U.S. Treasury Secretary Janet Yellen has said that the world’s foremost financial institutions—the International Monetary Fund and World Bank (also known as the Bretton Woods Institutions, or BWIs)—need to “evolve” to be truly efficient, and especially to help deal with climate action. But these nearly 80-year-old institutions have much deeper problems. They were set up to ensure economic growth and stability when the predominant global economic model was still one of colonial exploitation. Reform needs to be a deep and thorough process for the BWIs to work in the modern era.
When the BWIs were set up, the United Kingdom and France, two of the largest shareholders today (albeit smaller shareholders than they were in 1944) ruled more than 60 colonies between them. That colonial wealth was a substantial part of their initial shareholding and what came to be known as “quotas” in the International Monetary Fund (IMF). These colonies therefore became central not just to the war effort, but to the economic recovery from World War II that took place as the BWIs took shape. There were just four African founding members of the 44 states that set up the institutions, and only two, Ethiopia and Liberia, were independent nations. The other two—Egypt and South Africa—were still highly influenced by British rule as members of the Commonwealth.
Yet, at 80 years old, although larger than ever today in staffing and capital terms, the constitutions of the institutions—from their shareholding quotas to their operational models—have hardly changed. India, South Africa, Egypt, and Ethiopia all have smaller quota shares today than they did as founding members. Quota shares are important because they determine how much a country is allowed to contribute to the IMF as well as to use the IMF’s “back up currency” known as Special Drawing Rights as automatic stabilizer mechanisms without agreement by other members. Quotas also determine voting power on the IMF’s board, which in turn impacts decisions to provide loans to other countries for emergencies.
Colonial history explains why the BWIs have never played the role that African countries need them to play in development. Take Kenya, which joined the IMF in 1964 soon after gaining independence, and today faces significant debt servicing costs from, inter alia, using Eurobonds as well as bilateral creditors to finance everything from salaries to large infrastructure. Kenya has chosen this mixed route partly as a result of meeting significant constraints in achieving approval of projects and financing from the BWIs.
Some analysts, such as well-known Kenyan economist David Ndii, have called Nairobi’s spending reckless. But it is, in fact, at significantly lower levels of magnitude than the spending that’s needed in the country.
Just to build the basic infrastructure to meet the United Nations’ Sustainable Development Goals—for example, to ensure that every Kenyan has access to safe drinking water, a little electricity, and the internet—Development Reimagined (the firm that I lead) has calculated that Kenya needs to be spending between $14 billion and $21 billion per year, from both domestic and external sources of finance.
This itself would take up a massive portion—around 15%—of Kenya’s GDP. Yet, Kenya regularly spends years of effort to get, for instance, a $390 million loan from the World Bank to expand broadband access. Over the years since independence, Kenya has had to push (and sometimes pay for) feasibility study after feasibility study to get an upgrade to what remains its only major railway, finally obtaining two loans worth $3.2 billion from China’s Exim bank in 2014.
A loan of more than $3 billion might seem like a lot for an African country, but it is a drop in the ocean in terms of need.
The vast majority of African nations are in the same boat as Kenya. According to our research, in order to meet basic infrastructure needs for every citizen, as per the sustainable development goals, Ethiopia should ideally be spending between $23 billion and $35 billion a year on infrastructure, equivalent to 17 percent to 25 percent of its GDP. Zambia should ideally be spending $7 billion to $11 billion annually, equivalent to 26 percent to 38 percent of its GDP. I could go on.
The financial needs of most African countries—whether large or small, in peace or in conflict—will, for years to come, far exceed the capacity of their economies to invest what’s needed just to meet their citizens’ basic needs.
But the BWIs will never explain this dilemma, because it exposes how inadequate they are institutionally. Loans from the World Bank and IMF are presented as ground-breaking and massive. But the reality is they are all significantly smaller than what African countries need, smaller than what other countries receive, and often too costly as well.
Development Reimagined’s analysis of available IMF lending data, ranging from 1958 to date, suggests that the typical African country has been able to access IMF resources once every five years—more frequently than non-African countries. Yet, Africa received less than 10 percent of the IMF’s total commitments over the same period, for an average loan of approximately $200 million compared to a global average of $887 million. Put differently, the typical African country has worked hard and accepted significant policy changes to borrow about $1.5 billion on average from the IMF over the institution’s lifetime, compared to a global average of $8 billion.
The reasons for this differential, unfavorable treatment go back to the founding of the BWIs. They were never designed to stimulate growth beyond the major powers at the time. For countries that are not major powers and their allies, the BWIs often operate similarly to commercial banks, except for some highly limited funds where interest rates are lower and maturities are slightly lengthier, but which come with hefty prior conditions. The BWIs take fees, they are risk averse in their decision-making, and their best surveillance tools—from debt sustainability assessments to business indices—exacerbate and sometimes create market failures such as asymmetric information and perverse incentives.
Often-proposed reforms, such as increasing guarantees or removing certain IMF fees or even adding in new clauses to their repayment requirements, paper over these fundamental difficulties.
For instance, more than $40 billon at minimum needs to be flowing into just three African countries—Kenya, Ethiopia, and Zambia—every year up to 2030 in order to meet development goals. Yet if this happened just this year, based on a metric in constant use by the BWIs to determine lending ceilings, the debt-to-GDP ratio, these countries would be categorized as so “distressed” that they would be unable to borrow money at low cost for many years ahead. They’d be locked out of the system.
In contrast, for instance, at the time that Britain joined the BWIs in the mid-1940s, its debt-to-GDP ratio was more than 250 percent.
The World Bank, the IMF, and their primary shareholders need to be challenged and interrogated on this. Only through tough questions—and tougher reforms—can they deliver on their promise of global growth.
My colleagues and I have proposed, for instance, that some of this reimagining could come in the form of a “borrowers club,” inspired by the Grameen Bank—an institution started in the 1980s that found a way to give loans to those shunned by traditional banks for being too risky or not having enough collateral by lending to groups of individuals and businesses, and using the trust established within the group to ensure repayment. This cut down interest rates, expanded lending massively, and was transformational for financial inclusion globally.
Our view is that international financial institutions should be using the Grameen Bank model for all their lending to poorer countries. Indeed, the new Common Leveraging Union of Borrowers, established by the 28 member states of the Organization of Southern Cooperation in November 2023, is based on exactly this model.
However, while this is a key answer, there may be others. Kenyan President William Ruto has proposed, for example, a globally applied financial transactions tax as another answer. Some development finance experts are talking about the concept of “Global Public Investment” as another answer, while many Africans are in favor of an African Monetary Fund. Others believe that significant IMF quota reform is the solution.
While the result of any or all of these would no doubt be transformational for Kenya and many other African countries, it’s an open question whether the BWIs and their largest shareholders would buy into major reforms—and ones that would reduce their own power. However, significant reform is a better outcome than irrelevance, which is a real possibility. Slow, tepid reforms of the BWIs will only accelerate African countries’ need to turn to other lenders and currencies, whether they come from China, Russia, Saudi Arabia, or Turkey, or to implement the answers above independently.
The credibility of the BWIs is on the line. They could play a real role in the next 80 years—or they could dwindle into irrelevance by failing to reckon with their past.
