The Role of the IMF and World Bank - Essay Example

Understanding The Changing Role Of The World Bank And The International Monetary Fund And How They Evolved To Go With The Changing Times I. Introduction World Bank and the International Monetary Fund (IMF) are two of the most important organizations that helped shaped and strengthen the international relations of nations. They focus on stabilizing the international financial scene and helping nations achieve sustainability in terms of development. In the globalization era, the World Bank and the IMF play vital roles in shaping the economic, political and social state of affairs of nations. If we take a closer look into the affairs of these two organizations, we can clearly observe that at the start, the World Bank and the IMF tend to sway towards the realist point of view but later on, it adopts a more liberal stance. The realist theories propose that the sovereign states are the main actors in the international system and that other institutions have little influence in the international scene (Evans M. 2001). Of course this assumption at that time was very plausible considering the fact that globalization and giant multi-national organizations were not really very popular at the time when the World Bank and the IMF were organized. Remember that it was just after World War II when these organizations came into being and at that time the notion that the international system is anarchic (Doyle, Michael (1997) and that no authority is considered above the state that is capable of regulating the interactions among nations (Schweller, Randall L (2003) was very popular. Since the World Bank and the IMF were organized to help the states, their presence was more or less acceptable to its member nations. Of course the roles that World Bank and the IMF play have been questions by many people over the years but the point is that these organizations have been instrumental in bringing together some order in the international financial scene. Moreover, aside from trying to make some policy influence on some nations, the World Bank and the IMF do not really have any means of directly intervening into the affairs of the different states all over the world. In other words, despite the presence of these international organizations, nations remain to be relatively independent when it comes to making decisions. At the start, we can say that the World and the IMF were more biased toward assisting sovereign nations and do not really recognize non-government organizations as potential vehicles for development. The initial task of the World Bank was specific towards rebuilding the European nations after World War II and the IMF were more geared towards stabilizing the economy of nations (IMF Factsheet http://www.imf.org/external/np/exr/facts/globstab.htm). However, as years pass by, we can see certain changes in the roles of the IMF and the World Bank in the international scene. Going with the changing times, these two organizations started to lean towards liberalism. According to the theory of liberalism, there are unseen forces that shape society (Razeen S. 1998) and these unseen forces do not necessary go against the role of the state when it comes to providing basic necessities (Richardson J. 2001). Although the World Bank and the IMF function independently from each other, their functions are interlinked in many ways that many people who are really very familiar with the organizational structures and functions of the each organization would surmise that the World Bank and the IMF are one and the same. To help us understand the nature of these organizations and how their roles have changed over the years, let us look at each organization carefully and then evaluate how the changes in the roles of these organizations influenced globalization and vice versa. II. Understanding the Shifting Roles of World Bank and The IMF The World Bank was established in 1944 (see World Bank History). Originally, the World Bank was just composed of a single institution which is the International Bank for Reconstruction and Development (IBRD)1. Its original task was to rebuild Europe after World War II. Note that Europe was severely damaged during World War II thus there was a need to pour thousands of dollars into to Europe. To manage the funds going into Europe at that time, the IBRD was created. Its first client then was the government of France who borrowed money to start its post-war reconstruction efforts. When the reconstruction efforts in Europe and Japan were finished, the World Bank evolved. The World Bank shifted it focus on poverty alleviation from 1968-1981 (See World Bank History). During this time, the organizational composition of the World Bank became more complex. Instead of being just one organization, the World Bank grew into a group of five closely associated institutions that are focused on international development. These five organizations are the International Development Association (IDA)2, the International Finance Corporation (IFC)3, the International Bank for Reconstruction and Development (IBRD), the International Center for Settlement of Investment Disputes (ICSID)4 and Multilateral Investment Guarantee Agency (MIGA)5. All these five organizations work toward common goals and complimenting each others programs. In the 80s and 90s, the World Bank started to focus more on debt management and structural adjustments (Stone, Diane and Wright, Christopher eds. (2006). During this time, the World Bank increases its lending program to offset the effects of the financial crisis in the early 80s. It invested a lot of money in developing countries and helped these countries restructure its financial systems. During the turn of the millennium, the World Bank adopted the Millennium Development Goals and call for the implementation of sustainable development and eradication of poverty. Part of the Banks mission is to help developing nations and their citizens to develop an investment friendly environment, promote sustained growth and empower the poor to participate actively in the development of their nations. The World Bank sees five key factors that will enable it to achieve its goals. These factors are (a) capacity building (b) infrastructure creation (c) development of financial systems (d) combating corruption and (e) research, consultancy and training (Stone, Diane and Wright, Christopher eds. (2006). Capacity building is very important in development. Building the capabilities of governments to lead their countries towards a more stable economy and sustained growth was considered as one of the most important roles of the Bank in our present time. At present, there are two types of loans offered by the World Bank namely development policy loans and investment loans. The IBRD handles the low interest loans component while the IDA provides interest free loans to target beneficiaries. Most of the IDA grants go into debt burden relief for very poor countries that do not have the resources to pay their loans, assistance in water and sanitation programs, vaccination against communication diseases like malaria, assistance to AIDS victims and their families, support to recognized civil society groups that are promoting development initiatives in developing countries and assistance in research efforts on issues of greenhouse gases (Stone, Diane and Wright, Christopher eds. (2006). To meet the Millennium Development Goals, the World Bank needed to adopt a more liberal approach to development. In the past, it limits its dealings to governments but as it evolves, it begun to adopt the more liberal approach of extending its assistance to non-government institutions (World Bank 2005). This change in the role of the World Bank is very crucial since this means that it will now reach out to a wider clientele. Moreover, it opens the doors of the Bank to other development endeavors as well as promotes more environment friendly projects. In the past, major critics of the World Bank decry the Banks seemingly environmentally destructive projects (Stone, Diane and Wright, Christopher eds. (2006). Note that at the beginning, the World Bank programs were mostly into infrastructure projects and many of these infrastructure projects were considered as destructive to the environment. To correct this situation, the World Bank expanded its programs to include other aspects of development such as research, health and the likes. The idea here is to capacitate the people in the developing countries and make them more ready to embrace globalization. Women in particular benefited much in the expansion of the programs of the World Bank. Many of the programs of the World Bank greatly involved women in developing countries (World Bank (2001). Actually, the promotion of gender equality and empowerment of women tanks third in the Millennium Development Goal so this means that development of women sector is now part of the priorities of the World Bank (World Bank (2001). Clearly, the World Bank like many international organizations are beginning to embraces the idea of a feminist economy in the global arena (Barker, Drucilla and Edith Kuiper (2003). According to theory of a feminist economy, the unpaid labor performed by women in the household should be taken into account when measuring the success of economic systems (Barker, Drucilla and Edith Kuiper (2003). Moreover, the feminist theory also draws attention to the fact that women are afforded lesser opportunities for career advancement compared to their male counterparts (Power, Marilyn (2004). This disparity is very much evident in many developing countries that are assisted by the World Bank. To help correct this disparity and to promote gender equality in these areas of the world, the World Bank takes on the task to finance programs for the development of women. While the activities of the World Bank is focused more on giving direct financial assistance to countries that are struggling financially, the International Monetary Fund (IMF) is more focused on promoting international monetary cooperation. The IMF was created in 1944 on the grounds of international economic cooperation. Several nations agree that a framework for international cooperation is necessary to avoid a repetition of the mistakes that led to the great depression in the 1930s (IMF Factsheet). The initial goals of the IMF were actually drawn up in response to the economic crisis brought about by World War II. At that time, the Bretton Woods6 regime made the IMF its center in providing a basis for stability of currencies (Boughton (2001). The role of the IMF was primarily to provide financing assistance to countries that were saddled with imbalances in their external debt payments so that these countries can make the necessary adjustments in their national budget for debt servicing without jeopardizing its economy and the economy of other nations (Boughton (2001). To achieve its goals, the IMF was allowed to conduct surveillance of the macroeconomic policies of its member nations. The whole idea of economic surveillance was not meant to be an offense to the sovereignty of the state (Boughton (2001). The IMFs role was not like that of a police officer who apprehends any wrongdoing. Its role was more on the advisory level and the data that the IMF generates through its surveillance activities were used to help the country in question achieve a more stable economy and promote monetary exchange stability. When the Bretton Woods systems collapsed in the 1970s, the IMFs role was diminished (Boughton (2001); see also Boughton (2004). Without the Bretton Woods system, there is really no more need for the IMF to serve as the vehicle for financing balance of payments adjustments among highly industrialized countries (Boughton (2004). The increasing amount of capital available to highly developed nations made it quite unnecessary for them to rely on the IMF for monetary assistance. As the highly developed nations become more self-sufficient, they divorce themselves from the influence of the IMF. This situation is actually typical under the theory of liberalism. When the market reaches its equilibrium point, there is no need for outside interventions to stabilize the whole system. In other words, the IMF become an obsolete fixture is a stronger and more stable economy. Unless the IMF would reinvent itself, and focus more in other areas of development, it will no longer have any major role in the world economy. At this point, the IMF needed to change its roles drastically. A major shift in the role of the IMF involves refocusing its attention mostly on developing countries (Lane Timothy 2005). Developing countries have weaker economic environment thus they still require some prodding from outside forces to achieve some semblance of stability (Lane Timothy 2005). The shift in the focus of the IMF towards developing nations in the 1970s was actually very timely. During this period, most developing countries were borrowing heavy from foreign banks to help boost their economy. The problems in these developing countries were even made more complicated when globalization started. At this time corporations from highly development nations started to reach out to developing countries. The entry of big corporations into the territories of developing countries caused economic upheavals (Lane Timothy 2005). We must understand that developing countries have weaker currencies compared to highly develop nations thus there was a great imbalance in the economic field. With the entry of companies coming from highly developed nations into the developing countries, these developing countries suddenly find themselves in an unsustainable financial situation (Boughton (2001). Globalization started to encroach into the weak economies of developing nations and caused some major problems in these areas. Yes, the inflow of capital from global market players helped the economy of developing nations at some point but the entry of these foreign companies also pose some grave treats to the local businesses in these areas. The debt crisis in the Latin American region in the 1980s facilitated the entry of the World Bank into the affairs of developing nations (Lane Timothy 2005). Seeing the effect of globalization in the economies of developing nations and how these poor nations are struggling to pay-off their mounting foreign debts, the IMF embarked into the task of providing debt relief packages to these countries as a way of supporting economic development (Lane Timothy 2005). In most cases, the IMF works closely with the World Bank in delivering support for economic development. At this point, both organizations world mostly in developing countries to counter the negative impacts of globalization on the weak economies of developing nations. Note that globalization works well under the principles of liberalism whereby the free market forces are allowed to establish its own trends. By letting the market forces dictate the economy, most developing countries find themselves being eaten up by the more powerful economies of the world. To cushion the blow of economic imbalance, the World Bank and the IMF joined hands to help developing nations survive the onslaught of globalization on their local economies. The World Bank provided developing countries with long term loans to help improve the local infrastructures in these areas (Roubini, Nouriel, and Brad Setser (2004). On the other hand, the IMF worked on helping these developing nations come up with sound economic policies that will make these countries more investment friendly. When the United Soviet Socialist Republic (USSR) collapsed, the IMF started working on institution building and major economic reforms to create a more viable economy (Roubini, Nouriel, and Brad Setser (2004). This again marked another major change in the role of the IMF in the international arena. Instead of simply curing the problems of economic crisis, the goal of the IMF shifted to prevention economic crisis such as what happened in the Latin American debt crisis (Roubini, Nouriel, and Brad Setser (2004). III. Conclusion Over the years, the roles of the World Bank and the IMF have changed considerably to meet the demands of the changing times. To date, these two organizations play key roles in globalization. By helping developing countries cope up with the rapid changes and the many challenges brought about by globalization, these two organizations have successfully created great impacts in the global economy. Yes, these organizations may be committed some lapses in the implementation of their programs but in the end, these organizations are very valuable to economic development. References: 1. Barker, Drucilla and Edith Kuiper. (2003) Toward a feminist philosophy of economics. Routledge, 2. Boughton, James (2001), Silent Revolution: The International Monetary Fund 1979–89. Washington: IMF. 3. Boughton, James (2004), “The IMF and the Forces of History: Ten Events and Ideas That Have Shaped the Institution,” IMF Working Paper WP/04/75. 4. Bredenkamp, Hugh, and Susan Schadler, editors (1999), Economic Adjustment and Reform in Low-Income Countries. Washington: International Monetary Fund. 5. Collyns, Charles, and G. Russell Kincaid, editors (2003), Managing Financial Crises: Recent Experiences and Lessons for Latin America, IMF Occasional Paper 217. 6. Doyle, Michael. Ways of War and Peace: Realism, Liberalism, and Socialism (Paperback). 1997. London: W. W. Norton & Company, esp. pp. 41-204 7. Doyle, Michael. Ways of War and Peace: Realism, Liberalism, and Socialism (Paperback). 1997. London: W. W. Norton & Company, esp. pp. 41-204 8. Gideon Rose, "Neoclassical Realism and Theories of Foreign Policy", World Politics, Vol. 51, No. 1, pp. 144-172 9. Gideon Rose, "Neoclassical Realism and Theories of Foreign Policy", World Politics, Vol. 51, No. 1, pp. 144-172 10. http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTARCHIVES/0,,contentMDK:20053333~menuPK:63762~pagePK:36726~piPK:36092~theSitePK:29506,00.html 11. IMF Factsheet http://www.imf.org/external/np/exr/facts/globstab.htm 12. Lane Timothy (2005) Tensions in the Role of the IMF and Directions for Reform WORLD ECONOMICS • Vol. 6 • No. 2 • April–June 2005 http://www.rbwf.org/2006/Adelaide/Lane.pdf 13. Mark Evans, ed., Edinburgh Companion to Contemporary Liberalism: Evidence and Experience (London: Routledge, 2001 14. Mason, Edward S.; Asher, Robert E. (1973). The World Bank Since Bretton Woods. Washington, D.C.: The Brookings Institution, 105-107, 124-135.  15. Power, Marilyn (2004) "Social Provisioning as a Starting Point for Feminist Economics" Feminist Economics. Volume 10, Number 3. Routledge, November 2004 16. Randall L. Schweller, "The Progressiveness of Neoclassical Realism", pp. 311-347 in Colin Elman and Miriam Fendius Elman eds., Progress in International Relations Theory, (Cambridge, Mass.: MIT Press, 2003) 17. Randall L. Schweller, "The Progressiveness of Neoclassical Realism", pp. 311-347 in Colin Elman and Miriam Fendius Elman eds., Progress in International Relations Theory, (Cambridge, Mass.: MIT Press, 2003) 18. Razeen Sally, Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (London: Routledge, 1998), 17 19. Roubini, Nouriel, and Brad Setser (2004), Bailouts or Bail-ins: Responding to Financial Crises in Emerging Economies. Washington: Institute for International Economics. 20. Stone, Diane and Wright, Christopher eds. (2006) The World Bank and Governance: A Decade of Reform and Reaction, Routledge 21. Through Gender Equality in Rights, Resources, and Voice (Oxford University Press, 2001). 22. Word Bank FAQ http://web.worldbank.org/WBSITE/EXTERNAL/EXTSITETOOLS/0,,contentMDK:20147466~menuPK:344189~pagePK:98400~piPK:98424~theSitePK:95474,00.html 23. World Bank (2001) World Bank Policy Research Report Engendering Development: 24. World Bank (2005) Millennium Development Goals: Programs and Prospects in Europe and Central Asia http://siteresources.worldbank.org/INTECA/Resources/ECA-MDG-full.pdf 25. World Bank History http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTARCHIVES/0,,contentMDK:20053333~menuPK:63762~pagePK:36726~piPK:36092~theSitePK:29506,00.html Read More