The Shadow of Bretton Woods

IMF and World Bank have turned from aid-givers into mediators between rich and poor countries, from providers of progress into foreign policy activists and financiers of debt. Despite the economic upsets of the past two years, change is illusionary.

The 1944 Bretton Woods Conference created two institutions: the International Monetary Fund, to monitor the fixed exchange rate regime prescribed by the final treaty and to offer short-term finance to help member countries to overcome temporary balance of payments disequilibria while preserving the stability of the system; and the World Bank, with the main task of financing Europe’s reconstruction after World War II. It should be noticed that although some developing countries actually participated in the conference, both institutions were created mainly to serve developed countries.

As time went by, first the World Bank and then the IMF stopped being of use for advanced economies. The adaptation was relatively easy for the World Bank, but it was traumatic for the IMF. Floating exchange rates freed advanced economies from the need to borrow from the Fund when going through balance of payments crises and, thus, to follow its advice. From the end of the 1970s, only developing and sometimes very poor, countries would still borrow from the IMF. The Fund then stopped being a cooperative enterprise to become an intermediary between rich country donors and poorer country distressed borrowers. To deal with the new clientele, the Fund extended the maturity of its loans but also began demanding structural, and not only macroeconomic, conditionalities as guarantees for its loans. Developing-country economies were required to change their structures rather than just adjust them to qualify for loans.

Lack of legitimacy

The IMF in the 1990s did not seem to care about its lack of legitimacy and of mandate to impose structural change on borrowers. It trampled over domestic political processes to impose an idealized Anglo-Saxon type of free-market capitalism that its staff defended as being the most efficient. That the so-called Washington Consensus model did not really promote sustainable development was ignored, despite the abundant evidence relating liberalization to instability. Middle income countries that dismantled their defenses, prodded by the Fund and other international institutions, faced repeated crises in the 1990s. Poorer countries, most of the time, saw their productive facilities disorganized by the attempt to impose free market structures on countries which were not prepared for them. Ideology and the defense of the interests of at least some of the donors, made the Fund an instrument of impoverishment more frequently than one of progress and stability.

Adding insult to injury

The Asian crises of the late 1990s showed that the Fund was not shy to add insult to injury. The damages caused to successful economies by financial and capital account liberalization were widened rather than healed by the structural adjustment programs that were demanded by the Fund in exchange for financial help. The realization of how costly it is to appeal to the Fund and how important it is to avoid it, goes a long way to explain why so many emerging economies have accumulated so much international reserves in the 2000s.

The IMF itself seems to have finally realized, at least in part, the mistakes it made in the recent past. No major change in their views has been openly announced, but quietly and discretely the Fund has been signaling its willingness to pursue a more sensible mandate. The G-20, on the other hand, is exploring the possibility of changes in its governance to increase the weight of developing countries. It is just a beginning and the jury is still out but it is an improvement over the situation in the 1990s.

Read more in this debate: Peter Lanzet, Núria Molina.

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