JULY marks the 75th anniversary of the Bretton Woods agreement to create the International Monetary Fund and the International Bank for Reconstruction and Development with the principal goals to have an efficient foreign exchange system, prevent competitive devaluations of currencies and promote international economic growth. The IBRD is now the largest part of the World Bank Group. The IMF and the World Bank together are referred to as the Bretton Woods Institutions.
Reflecting back, there is little to celebrate, especially for developing countries. Both the IMF and the World Bank have shown not only utter incompetence in dealing with crises, but also their interference with aid conditionality to stabilise, liberalise, privatise and deregulate resulted in ‘lost decades (1980-–990)’ in terms of growth and structural transformation.
At the end of two decades of the IMF-WB-pushed liberalisation-privatisation reforms, the former president of the World Bank, James Wolfensohn acknowledged before his retirement, ‘… if we take a closer look, we see something alarming. In developing countries, excluding China, at least 100 million more people are living in poverty today than a decade ago. And the gap between rich and poor yawns wider.’
Interestingly, China, which according to Wolfensohn contributed most to the reduction of global poverty in recent decades, did not participate in this experiment.
A brief history
JOHN Maynard Keynes of the United Kingdom and Harry Dexter White of the United States conceived the system during World War II. Keynes wanted a powerful global central bank to be called the Clearing Union and a new international reserve currency, ‘bancor’. But White was for a more modest lending fund and a greater role for the US dollar, instead of a new currency. Their ideas were presented at a conference of 44 countries held at the Bretton Woods resort in New Hampshire in July 1–22, 1944. In the end, the adopted system leaned more toward White’s plan. Ironically, many within the US administration suspected White as a Soviet agent.
The outcome was the IMF to monitor exchange rates and lend reserve currency to nations facing temporary balance of payments crisis and the IBRD to provide assistance to countries physically and financially devastated by WWII. The Soviet Union, which participated in the work leading to the creation of the BWIs, was invited to be one of the ‘big five’ in their governance system, mirroring the United Nations Security Council; but ultimately, it decided not to join.
Keynes also wanted a third entity, International Trade Organisation, to encourage and regulate trade and commodity markets. However, this did not materialise in the face of the US opposition because it saw the ITO as more favourable for developing countries. The World Trade Organisation, created half a century later in 1995, is a compromised version of the ITO.
Developed country domination
THE BWIs are not governed by the principle of ‘one member one vote’. Instead, the decision making or voting power is determined by the weight of shares member countries hold. Obviously, the United States being the largest shareholder, dominates the BWIs, followed by Western Europe. The United States and Western European powers carved out a deal that the president of the World Bank has to be a US citizen while the IMF will always be run by a European.
Despite repeated calls for reforms, the BWIs’ governance structure remains biased towards the United States and Western Europe, failing to reflect justly the changing economic reality and emerging economic powers. While Europeans still control a third of the IMF votes, China has 6.09 per cent, Brazil has 2.2 per cent and India has 2.64 per cent (less than Belgium, the Netherlands, and Luxembourg). Therefore, policies that serve the direct financial interests of developed countries, such as open trade and capital markets, receive preferential consideration by the respective BWIs’ governing bodies. Poorer countries are forced to adopt these policies as conditions of support.
Both the IMF and the World Bank suffer huge credibility deficits according to their own internal evaluations. In a number of columns in this daily, I have written about costs and benefits of the IMF/WB loans as well as the credibility of their advice (see New Age, 25 January 2012; 4 February, 2012 and 9 April 2012).
The IMF failed miserably in anticipating the Asian crisis of 1997–98. In evaluating the IMF’s performance in two crisis countries, Indonesia and Korea, the IMF’s Independent Evaluation Office observed that the IMF’s surveillance failed to ‘adequately appreciate’ the seriousness or the implications of their vulnerabilities and financial sector weaknesses. The IMF also mishandled the crisis which contributed to its deepening.
The IMF also did not foresee the coming of the 2008–2009 financial crisis leading to Great Recession. It took one and a half years for the IMF to realise that the crisis in a small segment of the US financial sector would soon engulf the world. A month before the first tremors of the US ‘sub-prime’ mortgage crisis were felt, the IMF had noted: ‘The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised (upwards)’.
The Independent Evaluation Office of the IMF attributed the IMF’s inability to correctly identify the mounting risks to ‘a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches, [w]eak internal governance, lack of incentives to work across units and raise contrarian views….’
Thus, it is not surprising that the IEO found wariness among member countries about the IMF’s involvement in policy advice. Among the reasons for such apprehension are ‘inadequate knowledge of country-specific circumstances, frequent changes of mission chiefs and teams, a perceived lack of even-handedness… and insufficient use of cross-country perspectives or cross-cutting analysis.’
The IMF also displayed double standards and exposed its developed country bias. The eurozone bailouts consumed 80 per cent of total IMF lending between 2011 and 2014 even though the European Union had ample means to look after itself. But no such assistance had been available to Asian and Latin American countries when they ran into trouble. The IMF’s mishandling and enforcing of a ‘one-size-fits-all’ harsh fiscal austerity pushed millions to poverty and caused large-scale malnutrition and suicides, according to the prestigious medical journal Lancet.
Taking advantage of difficult times for the developing countries in the 1970s, the World Bank championed the virtues of a market economy. It told the countries that they could get loans from the bank provided they restructure their economies. In other words, they have to ‘privatise, liberalise and globalise’.
The IMF added ‘stabilise’ to this list of ‘ise’ as a condition for loans. The package came to be known as ‘structural adjustment programme’. It claimed to reflect a consensus about ‘good’ policies. Some called it the ‘Washington Consensus’, to indicate the consensus between the Washington based two BWIs and the US Treasury department.
The first testing ground for this package was Latin America. Assessing the SAP, Sebastian Edwards of the University of California, Los Angeles, concluded, ‘The adjustment process has been quite costly, generating drastic declines in real income and important increases in unemployment. In fact, … in a number of Latin American countries in 1986 real per capita GDP was below its 1970 level!’
William Easterly, a senior WB economist, titled his evaluation of the WB-IMF policy reforms during 1980–1998 ‘The Lost Decades’ and noted that in 1960–79, the median per capita income growth in developing countries was 2.5 per cent, compared with zero per cent during 1980–98. In the process, Africa de-industrialised and turned from a food exporter into a net food importer.
The World Bank itself admitted the failure of the IMF-WB-inspired policy reforms in its ‘Economic Growth in the 1990s: Learning from a Decade of Reform’. It observed, ‘… the expected growth benefits failed to materialise, at least to the extent that many observers had forecast. In addition, a series of financial crises severely depressed growth and worsened poverty… both slow growth and multiple crises were symptoms of deficiencies in the design and execution of the … reform strategies that were adopted in the 1990s….’
In advising developing countries to liberalise their capital account and financial market, the BWIs have also pushed the agenda of the Wall Street-based finance capital. Professor Jagdish Bhagwati called it a ‘Wall Street-Washington’ nexus which, according to him, has been responsible for the Asian crisis. The World Bank and the IMF have systematically made loans to states as a means of influencing their policies. Foreign indebtedness has been and continues to be used as an instrument for subordinating the borrowers.
In its September 26, 2015 issue, The Economist, usually a cheerleader for market-oriented reforms, pointed out several flaws of the World Bank’s Doing Business Report and concluded that the DBR ranking does not provide a reliable guide for policies. Countries might seek to improve their ranking just to appear good in the eyes of donors or foreign investors by amending regulations in ways that have little substance.
Recently under the leadership of its former president Jim Yong Kim, the World Bank has reinvented itself, from a lender for major development projects, to a broker for private sector investment. Since their creation, the IMF and the World Bank have violated international pacts on human and labour rights and have no qualms about supporting dictatorships.
ERIC Toussaint, a historian and political scientist, has documented in details the BWIs’ political interference and support of dictatorships (such in in Chile, Brazil, Nicaragua, Congo-Kinshasa, Philippines, Indonesia and Romania) in his books, The World Bank: A never-ending coup d’état. The hidden agenda of the Washington Consensus and The World Bank: A critical Primer.
The figures below (taken from Eric Toussaint) clearly show that the political and strategic interests of the major capitalist powers were determining factors in disbursing BWIs’ financial aid even though economic policies of these regimes did not meet official criteria or they fail to respect human rights. Furthermore, regimes seen as hostile to the major powers were deprived of loans on the pretext that their economic policies were failing to meet BWIs’ criteria.
These policies of the BWIs continue to the present day, long after the end of the cold war. They supported Soeharto’s Indonesia until his fall in 1998, Idriss Deby’s Chad until the present day, Tunisia under Ben Ali until he was deposed in 2011, Egypt under Mubarak until he was ousted in 2011 and now under Al-Sissi.
Authoritarian regimes such as Kazakhstan, Kenya, Belarus, Serbia, Georgia, Pakistan, the United Arab Emirates and Bahrain with dismal human rights and labour standards record often receive higher DBR rankings (see DBR 2017). DBR 2018 deliberately manipulated Chile’s ranking to discredit its left-leaning government of Michelle Bachelet in support of conservative billionaire and former president Sebastian Pinera in part on promises to slash red tape and boost investment.
When the World Bank’s respected chief economist Paul Romer apologised for this blatant political bias, he had to resign just as Nobel laureate Joseph Stiglitz had to go when he was critical of the BWIs’ handling of the Asian crisis two decades ago.
No sign of change
AFTER 75 years of incompetence, political interference on behalf of finance capital and advanced-country bias, there have been only some cosmetic reforms of the quota and share-holdings weighted voting system. There are also attempts to deflect attention by symbolisms, such as appointing a chief economist from developing countries; and better if the person is a female as in the case of the IMF.
There is no sign that the outgoing chief of the World Bank or the IMF would be replaced by someone from a developing country or emerging economy. The BWIs continue to entrap developing countries on behalf of their main shareholders beholden to finance capital.
Developing countries, therefore, must unite to establish new international financial institutions and global economic governance architecture as envisioned more than four decades ago in the United Nations call for a new international economic order to suit their development aspirations and uphold economic sovereignty.
Anis Chowdhury, an adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Want stories like this in your inbox?
Sign up to exclusive daily email
More Stories from Opinion