The IMF, World Bank and the Global Public Debt Crisis—Time for a New International Financial System?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
January 22, 2024
“Half our world is sinking into a development disaster, fueled by a crushing debt crisis…Some 3.3 billion people – almost half of humanity – live in countries that spend more on debt interest payments than on education or health.” – UN Secretary-General Antonio Guterres (Opening remarks in “A World of Debt” Report, July 12, 2023)
A recent article written by me appearing in the December 18, 2023 issue of PA Times (“Don’t Cry for Me Argentina”) described Argentina’s deepening financial debt crisis and the role played by the International Monetary Fund (IMF) and the World Bank (formerly called the International Bank for Reconstruction and Development). This month’s article focuses more closely on the work of these institutions as they relate to the current global public debt crisis.
By way of definition, global debt refers to the total amount of money owed by all sectors (government, business and households) worldwide. As of the second quarter of 2023, total global debt was $307 trillion, as reported by the Institute of International Finance.
For the year 2022, total public debt was reported by the UN, IMF and other agencies at $92 trillion, nearly one-third of total global debt. The latter figure has grown at an alarming rate in the last few years, exacerbated by the lingering effects of COVID-19, inflation, high interest rates, climate change and other factors.
Economists, investment bankers, international finance analysts and others are now fearful of growing debt distress, a situation that occurs when a country is unable to fulfill its financial obligations, such as repayments due on its debt. The IMF and World Bank estimate that 60 percent of low-income countries are at or near this point.
What should be the response of the international financial community, particularly the IMF and World Bank, to the current global debt crisis? Is the international financial system created nearly 80 years ago adequate to meet current challenges?
The IMF was created on December 27, 1945, at a conference held in Bretton Woods, N.H. to accomplish: the fostering of global monetary cooperation; financial stability; international trade; promotion of high levels of employment, sustainable economic growth and reduction of poverty around the world. A major agency of the UN, the IMF created a quota system where countries contribute funds to a pool from which countries may borrow if they experience balance of payments problems (IMF currently has 190 member nations with total resources of approximately $932 billion).
The second pillar of the global financial architecture, the World Bank (WB) serves as an international banking institution that provides financing (grants and loans), policy advice and technical assistance to third-world countries.
On balance, the IMF and World Bank have achieved over the years many of its goals. However, both institutions have aroused criticisms from both the left- and right-wing politicians. In particular, the IMF has been criticized by many for several issues, including:
- Not fulfilling the functions it used to fulfill, nor is there a clear consensus of new functions for the IMF to take on;
- Not receiving enough revenues to cover the IMF’s operating costs;
- Not playing a notable role in the debate about growing global imbalances, even though this issue is part of its overall mission;
- IMF’s governance structure has been questioned by many of its members, lending itself to a crisis of legitimacy;
- Conditions attached to loans and bailouts advanced to debt-ridden nations;
Many analysts will tell you that the world today has become increasingly multi-polar and geographically fragmented. More than 75 percent of the IMF’s current membership were not at the 1944-45 Bretton Woods Conference. Nations that were colonies or in decline back then (such as China and India) are now economic power houses. The BRICS alliance, originally composed of: Brazil, Russia, India, China and South Africa, has expanded its membership and with Russia at the helm in 2024, is poised to expand its influence in global finance.
Both the IMF and World Bank have made policy changes; for example, the IMF has modified its approach to bailouts, replacing austerity with the idea of sustainable debt (debt that is more investment focused). The World Bank in 2023 significantly increased the share of funds going to climate-change related projects. But more reforms are needed, such as:
- In general, ramp up growth levels. The best way to escape a debt trap is to grow out of it. Experts here recommend improving business conditions, better allocating resources and improving market competition;
- The IMF should make sovereign debt restructuring more effective by introducing new financial instruments that would better serve the needs of poorer countries, such as state-contingent debt instruments which reduce interest payments during recessionary periods and increase interest payouts during good times;
- Accelerate fiscal policy reforms, such as improving tax administration efficiency, close tax loopholes and move to broader tax rates that would support rather than impede long-term recovery. For nations such as the United Kingdom and United States, this would involve increasing tax rates (which is easier said than done, given the current political climate in both countries);
- Changing the governance structure of the IMP through a new Bretton Woods-type conference.
If both the IMF and World Bank were to focus more on economic issues, both are political creations that currently reflect the power systems of the countries that established, finance and manage them. This is the challenge that the global finance community faces; time will tell how successful this will be.
Postscript:
The UN/UNCTAD report “A World of Debt,” can be retrieved from https://UNCTAD.org./publication/world-of-debt. I would also recommend as background reading on this subject “The Debt System: A History of Sovereign Debts and their Repudiation,” (2019) by Eric Toussaint as well as “Debt, The IMF and the World Bank,” (2010), co-authored by Eric Toussaint and Damien Millet.
Author: Stephen R. Rolandi “retired” in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served as an officer, director and advisor on many associations, and is a frequent guest commentator on public affairs, public finance and politics. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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The IMF, World Bank and the Global Public Debt Crisis—Time for a New International Financial System?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
January 22, 2024
“Half our world is sinking into a development disaster, fueled by a crushing debt crisis…Some 3.3 billion people – almost half of humanity – live in countries that spend more on debt interest payments than on education or health.” – UN Secretary-General Antonio Guterres (Opening remarks in “A World of Debt” Report, July 12, 2023)
A recent article written by me appearing in the December 18, 2023 issue of PA Times (“Don’t Cry for Me Argentina”) described Argentina’s deepening financial debt crisis and the role played by the International Monetary Fund (IMF) and the World Bank (formerly called the International Bank for Reconstruction and Development). This month’s article focuses more closely on the work of these institutions as they relate to the current global public debt crisis.
By way of definition, global debt refers to the total amount of money owed by all sectors (government, business and households) worldwide. As of the second quarter of 2023, total global debt was $307 trillion, as reported by the Institute of International Finance.
For the year 2022, total public debt was reported by the UN, IMF and other agencies at $92 trillion, nearly one-third of total global debt. The latter figure has grown at an alarming rate in the last few years, exacerbated by the lingering effects of COVID-19, inflation, high interest rates, climate change and other factors.
Economists, investment bankers, international finance analysts and others are now fearful of growing debt distress, a situation that occurs when a country is unable to fulfill its financial obligations, such as repayments due on its debt. The IMF and World Bank estimate that 60 percent of low-income countries are at or near this point.
What should be the response of the international financial community, particularly the IMF and World Bank, to the current global debt crisis? Is the international financial system created nearly 80 years ago adequate to meet current challenges?
The IMF was created on December 27, 1945, at a conference held in Bretton Woods, N.H. to accomplish: the fostering of global monetary cooperation; financial stability; international trade; promotion of high levels of employment, sustainable economic growth and reduction of poverty around the world. A major agency of the UN, the IMF created a quota system where countries contribute funds to a pool from which countries may borrow if they experience balance of payments problems (IMF currently has 190 member nations with total resources of approximately $932 billion).
The second pillar of the global financial architecture, the World Bank (WB) serves as an international banking institution that provides financing (grants and loans), policy advice and technical assistance to third-world countries.
On balance, the IMF and World Bank have achieved over the years many of its goals. However, both institutions have aroused criticisms from both the left- and right-wing politicians. In particular, the IMF has been criticized by many for several issues, including:
Many analysts will tell you that the world today has become increasingly multi-polar and geographically fragmented. More than 75 percent of the IMF’s current membership were not at the 1944-45 Bretton Woods Conference. Nations that were colonies or in decline back then (such as China and India) are now economic power houses. The BRICS alliance, originally composed of: Brazil, Russia, India, China and South Africa, has expanded its membership and with Russia at the helm in 2024, is poised to expand its influence in global finance.
Both the IMF and World Bank have made policy changes; for example, the IMF has modified its approach to bailouts, replacing austerity with the idea of sustainable debt (debt that is more investment focused). The World Bank in 2023 significantly increased the share of funds going to climate-change related projects. But more reforms are needed, such as:
If both the IMF and World Bank were to focus more on economic issues, both are political creations that currently reflect the power systems of the countries that established, finance and manage them. This is the challenge that the global finance community faces; time will tell how successful this will be.
Postscript:
The UN/UNCTAD report “A World of Debt,” can be retrieved from https://UNCTAD.org./publication/world-of-debt. I would also recommend as background reading on this subject “The Debt System: A History of Sovereign Debts and their Repudiation,” (2019) by Eric Toussaint as well as “Debt, The IMF and the World Bank,” (2010), co-authored by Eric Toussaint and Damien Millet.
Author: Stephen R. Rolandi “retired” in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served as an officer, director and advisor on many associations, and is a frequent guest commentator on public affairs, public finance and politics. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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