Are the IMF and World Bank discredited global governance institutions?

The IMF and the World Bank are part of the Bretton Woods system. First conceived in 1944, set up following the Second World War in order to organise and manage the world’s economies in a time when these economies were becoming increasingly interconnected, as well as to prevent a repeat of the decades of hyperinflation and economic depression brought about by competitive devaluation that had followed the First World War. While it is true that these institutions have in many ways contributed to the long term development and modernisation of many states around the world, as well as providing short term loans to struggling economies, there are many controversies surrounding both the IMF and the World Bank. These include the claims that the world is being remoulded in a capitalist, free market image under the Washington Consensus and the issue of both institutions being dominated by the West. Due to these flaws, this essay will therefore take the view that the IMF and World Bank have become discredited institutions of global governance and are in need of reform.

The IMF is used for short term cash injections into developing countries and struggling economies to allow these states to rebuild and prosper, as well as avoiding the conflict that is often created by unstable or failing economies. The IMF has often been successful in its role, as demonstrated by the case of Colombia, where continuous guerilla insurgencies for five decades had displaced 6 million people and severely hindered economic growth within the country. The IMF assisted the government in carrying out extensive tax reforms in order to produce the funds required to rebuild and develop the rural areas damaged by decades of conflict. This additionally created incentives for investment in rural areas, bolstering the coffee industry that supports 7 million Colombians as well as making the country more appealing to foreign investment, allowing the nation to more quickly develop economically. It is not only less economically developed countries that have been supported by the IMF in recent years, with the Republic of Ireland requiring assistance following the Eurozone and housing crisis of 2008, which created mass unemployment (at a peak of more than 15% in 2011) and a brain drain out of the country. The loans and advice provided to the Irish government by both the EU and the IMF allowed the country to make a relatively swift recovery through the restructuring of the banks and government finances. Africa was another area hit hard by the financial crises of 2008, prompting the IMF to give £600 million to Ghana in 2009 which enabled it to become one of the frontier markets in the continent. The IMF is supported in these developments by the World Bank, which takes care of the continued long term success of these recovering nations.

However, the countries that require these injections of cash from the IMF have to accept a degree of reconstruction under structural adjustment programmes. These programmes have become widely known as the Washington Consensus, which essentially forces privatisation and the deregulation of financial markets, as well as the adoption of austerity measures. These conditions are becoming increasingly controversial, as they are seen as forcibly creating capitalist economies on a Western model in order for Western countries to more easily export goods to. This trade liberalisation has meant that it is very difficult for local businesses and entrepreneurs to prosper, as it is often cheaper to import goods from other nations rather than produce them locally. Stiglitz ( a former World Bank economist) has compared the IMF to the 19th century imperial Opium Wars and argued that the World Bank and the IMF never really set out to facilitate economic growth and recovery but rather deliberately cripple economies through debt bondage preventing them from seriously competing with Western powers on an economic level. This view is supported by IMF policies in Ecuador where austerity measures caused the price of cooking gas to be increased by 60%, pushing 51% of the population below the poverty line and the decimation of the working population of Malawi when privatisation led to food shortages that the government was now powerless to prevent. It is important to note that both China and India refused IMF loans, which protected their growing economies and allowed them to continue to prosper. Nonetheless, it is arguable that these more controversial methods are only set in place in order to facilitate quick economic growth, as the IMF has claimed that high rates of taxation and a large public sector inhibit the economy.

The World Bank differs from the IMF in the sense that it provides long term aid rather than quick cash injections, loaning money to developing nations in order to fund development in areas such as agriculture and education. It aims to lift greater proportions of the world’s population out of extreme poverty by producing more disposable income and has worked closely with the UN to halve extreme poverty (people living on below $1.90 a day) by 2015. Large swathes of Southeast Asia have been lifted out of poverty, although the World Bank often fails to mention that this is largely due to the 900 million Chinese who have emerged from poverty, rather than their own policies in countries that accept aid. The World Bank has also worked with other international organisations such as the Arab League to increase the participation of women in economic life which is a major source of poverty in the Middle East. Like the IMF (which changed from fixed to floating exchange rates in the 1970’s) the World Bank has demonstrated its ability to adapt to fit a changing world through its moves to greater involve local people in how loans are spent rather than simply dealing out untailored technical remedies.

Like the IMF the World Bank is seen to be dominated by the West, in particular the US, which has led to an emphasis on deregulation, privatisation and the promotion of free trade even when this has actually worsened the lives of ordinary people through the creation of sweatshops in free trade zones. The World Bank has also failed to successfully deal with poverty reduction and development in Sub-Saharan Africa, which has actually increased by 2% and the figure for extreme poverty ($1.90) continues to evoke controversy. This is due to the fact that this figure is seen to be far too low a benchmark to measure extreme poverty, with children in India living on $1.90 a day still having a 60% chance of being malnourished, which can permanently affect their mental and physical development, irrevocably damaging the future workforce of the nation. If the poverty line was set at a more realistic $5 a day then 60% of the world would be living in poverty, meaning that extreme poverty has actually increased since the beginning of the globalised capitalist era in 1990. This has given rise to the view that the World Bank is merely trying to justify the liberal capitalist system rather than actually fulfil its role of eradicating poverty and improving the lives of the global population, instead, promoting the widening division between rich and poor in the post-industrial age. Furthermore, the World Bank encourages poor countries to produce cash crops like cocoa and coffee, forcing developing nations to be dependent on the transnational corporations that control processing and distribution as well as reducing the amount of land used for domestic food production, leading to a continuing cycle of famine and poverty.

While poverty has increased in the Middle East in recent years this is due more to the conflict in the region, in particular, Syria, rather than a failure on the part of the World Bank to aid development in the region. Additionally, the IMF has a focus on increasing the capacity of organisations within developing countries such as central banks and finance ministries, which leads to greater economic stability and facilitates growth. This has been demonstrated in Kosovo, as when it was established as a new independent state it had no real banking infrastructure until the IMF set one up with the help of Japan. Thus far, the IMF has provided capacity development support to all 189 member countries of the UN which shows how extensive and effective this service has been. The IMF has also helped to amend the legal framework of countries in order to fight corruption, although neither it nor the World Bank have made good governance a requirement of their loans, meaning that many have gone to corrupt regimes which waste the money provided while still placing their countries in debt and subjecting them to the Washington Consensus. The IMF also plays the role of monitoring the global economy through operating closely with the G20.

The IMF is very undemocratic, as instead of each member countries having an equally weighted vote within the institution, voting rights are dependent on the money each nation puts into the IMF, with the US holding 18% of the vote and developed nations such as Germany, France, Japan, UK and the US having a combined control of about 38%  of the vote. This means that the interests of wealthy bankers and investors as well as TNC’s are placed ahead of the needs of the poorer people of the world who the IMF is actually meant to provide for. Additionally, the IMF and World Bank encourage unsustainable development, terracing hillsides and felling trees to provide areas to grow export crops which damages the local environment, decreases biodiversity and increases the risk of dangerous flooding in the area. Natural resources are also being exploited at an unsustainable level with the Ivory Coast’s increased reliance on cocoa exports leading to the loss of two-thirds of the country’s forest which reduces the ability of both lumber and fuel.

Overall, recent years have highlighted the glaring structural problems within the IMF and World Bank and demonstrated their tendencies to support Western powers and liberal capitalism over the needs of developing countries. These controversies show how reform is required immediately, as well as more influence from non-Western nations, if either institution is ever to return to a position of trust within the system of global governance.

Raman Newton