicians were the culprits. It all had an Old Testament ring to it - you sin, you pay the price, like all children of the vengeful Lord God.
Then something happened in 1997. All prudent East Asian currencies, backed by domestic savings surpluses and no current account deficits, started to fall like domino pieces. It turned the financial world upside down because the literature couldn’t diagnose the problem using explanations developed for the earlier crises. That was the age of portfolio flows and contagion effects. It turned out that it was not the fault of domestic politicians only, but also the financial shenanigans of market participants. In the following years, the literature on currency crises changed, and the G-20 finance ministers’ meetings started. Why? To prevent an era of financial deliberalization. Also, people realized that you cannot only work with the G7, where global fund flows originate. You need to take the recipients to the table to mend fences. Hence, the G-20 finance ministers and central bank governors meetings started. The IMF became a kind of a command center coordinating a collective policy response while the World Bank remained where it was.
Then we had the 2008 financial crisis in the U.S., which saw bigger financial shenanigans in the core countries. The G-20 increased in importance, and annual leaders’ summits started to take place. These developments strengthened the core role of the IMF in the new game, while the World Bank was still stuck with its old toolkit. With the Korean, Mexican and Russian presidencies of the G-20, the Sherpa track, which deals with development issues, grew in strength in areas apart from the finance track.
That should have been a glimmer of hope for the Bank, yet it could not follow the changing times. There are no new tools to make the G-20 relevant for developing countries. This is where the leadership at the Bank failed.
This is the 17th year of the G-20. The first 10 years took place in ministerial format, while the past seven brought leaders together. In 17 years, the IMF has adapted well by renewing its toolkit, while the Bank has not. So, in this cherry blossom season in Washington, D.C., the IMF looks very busy while the World Bank is still looking for a purpose. Those, at least, are my first impressions.