The World Bank and IMF at sixty: plus ça change?

7 April 2004 by Bretton Woods Project

Sixty years after their founding, the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
remain the dominant institutions in development but face determined opposition to their role in shaping globalisation.

Bank president James Wolfensohn says that critics should stop “going back to things that were addressed five years ago”. The Bank says it has moved on from the Washington consensus to the Post-Washington consensus. The term ’structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

’ is being done away with, replaced by the ’poverty reduction strategy’ and soon ’development policy lending’. A host of policies have been drafted and endless cubicles filled with staff focusing on the social, environmental and labour impacts of lending operations. Ownership and participation have supposedly become the touchstone of all work and a ’good governance’ agenda has been introduced to root out corruption.

Of the ten elements which made up the original ’Washington Consensus’, three have been both most aggressively pursued and most strongly opposed. Have the Bank and Fund changed their attitudes to liberalisation, privatisation and fiscal austerity?

Liberalisation: tinkering

On the trade front the Bank has rapidly expanded its trade department, re-positioning itself as the friend of developing countries. Research has highlighted the failure of trade agreements to benefit the poor. Kudos has been sought for advocacy efforts on market access, and research work to allow developing countries more time to implement agreements. Mavericks have openly questioned the Dollar and Kraay doctrine linking openness and poverty reduction which props up trade orthodoxy. Acceptance of what were once considered heterodox trade policies, such as regional trade agreements, export processing zones and commodity marketing boards, is growing.

While tariff conditionality may be on the decline, support is shifting to analytical services and capacity building which indoctrinate civil servants into the deep integration agenda. Massive loans are made in the name of trade facilitation. Old-style conditionality persists in areas where governments are loath to liberalise such as services, investment, and government procurement. The Bank and Fund continue to reject the evidence that an active industrial policy covering directed tariffs and investment laws has been crucial to successful developers both North and South. Different routes to development are rejected in favour of sequencing along a single path.

Plans to make capital account liberalisation a central tenet of the Fund’s work were shelved after crises in Asia, Russia, Latin America and Turkey shook the global financial system. The Fund was criticised from outside and within. The proposal for a debt restructuring mechanism represented an important admission by the Fund that markets alone could not be relied upon to resolve financial crises. Importantly however, the failed initiative would have replaced the ’free hand’ of the market with that of the Fund itself.

Before his departure, chief economist Ken Rogoff warned that there was no proof that financial liberalisation had benefited growth and seemed linked to “increased vulnerability to crises”. Horst Koehler, ex-managing director of the Fund, suggested that previous opposition to the establishment of an Asian Monetary Fund was “stupid”. Despite this contrition, the Fund’s best efforts to shore up the global financial system are limited to banking sector reforms and the development of standards and codes. The failure of the Fund to address systemic architectural issues partly explains why countries from Eastern Europe, East and Central Asia, and Latin America are finding it possible and worthwhile to disengage from the Fund.

Fiscal austerity: more space or passing the buck?
Developing countries have argued that Bank and Fund prescriptions for fiscal austerity have more to do with pleasing international creditors than with the long-term growth prospects of the economy. In recent negotiations in Latin America the Fund has allowed marginally more breathing room. It says that there is less need for strict prescriptions in middle-income countries.

In the face of public exhortations to greater spending on social services, low income country governments however find themselves trapped by Fund diktat on budget balances, inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. and interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
. As discussed in a comment from Zambia, countries throughout Africa have had to make cutbacks to meet arbitrary Fund-set targets.

Privatisation: no zealots?

Battles over proposed privatisations have erupted throughout the global south, particularly fierce where public services have been targeted. Responding to the level of public opposition, numerous re-nationalisations and to a growing reluctance on the part of multinational companies to participate, the Bank claims a change of heart. User fees for education have been abandoned. In water, staff say they are “not religious zealots”; the new focus is on public-private partnerships. In health care, electricity and telecommunications, reports say that there is a “vital role for the state”.

However, research from PSIRU at the University of Greenwich reveals that, despite such pronouncements, the IFIs are achieving similar objectives in different ways. A proliferation of bilateral and multilateral programmes, co-financed and managed by the Bank, are only available to countries if they choose private sector partnerships over public reform. While acceptance may be growing in some corners of the Bank for marketing boards, Malawian NGOs are furious that the Bank continues to demand privatisation of the state Agricultural Marketing Board as a condition of its support. An upcoming paper from ActionAid looking at conditionality in the water and energy sectors in India, Ghana and Uganda, finds that donor harmonisation around the conditions set by the Bank and Fund leaves developing countries “more constrained than ever in the choice of policy instruments left open to them”.

Post-Washington or Washington-Plus?

What of the other elements of the Post-Washington consensus: social and environmental safeguards, ownership and participation, and good governance?

Stories on a drainage project in Pakistan, the Bank’s role in climate change, and forestry reforms in the Democratic Republic of Congo, point up failures in both policy and practice with enormous human and environmental costs. Peter Bosshard’s comment reveals that Bank staff in the field take little heed of the endless yarn of policies spun in Washington.

A review of the experience with PRSPs as the strategies are moving into a second round shows the limits on genuine civil society participation. The comment from Zambia and the article on Malawi highlight the severe practical limitations of ownership in a framework dictated from Washington.

Good governance must not be a one-way street. Parliamentary scrutiny of agreements with the IFIs is slowly improving but still leaves much to be desired. Calls from all quarters to increase the voice of Southern countries at the Bank and Fund are perpetually stalled as the current IMF leadership selection process indicates. And at the same time, Bank action against corporate corruption is being tested in Lesotho.

At a time when multilateralism is under increasing attack there is a case for giving existing international institutions the benefit of the doubt. But to bring doubters on board, they must be genuinely multilateral and work much harder to practise what they preach.

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