The International Financial Institution Advisory Commission (IFIAC), established by Congress in 1998 to recommend U.S. policy toward such institutions as the International Monetary Fund (IMF) and the World Bank, delivered its final report to Congress and the Treasury Department on March 8. AEI visiting scholar Allan H. Meltzer chaired the eleven-member commission, which included Charles W. Calomiris, another AEI visiting scholar.

The report suggests that the institutions in question should restrict their activities to those that serve "an important, but limited, set of objectives" and should "change their operations to reduce opportunities for corruption in recipient countries." The report also argues that the institutions would be more effective if they were subject to greater accountability for their performance.

According to the commission, the World Bank Group and regional development banks (including the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank) have strayed from their original purpose. They were designed to help developing countries escape from poverty and become financially independent by providing financial support that would supplement capital shortfalls from the private sector. But with the emergence of global financial markets, today the flow of capital from the private sector far outstrips the amount of lending available from the World Bank Group.

The IFIAC recommends that the World Bank and the development banks focus on providing for public goods, such as research on health and agriculture, as well as grants for the urgent social needs of the poorest countries.

The commission found that the IMF, too, plays a role that far exceeds in scope the one envisioned by its founders. Designed to assist member states to correct balance-of-payments problems, the IMF was expected to provide short-term loans and advice to countries with payment deficits. In fact, it has become a manager of financial crises and a long-term lender.

The IFIAC suggests that the IMF should serve as something like a lender of last resort for developing nations, making loans only to nations that have already been shown to be financially sound. In order to minimize dependency on itself, the IMF should charge a penalty rate of interest and should end its long-term lending entirely.

The commission recommends increased reliance on grants. To minimize the effects of governmental corruption within the receiving nations, grants would be paid directly to the suppliers of goods and services once proof of delivery had been independently verified. Independent auditors should perform quantity and quality checks.

The report notes that the Bank for International Settlements (BIS) has adapted well to large changes in the financial industry and central banking practices. It suggests that the BIS remain a financial standard setter. The BIS might, however, benefit from streamlining its organizational structure, which currently causes confusion and a lack of transparency.

Finally, the WTO should not directly affect U.S. legislation, nor should it regulate banking services, accounting practices, or financial standards. Currently, countries that do not accept WTO decisions are subject to retaliation by injured parties in the form of trade restrictions. Instead, the report proposes, those countries should pay an annual fine equal to the value of the damages or provide equivalent trade liberalization.