Relevant for Civil Services Pre & Main

The Political Economy of the Bretton Woods Institutions

Challenges before IMF and World Bank in the Era of Globalization

Discuss the role of World Bank in development of the backward countries? What role does the World Bank play in favour of developed countries? How will you distinguish between the nature and role of World Bank and IMF?

inappropriate role in exacerbating the economic crisis in Africa during the 1980s and for the fiasco surrounding Mexicos recent collapse. The IMF played a significant role during the 1980s in bailing out the commercial banks. By providing The International Monetary Fund IMF credits to developing countries, essentially to The IMFs original service commercial debt, the mandate sets forth three What was IMFs help to the world in 1980s? IMF took upon itself the role main objectives: 1. To promote Who is called gatekeeper for creditors among of gatekeeper for creditors, forcing highly indebted international monetary nation? countries to adopt SAPs cooperation; Adjustment 2. To facilitate the What is SAP and how its related to the IMF? (Structural Programms) as a condition expansion of Under whose leadership World Bank grew not only for receiving IMF international trade; credits, but as the stamp of 3. To promote exchange dramatically and when? approval debtor countries rate stability. needed as a condition for receiving further grants and The IMF achieves these objectives by advising aid from all donor sources. member countries on their economic policies and by By disbursing funds to developing countries in the providing conditional assistance to member countries 1980s to service commercial debt, an most recently to experiencing balance of payments problems. Mexico, the IMF essentially postponed the debt crisis The IMF often escapes close scrutiny by groups who by providing short term funds on very hard terms for tend to focus their advocacy efforts on the World Bank. what was essentially a structural problem of insolvency Yet, the IMF has played a very significant, if not more which required long-term solutions. It is widely important, role in exacerbating the impoverishment of believed that the IMF financed the recovery with the developing countries. Critics argue that the IMF has strayed far from its original mandate of providing wrong resources and the wrong approach. member countries with funds to alleviate short-term Consequently, the IMF is now in the position of balance of payments crises and stabilizing exchangeextracting large net transfers of resources, especially rates. The IMF is increasingly under attack for its from those countries which can least afford it.
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The World Bank and its sister organization, the International Monetary Fund, were created at Bretton Woods, New Hampshire, USA in 1944. Together they are referred to as the Bretton Woods Institutions or BWIs. Originally created primarily to finance the reconstruction of war-torn Europe, the World Bank has become the primary financier of development projects in the Third World. It has also become the Third Worlds largest creditor. Together the countries of the Third World owe the World Bank more than US$160 billion.

The World Bank

that the major industrialized countries, led by the United States, and influenced by their corporations, set The World Bank is the agenda. In the process, the poor are often actively currently the largest multiundermined. national lending and Superficially the Bank and IMF exhibit many technical agency dealing common characteristics. Both are in a sense owned and with Third World directed by the governments of member nations. The development. As the Peoples Republic of China, by far the most populous worlds leading state on earth, is a member, as is the worlds largest development agency, the industrial power (the United States). In fact, virtually World Bank has a wideevery country on earth is a member of both institutions. ranging mandate, from Both institutions concern themselves with economic consolidating loans for large-scale development issues and concentrate their efforts on broadening and projects to providing structural adjustment loans and strengthening the economies of their member nations. sectoral adjustment loans to developing countries Staff members of both the Bank and IMF often appear experiencing balance of payments problems. In the at international conferences, speaking the same 1970s, under the presidency of Robert McNamara, the recondite language of the economics and development World Bank grew dramatically in size and scope. In professions, or are reported the 1980s, in large part owing in the media to be What does the World Bank finance for? to the debt crisis, the Bank negotiating involved and increasingly served as a debt What is the importance of Bretton Woods in somewhat mystifying management institution, programs of economic history of World Bank? lending in some cases as adjustment with ministers of much as 50% of a developing How is WTO related to World Bank? finance or other government countrys portfolio toward officials. The two institutions structural and/or sectoral adjustment lending. The hold joint annual meetings, which the news media primary feature of this kind of lending was to restore a cover extensively. Both have headquarters in troubled economys debt servicing capacity by urging Washington, D.C., where popular confusion over what indebted countries to adopt major economic reforms they do and how they differ is about as pronounced known as Structural Adjustment Programmes (SAPs). as everywhere else. For many years both occupied the But over the past decade, the World Bank has come same building and even now, though located on under increasing criticism from a wide range of groups opposite sides of a street very near the White House, in the North and South. Environmental groups argue that they share a common library and other facilities, many World Bank projects have had a disastrous effect regularly exchange economic data, sometimes present on the environment. The World Bank often finances large joint seminars, daily hold informal meetings, and infrastructure projects; including dams, open pit mines, occasionally send out joint missions to member and road construction. In case after case these projects countries. have been proven economically unsound, have Despite these and other similarities, however, the destroyed pristine rainforests, rivers and estuaries, and Bank and the IMF remain distinct. The fundamental have uprooted the livelihoods of millions of Third World difference is this: the Bank is primarily a development citizens who are affected by them. World Bank-funded institution; the IMF is a cooperative institution that development projects have forcibly resettled millions and seeks to maintain an orderly system of payments and millions of people since its inception. receipts between nations. Each has a different purpose, It is noteworthy that by the end of the Bretton a distinct structure, receives its funding from different Woods conference, the World Bank and the IMF had sources, assists different categories of members, and been founded and the groundwork was laid for the strives to achieve distinct goals through methods peculiar to itself. General Agreement on Tariffs and Trade (GATT), and eventually, in 1995, the creation of the World Trade Purposes Organisation. Although their roles evolved, their overAt Bretton Woods the international community arching purpose remained. As Jose Louis Jamarillo, the assigned to the World Bank the aims implied in its former Columbian Ambassador to GATT and President formal name, the International Bank for Reconstruction of the Group of 77, declared after the birth of the WTO, and Development (IBRD), giving it primary what we have created is an institutional trinity which responsibility for financing economic development. The will dominate all economic relations across the world Banks first loans were extended during the late 1940s to finance the reconstruction of the war-ravaged in the interests of the strongest. The decision-making economies of Western Europe. When these nations structures of all three institutions continue to ensure
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recovered some measure of economic self-sufficiency, which mobilizes funding for private enterprises in the Bank turned its attention to assisting the worlds developing countries, the International Center for poorer nations, known as developing countries, to Settlement of Investment Disputes, and the Multilateral which it has since the 1940s loaned more than $330 Guarantee Agency. With over 7,000 staff members, the billion. The World Bank has one central purpose: to World Bank Group is about three times as large as the promote economic and social progress in developing IMF, and maintains about 40 offices throughout the countries by helping to raise productivity so that their world, although 95 percent of its staff work at its people may live a better and fuller life. Washington, D.C., headquarters. The Bank employs a The international community assigned to the IMF staff with an astonishing range of expertise: economists, a different purpose. In establishing the IMF, the world engineers, urban planners, agronomists, statisticians, community was reacting to lawyers, portfolio managers, the unresolved financial How are the IMF and World Bank funded? loan officers, project problems instrumental in appraisers, as well as initiating and protracting the Briefly describe and assess World Bank experts in operations? Great Depression of the telecommunications, water 1930s: sudden, unpredictable supply and sewerage, variations in the exchange values of national currencies transportation, education, energy, rural development, and a widespread disinclination among governments population and health care, and other disciplines. to allow their national currency to be exchanged for Funding foreign currency. Set up as a voluntary and cooperative The World Bank is an investment bank, institution, the IMF attracts to its membership nations intermediating between investors and recipients, that are prepared, in a spirit of enlightened self-interest, borrowing from the one and lending to the other. Its to relinquish some measure of national sovereignty by owners are the governments of its 180 member nations abjuring practices injurious to the economic well-being with equity shares in the Bank, which were valued at of their fellow member nations. The rules of the about $176 billion in June 1995. The IBRD obtains most institution, contained in the IMFs Articles of of the funds it lends to finance development by market Agreement signed by all members, constitute a code of borrowing through the issue of bonds (which carry an conduct. The code is simple: it requires members to AAA rating because repayment is guaranteed by allow their currency to be exchanged for foreign member governments) to individuals and private currencies freely and without restriction, to keep the institutions in more than 100 countries. Its concessional IMF informed of changes they contemplate in financial loan associate, IDA, is largely financed by grants from and monetary policies that will affect fellow members donor nations. The Bank is a major borrower in the economies, and, to the extent possible, to modify these worlds capital markets and the largest nonresident policies on the advice of the IMF to accommodate the borrower in virtually all countries where its issues are needs of the entire membership. To help nations abide sold. It also borrows money by selling bonds and notes by the code of conduct, the IMF administers a pool of directly to governments, their agencies, and central money from which members can borrow when they are banks. The proceeds of these bond sales are lent in turn in trouble. The IMF is not, however, primarily a lending to developing countries at affordable rates of interest institution as is the Bank. It is first and foremost an to help finance projects and policy reform programs overseer of its members monetary and exchange rate that give promise of success. policies and a guardian of the code of conduct Neither wealthy countries nor private individuals borrow from the World Bank, which lends only to Size and Structure creditworthy governments of developing nations. The The IMF is small (about 2,300 staff members) and, poorer the country, the more favorable the conditions unlike the World Bank, has no affiliates or subsidiaries. under which it can borrow from the Bank. Developing Most of its staff members work at headquarters in countries whose per capita gross national product Washington, D.C., although three small offices are (GNP) exceeds $1,305 may borrow from the IBRD. In maintained in Paris, Geneva, and at the United Nations contrast, all member nations, both wealthy and poor, in New York. Its professional staff members are for the have the right to financial assistance from the IMF. most part economists and financial experts. Maintaining an orderly and stable international The structure of the Bank is somewhat more monetary system requires all participants in that complex. The World Bank itself comprises two major system to fulfill their financial obligations to other organizations: the International Bank for participants Reconstruction and Development and the International World Bank Operations Development Association (IDA). Moreover, associated with, but legally and financially separate from the The World Bank exists to encourage poor countries World Bank are the International Finance Corporation, to develop by providing them with technical assistance
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and funding for projects and policies that will realize community to reconsider how the IMF could most the countries economic potential. The Bank views effectively function in a regime of flexible exchange development as a long-term, integrated endeavor. rates. After five years of analysis and negotiation (1973During the first two decades of its existence, two 78), the IMFs second phase began with the amendment thirds of the assistance provided by the Bank went to of its constitution in 1978, broadening its functions to electric power and transportation projects. Although enable it to grapple with the challenges that have these so-called infrastructure projects remain important, arisen since the collapse of the par value system. These the Bank has diversified its activities in recent years functions are three. as it has gained experience with and acquired new First, the IMF continues to urge its members to allow insights into the development process. their national currencies to be exchanged without The Bank gives particular attention to projects that restriction for the currencies of other member countries. can directly benefit the poorest people in developing As of May 1996, 115 members had agreed to full countries. The direct involvement of the poorest in convertibility of their national currencies. Second, in economic activity is being promoted through lending place of monitoring members compliance with their for agriculture and rural development, small-scale obligations in a fixed exchange system, the IMF enterprises, and urban What are the areas of co-operation between supervises economic policies development. The Bank is that influence their balance the World Bank and IMF? of payments in the presently helping the poor to be more productive and to gain access Briefly describe and evaluate IMF Operations? legalized flexible exchange rate environment. This to such necessities as safe supervision provides opportunities for an early water and waste-disposal facilities, health care, familywarning of any exchange rate or balance of payments planning assistance, nutrition, education, and housing. problem. In this, the IMFs role is principally advisory Within infrastructure projects there have also been Over the past few years, in response to an emerging changes. In transportation projects, greater attention is interest by the world community to return to a more given to constructing farm-to-market roads. Rather stable system of exchange rates that would reduce the than concentrating exclusively on cities, power projects present fluctuations in the values of currencies, the IMF increasingly provide lighting and power for villages has been strengthening its supervision of members and small farms. Industrial projects place greater economic policies. Provisions exist in its Articles of emphasis on creating jobs in small enterprises. LaborAgreement that would allow the IMF to adopt a more intensive construction is used where practical. In active role, should the world community decide on addition to electric power, the Bank is supporting stricter management of flexible exchange rates or even development of oil, gas, coal, fuel wood, and biomass on a return to some system of stable exchange rates. as alternative sources of energy. Measuring the success of the IMFs operations over the The Bank provides most of its financial and years is not easy, for much of the IMFs work consists technical assistance to developing countries by in averting financial crises or in preventing their supporting specific projects. Although IBRD loans and becoming worse. Most observers feel that merely to have IDA credits are made on different financial terms, the contained the debt crisis of the 1980s, which posed the two institutions use the same standards in assessing risk of collapse in the worlds financial system, must the soundness of projects. The decision whether a be counted a success for the IMF. project will receive IBRD or IDA financing depends on the economic condition of the country and not on the Cooperation between Bank and IMF characteristics of the project. Although the Bank and IMF are distinct entities, they work together in close cooperation. This IMF Operations cooperation, present since their founding, has become The IMF has gone through two distinct phases in more pronounced since the 1970s. Since then the its 50-year history. During the first phase, ending in Banks activities have increasingly reflected the 1973, the IMF oversaw the adoption of general realization that the pace of economic and social convertibility among the major currencies, supervised development accelerates only when sound underlying a system of fixed exchange rates tied to the value of gold, financial and economic policies are in place. The IMF and provided short-term financing to countries in need has also recognized that unsound financial and of a quick infusion of foreign exchange to keep their economic policies are often deeply rooted in long-term currencies at par value or to adjust to changing inefficient use of resources that resists eradication economic circumstances. Difficulties encountered in through short-term adaptations of financial policies. It maintaining a system of fixed exchange rates gave rise does little good for the Bank to develop a long-term to unstable monetary and financial conditions irrigation project to assist, say, the export of cotton, if throughout the world and led the international
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The International Monetary Fund and the World Bank at a Glance International Monetary Fund oversees the international monetary system promotes exchange stability and orderly exchange relations among its member countries assists all membersboth industrial and developing countriesthat find themselves in temporary balance of payments difficulties by providing short- to medium-term credits supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas draws its financial resources principally from the quota subscriptions of its member countries has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion) has a staff of 2,300 drawn from 182 member countries the countrys balance of payments position is so chaotic that no foreign buyers will deal with the country. On the other hand, it does little good for the IMF to help establish a sound exchange rate for a countrys currency, unless the production of cotton for export will suffice to sustain that exchange rate over the medium to long term. The key to solving these problems is seen in restructuring economic sectors so that the economic potential of projects might be realized throughout the economy and the stability of the economy might enhance the effectiveness of the individual project. The Bank and the IMF have distinct mandates that allow them to contribute, each in its own way, to the stability of the international monetary and financial system and to the fostering of balanced economic growth throughout the entire membership. Since their founding 50 years ago, both institutions have been challenged by changing economic circumstances to develop new ways of assisting their membership. The Bank has expanded its assistance from an orientation toward projects to the broader aspects of economic reform. Simultaneously the IMF has gone beyond concern with simple balance of payment adjustment to interest itself in the structural reform of its members economies. Some overlapping by both institutions has inevitably occurred, making cooperation between the Bank and the IMF crucial. Devising programs that will integrate members economies more fully into the international monetary and financial system and at the same time encourage economic expansion continues to challenge the expertise of both Bretton Woods Institutions. The 50th anniversary of the founding of the Bretton Woods institutions in 1994 prompted a flood of initiatives aimed at assessing the role played by the
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World Bank seeks to promote the economic development of the worlds poorer countries assists developing countries through long-term financing of development projects and programs provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA) encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC) acquires most of its financial resources by borrowing on the international bond market has an authorized capital of $184 billion, of which members pay in about 10 percent has a staff of 7,000 drawn from 180 member countries World Bank and the International Monetary Fund and debating their future. Most of such reassessments begin by stressing how much the world has changed in the 50 years since both organizations were established. From the collapse of the Soviet Union to the communications and transportation revolution, and from the radical transformation of financial markets to the population explosion, the inventory of the new conditions under which the Bretton Woods institutions have to operate is certainly long. The implication, of course, is that the institutions should adapt their goals and policies to the new realities and then reorganize accordingly. In the case of the World Bank, the lack of consensus about its basic mission, limitations in its governance system and other conditions have led to a proliferation of goals-which in turn has had important organizational repercussions. Furthermore, the size, complexity and relative independence of the Bank create a substantial margin for inconsistencies among its environment, its strategy, and its organization. Usually, competitive pressures do not leave decisionmakers much choice but to adapt goals and strategies to environmental changes and to make the necessary internal adjustments to support the new strategy. But, without intense competition, or other external challenges, organizations like the Bank-large, complex, relatively autonomous, and with a significant capacity to influence its environment-can postpone, or even avoid, the difficult decisions required to minimize incongruities between strategy and internal organization. They can often afford the added costs and inefficiencies that result from the ineffectiveness of an internal structure whose objectives and policies do not respond adequately to the new external threats and opportunities.

The World Banks failure to achieve its primary been destructive for most people of the world, the IMF mission of poverty alleviation is now acknowledged at and World Bank policies have been a major instrument the most senior levels of the Bank itself, as well as by to structure the global economy (via structuring the the Canadian Auditor General. Evidence of project and national economies of developing countries) to allow portfolio failures have a form of neoliberal led to increasing calls globalization to be Criticisms of the Structural Adjustment for a comprehensive pursued that has led to Programmes/Policies (SAPs) review of the World the criticisms mentioned Bank and the IMF, the The effect of Structural Adjustment Programmes/ above. Critics also point most recent call coming Policies on poor countries has been one of the most out that the beneficiaries from the countries of the significant criticisms of the World Bank. The 1979 energy will be largely the G-7 in the communiqu people in crisis plunged many countries into economic crises. The wealthy from their 1994 Naples World Bank responded with structural adjustment loans western nations and the summit. The Banks which distributed aid to struggling countries while t r a n s - n a t i o n a l dubious logic of linking globalization and enforcing policy changes in order to reduce inflation corporations, while the majority of people in the integration to lower and fiscal imbalance. Some of these policies included world will not benefit. poverty and inequality encouraging production, investment and labourSo it is crystal clear has been challenging intensive manufacturing, changing real exchange rates that there are numerous from years. After its and altering the distribution of government resources. challenges before IMF promotion of openness Structural adjustment policies were most effective in and World Bank. and the evidence cited countries with an institutional framework that allowed The policies like of a large swathe of and countries having open these policies to be implemented easily. For some globalization economies and thus Adjustment countries, particularly in Sub-Saharan Africa, economic Structural growing fast (the Asian of these growth regressed and inflation worsened. The Programs Miracle and the World institutions have not alleviation of poverty was not a goal of structural Development Reports), adjustment loans, and the circumstances of the poor often achieved their objectives other academics who and hence have been worsened, due to a reduction in social spending and an looked at these noted failing so far in fulfilling increase in the price of food, as subsidies were lifted. that the various country their promises and studies used such a By the late 1980s, international organizations began claims. Contrary to their loose definition of to admit that structural adjustment policies were proclamations, these openness that worsening life for the worlds poor. The World Bank institutions and their comparisons across changed structural adjustment loans, allowing for social policies have played countries and with the spending to be maintained and encouraging a slower havoc generalised conclusions change to policies such as transfer of subsidies and price developing countries and were faulty and rises. In 1999, the World Bank and the IMF introduced its people. Not only erroneous and not warranted at all. The the Poverty Reduction Strategy Paper approach to human life but every sector of an economy has Bank view of the East replace structural adjustment loans. The Poverty been badly devastated by Asia miracle came under Reduction Strategy Paper approach has been interpreted them. Their criticism challenge, including in as an extension of structural adjustment policies as it cannot be refuted until some UNCTAD research continues to reinforce and legitimize global inequities. they stand by their work and its Trade and Neither approach has addressed the inherent flaws claimed objectives and Development Reports. within the global economy that contribute to economic promises. Both in form The current form of and social inequities within developing countries. By and essence the political globalization, which is seen, is unaccountable, reinforcing the relationship between lending and client economy of these Bretton institutions corporate-led, and nonstates, many believe that the World Bank has usurped Woods should be in the interest democratic. It further indebted countries power to determine their own of the Third World shows the links between economic policy. Countries and its people. tremendous odious debt and poverty in the developing countries with the effects And, undoubtedly, this is the challenge before them of the current forms of globalization that marginalizes that is to be tackled in the era of globalization the era a vast majority of people around the world. While not of growing economic inequality. KK the only part of the global financial system that has
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