Power Shift

The IMF and World Bank must adapt to the rise of Asia.

THIS WEEKEND'S meetings of the World Bank and International Monetary Fund will address the changing balance of world power -- and will miss part of the picture. There'll be a debate about the IMF: Some reformers want to reduce Europe's influence on the IMF's board to accommodate rising Asia, while others want the IMF to speak out more forcefully against currency manipulation, especially in China, which matters because of Asia's growing weight in the world economy. But there's unlikely to be a debate about the power shift that's swirling around the World Bank. In the 1990s, the bank and its leading shareholders -- the United States, Japan and Europe -- accounted for nearly all foreign assistance. Now they face a challenge from oil states and emerging economies such as China and India, which show signs of expanding their aid programs.

The IMF debate has been cooked up partly by the Bush administration, which is pushing for sterner treatment of currency manipulators. It's a reasonable demand -- China's undervalued currency contributes to its destabilizing trade surplus -- but the administration's own conduct shows why it won't achieve much. The IMF regularly points out that the U.S. budget deficit, like China's currency policy, contributes to trade imbalances, and the Bush team (like all previous U.S. administrations) simply shrugs off the criticism. If the IMF tries to lecture China, it will be brushed off, too. The Chinese central bank has vast foreign currency reserves and is in no danger of needing an IMF bailout.

There's more to be gained by giving rising Asian economies a larger say in IMF policies. The Asians keep their currencies cheap partly because they don't trust the IMF, which administered brutal and sometimes ham-fisted bailout programs during the crises of 1997-98. To avoid a repeat of that humiliation, Asians are happy to run trade surpluses and accumulate foreign currency reserves, diminishing the danger of needing another bailout. If IMF reform gave Asians a sense of ownership in the institution, they might be willing to boost their citizens' purchasing power by allowing their currencies to rise, so easing trade imbalances.

The problem posed by aid dispensed by China and other newcomers is that it lacks the constructive conditions that have grown up around most Western assistance. To be sure, the United States and its allies still give some bad aid, which flows to undeserving allies such as Egypt or lines the pockets of domestic lobbies, notably the farmers who grow food aid. But there's an advancing effort to focus aid on countries with good economic management and sufficient checks and balances to limit corruption and to insist that projects meet certain environmental and social standards. This sort of aid creates incentives for poor countries to embrace sound policies. But the incentives will be smothered if a new class of donors is ready to shower money upon renegades.

This is a danger rather than a certainty. The windfall from high oil prices is expected to boost oil states' aid budgets from their recent level of about $3 billion a year, but how far is uncertain. India has announced a variety of new aid initiatives, including a ramp-up in export credits. Statistics on Chinese foreign assistance are patchy, but James A. Harmon, a former head of the U.S. Export-Import Bank, estimates that China's export credit agencies will finance about $160 billion worth of exports by 2010, some 10 times the volume financed by its U.S. rival. The commercial purpose of Chinese aid is clear: It is dispensed by the Chinese Ministry of Commerce.

If this money flows to bad governments that use it to postpone economic and political liberalization, it will undermine poverty reduction. So this weekend's development discussions ought to start the process of bringing emerging donors into line with mainstream development values. Power is shifting in the world. Both the World Bank and the IMF need to adapt accordingly.