The World Bank and International Monetary Fund’s Annual Meetings in Singapore Tuesday and Wednesday will focus on the world’s development needs but will leave unasked the most important question: are the Bank and the Fund themselves helpful to development, and if not, what can be done about them?

I have suggested on a number of occasions that the IMF should be closed down, since it lost its original role of guardian of the Bretton Woods exchange rate system in 1973 and has proved itself inept and dangerous in its current role of Third World bailout facilitator. More difficult is the question of what should be done with the World Bank, which combines a number of functions, some of which are clearly desirable, while overlaying them with a culture and methodology that is deeply counterproductive to economic development.

There are four functions carried out by the World Bank, all of which may need to be done by somebody:

• The Bank provides long term financing for infrastructure and other needs to Third World countries which have difficulty borrowing in the private market on the terms and for the maturities the Bank provides
• The International Finance Corporation, the Bank’s “private sector” arm, provides debt and equity financing to Third World private sectors, without a government guarantee
• The World Bank and the IMF provide guidance to countries on economic development and public financial management, and act as a repository of information about Third World countries, even those that are not on the “radar screens” of the private sector
• Through its International Development Association affiliate the Bank provides financial support in the form of low cost loans, whose principal is sometimes written off in “debt forgiveness” deals, to the very poorest Third World countries, which are insufficiently creditworthy to tap the private credit markets.

In addition, current World Bank President Paul Wolfowitz is trying to involve the World Bank in fighting Third World corruption, an uphill task if ever there was one.

Starting from the bottom, IDA’s activities are in reality a form of multilateral aid. If Western governments and taxpayers want to provide such aid, they need a mechanism for doing so, but it makes no sense to disguise this aid as loans, thus burdening impoverished countries unnecessarily and preventing them from graduating to private market finance. The IDA should thus become purely a grant making institution financed by Western taxpayers and charitable contributions. As well as providing aid, it should act as a repository of knowledge on the Third World, which it will in any case need to collect to perform its main function.

While remaining in the grant and information business, the World Bank group should get out of the lending business. For one thing, since the World Bank and the IMF insist on their debt taking priority over everybody else’s debt in reorganization, they effectively subordinate private sector debt, diluting its security. Thus in the Argentina debt restructuring of 2002-05, the IMF was repaid in full and the World Bank has suffered no losses, whereas private sector bondholders suffered a 70% “haircut” in the value of their bonds.

The private sector, which used to like working with the World Bank, appears to have noticed this conflict of interest. In the 1970s, private lenders sought to undertake “co-financings” with the World Bank, because they believed the World Bank was more able to resist political pressures from creditor governments than foreign private lenders, and hence would provide a measure of protection for lenders against arbitrary expropriation. The Argentine case and others before it have demonstrated that in reality the World Bank and IMF act in their own interests, continuing to make short term advances to Argentina and thereby assisting it to stiff private creditors. Accordingly, co-financing has in recent years been limited to other government and international agencies, which can co-operate with the World Bank on a more or less level playing field.

The international capital markets are far deeper than in 1973, let alone 1944, so the World Bank is unnecessary as a financier of truly creditworthy borrowers. To the extent that marginal Third World borrowers are forced to run a more conservative budget policy by not having the World Bank available, this is a good thing. The IFC should remain in business (it has considerable expertise in financing the private sector in countries where private institutional investors have as yet little experience) but it should be privatized; to the extent its activities make sense and its expertise is valuable, they will still be sensible and valuable in the private sector.

For projects that are “socially desirable” but not quite creditworthy the grant agency can subsidize the cost of the project until it is financeable in the private markets – in this type of co-financing structure the conflict of interest disappears, since the grant agency is junior to the private money.

In the advice business the World Bank is a monopoly supplier, while the private sector advisors that existed in profusion before 1914, the London merchant banks, are no longer in business. The demise of the merchant banks is to some extent the World Bank’s fault (for taking away a profitable business which had forced them to remain client-focused and long-term-focused) but the damage is now done – alternative suppliers of advice to countries don’t currently exist.

In any case, there is a structural problem that needs solving. Before 1914, merchant banks established exclusive relationships with particular countries and borrowers within those countries, and other merchant banks by gentlemen’s agreement didn’t offer finance to those clients. Thus the local Ministry of Finance was forced to deal with its merchant banker when the country needed money, and to follow a development strategy that was acceptable to its banker. Borrowing too much money or engaging in wasteful public spending or corruption resulted in its bonds declining in price and credit being cut off.

In the 1920s, when international borrowing resumed, the London merchant banks were no longer so powerful, and New York investment banks, with more access to investor capital, entered as competitors. Since Americans believe in competing for everything, the old exclusivity rapidly broke down and countries which wanted to throw money about, such as Peru, were able to play the banks off against each other and do bond issues with several, without any overall control on their total financing volume.

The result in the 1930s was mass default and closure of the international bond markets; it was thus not entirely unreasonable for the Bretton Woods participants of 1944, viewing Britain’s weakened state, to suppose that the pre-1914 arrangements were impossible, so that the only sensible approach to Third World financial development was a public sector monopoly.

In 2006, this won’t do. If the World Bank is abolished, arrangements must be made for countries to sign 10 year exclusive contracts with a financial advisor, which will itself lead all the government’s financings, and will not be removable except on at least 3 years’ notice. The major banks will compete for these financial advisory contracts because they want the financing business; fortunately former World Bank staffers will be available for them to hire to do the advisory work. In all but the short term, this problem will thus be solved by a return to a structure close to that before 1914, although the advisory teams will be specialized operations within major banks rather than separate institutions. The advisory ”troika” set up in 1975 by Lazards, Lehman Brothers and Warburgs, two merchant banks and an investment bank, to advise Indonesia and other Third World borrowers in difficulties, is an alternative model that can be followed; here the advisors didn’t themselves raise finance but acted as the borrower’s representative in financing negotiations and kept overall control of the amount raised.

One major advantage of closing the World Bank would be to take the Non-Government Organizations out of the development discussion. Since the advent in 1996 as World Bank Chairman of James Wolfensohn, an investment banker consumed by guilt at his banking career, NGOs have been given an unmerited seat at the top development table. They have generally been distinguished neither by democratic accountability nor by economic competence, but only by a profoundly disturbing and fanatical commitment to wrong-headed ideological nostrums. The Singapore government, to squawks of protest from the World Bank, refused visas to 27 NGO representatives who had been invited to the Annual Meetings, describing them as “troublemakers” — in reality most NGOs fit this description.

Finally, if the World Bank becomes a grant making agency, it can certainly undertake Wolfowitz’s new task of fighting corruption. Ideally it should impose the highest moral and ethical standards on borrowers, similar to those imposed by a Victorian workhouse on its unfortunate inmates. Should the Bank’s standards be sufficiently Dickensian, this will provide an extremely useful incentive to economic development. Countries will move heaven and earth to sort out their economies and governance and qualify for the private capital market, thus freeing themselves from the gruel-denying ordinances of the World Bank’s Mr. Bumbles.

We come now to the central problem: however desirable it may be to restrict the World Bank to an aid and information role, and get it out of the financing and advisory businesses, there is no easy way of making it happen. Like the legendary vampires, international bureaucracies are almost impossible to kill. In a national environment, from time to time iconoclastic reformist governments are elected which close down redundant or harmful bureaucracies. Internationally, this doesn’t happen; one needs iconoclastic reformist governments in all the major countries at once, including entities such as the EU where such governments are more or less constitutionally prohibited. Thus the Reagan/Thatcher era in the United States and Britain, which brought reform to those countries, brought no equivalent reform to the World Bank, nor did the Gingrich era in the U.S. Congress, nor the Koizumi era in Japan. In reality therefore reforms that are more than cosmetic at the World Bank or the IMF are in the short term no more than pipe-dreams.

In the long term, there may be a “silver stake” vampire killer that can work, at least if we get a sufficiently lurid recessionary Walpurgis-Night. Current World Bank and IMF policies are likely to lead to repeated defaults by Third World countries, particularly in a period of tight money, which can only be remedied by new capital subscriptions from member countries. Refusing such subscriptions would in turn force real reform, if only because without new capital the institutions would lose their AAA credit ratings and be unable to pay the bureaucrats.

Even in a crisis situation, however, de-funding the World Bank would require great moral courage by member governments; they would be accused of attempting to starve the Third World, and the NGOs in particular, the shock troops of the World Bank bureaucracy, would stop at nothing to preserve their privileged position in the development discussion.

It could have happened in the tight money, high default period of 1980-84 but it didn’t; the good guys weren’t ready. Hopefully they will be ready next time.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)