The Struggle to Shape the Global Economic Environment - Term Paper Example

The Struggle to Shape the Global Economic Environment: The IMF, World Bank, the United s, and the Developed and Third World Countries Introduction As the Second World War released its fury all over Asia and Europe, the heads of powerful nations, particularly the United States and England, believed that building a new world order after the war would require multilateral organizations that could put in force policies supporting the free flow of capital globally (Chittick 2006). Thus, the British and American administrations met at a Bretton Woods, New Hampshire convention in July 1944 (Fischer 2004). There they formed the agendas for two organizations that would influence the global economic environment for the next six decades. The International Monetary Fund (IMF) was formed to facilitate global trade by curbing constraints in foreign exchange. It also produced a treasury of financial resources to be used by countries undergoing problems of short-term balance of payments so they could carry on with their foreign transactions without disruption (Killick 1995). This transformation of the global economy would confer privileges to all trading nations, particularly the wealthiest traders, England and the United States. Another institution established at Bretton Woods was the World Bank, or previously known as the International Bank for Reconstruction and Development. The institution was assigned to create financial reserves for post-war developments, which, since they were running at a loss, were not expected to be set off my private funds (Baker 2002). The World Bank was obliged as well to support private capital thru investments and loans acquired by private investors. The pioneers of these organizations expected that by instituting basic guidelines prior to the aftermath of the war, they would be able to keep themselves from the double risks of state-driven, socialist economies, and global disorder caused by aggressive forms of xenophobic private enterprise (Baker 2002). They predicted that if the most powerful nations did not guarantee some way in to large capital for the select few of less developed nations, as stated by Danaher (1994), those select few could implement rules with the possibility of disentangling the global capitalist economy. According to Fischer (2004), the traditional objective of the IMF and the World Bank, which has been implemented with retribution, has been to assimilate nations into the global capitalist economy. Fischer (2004) furthered that in spite all the arguments about poverty mitigation and progress, the main role of these multilateral organizations has been to immerse less developed countries’ governments and leaders more deeply into a global economy governed by giant, transnational firms. The IMF and the World Bank, over the past six decades, have progressively acquired influence and authority, becoming the major intermediaries identifying which nations will be granted international loans. This positive grants these multilateral institutions the authority to put into effect economic strategies drafted in Washington, where the IMF and the World Bank are founded (Danaher 1994). For the less developed countries, this brings back the ghosts of the colonial period. Effects of the IMF and the World Bank on Developing Countries The structural adjustment programs (SAPs) of the World Bank and IMF are intended to alleviate consumption in Third World nations and to reroute funds to export production for debt repayment (Baker 2002). This has brought about excessive production of major goods and a steep drop in their prices. In addition, it has resulted in the destruction of customary agriculture and to the appearance of masses of property-less farmers in almost all countries where in the IMF and the World Bank function (Baker 2002). Another devastating effect is the weakening of food security in all less developed countries, but specifically in Africa. Increasing reliance on food imports puts these weaker nations in a very risky status (New African Issues 2007a). They merely do not possess the needed foreign exchange to trade in sufficient food, still according to New African Issues (2007a), due to the drop in the prices of export goods and the qualification to repay obligations. Fundamental requirements of the World Bank and the IMF comprise reductions in social costs, particularly in education and health care. As stated by the report of the UN Economic Commission for Africa, health care costs in countries programmed by the World Bank and IMF dropped by 50% during the past three decades, and education costs dropped by 25%. The same patterns are obvious in every other Southern state (Danaher 1994, 20). Plans of the World Bank and IMF go together with other conditions. Governments are commonly obliged to eliminate financial supports to the needy on staple food products and services like maize and electricity (New African Issues 2007b). With IMF-World Bank-driven depreciation emerges price increases of every imported food product. Elimination of price regulations nationally results in abrupt inflation in products and services availed by the poor (Buira 2003). Substantial rises in interest rates brought about economic failures in state-controlled small enterprises and enlarged unemployment (Buira 2003). Abrupt elimination of trade constraints tosses local businesses into disorder and bankruptcy and increased unemployment. Removing constraints to foreign exchange permits the privileged to export resources abroad, free rein, as investment outflow, hence aggravating the balance of payments (Killick 1995). Even on the rationale of goals identified by the World Bank and IMF themselves, structural adjustment programs have not been effective (Danaher 1994, 21): An internal study within the IMF completed in 1988 reveals that the 40-odd programs implemented between 1983 and 1987 failed in their objectives of enhancing economic growth, reducing fiscal and balance of payments deficits, lowering inflation and stabilizing or decreasing external debt. Later schemes, like the UN Economic Commission for Africa and the United Nations Development Program (UNDP) have proven, have been even more bleakly unsuccessful with regard to the self-imposed goals of the World Bank and IMF (Buira 2003). However, the biggest letdown of these schemes is to be viewed in their effect on populations. Borrowing information given by the UN Economic Commission for Africa and United Nations Children’s Fund (UNICEF), it has been approximated that roughly six million five-year-olds and below have died annually in Latin America, Asia, and Africa since 1982 due to the people-defiant emphasis of the SAPs of the World Bank and IMF (Danager 1994, 22). Even more insidiously, these schemes have generated cultural and social damage anywhere and anytime they are launched. The prominent and greatly Northern-driven UNDP has identified that roughly 1 billion people in less developed countries currently subsist in absolute poverty (Fisher 2004, 60); more than half of the children in sub-Sahara are deprived of drinkable water and billions are underemployed or jobless. In a number of African countries, rates of infant mortality are twice over what they were a decade ago, prior to the launching of SAPs (Fischer 2004, 61). UNDP revealed in 1992 that, due to innate inequalities of SAPs, the socioeconomic disparity between the have and have-nots in less developed countries further widened (Baker 2002). Nowadays, the wealthiest nations, like the United States and Britain, gain hundred times more in earnings or revenues than the poorest nations, situated practically in the South (Danaher 1994). As expressed by UNDP’s Chief Adviser, “This [disparity] was a big shock to me. I had never expected a ratio of 150:1; perhaps 40 to 1” (Danaher 1994, 23). In sarcastically contemptuous ways, the report stated that “the World Bank and the IMF should be the buffer to protect developing countries, but their recent record shows that they have become institutions for recycling debt, not recycling resources” (Danaher 1994, 23). Therefore, leaders of developed and powerful nations have a great deal to think and do about the World Bank and IMF. IMF, World Bank, and Developed Countries Although majority of the nations present at the Bretton Woods conference were involved in an outward exchange of ideas, the actual deliberations occurred among only a handful. Well-known among these were Great Britain and the United States (New African Issues 2007c). The latter, being certainly the supreme actor in the deliberations, wielded its power and the IMF was formed. After unsuccessfully persuading the US administration over the International Clearing Union (ICU), European actors, especially Great Britain, focused on the second issue of the conference, the policy for Europe’s post-war rebuilding (New African Issues 2007c). In this subject, there were more modest political dissimilarities as the government of the United States acknowledged the significance to the economy of the United States of pumping development and increase of employment in Europe (Buira 2003). The outcome was the formation of the World Bank. The other major resolution made at the convention involved how these multilateral lending institutions would be supervised. The task of establishing monetary shares, with corresponding voting power, in the IMF was given to Raymond Mikesell, the US secretary of state (New African Issues 2007c). As noted by Ariel Buira (2003, 19): The formula developed by Mikesell in 1943 had the political objective of attaining the relative quota shares that the US president and secretary of state had agreed to give the ‘big four’ wartime allies, with a ranking which they had decided. Thus, the US was to have the largest quota, approximately $2.9 billion, the UK including colonies an amount about half the USA quota, the USSR a quota just under that of the UK, and China somewhat less. Basically, this was attained through a complicated procedure employing a variety of economic markers (New African Issues 2007c). Eventually, Mikesell responded to the dispute on the quota distribution (New African Issue 2007c, 18): I gave a rambling 20 minute seminar on the factors taken into account in calculating the quotas, but I did not reveal the formula. I tried to make the process appear as scientific as possible, but the delegates were intelligent enough to know that the process was more political than scientific. As pointed out by one scholar: “It is often assumed that there is a simple congruence between who funds the IMF and who has the largest say in the organization. This is misleading. The largest shareholders in the IMF enjoy the lion’s share of the votes but the actual expenses of running the institution are paid for out of income. The IMF’s income is mainly made up of the charges it levies on borrowers. A very small income is generated from other accounts. It bears noting that these charges have been increased substantially since the 1970s, putting a high burden on borrowing countries” (New African Issue 2007c, 18). Even though wealthy nations have roughly two-thirds of the voting share, they give roughly a portion of its revenue, have less than a portion of the globe’s populace and are excused from the IMF’s agendas (New African Issues 2007c). The inequitable composition of the boards of the IMF and World Bank is aggravated by an absence of transparency in their activities. Even when reports are given, they are exclusively accessible at the headquarters of IMF in Washington, DC (Killick 1995). This in effect makes the documents unreachable to most people, organizations, and policymakers outside the United States, an inexcusable condition for a world organization. Hence, this obsolete and undemocratic procedure has stayed all over the history of the two multilateral organizations—the World Bank’s head has consistently been a US citizen and a European has consistently been IMF’s managing director (Killick 1995). Their individual voting shares have permitted the wealthy Western countries to perpetuate an iron grip over the nationality of the most important powers in the World Bank and IMF. Although the election for the leaders of these organizations is not as relevant as the composition and activity of the boards, the reality that it continues to be a political conspiracy instead of a transparent and clear-cut mechanism is emblematic of the insincerity of the US and the European Union (EU) in advocating democracy and good governance across the globe but decline to do it themselves (Reid 2004). Even though the World Bank was originally intended to financially support rebuilding in Europe, this function was immediately seized by the US Marshall Plan. The World Bank, by 1953, was granting a loan of roughly $400 million to the rebuilding of Europe compared to more than $40bn dispatched to Europe by the Marshall Plan (New African Issues 2007c, 18). As stated by one scholar, this event pushed the World Bank to aggressively look for lending prospects in Third World nations during the 1950s and granting loans to these nations accordingly started to speed up during this period (New African Issues 2007c, 18). Since the 1970s, the mere connection of the IMF to non-borrowing constituents has been its task of inspection. Nevertheless, specifically for wealthier nations with their own monitoring ability and a capacity to take for granted the recommendation of IMF, if they want, this role of the IMF is insubstantial (Baker 2002). Aside from the removal of the system of exchange rate, the period also witnessed a boost in oil price. This had to major effects. Primarily, it formed an excess of OPEC foreign exchange endowed in investment banks accessible for loan needs of poor nations, a danger to the function of the IMF and World Bank (Baker 2002). And also, it resulted in a widespread problem of balance of payments in several Third World nations importing oil, a chance for the IMF and World Bank to strengthen their lending (Fischer 2004). The IMF accordingly launched accessibility of its funds for the less developed nations and the World Bank embarked on more policy-oriented, in contrast to project-oriented, loan activities (Fischer 2004). The US Federal Reserve, in 1979, started to regulate the escalation of monetary resources in order to curb inflation. Although this step had a modest effect on the growth of financial resources, temporary interest rates in the US increased twofold between 1978 and 1981 (Danaher 1994). According to New African Issues (2007c), the increases in interest rates gave difficulty for borrowing nations to fulfill their repayments of debt borrowed in dollars. Non-payment would have implied the liquidation of a number of major investment banks. The World Bank and IMF started to lend to debtors to guarantee their repayments, a completely new kind of ‘defensive lending’ unanticipated at the Bretton Woods conference (New African Issues 2007c). With this lending activity came a heightened degree of qualifications. The World Bank and the IMF claimed that the debtor nations had been incapable of fulfilling their obligations because of the breakdowns in their economic systems, and hence they have to ‘adapt’ and ‘secure’ so as to surpass their ‘structural’ issues (New African Issues 2007c). A common stabilization agenda of the IMF at this point involved regulations to curb inflation, expand taxation, escalate interest rates, remove financial supports, discourage public expenditure, and even out the exchange rate (Killick 1995). On the other hand, the World Bank promoted wide-ranging deregulation, privatization, and trade liberalization (Baker 2002). Contrary to its initial task, the IMF has turned into a continuous lender to indebted, economically weak nations. Due to the fact their balance of payments issues are permanent interference of the IMF has not aided them in surpassing their arrears (Buira 2003). Indebted countries have in fact enlarged their debt liabilities by becoming heavily ‘in arrears’ to the IMF; these are the apprehensions articulated by British economists have been given life by the formation of the IMF (Buira 2003). Furthermore, when the IMF began insisting the liberalization of trade in replacement for loans, it was enforcing a strategy that could simply worsen instead of alleviate a nation’s problems in financial and balance of payments (Baker 2002). The 1990s witnessed the World Bank and IMF moved forward into dealing with the problem of debt. The outcome was the formation in 1996 of the Heavily Indebted Poor Countries (HIPC), which as substituted in 1999 by the Enhanced HIPC (New African Issues 2007c). This was ultimately an acknowledgement that the serious debt difficulties of numerous Third World countries could not be taken for granted. In 2005, a debt agreement was proposed and confirmed in 2006; this effort is yet again an unspoken realization that earlier attempts have been unsuccessful (New African Issues 2007c). Nevertheless, even though overall debt annulment to the IMF and World Bank is being implemented, it is being granted to very select nations and, as always, they have to make remarkable economic leaps in order to be eligible (Fischer 2004). Not like Third World nations with issues in balance of payments, the United States does not have to ask for aid from the IMF. This is due to the fact that the dollar is the effective ‘international reserve currency’ (New African Issues 2007c, 20). Basically, this implies that nations with a real excess clutch their reserves in dollars which serve as a form of interest-free loan to the American people. Even though currently a number of Latin American and Asian governments have, to differing levels, broke out of the grip of the World Bank and IMF, after more than six decades (Buira 2003), it is obvious that the power of these two multilateral financial institutions in Third World countries is more significant than ever. Conclusions Hence, the World Bank should be substituted with an entirely new institution whose task and methods of operating could involve generating a process of autonomous financing, encouraging more transparency in operations, removing economic regulations and qualifications, modifying the procedures of loans and grants, governmental monitoring, and establishing a cluster of political, environmental, and social standards. Likewise, it is unquestionable that the task and system of the IMF implies that it is not able to appropriately cater to the issues of balance of payments, that it generates and sustains enormous liabilities and that these two multilateral lending institutions have brought about immense problems for less developed countries and poor people. The World Bank and IMF should now undergo revolutionary transformation. It is time to establish a global institution with an objective task and the mission to balance the scales between creditor nations and debtor ones. The IMF and World Bank are an outcome of the war’s political and economic climate, with insignificance to the current period. The crucial issue is then, ‘how these two long-established global institutions should be reformed?’ References Baker, J. The Bank for International Settlements: Evolution and Evaluation. Westport, CT: Quorum Books, 2002. Buira, A. & D. Rodrik. Challenges to the World Bank and IMF: Developing Country Perspectives. London: Anthem Press, 2003. Calleo, D.P. The Atlantic Fantasy: The US, NATO and Europe. Baltimore: Johns Hopkins University Press, 1970. Chittick, W. American Foreign Policy: A Framework for Analysis. CQ Press: Washington, 2006. Danaher, K. 50 years is Enough: The Case against the World Bank and the International Monetary Fund. Boston: South End Press, 1994. Fischer, F. “Thinking the Unthinkable: Combining the IMF and World Bank?” The International Economy, 18.4 (2004): 60+ Horowitz, D. & P. Carroll. On the Edge: The United States in the Twentieth Century. London: Wadsworth-Cengage, 2005. Killick, T. IMF Programmes in Developing Countries: Design and Impact. New York: Routledge, 1995. n.a. “How IMF, World Bank Failed Africa,” New African Issues, 2007, 12+ n.a. New African, Issues 458-469. The University of Virginia: IC Magazines Ltd., 2007. n.a. “The Case against IMF, World Bank,” New African Issues, 2007, 18+ Reid, T.R. The United States of Europe: The New Superpower and the End of American Supremacy. New York: Penguin, 2004. Sloan, S.R. NATO, the EUM and the Atlantic Community: The Transatlantic Bargain Reconsidered. Lanham, MD: Rowman & Littlefield Publishers, 2006. Webber, M. & M. Smith. Foreign Policy in a Transformed World. Harlow: Prentice Hall, 2002. Read More