45th Agenda 

45th Session Issues

IMF And The World Bank

History

The plans were laid in July of 1944, while fighting was still raging in the European and Pacific theatres. At a mountain resort in New Hampshire called Bretton Woods, financial representatives from the 44 allied nations devised institutions to alleviate the impediments to international financial growth that had arisen as a result of the war. The International Monetary Fund (IMF) was created to restore the volume of international trade that had dropped due to instability since the 1930s, when countries had abandoned the gold standard. A pool of currencies would be contributed by member states from which any member country could draw upon in order to correct any balance of payment problems. The US dollar was the universal standard, and this was freely convertible with gold at a fixed price.

In December 1945, the IMF and The International Bank for Reconstruction and Development, also known as the World Bank, were officially established. The original purpose of the World Bank was to grant loans to rebuild Europe after the war. Both institutions worked in conjunction with the Marshall Plan for the redevelopment and economic stabilization of Europe.

Description Of The IMF

In summary, the stated purpose of the IMF is the following:

• To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economy policy.
• To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect to current transactions between members and in the elimination of foreign exchange restrictions which hampers the growth of world trade.

The IMF is currently considered a specialized agency of the United Nations.

Membership

Currently there are 179 members of the IMF., the most recent being South Africa. The highest authority of the Fund is the Board of Governors, on which each country has 2 representatives: a Governor and an Alternate Governor. This board meets once a year, and occasionally votes are taken by mail. There is also a 24-member Board of Executive Directors which oversees the day-to-day operations of the Fund. The five largest contributors to the Fund (USA, United Kingdom, Germany, France and Japan) each appoint one Executive Director, while the other 19 are elected to represent several nations. For example, the Executive Director from Iran also represents Afghanistan, Algeria, Ghana, Morocco, Pakistan and Tunisia. Meetings are held behind closed doors, excluding the public and media to access of the proceedings and minutes.

Decision-making

Decision-making power is based on a proportional system of evaluating a member nation's quota. The quota is related to national income, monetary reserves, trade balance and other economic indicators. Besides being the factor which decides how much voting power a nation will carry, it also decides how much that nation must contribute to the Fund. By far the nation with the largest quota, and thus decision-making power, is the USA with nearly 18%. Germany, Japan, France and United Kingdom follow with approximately 5% each, while Saudi Arabia holds about 3.5%. Thus, the 6 leading nations in the IMF have about 40% of the decision-making power. Meanwhile, the entire continent of Africa comprises less than 5% of the decision-making power.

Tasks

One of the main tasks performed by the IMF is the provision of short-term (1 to 3 years) loans, which are made contingent on the imposition of structural adjustment programs (SAPs). These are usually designed to correct a deficit, and can involve any of the following measures: abolishing or liberalizing foreign exchange and import controls; reducing growth in the domestic money supply; increasing taxes and reducing government spending; abolishing food, fuel, and transportation subsidies; cutting government wages and seeking wage restraint from labor unions; dismantling price controls; privatizing publicly owned firms; reducing restrictions on foreign investment; and depreciating the currency.

Description Of The World Bank

The World Bank was originally instituted to aid in the reconstruction of post-war Europe; its current purpose is to assist the economic development of nations by making loans where private capital is not available. Its stated goals are the reduction of poverty in developing countries, the protection of the environment, and the promotion of both private sector and human resource development. The World Bank is currently considered a specialized agency of the United Nations.

Membership

There are 177 member countries of the World Bank, the most recent of which is South Africa. Only members of the IMF may be considered for membership. There is a Board of Governors, which consists of one representative from each country, that meets each year. The day to day operations are run by a board of 24 Executive Directors, which is a body appointed much like that of the IMF (see above).

Decision-making

Most decision-making is delegated by the Governors to their specific Executive Directors. Formal votes by the Directors are rare, for most decisions are made by consensus. Thus, the Directors consider and decide on Bank policy and on all loan and credit proposals. They present to the governors at the annual meetings an audit of accounts, an administrative budget, and any other pertinent issues. The current president and chairman of the Executive Directors is Lewis T. Preston from the USA.

Tasks

The World Bank works closely in conjunction with the IMF in performing its tasks. It makes available loans, which are on a long-term basis, repayable in up to 15 years. They are usually made for projects which are likely to offer a commercially viable rate of return. Recently, the World Bank has begun structural adjustment lending, which instead of financing specific projects, supports changes in economic structure. The Bank's programs for alleviating poverty have two main elements: the compiling of country-specific assessments, and the formulation of country-specific strategies which ensure that the Bank's projects support and complement the programs of the country in question.

Criticism 

Considering the state of the world's economy and the disparity between rich and poor nations, the Bretton Woods institutions have come under much criticism. This criticism has come from the entire spectrum of political thought, ranging from the "aid is imperialism" school, which believes that foreign aid has been used as a tool of coercion by the rich against the poor countries, to the more conservative critics who believe that foreign aid gets in the way of the market forces that will be the ultimate rectifier of poverty.

"50 Years is Enough"

Approximately 400 non-governmental organizations worldwide have mounted a campaign which calls for major restructuring and reevaluation of the Bretton Woods institutions' policies. As 1994 is the 50th anniversary of the Bretton Woods conference where the IMF and World Bank were formed, the campaign is called "50 Years is Enough." Some of the criticisms listed in the campaign's platform are:

Societal Factors

The IMF lacks the expertise to deal with social and environmental issues, and does not adequately accommodate the widely differing economic situations in each country. The lack of country-specific policies has hindered the stabilization of economies, and has rendered the IMF sometimes ineffective at the realization of its own goals. By aiming to focus only on correcting short-term balance-of-payment problems, the IMF has harmed the social fabric of the countries they claimed to have helped.

Some recent examples are in Eastern Europe. In 1986, the IMF imposed a SAP in Yugoslavia which devalued the dinar. The resultant inflation is considered a contributing factor to the already tense environment of ethnic tension and nationalism which has led to the current conflict throughout the region. In Russia and other former Soviet bloc countries, the IMF imposed "economic shock therapy" measures, which involved the sudden introduction of capitalism into what were previous command economies. The result has been widespread unemployment, and in the case of Poland going from 0% in 1990 to 15% in 1993. This has also led to the devaluation of pensions and large cuts in social services. In Russia, similar conditions are commonly attributed to the rise in popularity of ultra-nationalism, and the rise of Vladimir Zhirinovsky.

The Environment

More than half of the World Bank's $24 billion annual lending supports projects in environmentally sensitive areas. According to the campaign, the record of lending in these areas has been characterized by "needless environmental destruction and missed opportunities for economically more efficient and environmentally more friendly alternatives." As an example, between 1986 and 1993, 15% of World Bank loans were for projects (such as dams) which forcibly displaced 2 million people.

No Public Access

The campaign points out the problems of secrecy with which the two institutions operate. In the case of the World Bank, decisions that are made by the management are sometimes kept secret from the Bank's Executive Directors. Those citizens of the country who will be most affected by the decisions are left out of the decision-making process, with the exception of community meetings with World Bank officials which the campaign deems as public relations-driven window dressing. It was discontent with this culture of secrecy that led to the recent resignation of Herman Daly, formerly the Senior Economist of the Bank's Environment Department.

Not Addressing the Root Causes of Poverty

The World Bank has, according to the campaign, failed to address the structural problems of poverty, and these problems are exacerbated by SAPs. The Bank is "throwing good money after bad" by creating poverty situations, which lead to the necessity of further loans to attack the symptoms of the disease.

Perpetuation of the Debt Crisis

Currently, $278 billion is owed to the World Bank and the IMF. The pressure of the debt, as well as export-oriented SAPs and collapsing global prices for exports, have put many countries on an accelerating treadmill, forcing them to sell their assets, mine their natural resources and cut spending. Often this debt occurred because of loaning to corrupt regimes, such as that of Marcos in the Phillippines, Mobutu in Zaire and Somoza in Nicaragua. While many commercial banks and creditor nations have agreed to some debt reduction and rescheduling, the IMF and World Bank refuse to reschedule or reduce debt payments.

Destructive Agricultural Practices

The emphasis on World Bank agricultural lending programs is the development of export crops. The result is farming practices which emphasize chemical-intensive methods which are designed to achieve high economic rates of return. This includes hybrid seeds requiring intensive watering, chemical fertilizer, and pesticide use. Environmental problems stemming from these methods include soil degradation, limited and contaminated water supplies, loss of crop genetic diversity and deforestation. While the emphasis on export crops is designed to alleviate debt, food production for local consumption has fallen behind demand in some countries.

According to the World Bank's own evaluation process, of 82 agricultural projects, 45% were considered unsatisfactory. In a 1990 evaluation report, it was found that projects in the Northeast of Brazil benefited 100,000 owner companies while excluding most of the targeted 3 million low-income families from credit and agricultural services, as well as from the design of projects. An internal report on projects in India in 1991 reported that "project performance and economic viability have been poor all along for most projects" for many reasons, including cost and time overruns, declining construction and maintenance standards, and environmental degradation.

Aid as Deterrent to Market Forces

Other criticism of the Bretton Woods institutions, and foreign aid in general, comes from advocates of market forces. The belief is that much foreign aid is transferred from government to government, leaving people short-changed and bureaucrats and politicians, some corrupt, the beneficiaries. This promotes a disastrous politicization of life in developing countries, as well as Western-type heavy industries rather than small firms using indigenous technology. This over-stressing of the role of government discourages private market development and curtails the flow of private capital.

This process prolongs a country's dependence on official assistance, while only contributing at best a small fraction of investment. Examples of the commercial export development in West Africa and Malaysia in the early 80s are held up as models of private enterprise performing what foreign aid could not.

Questions

Societal Factors

1. How can the IMF better tailor SAPs to an individual country's needs?
2. What sort of evaluation process can be implemented which would better take into account societal factors?
3. Is it possible for the IMF to impose SAPs without causing significant cuts in government spending?

Environment

1. Are the World Bank and IMF living up to the standards as set forth in the Rio Conference of 1992?
2. Are major projects (such as dams) which displace populations given adequate review in the decision-making process? Are all alternatives explored?
3. Is the "modernization" being imposed by SAPs harmful to the environment of the borrowing countries? If so, what standards can be imposed that would result in less impact on the environment?

Public Access

1. How can community members be more involved in the decision-making process?
2. Would greater transparency of the proceedings of the IMF and World Bank hinder or help their ability to perform?

Root Causes of Poverty

1. What systemic causes of poverty are the IMF and World Bank overlooking? How can they better address these causes?
2. What should be the criteria for a failed SAP project?

Debt Crisis

1. Should any or all of the foreign debt to the IMF and World Bank be forgiven?
2. How can future debt crises be avoided?

Agriculture

1. How should farming practices be imposed as part of aid?
2. How can indigenous farming practices be incorporated with Western farming ideas to utilize the best of both methods?
3. What role should the IMF and World Bank have in prescribing farming methods?
4. Should the IMF and World Bank make greater strides in supporting small, family farmers?

Structure

1. Would a different decision-making process of the IMF and World Bank be beneficial? Is the current voting structure resulting in a strong Western bias?
2. If so, what alternative voting structure would be best?
3. Should the IMF and World Bank be merged into one institution?
4. Should the IMF and World Bank be closer within the sphere of the United Nations?

Sources

Cockburn, Alexander. "Beat the Devil" column. The Nation . New York City, June 15, 1993.

de Vries, Barend A. Remaking the World Bank. Washington D.C.: Seven Locks Press. 1987.

Elswick, Linda 50 Years is Enough Washington D.C.: World Sustainable Agriculture Association, 1994.

Europa Encyclopedia 1994 . London: Europa Publications Limited. 1994.

Feinberg, Richard and Gwin Catherine The International Monetary Fund in a Multipolar World: Pulling Together. New Brunswick: Transaction Books. 1989.

Keylor, William The Twentieth Century World: An International History. New York City: Oxford Press. 1992.

Lairson, Thomas D. and Skidmore, David International Political Economy: The Struggle for Power and Wealth. New York City: Harcourt Brace College Publishers. 1993.

Majot, Juliette. Brave New World Bank. San Francisco: Global Exchange. 1994.