11/1/2022

WB & IMF

Structure, Function and Issues

Post-World-War: Emergence of IEO &

IFIs
• The Brettonwood

US Institutions: ITO-1948; WB
and IMF: 1946-48
• Marshal Plan, ODA; 1947

• Comminoforma: 1947

USSR • Socialist Fund: 1948: Soviet

Socialist Solidarity Fund
(SSSF): 1949

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Cold War Period: IFIs and IEO

• LIEO: Liberal • NIEO: New • SIEO: Socialist

International International International
Economic Economic Economic
Order Order Order
Planed Economic
US Allies: GATT: UNCTAD: Third
Model: Second
First World World
World: USSR China

Post-Cold War Period

After the collapse of the Soviet Union, the western approach to market
liberalization, privatization, fiscal austerity, and free trade that had
produced economic growth in the developed countries—especially in the
United States—was exported to developing countries through the
International Financial Institutions (IFIs). Since they were headquartered
in Washington, D.C. the IFIs’ strategy was called the “Washington
Consensus.” As summarized by the World Bank, it had ten basic points:
1. Fiscal discipline (that is, not too much government spending).
2. Redirection of public spending toward education, health, and
infrastructure.
3. Tax reform (that is, broadening the tax base and cutting tax rates).
4. Market-determined interest rates.
5. Competitive exchange rates.
6. Trade liberalization (that is, eliminating quotas and tariffs).
7. Openness to foreign direct investment.
8. Privatization of state enterprises.
9. Deregulation.
10. Legal security for property rights.

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Post-Cold War Period: IFIs and IEO

Unilateral Multilateral Neutral World
World Order World Order Order
• WTO • BRICSA • OPEC
• WB &IMF • G-20 • Cuba & North
• G-8 • WSF America
• WEF • Latin • ODA and
• ADB American’s
Latina Banka
• UN-Funding
Agencies

Structure of WB and IMF

• Known collectively as the Bretton Woods Institutions after the remote
village in New Hampshire, U.S.A., where they were founded by the
delegates of 44 nations in July 1944, the Bank and the IMF are twin
intergovernmental pillars supporting the structure of the world's
economic and financial order. The creation of the World Bank and the
IMF came at the end of the Second World War.
• They were based on the ideas of a trio of key experts – US Treasury
Secretary Henry Morganthau, his chief economic advisor Harry
Dexter White, and British economist John Maynard Keynes. They
wanted to establish a postwar economic order based on notions of
consensual decision-making and cooperation in the realm of trade and
economic relations.
• the Bretton Woods conference, Henry Morganthau said the
“bewilderment and bitterness” resulting from the Depression became
“the breeders of fascism, and finally, of war”. Their aims were to help
rebuild the shattered postwar economy and to promote international
economic cooperation.

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Contd…
• The IMF would create a stable climate for international trade
by harmonizing its members’ monetary policies, and
maintaining exchange stability. It would be able to provide
temporary financial assistance to countries encountering
difficulties with their balance of payments. The World Bank, on
the other hand, would serve to improve the capacity of
countries to trade by lending money to war-ravaged and
impoverished countries for reconstruction and development
projects.
• Both the two IFIs are based on “Washington Consensus” (for
being based in Washington D.C.). The US is influential at the
IMF and World Bank. the IMF and World Bank are largely
controlled and “owned” by the developed nations such as USA,
Germany, UK, Japan etc. The US, for example, controls 17 to
18% of the voting power at the IMF and when an 85% majority
is required for a decision, the US effectively have veto power.
The World Bank is also 51% funded by the U.S. Treasury.

Size and Structure: WB and IMF

• The IMF is small (about 2,300 staff members ) and, unlike
the World Bank (With over 7,000 staff members), has no
affiliates or subsidiaries. Most of its staff members work at
headquarters in Washington, D.C., although three small
offices are maintained in Paris, Geneva, and at the United
Nations in New York. Its professional staff members are
for the most part economists and financial experts.
• The structure of the Bank is somewhat more complex. The
World Bank itself comprises two major organizations: the
International Bank for Reconstruction and
Development and the International Development
Association (IDA). Moreover, associated with, but legally
and financially separate from the World Bank are the
International Finance Corporation, which mobilizes
funding for private enterprises in developing countries, the
International Center for Settlement of Investment
Disputes, and the Multilateral Guarantee Agency.

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Functioning of IFIs
• The IMF collaborates with the World Bank, regional development banks, the
World Trade Organization (WTO), UN agencies, and other international bodies.
While all of these organizations are involved in global economic issues, each
has its own unique areas of responsibility and specialization. The IMF also
works closely with the Group of Twenty (G-20) industrialized and emerging
market economies and interacts with think tanks, civil society, and the media
on a daily basis.
• The IMF and the World Bank are different, but complement each other's
work. While the IMF's focus is chiefly on macroeconomic and financial sector
issues, the World Bank is concerned mainly with longer-term development
and poverty reduction. Its loans finance infrastructure projects, the reform of
particular sectors of the economy, and broader structural reforms. IMF loans
assist countries in continuing to pay for imports, stabilizing their currencies,
and restoring conditions for strong economic growth. Countries must join the
IMF to be eligible for World Bank membership.
• Given the World Bank's focus on antipoverty issues, the IMF collaborates
closely with the Bank in the area of poverty reduction. Other areas of
collaboration include assessments of member countries' financial sectors,
development of standards and codes, and improvement of the quality,
availability, and coverage of data on external debt.

Contd…
• Cooperating on financial stability, banking supervision, and trade
• The IMF is a member of the Switzerland-based Financial Stability Board,
which brings together government officials responsible for financial
stability in the major international financial centers, international
regulatory and supervisory bodies, committees of central bank experts,
and international financial institutions. It also works with standard-setting
bodies such as the Basel Committee on Banking Supervision and the
International Association of Insurance Supervisors.
• The IMF has observer status at formal meetings of the World Trade
Organization (WTO). The IMF's determination of a country's balance of
payments situation plays a considerable part in the WTO's assessment of
trade restrictions applied in the event of balances of payments difficulties.
• The IMF is also involved in the WTO-led Integrated Framework for Trade-
Related Technical Assistance to Least Developed Countries, and IMF staff
contribute to the work of the WTO Working Group on Trade, Debt, and
Finance.
• The IMF has a Special Representative to the United Nations, located at the
UN Headquarters in New York. Collaboration between the IMF and the
UN covers several areas of mutual interests.
• Increasingly, the IMF has been working with the Group of Twenty (G-20)
industrialized and emerging market economies.

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Similarities and Differences: IFIs

• Staff members of both the Bank and IMF often appear at
international conferences, speaking the same recondite
language of the economics and development professions, or
are reported in the media to be negotiating involved and
somewhat mystifying programs of economic adjustment
with ministers of finance or other government officials.
• The two institutions hold joint annual meetings, which the
news media cover extensively. Both have headquarters in
Washington, D.C., where popular confusion over what they
do and how they differ is about as pronounced as
everywhere else. For many years both occupied the same
building and even now, though located on opposite sides of
a street very near the White House.
• The fundamental difference is this: the Bank is primarily a
development institution; the IMF is a cooperative
institution that seeks to maintain an orderly system of
payments and receipts between nations.

The Major Task: WB & IMF

• The rules of the institution, contained in the IMF's Articles of
Agreement signed by all members, constitute a code of
conduct.
• The code is simple: it requires members to allow their currency
to be exchanged for foreign currencies freely and without
restriction, to keep the IMF informed of changes they
contemplate in financial and monetary policies that will affect
fellow members' economies, and, to the extent possible, to
modify these policies on the advice of the IMF to accommodate
the needs of the entire membership.
• To help nations abide by the code of conduct, the IMF
administers a pool of money from which members can borrow
when they are in trouble. The IMF is not, however, primarily a
lending institution as is the Bank. It is first and foremost an
overseer of its members' monetary and exchange rate policies
and a guardian of the code of conduct.
• Philosophically committed to the orderly and stable growth of
the world economy, the IMF is an enemy of surprise.

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Issues of WB and IMF

• The IMF and the World Bank have been criticized for its part in
promoting the Washington Consensus through its close participation
with the IMF in lending only to programs that were heavily conditioned.
• Some believe the programs are focused on austerity measures that
hurt the poor, while allow big corporations to flourish. In addition,
several unique factors contribute to dislike and distrust of the World
Bank. The World Bank is often accused of ignoring the environmental
and social impact of projects it supports.
1. The World Bank also funded a dam-building project in India that
resulted in the forced resettlement of people the Narmada River
Valley between 1978 and 1993.
2. The World Bank has been attacked for funding the Western Poverty
Reduction Project in China that opponents of Chinese control of
Tibet say will resettle 37,000 ethnic Chinese in the territory of Tibet.
3. The World Bank helped fund Brazil’s Polonoroeste development
program, inaugurated in the Amazonian state of Rondonia in 1981.
By improving the main highway into the forest, subdividing the land,
and granting ownership of the land to settlers, the program caused an
intense migration and land rush that resulted in the wide-spread
destruction of the rainforest (Mahar and Ducrot, N. D.).

Contd…
• Another major complaint about the World Bank (as well as the IMF) is its role
in causing high debt among developing countries. Although the World Bank’s
loans are intended to help countries, they also cause those countries to take on
debt that they must pay interest on and remain under the conditions of the
institution. They amount to “perpetual debt” that the poor people of world are
saddled with.
First, critics say that the conditions placed on loans are too intrusive and
compromise the economic and political sovereignty of the receiving
countries. For example, Joseph Stiglitz, a winner of the Nobel Prize in
economics and former chief economist of the World Bank, writes that those
conditions, often referred to as a whole as “conditionality,” are not just the
typical requirements that anyone lending money might expect the borrower to
fulfill in order to ensure the money will be paid back.
Rather, says Stiglitz (2002), ‘Conditionality’ refers to more forceful conditions,
ones that often turn the loan into a policy tool.’ The IMF has used
conditionality to exact major changes, called ” structural adjustments,” in
borrowing countries’ fiscal and monetary policies, including such issues as
banking regulations, government deficits, and pension policy.

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Contd…
• Second, critics say that the IMF imposed the policies of the Washington
Consensus on countries without understanding the distinct characteristics of the
countries that made those policies difficult to carry out, unnecessary, or even
counter-productive. According to Stiglitz, for example, the economists of the
IMF had a “one-size-fits-all” policy based on their academic training, which
focused on economic models with unrealistic assumptions about how real-life
economies work.
• Third, critics say that the policies were imposed all at once, rather than in an
appropriate sequence. For example, the IMF demands that countries it lends to
privatize government services rapidly—that is, sell them to private investors
rather than operate the services itself—such as water supply and utilities.
• According to Stiglitz, this is a result of the IMF’s “market fundamentalism,”
a blind faith in the free market, that ignores the fact that the ground must be
prepared for privatization. Private owners are most interested in operating a
company efficiently, which often means letting go of staff.
• Fourth, critics say that the IMF was not open to criticism or public oversight
when working on these policies, leading to arrogance and a lack of connection
to the reality on the ground in the affected countries.