The IMF needs to overcome its bipolar personality

FORTUNE — The IMF is not one, but rather, two institutions: a highly respected analytical outfit anchored by superb technocrats and delivering world class insights; and an inconsistent operator that frequently falls hostage to pressure from its political masters in advanced economies and thus fails to deliver on its promises.

Never has the contrast been as strong as it is today. And never have the consequences been as material.

Formed in 1944 under very different global circumstances, the IMF has brilliantly navigated the ebbs and flows of the global economy. In doing so, it has retained its reputation as the most powerful, competent, and relevant of all international institutions.

On paper, the IMF serves the global economy in four main ways: It provides unbiased analysis that covers not just national developments, but also, and importantly, their cross-border effects; it is a forum for global policy discussions and coordination; it is a financial first responder, providing emergency loans to countries shut out of markets and often on the verge of collapse; and it supports its member countries’ implementation of sound policies and establishment of sound processes and practices.

This is quite an impressive list already. Yet it does not give justice to the full scope and impact of a well-functioning IMF. You see, a credible IMF translates into an institution that is able to significantly leverage everything it does.

IMF loans can unlock funding from other sources. Its analysis feeds into economic summits, potentially influencing the agenda and the narrative. Its technical assistance can unleash the underutilized potential of domestic economies. And, in its role as a conductor of policies around the world, it can be the best source of checks and balances, including in enforcing international standards.

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At times over its history, the IMF has indeed excelled. It showed itself to be much more than the world’s intellectual leader, emergency provider of financing, and trusted advisor to governments. It also played the role of the world’s institutional north star.

Yet today’s IMF falls quite short of its potential and, even more consequently, of what the global economy needs in order to grow and prosper. The institution’s credibility is lacking. Its convening power has weakened. Its financial resources have lagged the growth and volatility of private capital.

The IMF also has considerable representation and legitimacy deficits. Its governance is a reflection of the distant past and, certainly, not of today’s global economy. As such, the institution’s policy coordination role is seen as asymmetric by most, and ineffectual by many. And the Fund no longer plays the catalytic role that is so important for good global economic outcomes.

The fault does not lie in the institution’s analysis. Its work, spearheaded by the “World Economic Outlook,” is regarded as first class.

I can attest to this as both an economist and market participant. We eagerly await the Fund’s analysis, data, and insights — all of which inform and influence how we think about the global economy and global markets.

The problem with today’s IMF is that it is easily manipulated by western countries in general, and Europe in particular. And the detrimental consequences have been clear for all to see.

Repeatedly over the last three years, the IMF has been pressured to participate in programs for struggling European economies that are inadequately designed, poorly monitored, and insufficiently financed.

Unsurprisingly, outcomes have consistently fallen short of what was promised to citizens. Understandably, many have started to see the IMF not as part of the solution but, rather, as part of the problem.

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This sad phenomenon was highlighted recently by the debacles in Cyprus.

To the stunned amazement of virtually everyone I know, the IMF signed on to an initial agreement that was so poorly designed that it immediately attracted widespread international and national condemnation. As a result, the agreement was essentially disowned by all those that, just hours earlier, had signed on and participated in a triumphant announcement.

In the follow-up, the IMF again undermined its credibility. It agreed to a revised program that showed insufficient understanding and analysis of the complexities of the country’s problems; and one that, even today, is yet to be fully financed.

In both cases, and in other similar circumstances elsewhere in Europe (including Greece), I suspect that the IMF felt it had no choice but to succumb to pressure by European politicians. But in doing so, it is has risked more than its credibility and standing. It has also undermined its ability to influence the flow of private capital that is so critical to growth and employment, and whose sudden reversal can destabilize countries and impose social hardships.

To be more effective, the IMF needs to do much more to press its political masters to revamp the institution’s governance and practices. The current modest proposals to tweak voting power and representation are insufficient and already stalling. They should be enhanced with more meaningful reforms. Moreover, the selection process for the institution’s leader, which de facto reserves the position for a European (and has done so since the Fund’s inception), should be dramatically changed to avoid nationality trumping merit.

Some feel that, while long warranted, such reforms stand no practical chance of implementation. They argue that Europeans will resist an erosion in their historical entitlements, even if these are now blatantly outdated.

They have a point. Yet the answer is not to allow the Fund’s enormous talent and its huge potential to erode further. Rather, their insight speaks to the importance of an honest and broad-based debate. And the anchor for this best comes from the IMF itself.

Now is the time for Fund’s management and staff to tell the world what is needed for the institution to perform a role that is critically required, and sorely missing in today’s highly inter-dependent global economy. With this as a blueprint, one can imagine a more informed and constructive global debate and real progress. Lacking that, the global economy will resemble an uncoordinated orchestra that, despite many bright spots, delivers confusing and, at times, painful renditions.

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