Bon Voyage, World Bank!

The global rise in prosperity and personal freedoms over the past 65 years has been an immense human achievement despite a string of horrible regional conflicts and pockets of terrible suffering.

Three pillars of the economic architecture created after World War II were instrumental in this record of success: the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (or GATT, which evolved into the World Trade Organization, or WTO). All three have been criticized for decades by one political group or another, and they remain controversial — but it cannot be true that the world would be better off today if they had never been established.

Moreover, the latest “Four Horsemen of the Apocalypse” — climate change, food security, infectious disease and urban youth unemployment — are rapidly approaching. It is hard to believe that the seven billion people living in 200 nations on earth today will be successful in holding them off without strong global institutions like the IMF, the World Bank and the WTO.

But are these institutions ready to meet the challenge? The answer from most analysts is “No,” and since the global financial crisis erupted in 2007, the calls for reform have escalated sharply.

Most of the proposed reforms focus on governance, especially reducing the dominant position of the United States and the European Union and giving the rising powers such as Brazil, China and India more of a stake in these institutions. However, there is one other way of strengthening these institutions that is rarely mentioned and merits consideration.

While the WTO is based in Geneva, Switzerland, both the IMF and the World Bank are headquartered in Washington, D.C. The time has come to move at least one of them out of the United States.

There are three compelling reasons for doing so:

  • Co-location in Washington has contributed to the almost universal perception that there is no significant difference between the IMF and the World Bank. They work so closely together and have so many overlapping activities that they look like conjoined twins. Their missions, however, are fundamentally different. Separation could make each one more effective.
  • The world is no longer U.S.-centric. As we iterate toward better forms of global governance — such as the shift from G7 summits to G20 summits — broad international support for the IMF and World Bank will depend on changing the widespread belief that they are instruments of U.S. policy. Moving one of them out of the United States would be a powerful symbolic step toward a global governance system that has broader legitimacy.
  • Until recently, Washington offered lifestyle advantages (such as access to high-quality education) that few other countries could match for attracting an international staff with the peerless expertise these institutions require. Now there are dozens of cities outside the United States offering comparable attractions. Moreover, high-speed Internet and other essential technologies are equally available in these cities.

Of course there are strong arguments for keeping both the IMF and World Bank in Washington, but to simplify the discussion, and assuming for the moment a general agreement to separate them, which of the two institutions should be moved — and to where?

Moving the World Bank makes much more sense than moving the IMF. In particular, the World Bank has no mandate to carry out operations in the United States. In contrast, the most important function of the IMF — which shockingly few people understand — is to assess the economic policies of the countries that play the largest roles in the international monetary and financial systems. As long as the United States has the world’s biggest economy and its deepest financial markets, it makes sense for the IMF to be based in the United States.

Because the World Bank’s operations are overwhelmingly in developing countries, a case can be made for moving the World Bank to Africa, Asia or Latin America. However, putting the World Bank headquarters in one of these regions would not sit well with the two others.

Europe, in contrast, offers numerous advantages. In particular, the European time zone has proven to be the best location for organizations that operate globally. Only there does the business day overlap with normal working hours in the rest of the world. Furthermore, support for the World Bank is broader and deeper in Europe than in the United States.

On the other hand, moving the World Bank to Istanbul in Turkey — the most obvious bridge between the West and the rest — has considerable appeal. So does Johor in Malaysia, a bridge away from Singapore.

If rated by a global panel of experts, however, Spain has two cities — Barcelona and Madrid — that look as though they would score higher than any others in Europe or elsewhere. One big advantage is that the World Bank’s Latin American members would gain a Hispanic host in exchange for losing one that is much closer. The other big advantage is that neither of these cities is currently hosting a major multilateral organization, unlike obvious alternatives like Paris and Rome.

The biggest obstacle to moving the World Bank out of Washington is the veto power that only the United States wields. While extremists exist in both political parties who, for different reasons, would like to see the Bank closed down, Republican and Democratic leaders in Congress can be counted on to attack vigorously the idea of moving it. Furthermore, the White House would be hard-pressed to justify expending any political capital on this issue with a dicey general election only 14 months away.

Although re-locating the World Bank is a political non-starter in the near term, none of the arguments for keeping the World Bank in Washington is compelling. So it is not too early to examine these arguments and begin a scholarly debate.

First, many supporters fear that the U.S. Congress will cut World Bank funding sharply if it leaves Washington. While such a reaction would be contrary to long-term U.S. interests, it is easy to imagine this result given the country’s current political mood. However, the United States has constrained funding increases for the Bank for more than a decade, and it is entirely possible for Europe and countries like China and Brazil to offset any reductions in U.S. funding.

Second, a move out of Washington could lead to a loss of control over the operations of the World Bank by the United States. However, a substantial reduction in U.S. influence in the years ahead is inevitable, regardless of where the Bank is headquartered. The odds are strong that the emerging-market countries will gain influence as their share of global economic output grows and as the U.S. share of the global population — already less than 5% — shrinks further.

Third, the World Bank’s departure from Washington would have a negative impact on the regional economy, including more unemployment. There is no way to avoid this impact, which would extend well beyond the Bank’s employees to a large number of well-paid contractors. But because the Bank occupies prime real estate in the heart of our nation’s capital, it should be easy to sell the Bank’s buildings. Moreover, putting these properties back in the private sector would boost local tax revenues since the World Bank — like foreign embassies — is exempt from taxes.

Fourth, the costs of moving the World Bank to Europe would be great. While it is true that the costs would be substantial, some of the biggest costs associated with similar moves in the past (like the construction of new buildings) have been underwritten by the host country, anticipating the large economic benefits over many years from gaining an employer of thousands of people. Furthermore, the Bank is already in the process of decentralizing staff to its regional offices, and the residual costs could be mitigated by stretching out the move over five or more years.

Fifth, easier and more important steps can be taken to strengthen the World Bank, such as ending the practice of always having an American president and instead appointing an outstanding individual from the developing world. Yes, steps of this kind can and should proceed without delay, and opening a debate on the pros and cons of separating the World Bank from the IMF need not slow them down.

Realistically, only the United States can initiate a serious debate about moving the World Bank to Spain or some other location. No other country would be foolish enough at this moment to challenge the United States on an issue that could offend national pride.

Launched at the right moment, however, a U.S. initiative could pay rich dividends. In particular, by enhancing the Bank’s legitimacy, it would help to make the World Bank more effective in meeting the global challenges that are likely to become more difficult in the years to come.

Above all, a U.S. initiative to consider moving the World Bank out of Washington is the kind of knock-your-socks-off gesture required to convince the world that the United States is looking beyond its short-term self-interests and sees the long-term benefits of making our global institutions look and feel more global.