Relevant for Civil Services Pre & Main

The Political Economy of the Bretton Woods Institutions

Challenges before IMF and

World Bank in the Era of Globalization
Discuss the role of World Bank in development of the backward countries?
What role does the World Bank play in favour of developed countries?
How will you distinguish between the nature and role of World Bank and IMF?

The World Bank and its sister organization, the

International Monetary Fund, were created at Bretton
Woods, New Hampshire, USA in 1944. Together they
are referred to as the Bretton Woods Institutions or
BWIs. Originally created primarily to finance the
reconstruction of war-torn Europe, the World Bank has
become the primary financier of development projects
in the Third World. It has also become the Third
Worlds largest creditor. Together the countries of the
Third World owe the World Bank more than US$160
billion.

inappropriate role in
exacerbating
the
economic
crisis
in
Africa during the 1980s
and
for
the
fiasco
surrounding
Mexicos
recent collapse.
The IMF played a
significant role during
the 1980s in bailing
out
the
commercial
The International Monetary Fund
banks. By providing
The
IMFs
original
IMF credits to developing countries, essentially to
mandate sets forth three
service commercial debt, the
What was IMFs help to the world in 1980s? IMF
took upon itself the role
main objectives:
1. To
promote Who is called gatekeeper for creditors among of gatekeeper for creditors,
forcing
highly
indebted
international monetary
nation?
countries to adopt SAPs
cooperation;
Adjustment
2. To
facilitate
the What is SAP and how its related to the IMF? (Structural
Programms)
as
a
condition
expansion
of
international trade;
Under whose leadership World Bank grew not only for receiving IMF
credits, but as the stamp of
3. To promote exchange
dramatically and when?
approval debtor countries
rate stability.
The IMF achieves these objectives by advising needed as a condition for receiving further grants and
member countries on their economic policies and by aid from all donor sources.
By disbursing funds to developing countries in the
providing conditional assistance to member countries
1980s to service commercial debt, an most recently to
experiencing balance of payments problems.
The IMF often escapes close scrutiny by groups who Mexico, the IMF essentially postponed the debt crisis
tend to focus their advocacy efforts on the World Bank. by providing short term funds on very hard terms for
Yet, the IMF has played a very significant, if not more what was essentially a structural problem of insolvency
important, role in exacerbating the impoverishment of which required long-term solutions. It is widely
developing countries. Critics argue that the IMF has believed that the IMF financed the recovery with the
the
wrong approach.
strayed far from its original mandate of providing wrong resources and
member countries with funds to alleviate short-term Consequently, the IMF is now in the position of
balance of payments crises and stabilizing exchange- extracting large net transfers of resources, especially
from those countries which can least afford it.
rates. The IMF is increasingly under attack for its
1

The
Bank

World

that the major industrialized countries, led by the

United States, and influenced by their corporations, set
the agenda. In the process, the poor are often actively
undermined.
Superficially the Bank and IMF exhibit many
common characteristics. Both are in a sense owned and
directed by the governments of member nations. The
Peoples Republic of China, by far the most populous
state on earth, is a member, as is the worlds largest
industrial power (the United States). In fact, virtually
every country on earth is a member of both institutions.
Both institutions concern themselves with economic
issues and concentrate their efforts on broadening and
strengthening the economies of their member nations.
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

The World
Bank is
currently the largest multinational
lending
and
technical agency dealing
with
Third
World
development.
As
the
worlds
leading
development agency,
the
World Bank has a wideranging mandate, from
consolidating loans for large-scale development
projects to providing structural adjustment loans and
sectoral adjustment loans to developing countries
experiencing balance of payments problems. In the
1970s, under the presidency of Robert McNamara, the
World Bank grew dramatically in size and scope. In
the 1980s, in large part owing
to the debt crisis, the Bank What does the World Bank finance for?
increasingly served as a debt What is the importance of Bretton Woods
management
institution,
in history of World Bank?
lending in some cases as
much as 50% of a developing
How is WTO related to World Bank?
countrys portfolio toward
structural and/or sectoral adjustment lending. The
structures of all
primary feature of this kind of lending was to restore a
ensure
troubled economys debt servicing capacity by urging
indebted countries to adopt major economic reforms
known as Structural Adjustment Programmes (SAPs).
But over the past decade, the World Bank has come
under increasing criticism from a wide range of groups
in the North and South. Environmental groups argue that
many World Bank projects have had a disastrous effect
on the environment. The World Bank often finances large
infrastructure projects; including dams, open pit mines,
and road construction. In case after case these projects
have
been proven economically unsound, have
destroyed pristine rainforests, rivers and estuaries, and
have uprooted the livelihoods of millions of Third World
citizens who are affected by them. World Bank-funded
development projects have forcibly resettled millions and
millions of people since its inception.
It is noteworthy that by the end of the Bretton
Woods conference, the World Bank and the IMF had
been founded and the groundwork was laid for the
General Agreement on Tariffs and Trade (GATT), and
eventually, in 1995, the creation of the World Trade
Organisation. Although their roles evolved, their overarching purpose remained. As Jose Louis Jamarillo, the
former Columbian Ambassador to GATT and President
of the Group of 77, declared after the birth of the WTO,
what we have created is an institutional trinity which
will dominate all economic relations across the world
in the interests of the strongest. The decision-making

in
the
media
to
be
negotiating involved and
somewhat
mystifying
programs
of
economic
adjustment with ministers of
finance or other government
three

institutions continue to

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,
they share a common library and other facilities,
regularly exchange economic data, sometimes present
joint seminars, daily hold informal meetings, and
occasionally send out joint missions to member
countries.
Despite these and other similarities, however, the
Bank and the IMF remain distinct. 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. Each has a different purpose, a
distinct structure, receives its funding from different
sources, assists different categories of members, and
strives to achieve distinct goals through methods
peculiar to itself.

Purposes
At Bretton Woods
the international community
assigned to the World Bank the aims implied in its
formal name, the International Bank for Reconstruction
and
Development (IBRD), giving
it primary
responsibility for financing economic development. The
Banks first loans were extended during the late 1940s to
finance the reconstruction of the war-ravaged economies
of Western Europe. When these nations

recovered some measure of economic self-sufficiency, which mobilizes funding for private enterprises in
the Bank turned its attention to assisting the worlds developing countries, the International Center
for
poorer nations, known as developing countries, to Settlement of Investment Disputes, and the Multilateral
which it has since the 1940s loaned more than $330 Guarantee Agency. With over 7,000 staff members, the
billion. The World Bank has one central purpose: to World Bank Group is about three times as large as the
promote economic and social progress in developing IMF, and maintains about 40 offices throughout the
countries by helping to raise productivity so that their world, although 95 percent of its staff work at its
people may live a better and fuller life.
Washington, D.C., headquarters. The Bank employs a
The international community assigned to the IMF staff with an astonishing range of expertise: economists,
a different purpose. In establishing the IMF, the world engineers, urban planners, agronomists, statisticians,
community was reacting to
lawyers, portfolio managers,
the
unresolved
financial How are the IMF and World Bank funded? loan
officers,
project
problems instrumental in
appraisers, as
well
as
initiating and protracting the Briefly describe and assess World Bank experts
in
operations?
Great Depression of the
telecommunications, water
1930s: sudden, unpredictable
supply
and
sewerage,
variations in the exchange values of national currencies
transportation, education, energy, rural development,
and a widespread disinclination among governments population and health care, and other disciplines.
to allow their national currency to be exchanged for Funding
foreign currency. Set up as a voluntary and cooperative
The World
Bank is an investment bank,
institution, the IMF attracts to its membership nations intermediating between investors and
recipients,
that are prepared, in a spirit of enlightened self-interest, borrowing from the one and lending to the other. Its
to relinquish some measure of national sovereignty by owners are the governments of its 180 member nations
abjuring practices injurious to the economic well-being with equity shares in the Bank, which were valued at
of their fellow member nations. The rules of the about $176 billion in June 1995. The IBRD obtains most
institution, contained in the IMFs Articles of of the funds it lends to finance development by market
Agreement signed by all members, constitute a code of borrowing through the issue of bonds (which carry an
conduct. The code is simple: it requires members to AAA rating because repayment is guaranteed by
allow their currency to be exchanged for foreign member governments) to individuals and
private
currencies freely and without restriction, to keep the institutions in more than 100 countries. Its concessional
IMF informed of changes they contemplate in financial loan associate, IDA, is largely financed by grants from
and monetary policies that will affect fellow members donor nations. The Bank is a major borrower in the
economies, and, to the extent possible, to modify these worlds capital markets and the largest nonresident
policies on the advice of the IMF to accommodate the borrower in virtually all countries where its issues are
needs of the entire membership. To help nations abide sold. It also borrows money by selling bonds and notes
by the code of conduct, the IMF administers a pool of directly to governments, their agencies, and central
money from which members can borrow when they are banks. The proceeds of these bond sales are lent in turn
in trouble. The IMF is not, however, primarily a lending to developing countries at affordable rates of interest
institution as is the Bank. It is first and foremost an to help finance projects and policy reform programs
overseer of its members monetary and exchange rate that give promise of success.
policies and a guardian of the code of conduct
Neither wealthy countries nor private individuals
borrow from the World Bank, which lends only to
Size and Structure
The IMF is small (about 2,300 staff members) and, creditworthy governments of developing nations. The
unlike the World Bank, has no affiliates or subsidiaries. poorer the country, the more favorable the conditions
Most of its staff members work at headquarters in under which it can borrow from the Bank. Developing
Washington, D.C., although three small offices are countries whose per capita gross national product
maintained in Paris, Geneva, and at the United Nations (GNP) exceeds $1,305 may borrow from the IBRD. In
in New York. Its professional staff members are for the contrast, all member nations, both wealthy and poor,
have the right to financial assistance from the IMF.
most part economists and financial experts.
Maintaining an orderly and stable international
The structure of the Bank is somewhat more
complex. The World Bank itself comprises two major monetary system requires all participants in that
organizations:
the
International
Bank
for system to fulfill their financial obligations to other
Reconstruction and Development and the International participants
Development Association (IDA). Moreover, associated World
Bank
with, but legally and financially separate from the Operations
World Bank are the International Finance Corporation,
The World Bank exists to encourage poor countries

to develop by providing them with technical assistance

and funding for projects and policies that will realize community to reconsider how the IMF could most
the countries economic potential. The Bank views effectively function in a regime of flexible exchange
development as a long-term, integrated endeavor.
rates. After five years of analysis and negotiation (1973During the first two decades of its existence, two 78), the IMFs second phase began with the amendment
thirds of the assistance provided by the Bank went to of its constitution in 1978, broadening its functions to
electric power and transportation projects. Although enable it to grapple with the challenges that have
these so-called infrastructure projects remain important, arisen since the collapse of the par value system. These
the Bank has diversified its activities in recent years functions are three.
as it has gained experience with and acquired new
First, the IMF continues to urge its members to allow
insights into the development process.
their national currencies to be exchanged without
The Bank gives particular attention to projects that restriction for the currencies of other member countries.
can directly benefit the poorest people in developing As of May 1996, 115 members had agreed to full
countries. The direct involvement of the poorest in convertibility of their national currencies. Second, in
economic activity is being promoted through lending place of monitoring members compliance with their
for agriculture and rural development, small-scale
obligations in a fixed exchange system, the IMF
enterprises, and
urban
economic policies
What are the areas of co-operation between supervises
that influence their balance
development. The Bank is
the World Bank and IMF?
of payments in the presently
helping the poor to be more
flexible exchange
productive and to gain access
Briefly describe and evaluate IMF Operations? legalized
rate
environment.
This
to such necessities as safe
supervision provides opportunities for an early
water and waste-disposal facilities, health care, familywarning of any exchange rate or balance of payments
planning assistance, nutrition, education, and housing.
problem. In this, the IMFs role is principally advisory
Within infrastructure projects there have also been
Over the past few years, in response to an emerging
changes. In transportation projects, greater attention is
interest by the world community to return to a more
given to constructing farm-to-market roads. Rather
stable system of exchange rates that would reduce the
than concentrating exclusively on cities, power projects
present fluctuations in the values of currencies, the IMF
increasingly provide lighting and power for villages
has been strengthening its supervision of members
and small farms. Industrial projects place greater
emphasis on creating jobs in small enterprises. Labor- economic policies. Provisions exist in its Articles of
Agreement that would allow the IMF to adopt a more
intensive construction is used where practical. In
active role, should the world community decide on
addition to electric power, the Bank is supporting
stricter management of flexible exchange rates or even
development of oil, gas, coal, fuel wood, and biomass
on a return to some system of stable exchange rates.
as alternative sources of energy.
Measuring the success of the IMFs operations over the
The Bank provides most of its financial and
years is not easy, for much of the IMFs work consists
technical assistance to developing countries by
in
averting financial crises or in preventing their
supporting specific projects. Although IBRD loans and
IDA credits are made on different financial terms, the becoming worse. Most observers feel that merely to have
two institutions use the same standards in assessing contained the debt crisis of the 1980s, which posed the
risk of collapse in the worlds financial system, must
the soundness of projects. The decision whether a
project will receive IBRD or IDA financing depends on be counted a success for the IMF.
the economic condition of the country and not on the Cooperation between Bank and IMF
characteristics of the project.
Although the Bank and IMF are distinct entities,
they
work together in close cooperation. This
IMF Operations
cooperation,
present since their founding, has become
The IMF has gone through two distinct phases in
more
pronounced
since the 1970s. Since then the
its 50-year history. During the first phase, ending in
activities have
increasingly reflected the
1973, the IMF oversaw the adoption of general Banks
convertibility among the major currencies, supervised realization that the pace of economic and social
a system of fixed exchange rates tied to the value of gold, development accelerates only when sound underlying
and provided short-term financing to countries in need financial and economic policies are in place. The IMF
of a quick infusion of foreign exchange to keep their has also recognized that unsound financial and
currencies at par value or to adjust to changing economic policies are often deeply rooted in long-term
economic circumstances. Difficulties encountered in inefficient use of resources that resists eradication
maintaining a system of fixed exchange rates gave rise through short-term adaptations of financial policies. It
to unstable monetary and
financial conditions does little good for the Bank to develop a long-term
throughout the world and led the international
irrigation project to assist, say, the export of cotton, if

The International Monetary Fund and the World Bank at a Glance

International Monetary Fund
oversees the international monetary system
promotes exchange stability and orderly exchange
relations among its member countries
assists
all
membersboth industrial
and
developing countriesthat find
themselves in
temporary balance
of payments difficulties by
providing short- to medium-term credits
supplements the currency reserves of its members
through the allocation of SDRs (special drawing
rights); to date SDR 21.4 billion has been issued to
member countries in proportion to their quotas
draws its financial resources principally from the
quota subscriptions of its member countries
has at its disposal fully paid-in quotas now totaling
SDR 145 billion (about $215 billion)
has a staff of 2,300 drawn from 182 member
countries
the countrys balance of payments position is so
chaotic that no foreign buyers will deal with the
country. On the other hand, it does little good for the
IMF to help establish a sound exchange rate for a
countrys currency, unless the production of cotton for
export will suffice to sustain that exchange rate over
the medium to long term. The key to solving these
problems is seen in restructuring economic sectors so
that the economic potential of projects might be realized
throughout the economy and the stability of the
economy might enhance the effectiveness of the
individual project.
The Bank and the IMF have distinct mandates that
allow them to contribute, each in its own way, to the
stability of the international monetary and financial
system and to the fostering of balanced economic
growth throughout the entire membership. Since their
founding
50 years ago, both institutions have been challenged by
changing economic circumstances to develop new ways
of assisting their membership. The Bank has expanded
its assistance from an orientation toward projects to the
broader aspects of economic reform. Simultaneously the
IMF has gone beyond concern with simple balance of
payment adjustment to interest itself in the structural
reform of its members economies. Some overlapping by
both institutions has inevitably occurred, making
cooperation between the Bank and the IMF crucial.
Devising programs that
will integrate members
economies more fully into the international monetary
and financial system and at the same time encourage
economic expansion continues to challenge the expertise
of both Bretton Woods Institutions.
The 50th anniversary of the founding of the Bretton
Woods institutions in 1994 prompted a flood of

World Bank
seeks to promote the economic development of the
worlds poorer countries
assists developing countries through long-term
financing of development projects and programs
provides to the poorest developing countries whose
per capita GNP is less than $865 a year special
financial assistance through the International
Development Association (IDA)
encourages private enterprises in developing
countries through its affiliate, the International
Finance Corporation (IFC)
acquires most of its financial resources by borrowing
on the international bond market
has an authorized capital of $184 billion, of which
members pay in about 10 percent
has a staff of 7,000 drawn from 180 member
countries
initiatives aimed at assessing the role played by
the

World Bank and the International Monetary Fund and

debating their future. Most of such reassessments begin
by stressing how much the world has changed in the 50
years since both organizations were established. From
the collapse of the Soviet Union to the communications
and transportation revolution, and from the radical
transformation of financial markets to the population
explosion, the inventory of the new conditions under
which the Bretton Woods institutions have to operate is
certainly long. The implication, of course, is that the
institutions should adapt their goals and policies to the
new realities and then reorganize accordingly.
In the case of the World Bank, the lack of consensus
about its basic mission, limitations in its governance
system and other conditions have led to a proliferation
of goals-which in turn
has
had
important
organizational repercussions. Furthermore, the size,
complexity and relative independence of the Bank
create a substantial margin for inconsistencies among
its environment, its strategy, and its organization.
Usually, competitive pressures do not leave decisionmakers much choice but to adapt goals and strategies
to environmental changes and to make the necessary
internal adjustments to support the new strategy. But,
without intense competition, or other
external
challenges, organizations like the Bank-large, complex,
relatively autonomous, and with a significant capacity
to influence its environment-can postpone, or even
avoid, the difficult decisions required to minimize
incongruities
between
strategy
and
internal
organization. They can often afford the added costs
and inefficiencies that result from the ineffectiveness
of an internal structure whose objectives and policies
do not respond adequately to the new external threats
and opportunities.

The World Banks failure to achieve its primary been destructive for most people of the world, the IMF
mission of poverty alleviation is now acknowledged at and World Bank policies have been a major instrument
the most senior levels of the Bank itself, as well as by to structure the global economy (via structuring the
the Canadian Auditor General. Evidence of project and national economies of developing countries) to allow
portfolio failures have
a form of neoliberal
led to increasing calls
globalization
to
be
Criticisms of the Structural Adjustment
for
a
comprehensive
pursued that has led to
Programmes/Policies (SAPs)
review of the World
the criticisms mentioned
Bank and the IMF, the
The effect of Structural Adjustment Programmes/ above. Critics also point
most recent call coming Policies on poor countries has been one of the most out that the beneficiaries
from the countries of the
be largely
the
significant criticisms of the World Bank. The 1979 energy will
G-7 in the communiqu
wealthy
people
in
crisis
plunged
many
countries
into
economic
crises.
The
from their 1994 Naples
western
nations
and
the
summit.
The Banks World Bank responded with structural adjustment loans
t r a n s - n a t i o n a l
dubious logic of linking which distributed aid to struggling countries while
globalization
and enforcing policy changes in order to reduce inflation corporations, while the
integration
to
lower and fiscal imbalance. Some of these policies included majority of people in the
world will not benefit.
poverty and inequality encouraging production, investment and
labourSo it is crystal clear
has
been
challenging
intensive manufacturing, changing real exchange rates that there are numerous
from years. After its
promotion of openness and altering the distribution of government resources. challenges before IMF
World
Bank.
and the evidence cited Structural adjustment policies were most effective in and
policies
like
of a large swathe of countries with an institutional framework that allowed The
and
countries having open these policies to be implemented easily. For some globalization
economies and
thus countries, particularly in Sub-Saharan Africa, economic Structural
Adjustment
growing fast (the Asian growth regressed and
Programs
of
these
inflation worsened. The
Miracle and the World
institutions
have
not
alleviation of poverty was not a goal of structural
Development
Reports),
achieved their objectives
other
academics who adjustment loans, and the circumstances of the poor often and hence have been
looked at these noted worsened, due to a reduction in social spending and an failing so far in fulfilling
that the various country increase in the price of food, as subsidies were lifted.
their
promises and
studies used
such a
By the late 1980s, international organizations began claims. Contrary to their
loose
definition
of
to admit that structural adjustment policies were proclamations,
these
openness
that
worsening life for the worlds poor. The World Bank institutions and
their
comparisons
across
policies
have
played
changed
structural
adjustment
loans,
allowing
for
social
countries
and
with
the
generalised conclusions spending to be maintained and encouraging a slower havoc
developing
countries
and
were
faulty
and change to policies such as transfer of subsidies and price
erroneous and
not rises. In 1999, the World Bank and the IMF introduced its people. Not only
warranted at all. The the Poverty Reduction Strategy Paper approach to human life but every
Bank view of the East replace structural adjustment loans. The Poverty sector of an economy has
been badly devastated by
Asia miracle came under
Reduction Strategy Paper approach has been interpreted them.
Their
criticism
challenge, including in
some UNCTAD research as an extension of structural adjustment policies as it cannot be refuted until
stand by their
work and its Trade and continues to reinforce and legitimize global inequities. they
Neither approach has addressed the inherent flaws claimed objectives
Development Reports.
and
The current form of within the global economy that contribute to economic promises. Both in form
globalization, which is and social inequities within developing countries. By and essence the political
seen, is unaccountable, reinforcing the relationship between lending and client economy of these Bretton
corporate-led, and non- states, many believe that the World Bank has usurped Woods
institutions
democratic. It further
should
be
in
the
interest
indebted countries power to determine their own
shows the links between
of the
Third
World
economic policy.
tremendous odious debt
Countries and its people.
and poverty in the developing countries with the effects And, undoubtedly, this is the challenge before them
of the current forms of globalization that marginalizes that is to be tackled in the era of globalization the era
a vast majority of people around the world. While not of growing economic inequality.

the only part of the global financial system that has