International Monetary Fund and World Bank - Term Paper Example

The International Monetary Fund is a cooperative international monetary organization. It was established together with the World Bank in 1945 as partof the Bretton Woods conference convened in the aftermath of World War II, at the Bretton Woods Conference in New Hampshire, U.S.A. These institutions were designed to be pillars of the post world war global economic order. Crisis prevention and conflict management became established as an important aspect of development policy in the 1990s. It is often assumed that the World Bank and International Monetary Fund in particular have considerable potential in establishing and maintaining peace and stability. "Due to their considerable financial resources, technical assets, and global presence, the IFIs1 (i.e. the World Bank and the IMF, S.K.) have the capacity to assist in maintaining or recreating an environment of peace and stability."2 Distinctions between the International Monetary Fund and the World Bank. The World Bank's focus is on the provision of long-term loans to support development projects and programs. The IMF, on the other hand, concentrates on providing loans to stabilize countries facing short-term financial crises. The World Bank and IMF are directed by the governments of the world's richest countries. Combined, the "Group of 7"3 holds more than 40% of the votes on the Boards of Directors of these institutions and the U.S. alone accounts for almost 20% of the votes. It was the U.S. policy during the Reagan Administration in the early 1980s, to expand the role of the World Bank and IMF to manage developing economies4. The statutory purposes of the IMF are, first, utilizing a permanent institution for the purpose of ensuring international monetary cooperation which also makes available expertise to deal with relevant problems. Second, bringing about an increase in the balanced growth of international trade, which will result in significantly reduced levels of unemployment. Third, ensuring that the stability, orderly arrangements and avoidance of competitive depreciation in respect of exchanges is maintained. Fourth, elimination of restrictions which hinder world trade by helping in the establishment, in respect of current transactions, between members. Fifth, reducing the duration and lessening the amount of disparity in the international balances of payments of members5. Their fundamental difference is that the World Bank is primarily a developmental institution whereas the IMF is a cooperative institution that seeks to maintain an orderly system of payments and receipts between nations. Each has a different purpose, a distinct structure, receives its funding from different sources, assists different categories of members and strives to achieve its distinct goals through methods specific to itself. The primary aim of the World Bank was the financing of economic development and accordingly, the Bank's first loans, during the late 1940s, were disbursed in order to finance the reconstruction of the war-ravaged economies of Western Europe. When these nations recovered some measure of economic self-sufficiency, the Bank turned its attention to assisting the developing countries, to which it has given more than $330 billion as loans. The World Bank's main aim is to promote economic and social progress in developing countries, by bringing about an increase in their productivity in order to enable their citizens to have a better quality of life6. The IMF is involved in key policy negotiations with regard to the exchange rate and the budget deficit. The monitoring of country's economic performance by the IMF provides the basis of so-called IMF surveillance activities over members' economic policies. The World Bank, on the other hand, is far more involved in the actual reform process through its country-level representative office and its numerous technical missions. Moreover, the World Bank is also present in most of the line ministries; the reforms in health, education, industry, agriculture, transportation, the environment, and so on are under its jurisdiction. The composition of expenditure in each of the ministries is under its supervision. In general, the IMF loan conditions focus on monetary and fiscal issues and emphasize programs to address inflation and balance of payments problems. This usually requires specific levels of reduction in government spending. The IMF is a monetary institution, not a development bank. It does not finance projects or programs. Its principal responsibilities include stability of the world's monetary system and overseeing of its member countries' exchange rate and economic systems. The World Bank programs have a wider agenda and are seized with matters pertaining to long term development, market liberalization, public sector reforms and the expansion of exports in order to promote growth. The World Bank is a multilateral development bank which makes loans and some grants to promote poverty alleviation, economic development, growth and economic policy reform in low and middle income countries. Two of its facilities, the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) lend directly to governments to finance projects and programs. The IBRD lends at market based interest rates while the IDA aid is highly concessional and is available to low-income countries only. Two other facilities, the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) also work with private firms to promote private sector growth. Similarities between the International Monetary Fund and the World Bank. The similarities between these institutions are set out in the sequel. The World Bank and IMF were created in order to solve monetary disparity between countries and to promote development. The reality, however, is that the interests represented by them have very little in common with these objectives. A significant feature of these institutions is their immunity to popular influence and their hostility to democracy. The evolution of a democratic process in Latin America is being threatened by the structural adjustment programs imposed by the World Bank and the IMF7. In recent years, the IMF and the World Bank have at times used their stabilization and adjustment loan programs for common ends. To supplement the IMF's resources in times of crisis, the World Bank has sometimes lent substantial. Three instances, namely, the Asian financial crisis and the crises in Brazil and Argentina, show that the IMF and multilateral banks work jointly in their response to major financial crises. The standard policy package imposed by the World Bank and IMF was termed as structural adjustment. Its purpose was correcting trade imbalances and government deficits and involved the promotion of the private sector at the cost of public sector. This ideology is known as neo-liberalism, free market fundamentalism, or the Washington Consensus and since the 1970s has been the dominant economic paradigm for governments of the rich countries and for the international financial institutions. Structural adjustment assumes that granting of greater importance to the market brings about benefits to both the rich as well as the poor. The reality is that in the international financial markets the strongest is bound to emerge victorious. It was considered that in order to improve economic growth the private sector had to be given greater importance. One of the aims of structural adjustment is the improvement of a country's balance of payments, by increasing exports and reducing imports. In respect of government budgets the aim is to reduce expenditure while increasing income. This, it is felt will enable a country, in the short term, to recover macroeconomic stability, whilst making conditions conducive for development and growth in the long term. These loans were initially given in order to help developing countries to stabilize their economies, "repay their debts, reduce deficits in spending, and close the gap between imports and exports. Gradually, these loans evolved into a core set of economic policy changes required by the World Bank and IMF"8. In order to mitigate criticism of the impact of World Bank and IMF programs in developing countries, these institutions have given greater prominence to poverty alleviation and social development programs in their public proclamations. Sanctioning of loans by the IMF and the World Bank, since the early 1980s, has been on the basis of a nations' compliance with structural-adjustment programs and economic reform policies encouraging a free market. Without this stamp of approval the release of additional bilateral and multilateral loans is not possible. However, almost all private foreign investment is earmarked for a small number of emerging market economies, for example eastern China is the bulk recipient of such loans; hence, most poor nations are able to just service the interest portion of their debts, entirely on the basis of bilateral or multilateral loans and foreign aid. Further, unless these countries are able to establish that they are implementing the economic reforms at a satisfactory pace additional instalments of these loans will not be released. In the 1990s, despite the claims of the IMF and the World Bank that they were helping the third world develop and get out of debt, most of the countries which had borrowed from them remained underdeveloped, poor and in deeper debt. "The gap between the rich and poor countries has doubled since the 1960s and the top 20 percent of the world's population controls more than 80 percent of the world's wealth and the bottom 20 percent controls about 1 percent". Loan and interest repayments of the poor countries to the rich countries are far more than the amount of new aid or foreign investment in the opposite direction. The gravity of the situation can be gauged from the fact that even "one third-world economy has not achieved both a high rate of growth and a substantive decline in poverty". In fact, as pointed out by a study conducted by the Centre for Economic and Policy Research, these structural adjustment programs have damaged economic growth rates. "The IMF and the World Bank establish conditions on lending based on adjustment packages regardless of particularities of the countries, with no respect for the cultural composition of a country. Rather than alleviate poverty in the recipient countries which implemented adjustment policies, Structural Adjustment Programs or SAPs have contributed to further sinking them into economic crisis9." The IMF and the World Bank play a major role in forcing indebted countries to change their economic policy to be in conformance with the interests of the international creditors. The aim is to never allow the debtor nations to pursue an independent national economic policy. The evidence suggests that countries which refuse to accept the Fund's corrective policy measures face serious difficulties in rescheduling their debt and obtaining new development loans and international assistance. The IMF also has the means of seriously disrupting a national economy by blocking short-term credit in support of commodity trade. "The International Monetary Fund (IMF) is a public institution, established with money provided by taxpayers around the world. This is important to remember because it does not report directly to either the citizens who finance it or those whose lives it affects. Rather, it reports to the ministries of finance and the central banks of the governments of the world10". In indebted countries, the sovereign government has to outline its priorities in a policy framework paper PFP, written under the close supervision of the IMF and the World Bank according to a standard, pre-set format. Another area of great significance is the destroying the national currency, which constitutes a key objective of the IMF World Bank intervention, this is brings about abrupt price hikes and a dramatic compression of real earnings while at the same time drastically reducing the cost of labour. This currency devaluation is a usual prerequisite for negotiating a structural adjustment loan. While devaluation activates inflation and the dollarisation of domestic prices, the IMF obliges the government to adopt an anti-inflationary programme. The latter is predicated on a contraction of demand instrumented through the dismissal of public employees, drastic cuts in social sector programmes and the deindexation of wages. To achieve this objective, strikes are outlawed and trade union leaders are arrested. These reforms also trigger the collapse of public investment. Precise ceilings are placed on all categories of expenditure; the state is no longer permitted to mobilize its own resources for the building of public infrastructure, roads or hospitals. The control of public investment by the donors contributes to the increase of external debt through the system of international tender and competitive bidding. This serves to allocate the entire execution of public works projects to international construction and engineering firms. Local construction companies are excluded from the bidding process, although most of the actual construction work will be undertaken by local companies using local labour at very low wages in separate sub-contracting deals reached with these multi nationals. In view of the foregoing it can be surmised that the Bretton Woods institutions claim to poverty alleviation is not tenable. The targeted programmes earmarked to help the poor combined with cost recovery and the privatization of health and educational services cannot constitute a more efficient way of delivering social programmes. Sustainable poverty reduction under World Bank guidance comprises of slashing social sector budgets and redirecting expenditure on a selective basis in favour of the poor. Further, since the 1980s, it has been clearly established that the World Bank and the IMF function in a manner which is beneficial to the wealthy and the powerful, despite their claim that they serve the comity of nations without any bias whatsoever. Of particular concern is the way in which their structural adjustment programs run counter to their sectoral policies. Sustainable development will never be achieved until these contradictions are deal with in an appropriate manner. Read More