Efforts to reform the Bretton Woods institutions could be so much better

Efforts to reform the Bretton Woods institutions – the International Monetary Fund and the World Bank – are progressing, albeit slowly. In December, the IMF Board of Governors approved a 50 per cent increase in member quotas, which will reduce its reliance on borrowed resources, and the World Bank has released an ambitious “evolution roadmap”, which sets a path toward modernising its mission, business model, and funding. But while these are welcome developments, they are not enough. Reforming these institutions’ governance structures is crucial.

The current governance structure gives an outsize voice to creditor countries – mostly in Europe – and an insufficient voice to emerging-market and developing economies, despite their increasingly substantial role in the global economy and financial system. This is nothing new: among those who have called for reforms to correct this imbalance is United Nations Secretary-general António Guterres. And a new report by the Brookings Institution advocates for changes to the quota-allocation formula at the IMF and the voting-rights system at the World Bank.

But such reforms will most likely be difficult and time-consuming. In the meantime, reforming the IMF and World Bank boards of directors according to best practices in corporate governance would go some way toward making these institutions fit for purpose. Changes are needed in six key areas.

First, their boards must be redefined. At the Bretton Woods institutions, the directors meet several times per week and manage the details of day-to-day operations. At most large corporations, by contrast, boards maintain a supervisory role – focusing on overall strategy, rather than day-to-day operations – and meet 4-6 times per year.

The latter approach makes far more sense – and the IMF and the World Bank should adopt it. This means shifting the boards’ focus to setting overall goals (at the country and international levels), providing high-level oversight and guidance, and monitoring institutional performance. Such a change would minimise operational inefficiencies and substantially reduce the potential for political interference in what should be impartial, technical decisions. Beyond redefining the boards’ mandates, the second change should be to move the IMF and the World Bank to a system of part-time, non-resident boards. At the 1944 Bretton Woods conference that gave rise to these institutions, the economist John Maynard Keynes made the case for just this, arguing that well-regarded, highly qualified non-resident members would provide their boards with both the technical skills and political capital needed to operate effectively.

But Keynes’s vision was not shared by all the conference’s attendees. Others believed that a fulltime resident board was needed to act as a political counterweight to the technical decision-making of the organisation’s management and staff – a kind of check by creditor-shareholders. This camp prevailed, leaving smaller developing countries with limited capacities unable to send their best talent to represent them.

These two reforms would also create an opportunity to make the third key change: clearly defining the terms of reference of board members and the minimum qualifications required, in line with international best practices. Board members should bring a wealth of skill, experience, and political capital to the IMF and the World Bank. And, rather than acting as ambassadors, representing the narrow interests of one country or group of countries, they must work to strengthen the institution they serve and advance its mission.

Similarly, the selection process for the Bretton Woods institutions’ leaders must be changed. The current approach – which always results in an American leading the World Bank, and a European leading the IMF – is more about politics than merit. Unfortunately, a purely merit-based approach, which pays no heed to national origin, is probably not politically feasible in the short run. But the process can be made somewhat (and progressively) more meritocratic, by clearly defining the qualifications one must have to lead either institution.

Moreover, the World Bank president and IMF managing director should not function as board chairs, as is currently the case. Instead, there should be a clear division of responsibility between these two roles. That way, the role of board chair can be filled by representatives from the Global South.

Finally, board membership should be expanded to include 2-4 independent directors representing the private sector and civil society, which play a much more important role in the world economy today than they did in 1944. These directors would act as a voice for project beneficiaries in strategy discussions, emphasising social-justice issues and private-sector-development imperatives.

In a world characterised by the threat of climate change, extreme social inequalities, systemic risks to financial stability, and elevated geopolitical tensions, strengthening the effectiveness and boosting the inclusiveness of the international financial system is more important than ever. The first steps on the path to that goal must be governance reform at the World Bank and the IMF.