At the recent IMF and World Bank meetings, the gathering of financiers, bankers, and economic policymakers turned into a critical reflection on global economic and geopolitical trends. The world was given optimistic messages about the state of the global economy, but the expectations of the participants and the global expert community were higher than that.
It was similar to visiting a doctor expecting a prescription but receiving only a diagnosis: the global economy is resilient, but risks remain: inflation, interest rates, real estate prices, financial stability, challenges in implementing sound fiscal measures, and geopolitical crises.
Furthermore, for the second time in just two years, officials left the conference room without a clear and unified message. They did not reach consensus on the impact of the conflicts in Gaza and Ukraine on the global economy.
Is this a passing dark cloud on the economic horizon, or something far more serious – a symptom of dissonance among global powers? Behind courteous diplomatic statements and formal protocols, visible contours of geopolitical rivalries and economic interests are emerging. World leaders, therefore, need to carefully analyze this moment, as the answers to all these questions are crucial for the future of the global economy.
Mihajlo Đukić, a research associate at the Institute of Economic Sciences, says that after the outbreak of the war in Ukraine, and especially following the conflicts in the Middle East, one should not expect complete consensus on all issues, particularly the qualification of the conflict.
“The absence of a joint message after the spring meetings is not significant by itself, as it has slowly become a regular practice over the past two years. However, it should be noted that these are still the two most significant financial institutions in the world, which undoubtedly share common goals regarding the promotion of global stability, poverty reduction, and sustainable development,” Đukić points out.
According to him, the geopolitical divide is deep and represents a “new normal.”
“The IMF Communications Department chair emphasized that wartime developments within the joint meetings will be analyzed solely in the context of their impact on the global economy. Nevertheless, differing views on security challenges only further amplify the impression that a more significant reform is needed regarding the functioning of these institutions. Eight decades after the founding of the IMF and the World Bank, questions are being raised about the capacity of these organizations to respond to 21st-century challenges. This is especially relevant to policies aimed at achieving Sustainable Development Goals, servicing external debt, and addressing developmental issues of countries in the Global South, many of which have not contributed to the spread of conflict but are suffering significant damage,” Đukić believes.
Net financial transfers to developing countries at lowest level
As an example of an alarming situation, he cites recent data from “The ONE Campaign” (a global organization fighting against poverty and injustice) which shows that net financial transfers to developing countries have fallen to their lowest level since the global economic crisis, with debt repayments again exceeding inflows, including new loans and development aid.
“In 45 countries, debt servicing costs exceed 15% of budget revenues. The pandemic and conflicts have led to an increase in the number of absolutely poor in 2022 to about 712 million, an increase of about 23 million compared to 2019, marking a change in the previous trend. A fundamental reform of international financial organizations is necessary, involving a global political agreement including a decision-making system that encompasses reforming the IMF quota system, fundamentally reassessing priorities with a focus on climate change, and credibly examining the effectiveness of policies to better utilize limited resources,” Đukić argues.
Financial institutions did not agree on a statement regarding the war in Ukraine and Gaza, but we know that the cause of the disagreement is much deeper and more complex. There are differing views on the geopolitical situation, which reflects on the functioning of international financial institutions. In such circumstances, their credibility erodes, and some countries may become more cautious about financing joint initiatives,” Đukić says.
According to him, traditional donors might show greater risk aversion and decide to redirect funds to their own development projects.
Regarding developing countries, considering the uneven impacts of climate change and facing debt repayment issues, these countries might prioritize questions related to sustainable development less. There is a justified concern among the poor that the costs of addressing climate change are unfair, i.e., that those countries which pollute the most should bear the greatest costs. Finally, apart from climate change, there are issues that require collective action, and their resolution will be limited in the absence of functional international organizations. Such issues include joint debt restructuring approaches and coordination of international tax initiatives,” Đukić emphasizes.
Selection of themes (un)expected
Đukić notes that positive signals were sent from the meeting regarding the state of the global economy, in the context that the worst is behind us. He also recognizes that the IMF and the World Bank have understood the need to focus on less developed regions of the world, which is a good message from the American continent.
“Positive tones can be interpreted in light of the fact that the period marked by sudden increases in interest rates is behind us. The global economy has shown resilience, a slight correction in real estate prices, and global growth estimates of 3.2% over the next two years seem quite solid under these circumstances. Positive impressions are also left by announcements regarding new development initiatives such as a new health program that will cover 1.5 billion people, and the joint cooperation of the World Bank and the African Development Bank to improve infrastructure in Africa. However, the mentioned risks, primarily war conflicts, make mid-term growth quite uncertain. The level of indebtedness of a large number of low-income countries, combined with potential problems in energy supply and high borrowing costs, could present a very serious challenge for policymakers in the near future,” Đukić concludes.
What other important voices across the ocean have to Say
In addition to the discussion on the state of the global economy, the urgency of addressing unsustainable global debt has surfaced. IMF Managing Director Kristalina Georgieva highlighted the increasing government debt worldwide. In 2023, global public debt rose to 93% of GDP from 84% in 2019, as governments had to spend more on healthcare and economic aid during the COVID-19 pandemic. The IMF President urged countries to collect taxes more efficiently and spend public money wisely.
The IMF also published details of the document titled “Policy Reform Proposals to Support the Fund’s Capacity to Assist Countries Undertaking Debt Restructuring.” The content reveals that reforms have been supported to facilitate assistance to countries restructuring debt. Some progress has been made in this regard, but recent IMF-supported programs have faced significant delays in approving funding due to a lack of confidence in reforms. For instance, Chad waited 11 months for funding after reaching a staff-level agreement with the IMF, Zambia 9 months, Sri Lanka 6 months, and Ghana 5 months. These delays should be addressed to expedite support in the future. The IMF’s announcement “hints” at inclusiveness and a desire for change, but this needs to be reflected in practice. The IMF states that it will continue to rebuild fiscal reserves, carefully tailor actions to specific country circumstances, protect the most vulnerable, and invest in growth. It will keep insisting on reforms to increase productivity, labor market participation, promote social cohesion, and support green and digital transitions. The IMF will continue to support vulnerable countries as they implement reforms to address their vulnerabilities and meet their financial needs.
During the spring meeting, IMF President Kristalina Georgieva also highlighted another major issue – taxing the wealthy, emphasizing that it needs to be more extensive and comprehensive. She noted that IMF research showed that eliminating tax avoidance by certain corporations could generate $200 billion annually for governments worldwide. She also mentioned that implementing a global corporate minimum tax could increase revenues by an additional $150 billion per year. Furthermore, the IMF estimated that setting a minimum tax threshold for companies whose operations increase carbon emissions could increase revenues by another $150 billion per year.
What IMF reform would entail
A key point of reform would relate to the decision-making mechanism, particularly the redistribution of national quotas and voting power among member countries. The United States has the ability to block the most crucial decisions due to its quota size and number of votes. Given the increasing significance of developing countries, especially the BRICS countries, in the global economy and politics, changes in the distribution of power within the IMF are inevitable. Each member country has a set national quota expressed in Special Drawing Rights (SDRs), which serve as a fundamental element in financial relations between countries and the IMF. Member quotas determine not only financial obligations to the Fund but also the level of their voting power in IMF decisions. However, the current voting system is based on weighting votes according to countries’ economic and financial strength, which can lead to imbalances in representing countries’ interests. The reform of IMF quotas has been the subject of many negotiations and political disputes, but it remains unresolved. The reform should involve including more developing countries in the decision-making process and addressing global economic challenges. Essentially, IMF reform is necessary to adapt this institution to the new realities of a multipolar world. China, as one of the largest economies in the world, has a relatively low quota in the IMF compared to its economic capacity, limiting its influence in key decisions. India also has insufficient representation of its interests in the IMF.
There are several reasons why the United States is not ready to allow significant increases in quotas. Reducing American influence could lead to a loss of control over decision-making and question U.S. interests in the international economy. Additionally, increasing quotas for developing countries would require larger financial contributions from the U.S., leading to higher costs for the American budget. Addressing this issue requires a compromise between the U.S. and developing countries. Critics also argue that the IMF needs to reconsider its approach to lending, especially to developing countries, to support sustainable economic growth while taking into account the specific needs and capacities of each country. The IMF’s role in the global economy, including its contribution to combating inequality, promoting inclusive growth, and addressing increasingly severe climate change consequences, will be increasingly scrutinized.
The IMF states that it is prepared to reform and has even set a deadline for changing the quota system – June 2025. It notes that special attention is being paid to addressing the quota system to better reflect the relative positions of members in the global economy, while protecting the quota shares of the poorest members. It confirms the aim of a strong, quota-based, and adequately resourced IMF at the center of the global financial safety net. “We recognize the urgency and importance of reallocating quotas to better reflect members’ relative positions in the global economy while protecting the quota shares of the poorest members. Therefore, we urge the Executive Board to work on delivering, by June 2025, possible approaches for further quota reallocation, including a new quota formula,” states the IMF, among other things.
World bank reform
Regarding the World Bank (WB), President Ajay Banga mentioned during the meeting that the bank needs speed and simplicity in providing financial services and is working to expedite the procedures for obtaining financial aid. He warned that achieving goals will also require private capital and that the bank is seeking ways to attract necessary funds. Banga informed the public about changes the World Bank has implemented, which allow the bank to be more ambitious and achieve higher goals. The World Bank President emphasized that the world faces a series of challenges such as the climate crisis, debt, supply chain insecurity, and pandemics, and stressed the need to accelerate access to clean air, water, and energy.
The World Bank, according to economists, faces several significant challenges. Firstly, the bank has not adequately adapted to changes in the global economy. It has retained an outdated financing model, and its approach to development needs to change. This includes a lack of flexibility in providing aid, insufficient attention to local needs, and limited access to innovative solutions. There is also criticism that the World Bank focuses too much on stimulating economic growth as its main goal, rather than on reducing poverty and improving social justice. This can lead to uneven distribution of benefits from development projects and insufficient assurance that all segments of society benefit from development efforts. World Bank-supported projects have often been criticized for their potential negative impact on the environment and society. The bank has only recently begun to shift towards financing the Green Agenda.
Previous infrastructure financing projects have led to environmental degradation, displacement of populations, and violations of local communities’ human rights. Additionally, there are complex conditions and procedures for obtaining loans from the World Bank, which are quite demanding for less developed countries. The bank needs to consider changes in this area, as well as expand its role in promoting sustainable and inclusive economic development worldwide. This includes focusing on poverty reduction, combating inequality, and supporting sustainable development projects. It will need to adapt to economic, social, and environmental challenges, such as climate change, population migration, and technological advancement. This requires flexibility in policies and support programs. Economists also emphasize the need for greater support for innovation and technological development. This includes initiatives to strengthen digital infrastructure, promote entrepreneurship, and support the development of new technologies. These are just some aspects of the reforms. Specific directions would depend on the particular needs and challenges the bank faces in different regions and sectors.
Source: Svet osiguranja