The Role and Functions of the IMF and the World Bank - Case Study Example

Order 140462 Topic: International Relations (The Role and functions of the IMF and the World Bank in the International Economic System) Introduction: This paper seeks to analyze and discuss the role and Role and functions of the International Monetary Fund (IMF) and the World Bank (WB) in the International Economic System in connection with international Relations. This paper maintains that IMF and WB might have outlived some of their original purpose and they need to have reforms to be relevant with the times. Define International Relations To relate the role of IMF and WB to international relations it is proper to define the latter term first. Wikipedia, (2006), said, defined international relations (IR) as “ a branch of political science, is the study of foreign affairs of and relations among states within the international system, including the roles of states, inter-governmental organizations (IGOs), non-governmental organizations (NGOs), and multinational corporations (MNCs). It is both an academic and public policy field, and can be either positive or normative as it both seeks to analyze as well as formulate foreign policy.” It also referred to IR as drawing upon such diverse fields as economics, history, law, philosophy, geography, sociology, anthropology, psychology, and cultural studies and that it involves a diverse range of issues, from globalization and its impacts on societies and state sovereignty to ecological sustainability, nuclear proliferation, nationalism, economic development, terrorism, organized crime, human security and human rights. (Paraphrasing made) As to how international relations originated, one cannot avoid talking about the Peace of Westphalia of 1648. It is with Westphalia that e the modern state system was developed since it encouraged the rise of the nation-state and the institutionalization of diplomacy and armies. (Wikipedia-IR, 2006) (Paraphrasing made) The role of United Nations in International Relations Having a background therefore of IR, we are confronted with the questions: What are the institutions involved? The United Nations assumes a major role in IR as it describes itself as a "global association of governments facilitating co-operation in international law, international security, economic development, and social equity". Wikipedia, (2006) stated that it is the most prominent international institution and many of the legal institutions follow the same organizational structure as the UN. (Paraphrasing made) UN has therefore affiliations with several legal institutions which include International Court of Justice, European Court of Justice and the African Court of Justice. It has also affiliations with human rights organisations which include, United Nations Human Rights Council, Human Rights Committee, European Court of Human Rights, Inter-American Court of Human Rights, International Criminal Tribunal for Rwanda and International Criminal Court. It has direct relations with economic institutions like World Bank and the International Monetary Fund (Wikipedia, 2006) We therefore have established the role of the UN to IR and its connection with the IMF and World Bank, for which understanding the function and role of the IMF and WB would now sound relevant. The role and functions of IMF and WB The International Monetary Fund (IMF), which has its headquarters located in Washington, D.C. Is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested? It is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. (Wikipedia, 2006) (Paraphrasing made) Wikepedia (2006) said that the IMF came into existence in December 1945, when the first 29 countries signed its Articles of Agreement. With no change in statutory purposes since 1944 IMF today continues to exist and it is said that from the end of World War II until the late-1970s, the capitalist world experienced unprecedented growth in real incomes especially with the Peoples Republic of Chinas integration into the capitalist system (Paraphrasing made). Membership in the IMF is voluntary, hence there is presumption that nations may not join if disadvantageous to them. Wikipedia, (2006) said, “Any country may apply for membership of the IMF. With increased membership, its influence in the global economy steadily increased. The number of IMF member countries has increased about four times if original number of 44 states involved in its establishment. IMF’s primary mission is to provide financial assistance to countries that experience serious financial difficulties. Under said mission, states with balance of payments problems may request loans and/or organizational management of their national economies and in return, the countries are usually required to launch certain reforms, an example of which is the "Washington Consensus". (Wikipedia, 2006) (Paraphrasing made) Together or in conjunction with World Bank, IMF prescribes structural adjustment programs to prevent financial crises rather than merely funding financial recklessness. However, this approach is criticized by some where Structural Adjustment Programs lead to an increase in poverty in recipient countries and hence contradicting the avowed purpose of IMF. To illustrate, Wikipedia (2006) described the criticism saying: “Typically the IMF and its supporters advocate a Keynesian approach. As such, adherents of supply-side economics generally find themselves in open disagreement with the IMF. The IMF frequently advocates currency devaluation, criticized by proponents of supply-side economics as inflationary. Secondly they link higher taxes under "austerity programmes" with economic contraction….Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies. Supply-side economists claim these Keynesian IMF policies are destructive to economic prosperity.” Many believers and supported of the IMF argue that some criticisms are the result of the fact that many people are not familiar with the operations and objectives of the IMF, and blame a lack of transparency within the IMF for this, as well as the dense nature of international finance in general. . (Wikipedia, 2006) (Paraphrasing made) On the other hand, WB has a different function. Wikipedia (2006) said, “The World Bank Group is a group of five international organizations responsible for providing finance and advice to countries for the purposes of economic development and poverty, where the United Nations Monetary and Financial Conference that led to their establishment took place (1 July-22 July 1944). The Bank came into formal existence on 27 December 1945 following international ratification of the Bretton Woods agreements. Commencing operations on 25 June 1946, it approved its first loan on 9 May 1947 ($250m to France for postwar reconstruction, in real terms the largest loan issued by the Bank to date).” World Banks activities are to concentrate on developing countries, in fields such as human development (e.g. education, health), agriculture and rural development (e.g. irrigation, rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. roads, urban regeneration, electricity), and governance (e.g. anti-corruption, legal institutions development). The bank provides loans at preferential rates to member countries, as well as grants to the poorest countries and loans or grants for specific projects are often linked to wider policy changes in the sector or the economy. (Wikipedia- WB, 2006) (Paraphrasing made). It is relied upon by poor countries as a contributor of development finance, but the World Bank is often criticized, primarily by opponents of corporate "neo-colonial" globalization. Critics fault the bank for undermining the national sovereignty of recipient countries through various structural adjustment programs that pursue economic liberalization and de-emphasize the role of the state. One general critique is that the Bank is under the greatly influenced by certain countries (notably, the United States) which critics believe profit from advancing their interests. Another is the Bank’s intervention in order to salvage irresponsible loans from private institutions to governments in developing countries, and thus shifts the risk from the original risk-takers to the public of the rich countries, who ultimately must back the Bank (Wikipedia, 2006) (Paraphrasing made). Caufield (1996) made a sharp criticism of the assumptions and structure of the World Bank operation, arguing that at the end it harms southern nations rather than promoting them. She first criticized the highly homogenized and Western recipes of “development” held by the World Bank. What she meant is that to the WB, different nations and regions are indistinguishable, and ready to receive the “uniform remedy of development”. She argued that the danger of this assumption is that to attain even small portions of success, western approaches to life are adopted and traditional economic structures and values are abandoned. Another assumption according to Caufield (1996) is that poor countries cannot modernize without money and advice from abroad, thereby generating a cycle of indebtedness that with the payment of interest means currently a net transfer from the poor to the rich nations of $1.7 billion yearly. (Wikipedia, 2006) Paraphrasing made) On the part of the WB, John Perkins in Confessions of an Economic Hit Man believed that the Bank as was an instrument of American imperial policy, provided loans to developing countries for projects that enormously benefit a ruling elite as well as American companies and making such countries subject to American influence and pressure (Wikipedia, 2006) (Paraphrasing made) WB is now however without defenders who contend that no country is forced to borrow its money. With both loans and grants provided by the WB at concessional arrangement (lower than market value interest rates) the bank allowed poor and middle income countries to have access to international capital markets. (Wikipedia, 2006) (Paraphrasing made) Let us see an application of the roles of IMF and WB in an Asian Crises in the next section. Role on IMF and World Bank in Asian Crises One could see whether there is truth to the claim of WB and IMF in a given crises. Mcfarlane (2001), said: “Trade unions across the globe have complained loudly since the early 1980s about the IMF insistence on "Structural Adjustment" packages which they described as a scheme to reduce real wages and weaken labour unions by use of subcontracting of labour and casualisation of the labour force. Economists sympathetic to labour movement hopes for a better life, including researchers at the OECD (OECD, 1995), in the Philippines (Jose, 1991) and Malaysia (Rasiah and Von Hoffman, (1995; 1998), denounced the effects of these packages and said that they confused the need for flexibility (the employers and IMF technocracys favourite term) with adaptability, which the unions were willing to encourage (OECD, 1998.)” The labour groups in effect accused the IMF of putting liberal, neo-classical economics into other countries economies. Mcfarlane (2001) also said, “During 1997, the World Bank, and even more surprisingly, the IMF, stated that poverty in developing countries had continued at unacceptable levels alongside economic boom in areas like Asia and that alleviating poverty would henceforth be a consideration in official lending policy (Bullard, 1999.) For two decades previously, the World Bank had claimed its agricultural loans had, as one aim, the eradication of rural poverty -- a claim strongly contested by former World Bank consultant, Ernst Feder in his Strawberry Imperialism, in Perverse Development(1978) and in other works (Feder, 1977).” There appears to be a great disagreement by the author on the present roles of IMF and WB for which reforms must be made. Mcfarlane (2001) made the a more notable observation when he reported that in December, 1999 the IMF surprised many by insisting that, in the wake of the Asian economic crisis, that it was still interested in providing funds for poverty reduction in return for labour market and fiscal reforms. Mcfarlane nevertheless found that meetings with NGO leaders in that month, the IMF representatives failed to convince those people that the new initiative was genuine, given the ideology and type of economic theory held within the Fund as virtual Holy Writ (Bullard, 1999). (Paraphrasing made) Conclusion: The IMF and World Bank have their roles and functions by virtue of their creation. Their continued existence must be proof of fulfilling their purpose despite the criticisms they got from those who oppose. On the other hand, as to why criticism exists must be based on evidence. If this institution claimed to have attained their purpose, the presence of criticisms may indicate the truthfulness of not meeting some of their avowed purposes. The essential issue is whether they are responding to the criticisms and oppositions made. There is thus basis to have reforms as recommended by Barry, et.al (2005) as follows: (1) Reform the Global Economic Organizations, including the International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO), to orient them toward sustainable development goals and to make them more transparent and representative of the entire global neighbourhood, not just the corporations and major powers. If this proves impossible, then these institutions should be replaced with others that are truly committed to broadly shared responsibility and environmentally sustainable development. (2) Scale Back the IMF to its original role of maintaining international financial stability through provision of short-term resources for financial crisis management, technical assistance, and economic research and monitoring. The IMF should get out of the business of providing long-term financing for economic restructuring. The United States and other great powers should not be exempt from IMF monitoring of fiscal policy that endangers global economic stability, and (3) Strengthen Regional Organizations such as the UN’s economic commissions and development banks; encourage the development of regional crisis-management institutions, like those in Asia, to complement the IMF in providing crisis financing. Like their global counterparts, the regional development banks should be reformed to be more transparent and representative, and if this proves impossible, they should be replaced by institutions with a clearer mandate and commitment. Bibliography: Barry, et.al (2005) A Global Good Neighbour Ethic for International Relations, {www document} URL http://www.irc-online.org/content/ggn/0505ggn.php, Accessed November 11, 2006 Bullard, Nicola (1999) "Keeping the Worlds Economies Afloat: IMF Takes a New Tack," Bangkok Post, 17 October. Caulfield, C. (1996) Masters of Illusion: The World Bank and the Poverty of Nations Feder, E (1977) "The World Banks Last Stand to `Save Underdeveloped Agricultures," Journal of Contemporary Asia, Vol.7, No. 1. Jose, V. (1991) "Philippines External Debt Problem: The Marcos Years," Journal of Contemporary Asia, Vol. 21, No 2. McFarlane, Bruce (2001) Politics of the World Bank-International Monetary Fund Nexus in Asia. Journal of Contemporary Asia. Volume: 31. Issue: 2. p 214 Mcfarlane, Bruce (2001) Politics of the World Bank-International Monetary Fund Nexus in Asia. Journal of Contemporary Asia. Volume: 31. Issue: 2. Page Number: 214. O.E.C.D. (Trade Union Advisory Committee) (1995) Adaptability or Flexibility? (Paris) Rasiah, R. and Von Hoffman, N (1998) Employment and Development, (Singapore, Frederick Ebert Foundation). Rasiah, R. and Von Hoffman, N. (1995) Social and Environmental Clauses and Free Trade (Kuala Lumpur: Frederick Ebert Foundation). The Pew Research Center for the People & the Press Pew Global Attitudes Project 44-Nation Major Survey (2002), {www document} URL http://people-press.org/reports/pdf/185topline.pdf, Accessed November 11, 2006 Wikipedia, IMF {www document} URL http://en.wikipedia.org/wiki/International_Monetary_Fund, Accessed November 11, 2006 Wikipedia, International Relations, {www document} URL http://en.wikipedia.org/wiki/International_Relations, Accessed November 11, 2006 Wikipedia, World bank, {www document} URL _____, Accessed November 11, 2006 Read More