Hamish McRae: We won't get good 'nannies' just by saying they're bossy and they don't know best

It is annual meeting time for the International Monetary Fund and the World Bank, and this year these conferences are in Singapore. That in itself is contentious: Singapore may be one of the most successful examples of economic development in the world, but it has a tough-minded approach to civic order - which is why it is none too keen on foreign protesters.

In recent years these organisations have started to try and disrupt the meetings - something that the Singapore authorities would not permit. As a result, there has already been a protest by more than such 80 groups to the effect that they haven't been allowed to protest.

But concern about the IMF and World Bank, founded after the Bretton Woods conference of 1944 to create the conditions for an orderly and successful post-war economy, does not just come from outside government. In the past few days two UK ministers, Hilary Benn and Ed Balls, have criticised aspects of their performance

Mr Benn has withheld part of the UK contribution to World Bank affiliate the International Development Association, which gives interest-free loans and grants to the poorest nations - on the grounds that the UK does not approve of some of the conditions applied to this help. Actually, holding back IDA payments has a long history and usually it is the US in the dock, with some in Con- gress deciding they don't like aspects of World Bank policy. I recall going to meetings and listening to UK officials fuming at US politicians for their pettiness. Doubtless, some people will be cross the UK has adopted an American technique.

Mr Balls has directed his fire more cerebrally. His basic contention is that the IMF pays too much attention to lending money and ordering developing countries about, and not enough to trying to influence the economic policy of the developed ones.

The World Bank and the IMF are large bureaucracies and, like all such bodies, they have their weaknesses. Besides, they are 60 years old and the world has changed. So, in a way, it is helpful to have an open debate, even if it is one that always proves hard to carry out constructively.

It is hard for a number of reasons. One is that they have a complex governance structure: the IMF has 188 member countries, which is like herding cats. Another is that all large organisations are hard to alter, for bureaucrats are geniuses at defending their turf.

Still another is that many of their critics see them as symbols of something bigger - globalisation, capitalism, whatever - and it is hard to adapt an institution to meet a challenge when it is not really the institution which is under attack.

So what can sensibly be said? The starting point is that conditions just after the war were very different from today. There was the chaos of conflict and the memory of the protectionism of the 1930s that had destroyed the world economy and arguably led to the rise of Hitler. With Bretton Woods establishing a fixed-exchange-rate system, the IMF was designed to lend money to countries that were in balance-of-payments difficulties, to stop them having to devalue their currency; competitive devaluation had been one of the most destructive policies of the 1930s. The World Bank was designed to lend money for rebuilding a shattered Europe.

The situation changed quite quickly. The World Bank found itself involved more in development than reconstruction and shifted its focus from Europe to Asia, Latin America and eventually Africa. The IMF's role changed after the end of the fixed-exchange-rate system in the early 1970s.

But the two greatest changes have come since then. One is the shift of world economic power towards Asia and away from the old developed world. The other is the rise of private sector capital for international investment.

You can catch some feeling for this in the graphs. The two pie charts show that the global region which grew most between 1950 and 2000 was Asia - in essence, China and India. By now, that relative growth will be larger still. So one premise of the World Bank - that, to promote development, you took money from the rich developed world and lent it to poorer countries - has been overtaken by events. World Bank funds have hardly played any role in Chinese economic development and only a small part in India's progress. Much of its effort is now directed towards Africa, which as a region has been far less successful.

Meanwhile, countries don't have to go to the World Bank for development funds; they can go to the private sector. The other chart shows some projections by the Economist Intelligence Unit for foreign direct investment (FDI) for the second half of this decade. Most FDI is still companies in rich countries investing in plants in other parts of the developed world, with the US at the top. But the new and striking thing is that China is projected to remain high on the list and India is now among the top 20 recipients. Go back 20 years and neither country would have attracted such funds.

The advantage of FDI is that it brings expertise and access to markets with only limited leakage in corruption. What is better for development, a multinational company building a car plant or the World Bank granting a loan that ends up buying the president a private jet?

The World Bank has tried hard to crack down on corruption and encourage countries to follow policies that will attract private sector capital. But this has pushed it into something of a nannying role and this, in turn, has brought criticism. The IMF, by contrast, was designed to have a nannying role. So when the UK got itself into an economic crisis in 1976 and went cap in hand to the Fund for borrowing, it had to submit to IMF surveillance - having the UK budget approved by the hard men from Washington. Now it would be almost unthinkable that a large developed country would need to go to the IMF for a loan because of a policy failure. Countries, by and large, have learnt the need for sensible fiscal and monetary policy and don't need to be told what to do. As a result, the IMF has found itself a role of lending not so much for stability but development, in effect treading on the World Bank's territory.

So what is to be done? Well, Mr Balls' comments about the IMF are interesting and there is a case for asking if the World Bank should still try to micro-manage countries' policies. Both organisations should probably be slimmed down. But you have to go back to basics and ask how we can best shepherd an increasingly global economy, and then see if our existing and actually very successful institutions can be adapted to the task. That needs calm and cautious planning plus a lot of persuasion rather than political gestures.

We're learning to live with expensive oil

Suddenly petrol is down below 90p a litre - well below, if you shop around. By any historical standards that is horribly expensive, of course, but it is a relief to see the money gauge going up appreciably slower at the pumps. The immediate reason is obvious: not only has crude fallen a bit in price but the pound has been strong against the dollar.

But to say that raises equally obvious questions about the future: will the fall in crude be sustained, and will sterling rise further against the dollar?

The second question is easier to answer than the first. It seems probable that there will be a further rise in interest rates later this year. Retail sales have recovered, the housing market has recovered, and inflation is towards the top of the range, even allowing for some fall in energy prices. So the consensus is that the Bank of England will push up rates. It may well find itself doing so at the same time as the US Federal Reserve is cutting the cost of borrowing in response to a very soft housing market in the States. Other things being equal, higher rates in the UK and lower ones in the US mean a higher pound against the dollar.

But what about crude oil prices? The pressures on the oil market are hugely complicated and as a result the experts are frequently wrong.

What seems to be happening is a slightly more favourable balance in the underlying supply/demand situation coupled with a shift in speculative positions. So there has been a modest rise in production from non-Opec sources (including Russia), no decline in Opec output, and a somewhat slower increase in global demand than the oil bulls expected. This shift has taken some investors by surprise. They had been expecting tight supplies over the winter, when demand for heating oil in the northern hemisphere rises, and thought the market would respond ahead of that. It hasn't, and unless there is a particularly cold winter, it may not.

The moral of all this is that the world is starting to learn to live with expensive oil. That does not mean the price will fall significantly. What it does show is that the market mechanism works even for a product that is such a necessity for the world economy.

And for us? Well, I think we have all learnt a lesson: to look more closely at our fuel consumption. A wise course, because if the price really were to fall, the Chancellor would resume the increases in fuel duty.