IMF and World Bank

Both sister organisations were established at the UN Monetary and Financial

Conference in Bretton Woods, NH, USA, in 1944, where representatives from
44 countries convened under the leadership of the USA and the United
Kingdom in order to agree on the post‐1945 international economic and
monetary order: the General Agreement on Tariffs and Trade, which later
became the World Trade Organization (WTO); the International Monetary Fund
(IMF) and the World Bank. While the WTO is concerned with trade in goods
and services as well as intellectual property rights, IMF and World Bank focus
on the international monetary and financial system. Their central goal is to
foster macroeconomic stability, economic development and poverty reduction.

The Bretton Woods system was conceived of as a response to the economically

and politically disastrous interwar years which were, in many countries,
characterised by the Great Depression, high unemployment, impoverishment
and political extremism. Governments at the time compounded the economic
downturn by pursuing ‘beggar‐thy‐ neighbour’ policies, including the
imposition of high tariff barriers, competitive currency devaluations and
mercantilist price and wage deflation. Instead of agreeing policies
internationally, each government tried to protect its domestic industries at the
expense of imports in an attempt to safeguard national wealth and jobs.
Consequently, cross‐border trade and capital flows plummeted and economic
conditions deteriorated further. The Bretton Woods idea was therefore to
guarantee open markets and free trade, to establish fixed but adjustable
exchange rates and to help countries invest and develop towards full
employment

The IMF was established to maintain the system of stable exchange rates, where
currencies were basically pegged to the US‐Dollar, which, in turn, was
convertible into gold. More specifically, the IMF had to (a) monitor national
policies and discourage actions, such as competitive devaluations, which would
undermine international economic stability; (b), in a (potential) balance‐of‐
payment crisis, provide short‐term funds to countries with insufficient foreign
currency reserves, thereby enabling them to undertake necessary monetary and
fiscal policy reforms while defending or slowly adjusting the fixed parity. In
contrast to the IMF’s original short‐term macroeconomic orientation, the World
Bank was created as a development agency, preoccupied with reconstruction
and long‐term growth primarily in war‐torn countries. It provided assistance for
investment projects when domestic savings were insufficient and access to
international private capital was non‐existent owing to market imperfections

Despite various reforms, the institutional set‐up of the IMF still largely reflects
the economic and political dominance of the West. Thus, the IMF is
headquartered in Washington D.C. The top executive, the Managing Director,
traditionally stems from a West European country, upon approval of the US
government. Even though each member country is represented in the Board of
Governors, usually by its finance minister or central bank president, voting
power in this shareholder body varies with the so‐called quota. This is
denominated in Special Drawing Rights (SDR), the IMF’s unit of account, and
based on a country’s relative global economic weight measured primarily by
GDP and economic openness. The quota also informs a country’s financial
contribution (‘membership fee’) and its access to IMF loans in times of crisis.
The weighted IMF system gives rich countries relatively more voice than
populous low‐ and middle‐income ones. With the latest quota reform in 2016,
the USA managed to keep the biggest share by far with 16.53 per cent, followed
now by China and Japan with about 6 per cent each and major European
economies ranging between 4 and 5.4 per cent.5 The five biggest European
economies still control about two times the aggregate votes of the BRICS
countries, despite only having approximately 60 per cent of their aggregate
GDP. While for most decisions majority suffices, IMF charter amendments and
the quinquennial quota reviews require an 85‐per‐cent supermajority, vesting
the USA and some Europeans combined with veto power.
At the instrumental level, the IMF primarily engages in (a) surveillance, (b)
capacity development and (c) lending.
(a)As for surveillance, the IMF regularly carries out the bilateral Article‐IV
consultations, which are mandatory for members (IMF, 2016b): in
collaboration with relevant national stakeholders IMF economists review
fiscal, monetary, regulatory and institutional policies and evaluate a
country’s economic performance.
(b)Besides surveillance, the IMF promotes capacity development. In particular,
it provides technical assistance and training to member countries in order to
strengthen staff skills and build up institutional capacities
(c)The arguably most important IMF instrument is lending. By granting loans
to member countries in balance‐of‐payment difficulties, the IMF acts as a
quasi‐lender‐of‐last‐resort. Basically, a member country without adequate
international reserves or access to affordable private capital can borrow from
the IMF, thus receiving breathing space to ‘restore conditions for strong
economic growth’. Typically, loans are relatively short‐term – up to four
years with final maturity of ten years – and can amount to a multiple of a
country’s quota, depending on the specific programme. In exceptional
circumstances, these so‐called access limits can be surpassed. Greece,
Ireland and Portugal, for instance, received loans of up to 30 times their
quota during the Eurozone crisis, far above the usual factor of 2 to 6. While
advanced and emerging nations are charged market‐related interest rates,
low‐ income countries can borrow on concessional terms, currently at zero
per cent.
In order to safeguard loan repayment and avoid moral hazard – a situation
where countries run into problems relatively insouciantly, knowing that there
will be a fairly pain‐free bail‐ out – IMF loans are subject to conditionality. In
most cases, this takes the form of ex‐post conditionality: in ‘Stand‐By
Arrangements’, for example, the IMF agrees with the borrowing country a
specific set of macroeconomic and structural policy reforms that are supposed
to guarantee recovery, growth and poverty reduction. Financial assistance is
then disbursed in phased installments, provided the crisis country complies with
programme stipulations. In 2009, the IMF launched a programme with ex‐ante
conditionality: the Flexible Credit Line. Only economically sound countries are
eligible if they have a strong track record of macroeconomic stability and meet
pre‐set criteria; these countries then get access to resources in a single up‐front
disbursement. Conditionality constitutes a strong link between lending and
surveillance. In principle, the IMF cannot coerce its members to adopt the
policies it advises based on surveillance. However, when a country requires
financial assistance the IMF can use conditionality as a lever to make countries
implement the recommended reforms.
Theoretically, the existence of an emergency lender is pertinent to the stability
of the international monetary system, just as a country’s central bank acts as
lender‐of‐last‐resort in a national financial crisis. Rather than defaulting in an
unorderly way and/or resorting to destructive measures, a country short of
liquidity can access emergency funds and thus continue to pay for necessary
imports or service foreign debt, while simultaneously adjusting its policies
and/or realigning its currency. Further, IMF loans can catalyse private capital
inflows as they signal a country’s efforts to avoid default.

The World Bank: Governance, Objectives and Instruments

To a large extent, World Bank governance resembles that of the IMF. The Bank
is also located in Washington D.C. and its president has traditionally been a
Westerner. The highest decision‐making body is the Board of Governors, where
each member state is usually represented by its minister of finance or
development. Voting power depends largely on shares in the capital stock,
which are allotted according to IMF quotas.
World Bank membership is contingent on IMF membership
While the original goal was reconstruction in war‐torn countries in Europe and
Japan with insufficient access to private capital, the emphasis is now on
development and growth as a means to reduce poverty and inequality in low‐
and middle‐income economies in Asia, Africa and Latin America. Addressing
poverty and inequality is a global public good that benefits all countries in two
ways: first, the well‐being of citizens with altruistic preferences increases when
the world becomes a fairer, more human place. Second, many poverty‐stricken
countries feature political, ecological, social and economic conditions that
potentially prompt externalities for richer nations in the form of terrorism,
crime, ecological degradation, pandemics and migration. Consequently, poverty
eradication is in the self‐interest of more advanced countries.

CRITICISM
The most severe policy criticism has focused on conditionality. According to
this, IMF and World Bank have imposed neoliberal policies on borrowing
countries via ‘one‐size‐fits‐all’ structural adjustment programmes. These follow
the ‘Washington Consensus’, a set of institutional and political reforms ranging
from far‐reaching privatisation, deregulation, liberalisation to currency
devaluations and austerity. Even the pace and sequence of reforms is dictated.
While intended to create growth, these policies are criticised for their
detrimental effects on the environment, social structure, democratic set‐up and
culture of the recipient country as well as the ignorance of country
circumstances. Local governments often lack ownership of the reform
programmes and support from their electorate. Indeed, many critics perceive of
conditionality as a veil for major shareholders’ vested interests and US
hegemony. The apex of conditionality‐based interference occurred during the
Asian Crisis in the late 1990s when crisis countries were almost micro‐
managed. Since then the Bretton Woods sisters have streamlined conditionality
by imposing fewer and more targeted conditions. As regards content, the focus
has broadened to include the institutional framework and human development
rather than simple output growth (sometimes called the ‘Post‐ Washington
Consensus’). More specifically, seemingly anti‐neoliberal policies such as
social spending and cross‐border capital controls become acceptable when they
benefit the poor or support recovery. However, criticism remains and some of
the changes are labelled as ‘window‐dressing’, with the neoliberal market
paradigm still intact.

Defining conditionality
• Conditionality: The application of specific, pre-determined requirements that
directly or indirectly enter into a donor's decision to approve or continue to
finance a loan or grant
One may distinguish between the following different forms of conditionality:
• Fiduciary conditionality: This relates to the financial management of funds
and to public accountability in relation to those funds. The purpose of this form
of conditionality is to ensure that the funds are used for the purpose intended
and that the funds are used in the most efficient manner. Hence, this is an
element of regular financial accountability.
• Policy conditionality/economic policy conditionality: This includes conditions
about the implementation of policies believed to be of importance in reaching
general development goals. Funding is not necessarily directed towards the
areas of policy conditionality.
• Process conditionality: This focuses on the process of planning, adopting
and/or implementing policies rather than their content or the management of
funds. Generally it involves that certain institutions are in place or certain
principles for participation are followed to enhance transparency and
representativeness of governance.
• Outcome conditionality: This focuses on measurable outcomes (e.g., GDP
growth, poverty reduction) rather than what kinds of policies are implemented
to reach those goals. This form of conditionality is central to the concepts of
results orientation in aid and output-based aid.
As our focus is on conditionality that requires the adoption of privatization
and/or liberalization, our main concern will be policy conditionality.
The IFIs tend to apply a specific and restricted definition of conditionality using
technical terms, such as: “the specific conditions attached to [the] disbursement
of policy-based lending or budget support”, or more narrowly and specifically
formulated for the Conditionality Review, as “the set of conditions that, in line
with the Bank’s Operational Policy (OP), must be satisfied for the Bank to
make disbursement in a development policy operation.”
There is also a certain discrepancy between the World Bank and the IMF in
their use of the term conditionality. The World Bank includes only legally
binding conditions as conditionality. This includes:
• Prior actions: policy actions that the country agrees to take before the
Bank’s/Fund’s Executive Boards approves a loan, and
• Tranche release conditions (floating or regular): policy actions that the
country agrees to undertake for the disbursement of loan tranches from the
World Bank.

Unlike the World Bank, the IMF generally also includes benchmarks and
program reviews that are not in the same way legally binding in the term
conditionality:
• Prior actions: measures that a country is expected to adopt before the approval
of an arrangement or completion of a review.
• Performance criteria: conditions that have to be met for the agreed amount of
credit to be disbursed (from the IMF). These may be: quantitative (referring to
macroeconomic policy variables, e.g. credit aggregates, fiscal balances, or
external borrowing); or structural (e.g. financial sector operations, reform of
social security systems, or restructuring of key sectors such as energy).
• Structural benchmarks: a monitoring mechanism to be applied to measures
that may not be objectively monitored or where non-implementation would not,
by itself, warrant an interruption of IMF financing.
• Program reviews: These are conducted by the IMF and are meant to serve as
an opportunity for a broad-based assessment by the Executive Board of
progress with the program
The first and by far the most discussed item in the “old” conditionality debate
relates to the policy content of conditionality. The lion’s share of this literature
focuses on the premises of or the effects of the market oriented policies often
associated with what John Williamson in 1990 termed “the Washington
consensus”, in which privatization and liberalization figured among the most
hotly debated elements. The critical literature is voluminous, varied and rather
well-known, focusing on the distributional aspects of the reforms, the failure of
reforms to take social and environmental issues into account, and their failure to
ensure sustained growth.
The second major focus of the debate was on the practice of conditionality. One
point of critique coming both from within and from outside the IFIs focused on
the lack of efficacy of conditionality. Already in the late 1980s, some evidence
was collected showing that in fact very few structural adjustment programs
were implemented as planned. Furthermore,studies showed that not only was
implementation of IMF and World Bank programs slow, there was also no
higher probability of introduction of market oriented policies in the countries
where an IMF program was in place than where this was not the case. In the late
1990s, a series of new studies confirmed these conclusions. They found “no
evidence that any of the variables under the World Bank’s control affect the
probability of success of an adjustment loan.” Moreover, in many cases loading
on new conditionalities was used as a means to remedy failure of compliance,
with very little success. Easterly concluded that: “Putting external conditions on
governments’ behavior through structural adjustment loans has not proven to be
very effective in achieving widespread policy improvements or in raising
growth potential. If the original objective was “adjustment with growth”, there
is not much evidence that structural adjustment lending generated either
adjustment or growth.”
A second point of critique was that conditionality impinged upon the
sovereignty of borrowers. Thus, there were not only economic repercussions of
conditionalities, but also democratic, as the public will – expressed through the
government or elected national assemblies – was set aside in the attempt to
satisfy conditionalities set by the IFIs.
A third and related critique was the lack of enforcement of conditionality by the
IFIs. One study of the top twenty adjustment recipients over a period of 20
years, found that countries continued to get new adjustment loans in spite of
their failure to implement policies upon which prior loans were conditioned.
Such inconsistency and mixed message to the borrowers was found to result
from the pressure within the IFIs for high levels of disbursement and creation of
new loans. It was viewed as a major factor in explaining the lack of results.
A final point of critique, coming rather from inside the Bank and the Fund and
from governments attempting to implement programs, was that they contained
too many conditionalities. This often resulted from the failure of the IFIs to
coordinate among themselves, and a tendency for the IMF to “step in” and take
on the traditional role of the World Bank in cases where the Bank was not
engaged in lending and policy advice. As many conditionalities were highly
demanding and dependent on legal changes, the conditionality overload led
often to a totally unmanageable task for borrowing governments.