The World Bank must come forward to aid in a manner which renders the leaders of poorest nations, inducements to accept policies that foster economic liberation and reinforce the legal policy. One option remains to render help to nations which rule in a balanced manner, make investment in human resources, and support financial freedom. To put it differently, financial assistance is extended exclusively to nations having comparatively sound rules and regulation. Financial assistance must be extended in the shape of grants based on achievement instead of loans.
During 2000, the International Financial Institution Advisory Commission suggested a formula of grants based on achievements for the World Bank. The bank would join hands with private sector businesses, charitable institutions, universities, and other suitable organization to meet quantifiable goals, for instance, the number of vaccines administered to children, the number of children given food at a local village, and the number of patients attended to in a small town.
In this manner the bank can exert more authority on the implementation of a project, supervise the outcome with increased ease, lower the scope of fraud and assure expected results. Admittedly, this methodology would demonstrate the greatest result just in case the World Bank practically refrains from extending loans to nations which persistently stick to guidelines that hamper growth and development on the economic front. The test for the World Bank is to represent a strict assertive stance, regardless of the level of poverty present in the nation, and discontinue lending in case reforms are heading a dead end.
In following this approach, it will give more guarantees that the assistance will turn out to be increasingly helpful, however, it will even give inducements for other nations to espouse guidelines which enhance their scope for economic growth and development. The benefits as per rules which the IMF is able to give are two fold. First of all, it could lower the threat of international or worldwide financial emergency by acting as the quasi lender of the last resort. Secondly, it is able to supply information, accounting, and financial benchmarks which can lower the expenses of obtaining information.
More refined information enhances market allotment by facilitating the market participants to arrive at more options based on information. A probable advantage would be lower mass behavior by the lending nations. In case the lenders get the information that a leading lender is not assessing its loans, the possibilities that a country in financial crisis might be compelled to devalue its currency resulting in higher chances of default of payment. Lowering the coverage of loans to that particular nation assumes a greater sensible approach compared to the earlier stance.
It has been proven that markets react rapidly to breaking news. The IMF enjoys an edge in getting information due to its operational relationship with a lot of developing nations and its compulsory Article 4 reports on the progress of development in countries. The IMF has been tardy to make benchmarks to enhance the quality of information and tardier to release the information to the people. Although a lot of information has been made in recent years, however a great deal is needed to be done.
The primary tasks of IMF are deterrence and alleviation of financial emergencies along with extending service as a quasi-lender of the last resort. The IMF has construed its role in wider terms, however its success has been far from good, and its accomplishments are average. Its employees as also the outsiders, do not find any substantiation that nations in IMF programs and experiencing its provisional aid, steadily undergo lesser erosion of productivity compared to other nations. The most fundamental task should be reaffirmed by the IMF.
As opposed to lending to each and every nation mired with difficulties, it must confine its task to check the multiplication of emergencies from nations having problems with their neighbors, business associates, and other nations. In place of elaborate talks to haul out assurances of restructuring, it must refrain from lending to nations which have not taken on and sustained certain precise restructuring. Establishing these alterations, permitting time for correction, would immensely alter inducements for nations and lenders. Economies that desired to undergo reforms could clarify its voting public that the nation would have lower risks.
It will, thus get enhanced investment meant for development from foreign nations at lesser cost. This must pave the way for IMF to liberate itself from the arduous load of entangling in elaborate debate or restructuring agreements which the nations sometimes are unable to carry out or maintain. It is a fact which the lenders must bear in mind that in case they lend to economies which are yet to restructure, they must be willing to assume losses at the time of an emergency situation. Interest rates prevailing in the market would show up variations in risk, therefore market effectiveness would go up.
The restructuring agenda looks forward to change the current command and control system to a system based on incentives. A possible outcome would be lower worldwide lending in the shape of loans or bonds with maybe higher Foreign Direct Investment — FDI. This, also, would better the correlation of risk to return. In order to be apposite, the IMF must accord bigger developing nations a higher interference in its functioning and examine the balance sheets of rich nations as also developing nations. More and more joining of important promising market nations on the board of IMF is crucial.
The time when nations would simply take for granted the recommendation of IMF without raising doubts regarding its applicability are absent since a long time. The IMF is faced with a problem in its reliability to some extent due to the pervasive belief that its reaction to the East Asian financial imbroglio resulted in lowering of its productivity outside of what was needed for solving the emergency. Its past reliability can be recouped in case IMF’s suggestion is supported by a Board having considerable members from nations which might require IMF policies.